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To: Alias Shrugged who wrote (272535)	1/3/2004 8:55:04 PM
From: S. maltophilia	Read Replies (2) \| Respond to of 436258

There's very little Epstein does that can't be done by a lot more cheaply and efficiently by someone in India as Epstein enrolls in bedpan handling class at his local junior college. OTOH; never mind the efficiently part. Once a week is more than plenty.

To: Alias Shrugged who wrote (272535)	1/4/2004 6:36:00 PM
From: ild	Read Replies (1) \| Respond to of 436258

hussmanfunds.com On the valuation front, one of the classic signals of an emergent bubble is the appearance of new measures of valuation to justify the elevated prices. John Kenneth Galbraith noted this phenomenon decades ago in his book The Great Crash 1929: “It was still necessary to reassure those who required some tie, however tenuous, to reality. This process of reassurance eventually achieved the status of a profession. However, the time had come, as in all periods of speculation, when men sought not to be persuaded by the reality of things but to find excuses for escaping into the new world of fantasy.” We saw this during the late 1990's in the form of valuation measures based on “hits” and “eyeballs,” Harry Dent's demographic models, and incredible contortions of finance theory like Glassman and Hassett's Dow 36,000. Not to be outdone, the recent advance has engendered a new fantasy valuation approach from the latest of Arthur Laffer's liquor-soaked cocktail napkins, dutifully featured this week in Barron's. Laffer reports that after calculating the S&P 500 P/E ratio using an earnings measure that isn't actually based on S&P 500 earnings, adjusting that P/E using interest rates of a far shorter duration than are relevant for pricing stocks, and modifying that adjusted P/E with numerous ad-hoc assumptions about tax impact, it turns out that the actual P/E ratio on the S&P 500 is ostensibly 3.3 (three point three - that's not a typo). Notably, Laffer's cartoonish P/E ratio was already below-average at the year 2000 bubble peak, which is a nice thing to know when you're about to lose half your money. As Glassman and Hassett argued with a straight face, if earnings were dividends, and growth needed no investment, and stocks were bonds, and risk was safety, the Dow's P/E could be 100. To seriously entertain valuation theories like these, or even variants of them, requires the willingness to make endless substitutions that interchange fact with fiction. To any serious analyst of the markets, the entertainment value in doing this runs out very quickly. Rich valuations On the basis of price-to-peak-earnings, the S&P 500 now trades at a multiple of 21, which is higher than the final peaks of 1929, 1972 and 1987. Moreover, those prior peak earnings (achieved in 2000) were on the basis of unusually strong profit margins and return on equity. In other words, those earnings were out-of-line with revenues and book values (not to mention dividends) observed at the same point. On the basis of a wide variety of fundamentals - the most relevant to us always being linked to the generation of free cash flow - the market has been more richly valued during only one other span of history, which was the approach and early decline from its bubble peak in 2000. Reported cash flow has certainly picked up in recent months, but I remain skeptical of the source. Charles Mulford, who oversees the Financial Analysis Lab at Georgia Tech agrees: “At least some of the recent improvement in cash flow is from liquidating the balance sheet; it is not earnings produced. That kind of growth is not sustainable.”