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> -----Original Message-----
> From: Jim Johnson [mailto:jejohn@xxxxxxxxxxx]
> Sent: Saturday, September 07, 2002 9:38 AM
> To: Gary Funck
> Subject: Re: [RT] RE: Fortune.com Retirement 2002/Bill Gross
>
>
> Hello Gary,
>
> my first post was not clear possibly. DecisionPoint.com uses actual
> earnings not the rose colored glasses type. DP's analysis also shows
> the SP500 overvalued by a lot.
Jim thanks for the clarification. There's a lot of models running around
these days. I agree that using forward earnings is suspect. However, the
"original" Fed Model (circa 1997) seems to also use forward earnings:
http://www.federalreserve.gov/boarddocs/hh/1997/july/ReportSection2.htm
[...]
Equity Prices. Equity markets have advanced dramatically again this year.
Through mid-July, most broad measures of U.S. stock prices had climbed
between 20 percent and 25 percent since year-end. Stocks began the year
strongly, with the major indexes reaching then-record levels in late January
or February. Significant selloffs ensued, partly occasioned by the backup in
interest rates, and by early April the NASDAQ index was well below its
year-end mark and the S&P 500 composite index was barely above its. Equity
prices began rebounding in late April, however, soon pushing these indexes
to new highs. Stock prices have been somewhat more volatile this year than
last.
The run-up in stock prices in the spring was bolstered by unexpectedly
strong corporate profits for the first quarter. Still, the ratio of prices
in the S&P 500 to consensus estimates of earnings over the coming twelve
months has risen further from levels that were already unusually high.
Changes in this ratio have often been inversely related to changes in
long-term Treasury yields, but this year's stock price gains were not
matched by a significant net decline in interest rates. As a result, the
yield on ten-year Treasury notes now exceeds the ratio of twelve-month-ahead
earnings to prices by the largest amount since 1991, when earnings were
depressed by the economic slowdown. One important factor behind the increase
in stock prices this year appears to be a further rise in analysts' reported
expectations of earnings growth over the next three to five years. The
average of these expectations has risen fairly steadily since early 1995 and
currently stands at a level not seen since the steep recession of the early
1980s, when earnings were expected to bounce back from levels that were
quite low.
[...]
(see attached chart)
In a related area, Bob Bronson outlined the various factors that go into
these models (and plugged his own version):
http://csf.colorado.edu/forums/longwaves/2002/msg00913.html
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