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Thread: weekend commentary - HERE's some 'value investing' analysis for ya !

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    Default weekend commentary - HERE's some 'value investing' analysis for ya !

    (snip)"******* S&P 500 FUNDAMENTALS ****************************

    The real P/E for the S&P 500 is based on "as reported" or GAAP earnings
    (calculated using Generally Accepted Accounting Principals), and it is the
    standard for historical earnings comparisons. The normal range for the GAAP
    P/E ratio is between 10 (undervalued) to 20 (overvalued).

    Standard & Poors has introduced a version called "core" earnings, which is
    more critical than GAAP and will probably become the standard in the future.

    Market cheerleaders invariably use "pro forma" or "operating earnings,"
    which exclude some expenses and are deceptively optimistic. They are
    useless and should be ignored.

    The following are the most recently reported and projected twelve-month
    trailing (TMT) earnings and price/earnings ratios (P/Es) according to
    Standard and Poors.

    Est Est Est
    2007 Q3 2007 Q4 2008 Q1 2008 Q2
    TMT P/E Ratio (GAAP).......: 17.2 18.5 19.1 20.4
    TMT P/E Ratio (Core).......: 18.5 N/A 18.5 N/A
    TMT P/E Ratio (Operating)..: 15.1 16.0 15.9 16.0

    TMT Earnings (GAAP)........: 78.60 72.86 70.53 66.15
    TMT Earnings (Core)........: 73.10 N/A 73.10 N/A
    TMT Earnings (Operating)...: 89.31 84.44 84.80 84.19

    For a more thorough discussion of earnings and other fundamentals
    click here.

    Based upon the latest GAAP earnings the following would be the approximate
    S&P 500 values at the cardinal points of the normal historical value range.
    They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20:

    Undervalued (SPX if P/E = 10): 786
    Fair Value (SPX if P/E = 15): 1179
    Overvalued (SPX if P/E = 20): 1572

    "(snip)

    By this value analysis, even though the S&P 500 has already fallen from the 1500 to 1350 ballpark, it's still significantly overvalued (= overpriced).

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    here's the same 'value gap' in graphic form

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    All these idiot analysis fail to take into account the most important factor in P/E analysis.

    The underlying Risk-Free-Rate or the yield on a 10-Year T

    The P/E of a stock should be greater than P/E of a Bond

    At 5%, the P/E of a bond is 20. So, stocks should trade above P/E of 20

    Again it is based on a simple fact, If Bonds pay very low interest rates, say 5%, investors are pretty happy to buy a Stock with a low earnings yield of 5%.

    This is because Stocks earnings grow (at least by GDP growth) while Bonds earnings are fixed. So stocks almost becomes less riskier than Bonds while giving higher returns

    Summary, Any P/E analysis which doesn't normalize for a 10 Year Bond Yield is stupid

    I will not even comment on the idiocy of taking the recession year earnings to value a stock.

    Just to give you an analogy, It is as stupid as a banker taking the dancers worst day's pay and projecting it for the annual income while giving you a mortgage.

    This is the year when Banks wrote off Billions of Dollars, obviously the P/E will be relatively high, because E is abnormally low

    BTW, you still havn't answered the following simple questions
    i) What is the Value of a Stock?
    ii) If a guy is selling $100 bills in the street corner, how much do you think it'll sell for?

    If you don't get your basics right, any advanced analysis will only maginify your basic mistakes

    So, using simple analysis, Investors have two choices
    i) For $100, they can buy a bond, which pays them $5 forever
    ii) For $100, they can buy BasketOf500Stocks, which pays $5 the first year and grows around 10% every year. (This is exactly equivalent of S&P trading at P/E of 20). By buying 500 stocks from different companies, you also diversify away risks associated with a single company or an industry

    Most Risk-Neutral investors chose (ii), thus making the P/E of 20 reasonable

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    Just to add to the above example,
    Lets say the Bonds give you 10% yield (Historically, Bonds have given yields between 8-15%)

    Now, the investors have two choices
    i) For $100, they can buy a Bond which pays $10 forever
    ii) For $100, they can buy BasketOf500Stocks, which pays $5 the first year and grows around 10% every year

    Investors will easily take (i), Thank you very much, thus making P/E of 20 very expensive

    So, you have a scenario when a P/E of 20 is cheap while making it very expensive in another scenario. The underlying factor that drove that was the Bond Yield.

    Bottomline, if you don't get your basics right, you'll be easily fooled by the Elaine's and Swenline's of the world and ignoring the Buffett's of the world.

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    What is the Value of a Stock?
    whatever willing buyers bid for it ! Everything else is theoretical

    If a guy is selling $100 bills in the street corner, how much do you think it'll sell for?
    114 Yen ... no wait 109 Yen ... no wait 107 Yen ... assuming that the corner is in Tokyo. Same applies to Yuan, Euros, or whatever currency the hedge funds are borrowing to buy US stocks with, or whatever currency US consumers are ultimately paying for their oil / consumer goods / food with.

    ii) For $100, they can buy BasketOf500Stocks, which pays $5 the first year and grows around 10% every year
    ahem, just like the value of California houses grows around 10% every year I suppose !

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    Quote Originally Posted by Melonie View Post
    whatever willing buyers bid for it ! Everything else is theoretical



    114 Yen ... no wait 109 Yen ... no wait 107 Yen ... assuming that the corner is in Tokyo. Same applies to Yuan, Euros, or whatever currency the hedge funds are borrowing to buy US stocks with, or whatever currency US consumers are ultimately paying for their oil / consumer goods / food with.



    ahem, just like the value of California houses grows around 10% every year I suppose !
    Quote Originally Posted by Melonie View Post
    whatever willing buyers bid for it ! Everything else is theoretical



    114 Yen ... no wait 109 Yen ... no wait 107 Yen ... assuming that the corner is in Tokyo. Same applies to Yuan, Euros, or whatever currency the hedge funds are borrowing to buy US stocks with, or whatever currency US consumers are ultimately paying for their oil / consumer goods / food with.



    ahem, just like the value of California houses grows around 10% every year I suppose !
    i) Wrong ( I asked 'Value' not 'Price')
    ii) Wrong (Showing off calculus knowledge when basic arithmetic is wrong)
    &
    iii) Wrong (Check out S&P 500 earnings history. But that would involve research, and facts)


    Really, you are basics are so wrong it borders on cluelessness.If somebody can't get 2+2 right, why would anyone take their discourse on algebra and calculus seriously?

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    well, i don't have much time but i can argue that Mel's def for value is more accurate description of value than it is of price.

    price can be just a number- perhaps a number or price no one would pay (therefore not it's value). value is the amount that a buyer and seller make a deal at, so she is somewhat exact in her answer...

    but then you can get into over 32 different versions of value.. book value, asset value and so on...
    Oh Canada, we stand on cars and freeze...

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    price can be just a number- perhaps a number or price no one would pay (therefore not it's value). value is the amount that a buyer and seller make a deal at,
    that is exactly my point - which should have been amply proven by the CDO / mortgage bond crisis fallout. The 'conventional' two or three dozen different measures of 'value' are all theoretical these days.

    The underlying difference that now seems to apply is yesterday's 'real' capital versus today's 'ficticious' capital. Where the Countrywides and Citibanks are concerned, the recognition that their classically calculated 'value' was based on 'ficticious' capital assumptions caused their stock prices to undergo an abrupt adjustment.


    Showing off calculus knowledge when basic arithmetic is wrong
    obviously my yen valuations were on a per US dollar basis. My point was that, as the reserve currency status of the US dollar has eroded, the US dollar's 'worth' is increasingly determined by the central banks of Japan / China / ECB etc. And since today's US economy imports damn near everything from oil to autos to appliances / electronics to consumer goods to food ... all of which are actually priced in the currency of their country of origin and not in US dollars ... the exchange rate value of the US dollar now has a direct impact on the US dollar pricing at American gas pumps, American car dealers, and on American retailers' shelves. And as more US industries move offshore, as a higher percentage of US oil and gas must be imported etc. this vulnerability of US domestic prices to the US dollar exchange rate will only get worse.

    Check out S&P 500 earnings history. But that would involve research, and facts
    a picture is worth 1000 words ...



    the Year over Year growth of the S&P has been pretty close to zero since 1999. It was also pretty close to zero from 1991 to 1994. It was also pretty close to zero from 1976 to 1980. It was also pretty close to zero from 1972 to 1974. Yes on a very long term basis both S&P price and growth have been positive. However, there are lots of periods where S&P price and/or growth have been close to zero or significantly negative - periods where other investments have vastly outperformed the S&P.


    Just a tiny reminder that the hedge funds prospered for years based on sophisticated computer models which relied on the principles in Xan's 'textbooks' - right up to the point where those computer models were no longer able to accurately forecast s#!t. The reason that lots of hedge funds lost their a$$es is that they refused to acknowledged the creeping effects of globalization and de-facto loss of US dollar reserve currency status, thus they continued to 'bet' on computer models that utilized now outdated economic theories and assumptions.

    The classic theory that domestic economic transactions / pricing are independent of foreign exchange factors simply doesn't work any more in an economy as globalized as America's is today.

    ~
    Last edited by Melonie; 02-17-2008 at 05:04 AM.

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    Quote Originally Posted by Melonie View Post
    whatever willing buyers bid for it ! Everything else is theoretical
    Wrong again.

    Price is what you pay, value is what you get. Drill that difference into you head if you want to be a successful investor.

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    Default Re: weekend commentary - HERE's some 'value investing' analysis for ya !

    ^^^ a very good observation for investment banks and other CDO investors ... right up to the point where regulators and auditors forced them to 'revalue' versus the (notional) prices they had listed. And the reason they were forced to revalue was the requirement of 'marking to market' based on the amounts that willing buyers were now bidding / offering for similar CDO's.

    ~
    Last edited by Melonie; 02-17-2008 at 07:50 PM.

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