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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host -- Ignore unavailable to you. Want to Upgrade?

To: Justa Werkenstiff who wrote (5017)	5/17/1998 8:03:00 PM
From: MrGreenJeans	Read Replies (3) \| Respond to of 42834

Is the SPX Overvalued and Why Should One Be Fully Invested? As I write this the SPX is currently at 1108 with a trailing price earnings ratio of 23.67. If one assumes that the earnings on the S&P will attain $50 this year it is trading at a prospective pe of 22.16, and if one assumes the S&P will earn $54 next year it is trading at a prospective pe of 20.52. Assuming that the earnings hit $50 this year an assigned pe of 23 yields Dow 9200 and if earnings hit $54 next year an assigned pe of 23 yields Dow 9936 or roughly Dow 10,000. Tonight the Dow is at 9096 and a move to 10,000 in 1999 translates to a 10% advance. Questions: 1. PE ratios are currently at historic highs on the S&P. Does it make sense to buy the Index or dollar cost average into the index at these levels for a possible 10% advance? (This scenario assumes a pe of 23-of course if the price earnings ratio drop slightly the revised 10% figure would have to be revised downward) Or does it make more sense to sidestep buying the S&P and go into cash with a money market fund yielding roughly 6% for an opportunity cost of 10%-6%=4% if things go as expected? (Let's sidestep the tax question for the moment and look strictly at the risk / reward ratio) 2. If the S&P earns $54 in 1999 and the price earnings ratio drops to 22 this would yield Dow 9500, a price earnings ratio of 20 yields Dow 8640? Why is the world assuming the price earnings ratio will stay at 23 and nothing will go wrong in this environment of economic nirvana? 3. The Federal Reserve has placed the world on notice that it has changed its outlook slightly on rates from a neutural stance to a tightening stance, through a published article in the Wall St. Journal with the minutes of that meeting being released May 21st, meaning that their next move is likely to be up. I agree with those that believe the Federal Reserve has no reason to raise rates. I agree with those that expect no increase in rates this coming Tuesday and I agree with those that expect no increase in rates come July. But whether or not we all agree we do not make FOMC policy Greenspan does and what Greenspan thinks is the only thing that counts and what he decides is the only thing that matters. 4. For those that believe that he will not raise rates in an election year, if my memory has not failed me, he did raise rates I believe in the September right before the Presidential election a number of years back. 5. With a possible Federal Reserve tightening later this year and with the Federal Reserve concerned about asset inflation in the equity markets why not go partially to cash and start to disengage early as opposed to later when more significant damage to our portfolios may occur? 6. Finally, let us remember that most people think they can get their money out of the market at the top and let us remember that most people do not...I for one have no interest in being an lemming... Let the discussion begin...