Rcsam

Are Stocks Actually Cheap Now?

That is probably the dumbest analysis I have ever heard. If earnings went negative, based on your analysis, the stock market would be worthless. You have to normalize earnings. Just as you cannot put a peak multiple on peak earnings, you cannot put an average multiple on trough earnings. The earnings of the S&P 500 normalized is about $70. That is a13% ROE. The ROE at the peak was 18% in 2006. Twelve times that is 840. Since earnings are almost meaningless in this free fall economy a better guage is the value of stocks relative to GNP. It is now 65% down from 120% in 2006 and above the depression level of 40% and 45% in 1974.


On Mar 29 06:58 AM Dave Wrixon wrote:

> Sanity returns to the discussion.

Chart: Value of U.S. Stocks as a Percent of GNP

Just to verify; wiki.answers.com/Q/Wha... Wilshire Associates estimates the U.S. market value of $15.35 trillion on May 23,2007, The market is down 48.5% since then making U.S. equities worth $7.9 trillion or 55% of GNP as of Feb 19,2009. Whatever the range it is clearly in the region of the mean of the last 100 years.


On Feb 19 10:46 PM Rcsam wrote:

> The numbers you published are incorrect. The GNP of the U.S. is
> $14.2 trillion in Q4,2008 according to The Bureau of Economic Analysis.
> The value of the U.S. Stock market was $15.64 trillion according
> to Atlantic Monthly in April 2007. The market is down 44.5% since
> then to $8.65 trillion. The ratio is 61%. Almost to the mean of
> the last 20 years

Chart: Value of U.S. Stocks as a Percent of GNP

The numbers you published are incorrect. The GNP of the U.S. is $14.2 trillion in Q4,2008 according to The Bureau of Economic Analysis. The value of the U.S. Stock market was $15.64 trillion according to Atlantic Monthly in April 2007. The market is down 44.5% since then to $8.65 trillion. The ratio is 61%. Almost to the mean of the last 20 years

How Low the S&P 500 Could Go

Where were you 6 months ago. Negative comments always come out at or near the bottom. You must adjust for inflation and interest rates. The stock market return is correlated with 30 year treasuries. You haver a choice between Treasuries and stocks. The market only needs to provide a 3% premium to treasuries and they are yielding 4.15%. The required return on stocks is around 7% to adjust for the greater risk of equities. The yield is 2.5% on the SPX so growth must be 4.5%. Is that reasonable? Growth is inflation plus population growth plus productivity gains. You would have to forecast no productivity growth which contrary to the American experience for the past 100 years. If the market were 1/2 of today, the yield would be 4.8% and growth would only need to be 2.2% to get to 7%. If inflation goes to 10% like it did in 1975 then you are right as bond yields would go to 13% which is a 3% premium to inflation and the required return on stocks is 16%. You can do the math were the stock market would sell---lower. We do not have 10% inflation nor the prospect of such. More likely we will have deflation.