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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (34733)	10/29/1998 11:12:00 AM
From: Knighty Tin	Respond to of 132070

Coby, I resent that gentleman comment. <G> But what the hey, Gentleman beat Skip Away last time out. He lost to Wagon Limit in the same race, but he did beat Skip Away at Belmont. Most of your notes do not require an answer, so I'll just hit the ones that do. On what mechanical factors do I use. I use a valuation model that I cribbed from my old finance texts and have modified over the years. It is very similar to the one every quant in the world uses, which is why the S&P model resembles the Merrill model. They buy them by the dozen from Models R Us. <G> The model means very little. It is the input that matters. Using Micron Tech as an example, it was not my model that made my outlook on the dog superior to that of Whittington or Kurlak or everyone else on The Street (but not everywhere. Fred Hickey and Bill Fleckenstein sure knew that their eps estimates were bogus). Heck, if I thought they were going to earn $10-17 a share in FY 1997, I would have considered them undervalued, too. My model would have rung a bell and wacked me upside the head if I didn't mortgage the ranch to load up on the stock. However, I, and Fred and Bill and many others, but not enough of us to overwhelm the 95% of the analysts and touts who were bullish, noticed a slowdown in pc unit sales. How a Wall Street chip analyst would not notice that is amazing. We also noticed a huge buildup in chip capacity in Asia and the U.S.. This one I understand. Chip analysts cannot find Asia on a map, so they ignore it. <G> My calculations showed that a slowdown in demand growth of pc boxes at the same time as a speedup in chip capacity, both through new fabs and greater efficiency at old fabs, was going to cause a glut. So, where Whittington had $17 of eps in his model, I had $1. Where his growth rate for the next five years was 30-40%, I had negative 20%. We could have used exactly the same model and still, he would be a raging bull, long and wrong, and I would have been a raging bear, put and strut. <G> The problem with getting info my way is that it involves work. Analysts like to do banking deals and for their other issues, simply take whatever data the companies and the Dataquests of the world dump on them. Minimum effort, minimum thought process, minimum results, especially when they are dealing with a touty co. mgt. But even good co. mgts tend to be overly optimistic. The 5% eps growth I am forecasting is on the market, not on Pfizer. If Merrill is forecasting 20%, that is much higher than I've seen from them. And they are wrong. Very wrong. I think we just had a failure to communicate on this one. The risk free rate is a nebulous term. Some say Treasury bill rate, some overnight repo, some discount rate, some money market rate. I would not agree with the latter, as money market funds do occasionally take losses. Rare, but not risk free. But risk free rate is somewhere between 4.75% and 5.25%. My point is, the lower the risk free rate, the higher stock pe ratios can go. My current caluculation is that the market pe ratio requires a 2.2% risk free rate to support its level of valuation. If Merrill thinks the eps are growing at 20%, that would explain the disparity. But they are not. They may be growing faster than 5%, and maybe the market can support a somewhat higher rf rate. But the eps are not and will not grow fast enough, IMHO, to support the current bloated levels. MB