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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: Zeev Hed who wrote (67166)	5/14/2002 6:37:07 PM
From: Road Walker	Respond to of 99280

Zeev, re: "By all historical standards, this is an anomaly. So are short term interest rates that equal inflation." What's "inflation"? Productivity appears to have negated that possibility (at least according to Mr. Greenspan). So by historical standards, what PE is appropriate without inflation, and with very strong productivity growth? I sure don't know. I don't think the market knows. John

To: Zeev Hed who wrote (67166)	5/14/2002 6:38:32 PM
From: shoreco	Read Replies (1) \| Respond to of 99280

Zeev, What do you think will be the catalyst to have this market reverse and set new lows... I know your calling for a bloodbath, but for some reason I get the feeling "they" aren't gonna let it happen... It looks to me like "they" are loading with inventory and they will slooooowly unload the goods just like "they" did in March... I see them running the Nasdaq somewhere in between 1740ish and 1800ish depending on the "mood"... I could even see the QQQ's try for 35ish but not before we stall around 33ish for expiration... If they just "gap" this thing up again I will be less of a believer of the above scenario... I was long, I sold, now I must step to the side.... EOM Shoreco

To: Zeev Hed who wrote (67166)	5/14/2002 6:49:52 PM
From: limtex	Respond to of 99280

ZH - The current P/E of the S&P is an abberation casued by the fear engendered in the market by the historic short operations of the hedge funds. As these hewdge funds are forced to withdraw or alternatively they convert theri operations to long then the confidence that will return to the market will soon feed through into the economy and corporations will start to expand their businesses. The P/Es will adjust accordingly. The effect that the short hedge funds have had has led to a historic destruction of wealth. It is not a zero sum game. Still it all depends whether we can get enough confidence to cause buying to continue for antother few days. Each day that goes by lke today adds to the pressure on the shorts to capitualte or risk going bust. Best, L

To: Zeev Hed who wrote (67166)	5/14/2002 6:51:22 PM
From: yard_man	Read Replies (1) \| Respond to of 99280

if they would quit lying -- real interest rates are NEGATIVE ... and by a wide margin

To: Zeev Hed who wrote (67166)	5/14/2002 6:51:31 PM
From: ajtj99	Respond to of 99280

Actually, Zeev, with the new accounting standards put out by Standard & Poors, the SPX is at a P/E of greater than 40, I believe, based upon next year's earnings. That's about nearly twice the Fed model ideal, but it is the more historically accurate way to value companies if we are using historical accounting.

To: Zeev Hed who wrote (67166)	5/14/2002 7:22:13 PM
From: paul_philp	Read Replies (1) \| Respond to of 99280

Zeev, I have been doing some research on the P/E ratio recently. I have no specific theory yet but let me share a few observations. Some of this is a repeat and some is new. Bear with me. At the end of a recession the P/E ratio is notoriously difficult to understand. A company may have negative earnings or earnings close to zero. This makes very high earnings growth rate likely (witness AMAT 300% q-o-q earnings growth, at that rate AMAT will be bigger than the global GDP in just five years). With low interest rates, high productivity and improved cost structures, earnings will grow faster than GDP growth in the first year. Another problem arises when you calculate a cumulative P/E for the S&P. The earnings numbers includes the GAAP losses for companies losing money. This is as it should be, except, a large amount of the total GAAP losses comes from Goodwill writedowns from the bubble era. The insane goodwill numbers come, mostly, from acquisitions done with stock. Companies used their overinflated stock to by companies at overinflated prices. Now we stock prices reduced this leaves huge amounts of goodwill to be written off. This type of goodwill write down has no economic reality. I have not added up all the numbers but my back of the envelop calculations shows that 4 - 5 points of that 22 P/E come from including these overinflated writedowns in the cumulative earnings. Other issues which make the P/E ratio hard to understand today are the low interest rates, low inflation and high productivity. There is really no precedent for these types of numbers but you would expect an historic high P/E ratio with interest rates at an historic low. I am not convinced about the productivity number. A good part of it comes from the lag in labour cost reductions. Moving forward, we can assume that inflation wont stay low and that the fed will fight/prevent inflation aggressively. So interest rates will rise soon rather than later. However, in the early days of inflation doesn't most of the inflation go right into earnings. Labour costs are slow to respond to inflation at first. Interest costs will rise slowly at first as well. The first bout of price inflation will be good for corporate earnings. Of course, after a while, consumer spending will slow down quite a bit and cause a recession, but not at first. It looks to me like earnings growth could be quite healthy at the start of the recovery. This is long enough and these are a few of my observations that have me think that using P/E to assess valuation is problematic right now. I don't mean to challenge you at all. I am just trying to get my thinking straight and get the critique of someone I respect. Paul