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Some excellent points here supporting the fact that markets can exist for
substantial periods where prices and intrinsic value bear little or no
relationship. However, the expectation of continued high rates of future price
increases, without regard to intrinsic value, are one of the certain measures of
a mania.
Earl
-----Original Message-----
From: A.J. Carisse <carisse@xxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Tuesday, June 23, 1998 12:28 AM
Subject: Re: Bull Mania Alive and Well
>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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