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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 (135)	4/3/1998 9:29:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 1722

>Yet, if the Market goes up 60% from here, then falls back a >"calamitous" >40%, that would only leave the Market 4% down from where it is now. What if there is an economic relationship between the cost of capital (interest rates) and Return on Equity? What if there is some sort of competitive pressure/wage/overcapicity issues that drives ROE down to lets say 5.5% above the so called risk free rate (long treasuries). That has been the ball park average and the number used in a couple of pricing models that are popular. (over time of course) What if a majority on Wall St. or the FASB finally admits that earnings are overstated due to stock option compensation. (actually FASB has already admitted it but they were overruled by political pressures from those who are issuing them to themselves) All of a sudden corporate ROE (would be 11%-12%). (the reality numbers..not Wall St illusions and slight of hand) These are the types of numbers that existed in the past under similar conditions to today. Book value for the S&P500 is around 200 (97 numbers not yet released) .12 * 200 = EPS 24 To grow at 6% would require the addition of $12 of book value capital. That would mean dividend slashes and a PE of over 45. The present value of future cash flows would suggest that the values of the businesses are back to about a PE 14 or so!!!! 14 * 24 = S&P500 = 336. Ouch...I mean Double Ouch Noone can argue with any view about "stocks may or may not go up and by how much" or "how much they will come down". Enough liquidity from the central bank and all is possible for a while. We are discussing value investing though. By definition we are discussing present values of future cash. Of course the above is a worse case scenario but the present value of current "real" cash suggest that investors are accepting lower real and nominal rates than ever. If there are any of the above economic balancing effects (and I strongly believe there are) then stocks are wildly overvalued. AGAIN...they can continue to rise but that would have nothing to do with value which is what we are discussing. The printing press can accomplish wonders for years until it leaves a country in ruin...Japan Again! value is what is real not what Wall St. fails to recognize or accept.