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Strategies & Market Trends : Galapagos Islands -- Ignore unavailable to you. Want to Upgrade?

To: Jorj X Mckie who wrote (37977)	4/27/2003 9:40:06 PM
From: Techplayer	Respond to of 57110

another reason to slash interest rates a bit more: Price/Earnings ratio We're all pretty familiar with the concept of P/E ratios (or price/earnings). This is simply a quick measure of the cost of a share of a stock in relation to earnings per share. A high P/E means the stock is relatively expensive, while a low P/E indicates a bargain stock price. The historical average P/E has been about 16.7, although recent averages push that figure nearer to 20. As a rule of thumb, many analysts say 'sell' when P/Es reach 19 or higher. That P/E of 19 may be laughable by the standards set in 1999 and early 2000 (with P/Es as high as 100 or more). However, remember that 1999 and early 2000 were the fluke - not the norm. That 19 P/E is a reasonable standard. As of yesterday, the average P/E for the thirty stocks in the Dow Jones Industrial Average was 19.33. Those 0.33 points may seem 'close enough' to 19.0, but it's really not. And considering that the average P/E is 16.7, that 19.33 P/E shows that stocks may still be overvalued. Interest Rates The bottom line is, stocks will go up when it makes more sense to be in stocks than in other investments, such as bonds. If the return on a 30 year treasury is greater than the yield on stocks, who'd want to sell bonds to buy equities? So how do we compare yields? To calculate the percent yield of a stock, the P/E ratio is simply turned into an E/P ratio. In other words, if the P/E is 20, then the yield would be 1/20, or 5 percent. (If you have one of these, you can always calculate the other). As of yesterday, the yield on the thirty Dow stocks was averaging 4.5 percent. The current yield on a 30 year treasury is better, at 4.83 percent. To cross this hurdle, one of two things will have to happen: earnings (equity yields) will have to improve, or interest rates will have to go lower (or both). siliconinvestor.com