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To: Michael Burry who wrote (147)	3/23/1999 10:37:00 AM
From: Daniel Chisholm	Respond to of 270

Hi Mike, Dow 36K, no? If you thought that was ridiculous, check out the "Dow 652,230! No, Really" article in TheStreet.com: thestreet.com Anyhow, getting back to the Dow 36,000 article in the WSJ, here's a snippet of an email I wrote last Thursday: The key part of that article, after it argues that over the long haul stocks are as riskless as bonds, is this: > Assume Treasuries yield 6%. To equalize that cash flow, > stocks can yield much less than 6%, because, unlike bonds, > stocks increase their earnings and dividends each year. In > inflation-adjusted terms, earnings per share have been rising > by an average of 3.3% annually since World War II. > > Our conservative calculations show that an earnings return > of about 1%--or a P/E of 100--is adequate to match cash > returns from bonds over long periods. Since the P/E of the > Dow is currently about 26, stocks could nearly quadruple > before becoming overpriced. Accepting their argument, and the facts they quote in the first paragraph I have pasted, I still don't see how they figure that stocks oughta yield 1%. If I use a discount rate of 6% (which seems appropriate here), and an average perpetual growth rate of 3.3%, then I figure that they should value todays' stock earnings at 1/(0.06-.033), i.e., an earnings yield of 2.7%. This is a P/E of 37, which would imply a Dow of about 37/26*10,000 = about 14,250. This is roughly Nikkei territory, which somehow seems symbolically relevant. Perhaps I ought to try contacting the authors and see if they can enlighten me where I made a mistake, and how I too can conservatively arrive at an earnings return of 1%. Bill Fleckenstein also had some choice words to say about that article, see: stocksite.com - Daniel