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

To: Michael Bakunin who wrote (41985)	1/4/1999 11:08:00 AM
From: Mike M2	Read Replies (1) \| Respond to of 132070

mb, I didn't click on your link but keep in mind that in the past high PE's have been based upon depressed earnings. In the current mkt not only are PEs high but earnings peaked one year ago. Wall st cannot make a case for higher earnings in 1999 unless they base it on hope. Not only are PEs high but I would argue that the quality of those earnings is the lowest on record due to very aggressive and misleading accounting like esops and share buybacks. In addition, the decline in interest expense has been a major factor in the improvement of earnings power in the US -a factor which will be of little benefit going forward. The US economy has been powered by a debt fueled consumption bubble due to easy credit and the wealth effect of the stock mkt. Mike

To: Michael Bakunin who wrote (41985)	1/4/1999 11:40:00 AM
From: Ilaine	Respond to of 132070

Thanks for the article, mb, I thought it was well-written and interesting. I particularly liked the discussion which began on p. 13, about stock valuation in an era where fewer companies are distributing earnings as dividends. The authors set forth three competing views on the present high level of S&P P/E: 1) that P/E ratios have risen permanently because long-run returns have declined, possibly because stocks have become less risky. They then set forth three possible reasons why stocks have become less risky: a) stocks in investments such as the S&P 500 have become less volatile ; b) the risk premium may have been too high in the past; c) people live longer, so have a longer time horizon, and rates of return are less volatile over time. 2) that P/E ratios have risen permanently because the rate of return has declined because they don't pay dividends as they used to, and most investor income is classified as long-term capital gains, which is taxed at a lower rate than ordinary income, and can be deferred until the stock is sold, all of which gives stocks an advantage over bonds as the time horizon gets longer. 3) that P/E ratios are temporarily overvalued, and that the price of stocks will decline. Speaking anecdotally only, the typical individual investor that I discuss these matters with (outside SI, just my friends and acquaintances) believe in buy-and-hold, because their investments are in retirement accounts. The consensus is "You're in this for the long haul." Stock price volatility mystifies them. They don't want to sell their stocks, although I don't know if they realize that they wouldn't have to pay gains on stocks in retirement accounts. They don't mind that certain stocks (Intel, Microsoft) are expensive, because they are big names and they believe that when they retire, Intel and Microsoft will still be in business.