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I don't think the Germans are laughing at anybody, including the US.
Regards
DanG
Frankfurt
"M. Simms" wrote:
>
> The government is the NEW NASDAQ .......highest growth industry in the USA.
> What does the government produce ?
> Paper, rules and regulations, lots of hot air, and a bit of
> defense....really, really expensive defense.....
> and as we saw from 9-11, not all that effective either.
>
> If you know your economics, this is really, really bad news.....long term.
> Any government with enough money can look good, but we need a COST EFFECTIVE
> government.
> Ask Europe, they are laughing at the US.
> I can hear them chanting now..."The US is JA-PAN", "The US is JA-PAN", "The
> US is JA-PAN".
>
> > -----Original Message-----
> > From: Charles Meyer [mailto:chaze@xxxxxxxx]
> > Sent: Friday, September 06, 2002 12:20 PM
> > To: realtraders@xxxxxxxxxxxxxxx
> > Subject: Re: [RT] P/E inflation and the tenuous relationship between E
> > and P
> >
> >
> > 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:
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> > > >
> > > >
> > > >
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> > >
> > >
> > >
> > >
> > >
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> > >
> > >
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> >
> >
> >
> >
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