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Hello Gary,
no. its not the "fed model". just regular earnings (using Barron's
conventions).
Best regards,
Jim Johnson mailto:jejohn@xxxxxxxxxxx
--
Saturday, September 7, 2002, 11:42:48 AM, you wrote:
>> -----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.
>>
GF> Just so we're talking about the same thing -- it is likely that Decision
GF> Point is tracking the Fed Model, popularized by Ed Yardeni,
GF> http://205.232.165.149/public/dstock_c.pdf
GF> Dr. Ed's rendition uses analysts' forward P/E estimates, which at the moment
GF> are quite optimistic. Thus, by this model's reckoning the S&P is 35% *under*
GF> valued. An important part of this model is the prevailing interest rate on
GF> 10 year Treasuries, which are historically low. Although the Fed Model gets
GF> a lot of press, it actually would've had some major gaffs back in the 70's
GF> and 80's, along with a few good calls. I think one problem with Dr. Ed's
GF> formulation is the use of analyst estimated P/E's. As the study I posted,
GF> and others, show -- there is actually a very poor relationship between S&P
GF> stock price gains and future EPS gains. Therefore, even if the analysts were
GF> correct in their forecast, the basic premise of the model has no basis in
GF> historical stock price performance.
GF> The model that Gross, and the analysts he referred to, Arnott and Bernstein,
GF> is based upon the price to *dividend* ratio. The thinking here, over the
GF> long run, most stock portfolio appreciation was due to dividends and the
GF> rate of dividend increases. This idea went out the window during the period
GF> 1982-2000, but especially during the period 1995-2000, where most of the
GF> appreciation was due to the increase in P/E multiples that people were
GF> willing to pay for stocks.
GF> The question as to whether companies should buy back their stock in lieu of
GF> increasing their dividend is an interesting one. Some economists have shown
GF> that there is actually no logical, rational, basis for stocks to pay a
GF> dividend at all, and have delved into why they do that. Some portfolio
GF> managers say that they like companies that pay dividends because paying
GF> dividends enforces a certain degree of fiscal conservativeness (the company
GF> has to have the cash on hand to pay the dividend), at least as long as the
GF> company doesn't go into debt just to pay the dividend.
GF> Something to consider regarding buy backs -- over the long term, the S&P has
GF> suffered about a 2% dilution each year (in spite of all buy backs). Employee
GF> stock option plans, and secondaries, contribute to the dilution. So, on
GF> average, even if a company announces that it will buy back 6% of its stock
GF> over the next three years, it may be just treading water with respect to
GF> shares outstanding. I know one company that announced a recent buy back of
GF> 7% of its shares over the next three years - they pretty much said that this
GF> buy back is cash flow neutral, because they're just off-setting anticipated
GF> employee stock option purchases. No big vote of confidence there.
GF> When referring to Buffett, remember that even though he may support company
GF> stock buy backs, he does not support company stock options. At least he is
GF> consistent. :) Also, I think that Buffett's view is the company should use
GF> its capital to increase the *value* of the company (ie, expand the business,
GF> improve the margins), and not simply to buy back shares.
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