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To: Ken Brown who wrote (4212)	3/17/1998 1:05:00 AM
From: sea_biscuit	Respond to of 42834

There's an awful lot of optimism around. Here's something to cool the flames just a little. And here's something to fan them further (emphasis mine): ---------------------------------------------------------------------------- "Today is unbelievable. We're seeing easily three buying orders for every selling order," said Frank Calta, managing director of institutional trading at Dain Bosworth. [...] Traders said the bullishness was slightly overwhelming. "It's a little frustrating because its getting very hard to find sellers -- so you can't get some of these stocks for your customers," said Calta. ---------------------------------------------------------------------------- Another thing that gave me the chills -- a friend whom I have been helping construct a portfolio of mutual funds just called me and said he wanted to re-consider the 70/30 stock/bond portfolio that I had recommended to him. He said that allocation could turn out to be "a big mistake" and he is having "second thoughts", and maybe he can "go for 100% in stocks?"... Shivvvvvver!! :-) Dipy.

To: Ken Brown who wrote (4212)	3/17/1998 1:52:00 AM
From: wooden ships	Read Replies (3) \| Respond to of 42834

Ken: In this vein, an article appearing in the 16 March 1998 Barron's is, in a word, provocative. It seems that a stock market valuation model used by the Federal Reserve has been unearthed by Ed Yardeni, economist for Morgan Grenfell, who found it buried in the back pages of a Fed report. The model is based, according to Barron's, on a comparison of the yield on the 10 year Treasury notes to the price/ earnings ratio of S&P 500(employing 12 month projected earnings). Interestingly, the model uses a so-called "earnings yield on stocks" for comparison to the 10 year note. The earnings yield is the inverse of the price to earnings ratio. Therefore, in the present instance of an S&P 500 at 1079 odd and projected 12 month earnings at $50.78(using current IBES Int'l estimates) the earnings yield on stocks would equal 4.70%. The 10 year Treasury note currently earns about 5.54%. To paraphrase Barron's, "The model asks why anyone would buy stocks with a 4.70% yield when they could get a bond with a yield of 5.54%?" Using these numbers, the model would suggest the S&P 500 should be trading at 916, instead of 1079, or, put another way, the current market is 18% overvalued. As Yardeni asserts, "The market is as overvalued now as it was before it took a dive in October (1997)." The Federal Reserve model, per the graphs accompanying the Barron's article, "has done a pretty good job of predicting the path of the S&P 500 over the past 18 years."* Believing the IBES estimates of $50.78 for S&P 500 earnings too optimistic, Yardeni states, "I think we'll be lucky to do $48. If you use $48, the market is about 25% overvalued." Indeed, factoring in a 10 year note yield of 5.54% and earnings of $48 for the S&P 500, the Fed model suggests a market fairly valued at 866 on the S&P 500, instead of the present 1079. Meanwhile, Yardeni admits that the market "can remain overvalued for quite some time" and that overvaluation can be corrected by a fall in interest rates and/or a rise in profit estimates. Parentheti- cally, one need only to refer to the Japanese market experience of some years ago to make the case that unseemly overvaluation can endure for lengthy periods. On the other hand, as reported on this thread prior, Yardeni, the raging bull of the 1980's/90's has turned markedly cautious, partly due to expected Year 2000 computer problems, and counsels that "the days are numbered for this bull market." * "The point of most extreme overvaluation came just before the crash of 1987, when stocks were 32% overvalued (per the Fed model)."