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Strategies & Market Trends : The Stock Market Bubble -- Ignore unavailable to you. Want to Upgrade?

To: Box-By-The-Riviera™ who wrote (2238)	10/30/1998 10:24:00 AM
From: Tommaso	Respond to of 3339

The economy seems very good; it's just that even the most optimistic possibilites for stocks can't justify the levels that they are at. People have been buying mutual funds for several years as if they were bank accounts that carried a guaranteed return. Merely to keep up with, say, the 4% or slightly better offered by bank money-market accounts, the profitability of all businesses would have to grow constantly at about 3.5% per year (this is allowing for the approximate current dividend yield aaverage of 1.5%. Many highly-valued stocks have no earnings or earnings that are extremely small in relation to the price. All businesses and all economies have moments of faltering, however, when profits decline or when there are actual losses, even bankruptcies and failures. Look at Japan! Ten years ago it was thought to be unstoppable and the Nikkei was over 40,000. Now its GNP is actually declining and the Nikkei bounces around near 13,000. A person who invested at the top would have nothing to show for ten years of holding except a loss of 65% of capital. I am afraid that the need to keep up a dignified appearance may have prevented the acknowledgement in Japan that many banks and insurance companies really are not solvent.

To: Box-By-The-Riviera™ who wrote (2238)	10/30/1998 10:09:00 PM
From: Moominoid	Read Replies (3) \| Respond to of 3339

Stock prices only look reasonable value if we will get the outrageous increases in profits that the analysts are still predicting for 99 and thereafter. There is no reason why GDP growth of 3% this late in the cycle will make those numbers turn out to be right. Let's assume profits grow at 5% nominal forever more (3% real +2 inflation) and free-cash flow=earnings and the equity premium is the historic 6.5% and the risk-free rate is 5%. Then P/E = 1/(rf+ep-g) = 1/(.05+.065-.05) = c. 15 What's the P/E currently? 27, 25? This points to the 5000-6000 range. Please adjust my assumptions in line with reality :) David