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Strategies & Market Trends : Value Investing

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To: sjemmeri who wrote (6475)	3/30/1999 3:48:00 PM
From: Freedom Fighter	Read Replies (1) of 78497

Steven, >>Nice data Wayne. Two quick comments. 1 - If you want a valuation measure that's stretched out of normal range, choose P/BV. 2 - OTOH, E/BV is much higher now then historical. Why? Is it the shift in proportions from heavy industry to service economy? << That's one of the big questions to me. Here are my thoughts as to why ROE is higher. I think it's a combination of all the following and perhaps things I haven't thought of too. 1. The asset values of software and some other technology-like companies are understated because R&D is expensed. Just to be clear, I'm not arguing for a change in accounting, but you constantly see companies in the business buying each other's "R&D in progress" for a lot of money. These types make up a bigger % of the indexes. 2. There were accounting changes for post-retirement benefits in the early 90s that in some cases wiped out a large chunk of book value and effected EPS going forward to lesser degree. This did not change the economic reality just the way it was reported. (GM is the best example) 3. Some companies have leveraged themselves (on tangible equity) by buying other companies for a big premium to tangible book. They are also using debt to repurchase shares in amounts beyond free cash flow. This reduces book value and raises ROE. 4. The bull market itself is contributing to the profitability of some companies (banks, brokers etc..) and indirectly helping others because they don't have to allocate as much money to pension funds due to the rise in fund asset values. 5. Companies are writing down asset values more often. This reduces book value and raises earnings as the depreciation charges going forward can be reduced. 6. We are late in the business cycle and this is somewhat typical. 7. There is a greater emphasis on profitability by corporate America and pressure from Wall St to deliver. 8. Stock options are not expensed and are a growing form of compensation. Off the top of my head that's the best I can do. I think some if not most of it is not sustainable or accounting tricks. That's part of why I think we are very overvalued. Wayne members.aol.com

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