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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: RetiredNow who wrote (61265)	9/12/2002 12:45:41 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77398

Mindmeld, I'm not sure we agree. Yes, if there's growth in the economy there will be growth in the value underlying stocks. But value and price are not the same. In other words, yes, I think that with the weak growth in the economy, Cisco's stock price should move up weakly. From it's current economic value. To be specific, as I type, the price is $13.25. But back in the spring time we estimated the economic value to be around $8.00 (and that included some reasonably generous assumptions about growth, and a second half recovery and whatnot...). Let's assume Cisco is representative of the market. If we allow the definition of weak growth to be 10%, then the market, converging on economic value, will gradually "lift" from its current price well above fair value to meet with the more rapidly lifting fair value, and arrive roughly where we are today by about January 2007.* If weak is weaker than this... then it could be longer. If economic value is lower than estimated (e.g. because estimated rates of growth are lower, for example), then it could also take longer too! If Cisco is more fairly priced relative to the market (it's one of the best position companies out there), then the market will "improve" more slowly. If Cisco is more overpriced [than the market], then the market will "improve" more quickly. Which do you think is more likely? I find the extrapolations from this base difficult to correlate with your description of "growth moving the market upwards" or good news for Cisco. John * For those who like to follow the math, current price $13.25 is about 1.66x the estimated economic value of $8 for Cisco's stock price, and 10% p/a growth will result in 1.66x in about 5.3 years.

To: RetiredNow who wrote (61265)	9/12/2002 1:17:13 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77398

Hmmm... re-reading my earlier post I'm sure it's clear as mud. Try 2. Let's say that Cisco is representative of the market. Both are over priced. We estimated Cisco was worth about $8 a share and it's trading at $13.25 a share. We also assume that over the long term the price of the market will converge on its economic value. Now, if the Dow is similarly over priced and is trading at 8433, then we can extrapolate it's actual value at 8/13.25 x 8433 = 5087. Remarkably close to that "Dow 5000" number you've heard from folks who might know something about mathematics and economics and the process of curing the madness of crowds. In the long term, we expect the Dow to converge towards its economic value, which should be lifting from 5087 by the rate of growth that is occuring in the economy over that period of time. Let's take 10% growth in the economy for 5.3 years. That would move our 5087 Dow to 8433 and "lift" the market to... hmmm.. just about where it is today. Now, if the economy grows more slowly than 10%, say 5%... well we'd have to wait 17 years before we see 8433 again. This is the point I was making. If these assumptions hold true, then even moderate economic growth means you can kiss returns in the stock market goodbye for a long time. Bear market rallies notwithstanding. John