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Hi Norman,
You are defiantly a "glass is half full" type of
guy. Or should that be the coffee mug is half full.
Good luck and good trading,
Ray Raffurty
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----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Norman
Winski
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxxx
Sent: Friday, September 06, 2002 2:58
PM
Subject: Re: [RT] P/E inflation and the
tenuous relationship between E and P
MSimms, All of those ever
increasing govt. employees has to be bullish forcoffee!
<G>Afterall, a large portion of the govt. work day is spent on
coffee breaks.Cheers,Norman----- Original
Message -----From: "M. Simms" <<A
href="mailto:prosys@xxxxxxxxxxxxxxxx";>prosys@xxxxxxxxxxxxxxxx>To:
<<A
href="mailto:realtraders@xxxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxxx>Sent:
Friday, September 06, 2002 1:13 PMSubject: RE: [RT] P/E inflation and the
tenuous relationship between E and P> The government is the NEW
NASDAQ .......highest growth industry in theUSA.> 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
COSTEFFECTIVE> 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 comeabout?> > 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:> > > > <A
href="http://www.spglobal.com/earnings.html";>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 chargesans> >
> > 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, alinear> > > >
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 abouta> > 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 duringthe> > > > 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>
> > >> > > >> > > >> > >
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