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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Richard Nehrboss who wrote (67064)	9/1/1999 12:13:00 PM
From: Mike M2	Read Replies (1) \| Respond to of 132070

Richard, the trouble with rationalizing current PEs based upon earnings projections is one can justify any PE level if you assumptions are optimistic enough. I believe history is a much better guide. At the market peak in 1929 the PE on the Dow was 16 I believe. One important fact that is conveniently overlooked is the comparison between the growth rate of reported earnings and the growth rate of EBITDA . take out the transient factors of the dramatic decline in interest rates, lower tax rate, and a reduction in depreciation charges due to a prior reduction in capital spending and the profit miracle of of the ninties loses its shine. If memory serves this accounts for approximately half of the growth in earnings. search Barron's 1996 ? Martin Barnes of the Bank Credit Analyst for the story. BCA also covered this in their april 1999 issue. This current economic miracle pales in comparison to the 1920s . There was a time when the health of an economy was judged by its rate of savings and investment, productivity, and balance of trade. In the 20's our savings rate was 10%, productivity averaged 6% per year, the US ran a trade surplus and was the world's leading creditor. In addition, the US gov't had a balanced budget that was truly balanced not a mythical balanced budget that Clinton and his enablerers in the media crow about. During the 20s the national debt was reduced by 1/3 . Currently our national debt continues to rise but yet the spin doctors tell us the budget is balanced. With respect to GE - GE Capital has been a major profit source for GE and the long decline in interest rates has been a major help. I'll have to double check the numbers but in 1929 there was $ 2 of debt created for every dollar of GDP growth recently we have run as high as $5 with the greater portion coming from non bank sources and not captured in the monetary aggregates. Simply put, the economic miracle is based upon unprecedented excesses in credit growth to finance speculation. In 1929 the debt to GDP ratio was 140% we are now at 260-70 %. Mike

To: Richard Nehrboss who wrote (67064)	9/1/1999 1:29:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 132070

Richard, >>I take it you are referring to returning to the same PE level. The problem with this is that it's more appropriate to construct a model that makes assumptions about earnings growth and discount rates. I have no idea what growth rates were in '29 or discount rates, perhaps similar, but I doubt it.<< In the late 20s the growth rate of GDP and earnings was far in excess of those of the 90s if measured on the appropriate peak to peak basis. Furthermore inflation was lower and interest rates were significantly lower so it's easier to make the new era case in the 20s. In the 90s, if earning growth is measured on a peak to peak basis it has been no faster than the long term historical average despite the fact that there were a significant number of tail winds related to depreciation charges and interest costs. And over that time the quality of those earnings has steadily declined. So the 90's has actually been extremely disappointing despite the hoopla and general prosperity. In addition, we practically had a global financial meltdown during the last 2 years due to the extreme credit levels. Even the Bank for International Settlements has publicly admitted that. So the idea that the economy is somehow less risky is the most ridiculous claim made by the bulls. It's out and out balderdash! IMHO the facts are so clear that those on Wall St. that keep cheerleading stocks are either incompetent, delusional or will say anything to advance career and personal gain. Wayne