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To: studdog who wrote (8014)	11/15/1997 12:45:00 PM
From: Haim R. Branisteanu	Read Replies (1) \| Respond to of 18056

Karl, all is fine with your model, but my expectations are 15% to 30% lower profits for next year!! Therefore at present time the market will find balance around SPY 750 if not lower as pessimism will grow. US market valuation is above the US GDP. Think about how a prolonged/substantial market erosin will influence the GDP. Retail sales are already slowing, - resulting in lower profit for the retail sector! Car sales are down - lower profit for GM, F, C and their host of suppliers. Happy trading Haim

To: studdog who wrote (8014)	11/15/1997 1:51:00 PM
From: Rational	Read Replies (1) \| Respond to of 18056

Karl: The valuation model you have presented is correct if there is no growth in S&P500 earnings. The correct valuation model with non-zero growth is: Value = Earnings/(Cost of Capital - Growth Rate). Thus, the market may not be over-valued if the earnings estimates you present are right and there is a modest growth in earnings. But, it is highly sensitive to the expected COC which changes as the mood in the market shifts. The rumor on Friday that the Japanese Government was planning to sell US Treasuries (tied in their pension plans) to buy Japanese bank preferred stocks, made the market believe that Asian economies would recover and so they bid up the tech stocks towards the end of the day. But, over the week-end, there will be a re-evaluation of COC as the Japanese dump US Treasuries, making the price fall and yield rise. On Friday, the yield did not rise because the Jap Govt did not yet begin dumping -- it was just a report that they would. Sankar

To: studdog who wrote (8014)	11/15/1997 2:28:00 PM
From: Jack Clarke	Read Replies (1) \| Respond to of 18056

Karl: You have received excellent input from knowledgeable people, so I don't hope to add much since I am not a pro and not a number cruncher. But FWIW, I think one problem in your model may be the concept of "growing productivity". When I went shopping with my son recently at a large computer store, we were behind twelve people in line at the only cash register (out of 7 lanes) which was attended. My son asked me what was going on, and I answered, "PRODUCTIVITY." My point is we may have gone as far as we can go. How much further can productivity be "tweaked"? Everything has its limits before quality suffers enough to cause a turnaround. Mergers, answering machines, personnel cuts are all great for the bottom line, but didn't it make you a little leary when a major airline said it was cutting maintenance costs by 30%? I won't mention what is going on in my own profession (medicine) -- thats a story for a different thread. Jack

To: studdog who wrote (8014)	11/15/1997 2:50:00 PM
From: Zeev Hed	Read Replies (1) \| Respond to of 18056

Karl: Two comments, the 10 years bond is influenced mainly by two parameters, inflation expectations and temporary imbalances of supply and demand. You are right that inflation expectations will cause a down trend in the 10 years rate (but they will not go below the discount or overnight rates), on the other hand, if my scenario of massive selling of treasuries is borne out you will get two diverging forces, the first is a temporary spike up of the rates (too much supply of treasuries) the second is a lowering of expectations of earning for the S&P. Long term (6 to 9 months) you r model make sense but short term it is dangerous. Finally, if you chose to go long, you should go with "unbroken" stock that are not particularly overvalued, suc as some drugs (I like MRK), some telephones (I like T), a beaten down stock, but not broken like BA. All these stock are relatively well sheltered from deflation in the rim. Going with technology and particularly with the Semi sector, will in my opinion be a mistake, because that is exactly where the deflationaryy forces are the strongest and the profit margins going to be squeezed. If you insist on a high tech there are some that are beaten to a very small premium to book, like WFR. Howvever, even this excellent company, I expect to buy in few months at bargain prices under book. Zeev

To: studdog who wrote (8014)	11/16/1997 2:29:00 PM
From: Sonki	Read Replies (2) \| Respond to of 18056

Karl, w.forward earning of 47-50 and your guess of 860-950, market is already fully valued for next year's growth. at s&p = 950 w. yield of 5% we have pe of 20. current pe 21. one thing to note: market was trading at 7 pe approx 7yrs? ago at the high valuations (20pe) is justified w. growth rates of 15%. when earning growth slows, pe will also contract and don't forget some people will rather pay 18% tax starting jan98 then to possibly take a risk of 15% correction. btw: i found your methods very intresting. how did u come up w. earning/ 10yr yield makes perfect sense w. valuations.