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<DIV><FONT color=#000000>I was talking to a good fundamentalist friend of mine
last week and wondered how the Bulls would turn the Asia Meltdown into a wildly
bullish senario. I suggested that with more Asia's being forced into
bankruptcy that this would result in more little Asian's 9 months down the road
and more mouths to feed, more personal hygine products to buy....and the list
goes on and on and on.</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>I just saw on the internet and lost my url an
explanation by Elaine Garzarelli explaining why 0 (yes ZERO) earnings growth was
a bullish case for the Dow to reach 12000! Her reasoning is that
"because interest rates wold remain low and stocks would go
higher"!!!! (Did anyone else see this statement last week?)</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>Boy she would be a great person to sell your
business. She could explain why your business would be worth 3x and 4x
today's inflated price JUST because there was going to be ZERO earning growth in
your business and in your industry in the next year!!!!</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>The Bull Mania is Alive, Well and Kicking!</FONT></DIV>
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</x-html>From ???@??? Tue Jun 23 00:49:03 1998
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Date: Tue, 23 Jun 1998 03:32:58 -0300
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From: "A.J. Carisse" <carisse@xxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Subject: Re: Bull Mania Alive and Well
References: <004901bd9e61$62751ae0$8d7297d1@xxxxxxxxxx>
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Lee Clayton, D.D.S. wrote:
> I just saw on the internet and lost my url an explanation by Elaine
> Garzarelli explaining why 0 (yes ZERO) earnings growth was a bullish
> case for the Dow to reach 12000!...Boy she would be a great person to
> sell your business. She could explain why your business would be
> worth 3x and 4x today's inflated price JUST because there was going to
> be ZERO earning growth in your business and in your industry in the
> next year!!!
First, last sale of stock is not a valid way to value the worth of a
business. It is erroneous to assume that the total value of stock can
be measured by last sale - obviously, turning it over would almost
always result in total receipts being only a small fraction of last
sale. In other words, although it may have traded last at 80, putting
all outstanding stock up for sale would most often overwhelm demand and
"crash" it, resulting in only a small fraction of its "capitalization"
being returned to present shareholders. When the smoke clears, what
would result would be a much more accurate representation of what the
firm's actual value was. However, we needn't concern ourselves too much
with this "intrinsic" value when simply dealing with predictions of
future price movement - we need to focus simply on future supply and
demand levels for the stock, which is ultimately the sole criteria for
determining it.
You have to realize that stock trading involves placing wagers on the
value of the instrument itself, and not necessarily the underlying
business. This is sometimes difficult for 'investors" to understand,
but stock trading is essentially nothing more than placing bets - and
what is being wagered on isn't the health of the business per se, but
the future demand of the stock. Now, it is true that the state of the
underlying business affects stock prices - but only to the extent that
it may effect current supply and demand. Expected dividends do bear a
relationship to earnings, but even this is subordinate to current prices
(S/D), and this represents a fairly insignificant portion of expected
return in any case. It isn't really fair to state that "mania" exists
when PE ratios climb to historic levels - since it is future demand and
not earnings growth that is being speculated upon, and as long as there
is a good reason to expect demand to exceed supply, there can be nothing
unreasonable about such speculation.
Now, in terms of the entire market, things become even more removed from
fundamentals. While a stock's price can be perpetuated by rising demand
to a degree, it still must compete against other issues, which acts as a
buffer of sorts, as capital is transferred among issues on the basis of
perceived criteria. However, this is much less the case in the
aggregate. It is far easier for aggregate stock market capitalization
to perpetuate higher levels, since all this essentially requires is for
more capital to be added than subtracted - a phenomenon which has been
accelerated during the current run, and may continue for some time to
come. As long as this happens, the relative positioning of equities
versus other financial instruments will be perpetuated. Think of it
this way - all other things aside, if inflow exceeds outflow by 20%,
then overall prices will rise accordingly. It doesn't matter a whit
what level of growth the underlying firms are experiencing here - while
capital may shift around from sector to sector on this basis, the
capital growth alone that the market is experiencing and is expecting to
experience (and this is totally self-fulfilling) can be more than
sufficient to keep equities well positioned with respect to other
"investment" options, and thus ensure that the trend will continue.
Therefore, it is not unreasonable at all to suggest that the Dow can go
substantially higher even without any further earnings growth.
Regards,
A.J.
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