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Technology Stocks : John, Mike & Tom's Wild World of Stocks -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (2679)	3/12/2002 2:18:24 PM
From: John Pitera	Read Replies (1) \| Respond to of 2850

Interesting charts by Justa $ First Call valuation @ bottom.... Max: Here is an interesting Vix chart I came up with to illustrate my point. BPOEX divided by Vix: stockcharts.com[w... Try this chart with the BPSPX: stockcharts.com[w... Broader market is making a intermediate top and the Nasdaq is being dragged along for the fun of it. ----------- www1.firstcall.com\|market\|full report First Call S&P500 Earnings Model We continue to believe that analyst and strategist earnings estimates for 1H02, and hence for CY02, are still too high and we expect meaningful downward revisions. Furthermore, we believe there is more than an even chance that analyst and strategists earnings estimates are also too high for the 2H02, but visibility is sorely lacking that far out. The industry analysts currently expect earnings will be up 17.0% in CY02. We believe the more likely outcome would be a lesser gain, probably closer to 5%. 1Q 2Q 3Q 4Q CY CY S&P500 Bottom Up Earnings Estimates Bottom Up Top Down*** CY2001 12.21A* 11.68A* 10.53A* 10.37 45.14 43.30 CY2002 11.18 12.73 13.82 14.71 52.81** 49.88 Yr/yr gain -8.4% 9.0% 31.3% 42.9% 17.0% 15.2% * restated on basis of current S&P500 composition, etc. quarters may not add to full year because some analysts that have full year estimates do not have estimates for all quarters. * some top down providers are not excluding as many unusual items as the industry analysts are excluding. MARKET VALUATION The First Call valuation model compares the forward four-quarter P/E ratio to the inverse of the interest rate on the 10-year Treasury. There is also some interest on doing the same calculation on a trailing four-quarter basis. At the close last Friday (8 Mar), the S&P500 stood at $1164 (up 2.8% from the $1132 at the end of the prior week) and the 10 year note interest rate at 5.33% (up 36 basis points from the 4.97% at the end of the prior week). Forward 4Q earnings through 4Q02 for the S&P500 earnings are at $52.81 (down slightly from the $52.89 of the prior week). Trailing 4Q earnings through 4Q01 are at $45.13. Based on forward 4Q earnings, the current P/E is 22.0, compared to the implied fair market P/E of 18.8. That means that the market is now over valued by 17% according to the formula. Based on trailing 4Q earnings, the current P/E is 25.8. However, First Call’s forward four-quarter estimate for S&P500 earnings is $48.00. The current multiple on that estimate is 24.3. If the First Call estimate proves to be more accurate than that of the analysts, <b.then the market would be overvalued by 29%. Another way to look at valuation is to use earnings normalized for the business cycle. Based on the forward 4Q normalized earnings of $57.94, the P/E would be 20.1. That would imply the market is somewhat above fairly valued if earnings are adjusted to take out the cyclical effects and look at the underlying earnings power. However, the market normally does not do that, at least not to the full extent. The current forward 4Q earnings estimate from the analysts is 8% below the forward 4Q normalized earnings (S&P500 earnings are finally spending some time below trend line after seven years of running above trend line, although it appears the widest deviation point for this cycle, 14% for the period ending 3Q02, has been passed). Furthermore, as interest rates drop to unusually low levels, the validity of the formula comes into question. The relationship of the reciprocal of interest yield to the price/earnings ratio is not a linear one. It happens to be close to linear in the range of where interest rates normally fall, but at low interest rates the formula blows up. One way to test a hypothesis based on empirical results is to look at the extremes. For example, it 10 year note yield falls to 1.00%, that would imply a fair market P/E of 100, or at a yield of 0.25% it would imply a 400 P/E. Even for Japan where the 10-year note was at 1.25% in November 2001, virtually no one would advocate the fair P/E of 80 implied by the formula. The conclusion should be that, because of the non-linear relationship, the implied linear relationship of the formula overstates the fair value P/E at low interest rates. 1Q02 Pre-Announcements For 1Q02 From 1Jan02 Thru 8Mar02 For 1Q01 From 1Jan01 Thru 8Mar01 %inc 1Q02 vs 1Q01 For 4Q01 From 1Oct01 Thru 8Mar01 % inc 1Q02 vs 4Q01