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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: Killswitch who wrote (14636)	9/21/2002 6:26:29 PM
From: robert b furman	Respond to of 19219

Hi Brian , Thanks Bob

To: Killswitch who wrote (14636)	9/22/2002 6:36:12 PM
From: Killswitch	Read Replies (1) \| Respond to of 19219

Here is something from a recent Barrons interview with a fund manager named Rudolph-Riad Younes that is very relevant to those who try to use the "Fed Model" to determine if stocks are fairly valued. "Barrons: What's your world outlook? Younes: Even when you are investing in international equities, when you are trying to solve the international puzzle, the U.S. is the starting point before venturing into other geographies. It is the locomotive for global growth, and the U.S. consumer spends more than anybody else. So for us, the U.S. is the most important market. The key issue surrounding the U.S. today is not whether or not the economy is heading into a double-dip recession, but how real are earnings? You don't need fraud to have wrong earnings. There are three different methods that lead us to estimate the earnings of the S&P 500 this year at around $35 a share. S&P's own work suggests earnings will be about $35 a share. The consensus is about $49 and it keeps going lower as days go by. For 2003, the consensus is about $57, even as 2002 earnings get lower by the day. That's wishful thinking. Q: How do you get to $35? A: We're looking at what Standard & Poor's is calling "core earnings." It's S&P's answer to problems associated with reported and operating earnings. It adjusts reported earnings to exclude the cost of stock options, gains from pension plan investments and other non-core gains or losses. S&P's investment strategist said in May, when the index was at 1050, that if the core-earnings approach was applied it would increase the multiple of the index from 20-22 times based on operating earnings to about 30 times. That suggests earnings of $35 a share. Wall Street is ignoring this method of estimating earnings precisely because earnings estimates will be below operating earnings. Q: Can you get to that figure independently? A: There are two ways we calculate normalized earnings. We look at total after-tax corporate profits as reported to tax authorities. They have averaged 5.4% of gross domestic product in the post- World War II era. We expect GDP to be $10.6 trillion by the end of this year, and so normalized earnings for all corporate profits are about $573 billion. That figure represents the earnings of 4.8 million companies that file tax returns. The S&P 500's profits as a percentage of total corporate profits have averaged about 56% since 1963. From that, we get an estimate of normalized earnings of $321 billion for 2002, or $35.20 a share. If we assume the economy grows at the nominal rate of 4.8% in 2003, then earnings should be around $336 billion, or $36.90 a share. The other way to get to the same number is to multiply the estimated sales of the S&P 500 -- which are expected to be around $6.44 trillion this year and $6.75 trillion next year, based on a nominal growth rate of 4.8% in the economy -- by the historical average net margin of 5.1%, and we get to $328 billion and $344 billion in earnings and earnings per share of $36 a share this year and $37.70 next year. Q: What about Nasdaq? A: Nasdaq is still really, really overvalued. Even making ridiculous, heroic assumptions -- along the lines that information-technology spending becomes 100% of capital spending in 20 years, earnings increase at a rate of 9% a year over the next 20 years and no new businesses are formed -- even those assumptions lead you to only 800 on the Nasdaq. Nasdaq is kept aloft because of historical valuations."