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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (1227)	2/10/1999 7:45:00 PM
From: porcupine --''''>	Read Replies (1) \| Respond to of 1722

Nice --''''>

To: Freedom Fighter who wrote (1227)	2/14/1999 6:20:00 PM
From: porcupine --''''>	Read Replies (2) \| Respond to of 1722

"Checking the Market's Arithmetic" [Isn't 48 times earnings the level the Nikkei Eventually Reached? RR] By GRETCHEN MORGENSON -- February 14, 1999 NEW YORK -- With the Dow Jones industrial average confined to a fairly tight trading range for the last 30 days, investors may be starting to wonder where their bull market has gone. It hasn't helped that yields on Treasury bonds have jumped from 5.1 percent in mid-January to 5.42 percent on Friday. Since the Federal Reserve Board has let the bond market take the lead on interest rate policy in recent years, the move in yields may be a sign of higher interest rates in the months ahead -- never a plus for stocks. To be sure, a month of lackluster stock prices does not mean the end of the bull run. And bond traders could be wrong about rates. Nevertheless, it may be a good time for investors to look at their expectations for stock returns. Those expectations remain sky-high, thanks to years of outsized returns. A survey conducted by the IAI mutual fund group in 1995 asked 1,600 of its customers what they expected to reap annually on their holdings. Some 55 percent said they anticipated stocks to gain 15 percent or more each year. Such pleasant fantasies have been reality for stocks during the four years since the survey. But historically speaking, those returns are high. According to Ibbotson Associates, stocks have returned 11.2 percent a year, on average, since 1926. Yet expectations may now be even higher, given four years of 20-percent-plus stock gains. Does that mean investors are crazy? Maybe. Christopher Orndorff, principal at Payden & Rygel, an investment firm in Los Angeles, has done some math to show why. Orndorff did two analyses of where stocks might be 10 years from now. For the best case, he took the average annual return on stocks during the past 10 years -- 18 percent, including dividends -- and reprised it over the coming decade. He assumed that earnings would grow 6 percent a year (on the high side of performance during the recent past), and that inflation would stay low, at 2 percent. For the worst case he plugged a price-to-earnings ratio of 17.6 for the S&P 500 into his equations, the average during periods of low inflation. He also assumed a much lower, but not outlandish, earnings growth rate of 2 percent a year. The conclusion? If stocks returned what they have for the past decade, the S&P would be trading at 48 times earnings in 2009, or 50 percent higher than the 32 times earnings for the index today. But if the p/e ratio reverted to normal levels in a low-inflation economy, stocks would return just 1.9 percent each year. "We did this because we would occasionally hear clients make projections for the next 10 years," Orndorff said. "They didn't fully appreciate how truly extraordinary the last 10 years have been." Nobody knows where stocks will be in 2009, of course. But looking in the rear-view mirror rarely reveals what lies ahead. After all, who would have guessed in 1989 that the Dow industrials would be more than 6,000 points higher in 10 years? Investors who now believe the decade's high stock returns will continue may be proven just as wrong. "No sensible person can honestly say they expect the S&P to sell at 48 times earnings," said Peter J. Tanous, the president of Lynx Investment Advisory Inc. in Washington. "If they do, there's only one word for them -- and the word is delusional." Copyright 1999 The New York Times Company