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Kent-
And just how do you believe a 'smaller governemnt' is going to come about?
Can you see
ANY administration cutting government agencies; or government spending? Or;
even the
growth of spending on a percentage basis? The crowd up there is drunk with
power and squandering our money; both parties.
chas
----- Original Message -----
From: Kent Rollins <kentr@xxxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Friday, September 06, 2002 10:39 AM
Subject: Re: [RT] P/E inflation and the tenuous relationship between E and P
> A down market and sluggish economy is not too large a price for a smaller
> government. We'll adapt.
>
> Kent
>
>
> ----- Original Message -----
> From: "M. Simms" <prosys@xxxxxxxxxxxxxxxx>
> To: <realtraders@xxxxxxxxxxxxxxx>
> Sent: Friday, September 06, 2002 10:37 AM
> Subject: RE: [RT] P/E inflation and the tenuous relationship between E and
P
>
>
> Well done, and a heckuva study.
> One really important issue: WHY did the PE inflation of the 90's occur ?
> Answer: Greed
> WHY will PE deflation of the 02+'s occur ?
> Answer: Fear
>
> What controls greed and fear ?
> Answer: the flow of money
>
> Where's all of the money flowing right now ?
> Answer: to the government
> (see today's job report details.....all new jobs are in the government or
> government-related contractors.....the private sector is dead)
>
> Conclusion: Until the government REFLATES in a massive way, this market's
> going down or nowhere.
>
> > -----Original Message-----
> > From: Gary Funck [mailto:gary@xxxxxxxxxxxx]
> > Sent: Thursday, September 05, 2002 9:42 PM
> > To: Realtraders@xxxxxxxxxxxx Com
> > Subject: [RT] P/E inflation and the tenuous relationship between E and P
> >
> >
> >
> >
> > I ran the following what-if study. Perhaps some folks here will find it
of
> > interest.
> > The idea behind the study was to first look at the relationship
> > between changes
> > in
> > stock prices and changes in earnings, and the second part of the
> > study projects
> > the price of the S&P forward, and demonstrates how dramatically
> > the price might
> > fall, even though earnings are improving at a normal pace, yet
> > the P/E premium
> > recedes from its current high level down to a level more typical
> > of bear market
> > and recessionary periods.
> >
> >
> > I began with the S&P earnings data (and forecasts) on this page:
> > http://www.spglobal.com/earnings.html
> >
> > The first thing that I looked at was the relationship between
as-reported
> > earnings changes (the earnings that including acquisition charges ans
> > amortization) and S&P price changes. See the attached chart,
> > which shows the
> > quarterly percent changes for the S&P and S&P earnings, annualized.
> >
> > Over the 1988 through June 2002 timeframe (14 years), the average
> > annualized
> > S&P percent change was 11.4% with a 16% standard deviation. The average
> > annualized EPS change was 6.4% with a 28% standard deviation. The
> > first simple
> > conclusion we can reach is that something like 5% of the excess
> > return in the
> > S&P was due to "P/E inflation" over the 1988 through 2002 period.
> > Interestingly, when we eyeball the chart, it is difficult find a
> > relationship
> > between S&P price changes and S&P earnings changes. In fact, a linear
> > regression of s&P price change as a function of EPS change gave
> > an R-squared of
> > close to zero, confirming that S&P price changes appear unrelated to EPS
> > earnings changes during this period.
> >
> > I also looked at the lead/lag relationship between S&P price
> > changes and EPS
> > changes:
> >
> > Lag Correlation
> > 0 0.21
> > 1 0.21
> > 2 0.13
> > 3 -0.03
> > 4 -0.11
> > 5 -0.23
> > 6 -0.35
> >
> > Above, "Lag" is the number of quarters that EPS is lagged in the
> > correlation
> > calculation. The convential wisdom is that S&P price changes lead
> > EPS price
> > changes by 2 to 3 quarters (6 to 9 months). The correlation study
> > above shows
> > that 0 and 1 quarter EPS lags (or S&P leads) had the highest
> > correlations, but
> > the level of correlation was rather low. Lags of greater than 2
> > quarters shown
> > an inverse relationship.
> >
> > I then tried to forecast the S&P forward 3 years, by beginning with the
> > analysts
> > rather optimistic EPS forecasts for the next 5 quarters, and then
> > assumed an
> > average annualized EPS gain of 6.4% annual growth rate after that
> > (which is in
> > line with the average over the past 14 years). Some might argue that S&P
> > forecasts are unrealistic, and that the economic environment may
> > not support an
> > EPS growth rate of 6.4% -- I'll simply argue that this scenario
> > is at least
> > somewhat optimistic in the current economic climate. To complete the
> > forecast, I assumed that the trailing twelve month P/E of 28.2
> > drops over the
> > course of the next three years to a rather low level of 10.7
> > which was last
> > seen in 1988. Thus, the forecast assumes that earnings growth is
> > robust and at
> > least as strong as that seen in the last decade, combined with a
> > decline in
> > P/E. As an aside the recipricol of 6.2% would yield roughly a P/E of
15.6,
> > which is consistent with the longer term S&P average (as reported) P/E
of
> > 17/so. Thus, the P/E inflation of the past 1990's doesn't seem to
> > be justified
> > by the actual EPS growth rates.
> >
> > Given the forecast's assumptions, the S&P would decline further
> > to about the
> > 545 level in Q3 of 2005. In this scenario, given reasonable
> > expectations for a
> > risk premium on the stock market, the S&P should be trading at about a
477
> > level in order to be a value-based buy at this time.
> >
> >
> > To summarize:
> > 1) The connection between S&P price changes and EPS changes during the
> > 1988-Q2.2002 time frame seems tenuous at best.
> > 2) The P/E inflation seen during the 90's (and especially the
> > late 90's) seems
> > unjustified, based upon actual EPS growth rates.
> > 3) The combined assumptions of average to high EPS growth rates
> > and a declining
> > P/E benchmark leads to the conclusion that the S&P can drop a lot
> > further over
> > the course of the next three years.
> > 4) For the S&P to trade higher from here, either the EPS growth
> > rate will need
> > to be much higher than normal, or the market will have to remain
> > comfortable
> > with historically high P/E levels.
> >
> >
> > To unsubscribe from this group, send an email to:
> > realtraders-unsubscribe@xxxxxxxxxxxxxxx
> >
> >
> >
> > Your use of Yahoo! Groups is subject to
http://docs.yahoo.com/info/terms/
> >
> >
>
>
>
>
>
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>
>
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>
>
>
>
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