To: stockman_scott who wrote (14504 ) 10/24/2002 1:17:20 AM From: XBrit Respond to Yes, the Siegel-and-Shiller show. I owe Shiller big-time, because I read his book in May 2000, and it convinced me to sell all my stocks."Furthermore, argues Siegel, stocks now deserve a price-earnings ratio in the low 20s--vs. an historical average of around 15--because inflation, taxes on capital gains, and stock trading costs are all significantly lower than they typically have been." "...most of the "fair value" calculations tossed about by Wall Street analysts are predicated on the 10-year Treasury bond yield. If the 10-year Treasury yield is low, analysts generally assume that stock yields should be similarly low (and that P/E multiples should be high). Indeed, this is the whole basis of the so-called "Fed model." I've frequently noted that despite a few good "calls" based on extreme outliers in 1982 and 1987, the historical data taken as a whole shows zero correlation between the "overvaluation" or "undervaluation" indicated by the Fed model, and the actual subsequent return for the S&P 500. That's zero to about 4 decimal places, mind you. Completely useless." "The distinction between opinion and evidence is that evidence can be observed in real-time, and has a certain amount of testable, factual weight. In this regard, the so-called "Fed model" of stock valuation (dividing the prospective earnings yield on the S&P 500 by the 10-year bond yield) is opinion, in the sense that "overvaluation" or "undervaluation" on the basis of that model has zero statistical relationship with subsequent market returns (even including a few good "calls" from extreme readings in 1974, 1982 and 1987 which were apparent even using the raw P/E). This is not to mention the fact stocks currently have a duration in excess of 40 years, which makes it a laughable notion that anybody would think of pricing them off of a 10-year Treasury with a duration of less than 8." hussman.com
