|
PureBytes Links
Trading Reference Links
|
> -----Original Message-----
> From: Jim Johnson [mailto:jejohn@xxxxxxxxxxx]
> Sent: Saturday, September 07, 2002 6:21 AM
> To: Wong
> Subject: Re[2]: [RT] Fortune.com Retirement 2002/Bill Gross
>
>
> Hello Wong,
>
> I don't know off hand. What PE the average PE ratio in 1982?
> According to DecisionPoint.com the SP 500 was undervalued relative to
> its historical average from 74 thru 89 with a brief hiatus in 87 that
> was unceremoniously corrected. So it would seem Gross's general
> premise would have been true in 82 and late 1989. Not bad timing.
>
Just so we're talking about the same thing -- it is likely that Decision
Point is tracking the Fed Model, popularized by Ed Yardeni,
http://205.232.165.149/public/dstock_c.pdf
Dr. Ed's rendition uses analysts' forward P/E estimates, which at the moment
are quite optimistic. Thus, by this model's reckoning the S&P is 35% *under*
valued. An important part of this model is the prevailing interest rate on
10 year Treasuries, which are historically low. Although the Fed Model gets
a lot of press, it actually would've had some major gaffs back in the 70's
and 80's, along with a few good calls. I think one problem with Dr. Ed's
formulation is the use of analyst estimated P/E's. As the study I posted,
and others, show -- there is actually a very poor relationship between S&P
stock price gains and future EPS gains. Therefore, even if the analysts were
correct in their forecast, the basic premise of the model has no basis in
historical stock price performance.
The model that Gross, and the analysts he referred to, Arnott and Bernstein,
is based upon the price to *dividend* ratio. The thinking here, over the
long run, most stock portfolio appreciation was due to dividends and the
rate of dividend increases. This idea went out the window during the period
1982-2000, but especially during the period 1995-2000, where most of the
appreciation was due to the increase in P/E multiples that people were
willing to pay for stocks.
The question as to whether companies should buy back their stock in lieu of
increasing their dividend is an interesting one. Some economists have shown
that there is actually no logical, rational, basis for stocks to pay a
dividend at all, and have delved into why they do that. Some portfolio
managers say that they like companies that pay dividends because paying
dividends enforces a certain degree of fiscal conservativeness (the company
has to have the cash on hand to pay the dividend), at least as long as the
company doesn't go into debt just to pay the dividend.
Something to consider regarding buy backs -- over the long term, the S&P has
suffered about a 2% dilution each year (in spite of all buy backs). Employee
stock option plans, and secondaries, contribute to the dilution. So, on
average, even if a company announces that it will buy back 6% of its stock
over the next three years, it may be just treading water with respect to
shares outstanding. I know one company that announced a recent buy back of
7% of its shares over the next three years - they pretty much said that this
buy back is cash flow neutral, because they're just off-setting anticipated
employee stock option purchases. No big vote of confidence there.
When referring to Buffett, remember that even though he may support company
stock buy backs, he does not support company stock options. At least he is
consistent. :) Also, I think that Buffett's view is the company should use
its capital to increase the *value* of the company (ie, expand the business,
improve the margins), and not simply to buy back shares.
------------------------ Yahoo! Groups Sponsor ---------------------~-->
4 DVDs Free +s&p Join Now
http://us.click.yahoo.com/pt6YBB/NXiEAA/MVfIAA/zMEolB/TM
---------------------------------------------------------------------~->
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/
|