Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: edward miller who wrote (13696)	2/1/1998 1:56:00 PM
From: Tommaso	Read Replies (2) \| Respond to of 18056

Here's something that has often been noted: Although it hasn't yet happened to any great extent, except very briefly during the October downspike, much of the money that is in retirement accounts invested in stocks can be switched any time into bond or money market funds. With the low cash balances in most equity funds, only a modest shift in mood is needed to effect a large decline in equities. Only ten percent of the nest-egg-building public needs to decide to switch out of stocks, or only twenty percent needs to decide to switch half out of stocks, to set off a big decline in the markets. The amazing thing is that it hasn't happened yet. Seldom has there has there ever been quite the lack of caution--on the part of banks as well as many businesses and many persons--about money as there is right now.

To: edward miller who wrote (13696)	2/1/1998 11:39:00 PM
From: studdog	Read Replies (1) \| Respond to of 18056

Thanks for outlining your thoughts on current market valuation. TO help me make investment decisions,I have chosen to use the model put forward by the fed and popularized by Dr. Yardeni. It basically states that stock market valuation has historically followed a model pretty closely that simply says: fair value of S&P 500 = one year forward earnings expectations for stocks in the index, divided by the yield of the 10 year bond. IBES has forward earnings estimates at about $50. so, 50/5.5 = 910. THis suggests an overvaluation of about 9% which is not too outrageous. For comparison, the S&P was more than 30% overvalued in 1987 prior to the crash, and about 25% overvalued this past August prior to the turmoil this year. In both instances fair valuation was reached again by a combination of a drop in interest rates, a rise in earnings estimates and a fall in stock prices. So, For my simple mind, the future direction of the market is dependant on rates and earnings estimates. If you think earnings estimates will be cut, then the current mild overvaluation becomes much more significant. Unless of course yields drop. It seems to me that the inexorable drop in rates over the last several years has really fueled the current high multiples. At the same time earnings have grown greatly, compounding the gains in the market. Some folks much smarter than me are expecting further falls in yields. Karl