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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (1)	2/28/1998 1:12:00 AM
From: Jay Mowery	Read Replies (2) \| Respond to of 1722

Porc et al, Here's my first question on all this stuff. I get the general ideas on all the production cost parts and the corporate profitability stuff. I also get the parts on inflation and spending etc... The question that keeps churning through my head when I look at the markets today goes something like this: All these variables that are used seem to be ahead of themselves! They appear to me to be based on what I would classify as World War II standards. (No disrespect here) 1) We have population growth. a) Is this because there are more babies being born? Or is it because more people are living longer?(ie: 70 1/2) b) If it is the second, of these people, how much money do they control and how much is income they receive from managed funds. That they spend and cycle back into the economy,without being counted as part of the work force? (Hope this makes sense as a question) 2) Due to the economic growth over say the past 10 years (arbitrary number) a) how many people have dropped out of the work force and turned say investing on their own as a means of employment? Hence removing themselves from the unemployment figures, thus skewing the monthly unemployment numbers? Dropping the unemployment rate and increasing the inflow of money to the market not just through mutual funds and IRA's but also personal investments through a greater dependence on the markets and increased cash flow FOR the markets.(I know of at least one person that's done this and I bet if they check. There are a whole lot more of us! None of which are tracked or counted) b) I've never seen any studies of this type. I really believe if statistics were run on this: You may find at least part of reduced unemployment figures, your over valuation in stock prices and maybe part of why the markets continue to rise. c) This whole thing may sound too simple or even stupid but as it stands the reasons given in the news don't make any more sense to me.(here again maybe I'm stupid) If you put money in the market,(buy stock) The money is used to produce goods. The goods are sold to people who need them.(maybe even me in some cases) The company makes a profit. The stock price goes up. I sell the stock and make a profit. Pay for some of the goods with my profit. Reinvest the rest of my profit to make my cash reserve grow. d) The cycle continues the market grows. It's very interesting to me, but I just get the feeling at least, the Government, is leaving out some information to skew the picture in the direction of, making themselves look good, more than in the direction of accurate statistical analysis. Porc... I hope these questions make sense as I really did try to ask them clearly and sincerely. I hope ya'll can discuss at least some of this stuff or direct me to some information. I really don't think todays markets are a bull or bear thing. For me they are a necessity thing! Best of luck to ya'll,(I'll check back in later) Jay PS. You end up with two factions here. 1) Individual investors who are their own little uncounted companies, that have no impact on statistical data. They're basically money factories that pay taxes. 2) Corperations/Funds, Investment advisors: The few counted employees who invest for the masses of senior citizens who are not counted statistically except for taxes and who control major chunks of wealth. Who I also happen to believe hold a pretty substantial ratio of the population!

To: porcupine --''''> who wrote (1)	2/28/1998 5:32:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

I would like to add that I agree that higher PE ratios are justified by lower interest rates and inflation. I have been willing to pay up somewhat in this cycle. However, there has never been a case in history where PE ratios in general have sustained levels like these. In fact there is only one other period in American history in which PE ratios got past 20 for non-depressed earnings. That was 1987. Even in 1929, when the inflation rate was 0% and long bonds were yielding 3.5% the PE ratio was only 19 as opposed to the 22X on the Dow and 26X on the S&P that we have now. As for increased revenues vs flat capital spending. Investment Capital spending is generally done in clusters. There was such a cluster in the late 80's and early 90's. I suspect that is was that investment that produced the revenue and profit growth for this business cycle. It is not so much that more profits are being achieved with less investment during the 90's. Therefore, I don't believe that the capital spending budgets of the late 80's are comparable with the present because the next cluster has not occurred yet. I cannot be sure, but I suspect that there will be another such cluster in the not so distant future. Capital spending growth is simply not smooth. There has also been a great deal of mergers and buy-outs done in the 90's instead of capital spending. Companies are using stock and cash to buy factories etc...instead of building them. This also makes the comparisons in aggregate capital spending very difficult and somewhat suspect. As for companies being managed better. I suspect that this is true to some degree also. In some cases it would represent a reason for expecting less cyclical earnings comparisons. This justifies slightly higher prices. I said "I suspect" because there may be a downside to various inventory practices that exist at present that just haven't been exposed yet. In general though the U.S is doing a better job. On the flip side, if one looks at those companies like drugs, foods, beverages, confectionery etc.. and other companies that were never considered cyclical or economically sensitive to begin with, they are mostly selling at historic PE ratios despite generally the same wonderful prospects that have had for the last 35 years. Some, despite their high growth at present, are growing more slowly than in the 60's but selling at higher prices. This suggest excess. Lastly, If the economy is somehow different than the past, then the prices already reflect it. Value Investing is about margin of safety. If the most optimistic among us are correct, there is no margin of safety in the current aggregate prices. If those from "Missouri" turn out to be correct, then there is massive overvaluation in many sectors. Only time will tell.