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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 02:48 AM   #61
 
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Re: Stock Market Valuations and Entry Point.......

Hi Michael! I wondered if someone would ask this,
but am puzzled. Who exactly are you suggesting is "asking" the S and P dividends to support
"the majority of retirees"?

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 02:48 AM   #62
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Re: Stock Market Valuations and Entry Point.......

Start a thread on stock market valuation and end up squabbling about immigration, the economic fate of the nation and abortion all at the same time. Wow.

The phrase "safe withdrawal rate" means different things to different people. Shrinks might want to make use of it if they ever tire of using inkblots to find out what is going on in a patient's psyche.
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 04:01 AM   #63
 
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Re: Stock Market Valuations and Entry Point.......

SWR.........Sometimes Wandering Rants?

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 09:35 AM   #64
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Re: Stock Market Valuations and Entry Point.......

Quote:
Who exactly are you suggesting is "asking" the S and P dividends to support "the majority of retirees"?
A variety of people. The politicians want to dump Social Security, and have private accounts invested heavily in the S&P replace it. Myriad corporations are dumping traditional retirement plans, and replacing them with 401k plans invested heavily in equities. A lot of financial consultants tell people to invest in equities for inflation protection. Tax law pretty much limints the choices in IRAs to equities, bonds, and gold coins. The net result is that the majority will be depending upon equites for their retirement. Except you of course.
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 09:48 AM   #65
 
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Re: Stock Market Valuations and Entry Point.......

Wow Michael! As Tony Soprano would say, "Oh poor me!"

No use whining. If the rock in the ER road is too big to move, find a way to get around it. IOW, play the hand you're dealt.

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 11:28 AM   #66
 
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Re: Stock Market Valuations and Entry Point.......

If you're going to analyize dividends on the SP500 you need to do so relative to interest rates and inflation. Personally, I'd rather defer dividend payments as I have better control of taxes.
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 05:38 PM   #67
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Re: Stock Market Valuations and Entry Point.......

Since nobody has risen to the bait, let me put a little meat on the bones of my argument that the S&P 500 is overvalued at this point vis a vis any reasonable calculation of intrinsic value.

I returned to yesteryear to dredge up the old fashion notion that what the average investor ought to be valuing is a stream of future dividends. I have never been in Missouri but I like their State motto. To get me to invest in anything you gotta show me the money. Earning are nice. Sales revenue is nice. But show me the money. Show me the dividends I am going to get out of this deal. To value that stream you need a holding period and appropriate capitalization rate. So lets examine the elements.

Dividends. S&P reports that the 500 returned $178 billion in dividends in the 12 months ended Sep 30, 2004. That’s up about 16% from the previous 12 month period. (Thank you GW for investor friendly tax reform) We have to make a guesstimate about how that dividend stream is going to grow in the future. Just for fun, lets throw out that last 16% spurt and focus on the preceeding 15 years which reflect an average dividend growth rate of 5.7%. You might argue for a higher growth rate in dividends, but remember we are just having fun here.

Holding Period. You might argue that the S&P 500 is a perpetuity machine. But I personally, am not planning on living in perpetuity. I know some of the posters here are. But not me. Just for some more fun lets assume that the lights go out permanently in 30 years and no sense valuing dividend streams past the grave. So, if you punch that $178 billion of dividends out 30 years at a 5.7% average annual growth rate you get about $939 billion in dividends at the end of the last year of your life. Not bad so far.

Capitalization Rate. Heres where things get a bit tricky. Everybody has a different take on what constitutes a reasonable rate of return. I personally would start with my reasonably attainable long term risk free rate which is now about 4.5%. To that I would add another say 3% to cover inflation which gets us to 7.5%. On top of that I would have to get rewarded for assuming some market risk. Just for some more fun lets say you gotta give me 2.5% for my lost sleep bringing the total up to a nice round 10%.

Now my old pals Weston and Brigham used to argue that the price you should pay today for this dividend machine is the Net Present Value of the dividend stream plus the net present value of the market price of the asset at the end of the holding period (ie, at the end of 30 years). The NPV of my dividend stream growing at 5.7% with a 10% discount rate is about $3.0 trillion. They define the market price of the asset at the end of the holding period as the Dividend in the final year capitalized at the capitalization rate less the growth rate of the dividends or: P = D/(k-g) where P is the market price; D is the dividend; k is the required capitalization rate; and, g is the growth rate of the dividends. For me P = $939 billion/(.10-.057) = $21.837 trillion. The NPV of that $21.8 trillion 30 years from now discounted at 10% is $1.245 trillion. So, according to W and B, the intrinsic value of the S&P 500 dividend stream to me over my remaining estimated lifetime would be $3.025 trillion plus $1.245 trillion = $4.297 trillion.

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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 05:42 PM   #68
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
Since nobody has risen to the bait, let me put a little meat on the bones of my argument that the S&P 500 is overvalued at this point vis a vis any reasonable calculation of intrinsic value.

I *returned to yesteryear to dredge up the old fashion notion that what the average investor ought to be valuing is a stream of future dividends. *I have never been in Missouri but I like their State motto. *To get me to invest in anything you gotta show me the money. *Earning are nice. *Sales revenue is nice. *But show me the money. *Show me the dividends I am going to get out of this deal. *To value that stream you need a holding period and appropriate capitalization rate. *So lets examine the elements.

Dividends. *S&P reports that the 500 returned $178 billion in dividends in the 12 months ended Sep 30, 2004. *That’s up about 16% from the previous 12 month period. *(Thank you GW for investor friendly tax reform) We have to make a guesstimate about how that dividend stream is going to grow in the future. *Just for fun, lets throw out that last 16% spurt and focus on the preceeding 15 years which reflect an average dividend growth rate of 5.7%. *You might argue for a higher growth rate in dividends, but remember we are just having fun here. *

Holding Period. * You might argue that the S&P 500 is a perpetuity machine. *But I personally, am not planning on living in perpetuity. *I know some of the posters here are. *But not me. *Just for some more fun lets assume that the lights go out permanently in 30 years and no sense valuing dividend streams past the grave. *So, if you punch that $178 billion of dividends out 30 years at a 5.7% average annual growth rate you get about $939 billion in dividends at the end of *the last year of your life. *Not bad so far.

Capitalization Rate. *Heres where things get a bit tricky. *Everybody has a different take on what constitutes a reasonable rate of return. *I personally would start with my reasonably attainable long term risk free rate which is now about 4.5%. *To that I would add another say 3% to cover inflation which gets us to 7.5%. *On top of that I would have to get rewarded for assuming some market risk. *Just for some more fun lets say you gotta give me 2.5% for my lost sleep bringing the total up to a nice round 10%. *

Now my old pals Weston and Brigham used to argue that the price you should pay today for this dividend machine is the Net Present Value of the dividend stream plus the net present value of the market price of the asset at the end of the holding period (ie, at the end of 30 years). *The NPV of my dividend stream growing at 5.7% with a 10% discount rate is about $3.0 trillion. * They define the market price of the asset at the end of the holding period as the Dividend in the final year capitalized at the capitalization rate less the growth rate of the dividends or: *P = *D/(k-g) where *P is the market price; D is the dividend; k is the required capitalization rate; and, g is the growth rate of the dividends. *For me P = $939 billion/(.10-.057) = $21.837 trillion. *The NPV of that $21.8 trillion 30 years from now discounted at 10% is $1.245 trillion. *So, according to W and B, the intrinsic value of the S&P 500 dividend stream to me over my remaining estimated lifetime would be $3.025 trillion plus $1.245 trillion = $4.297 trillion.
So!
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 05:47 PM   #69
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Re: Stock Market Valuations and Entry Point.......

The market value of the S&P 500 at 1213 on the index is about $11.5 trillion. So, for me, the market value would have to drop about 62% to hit my computed intrinsic value. That would imply an intrinsic value entry point into the S&P index at around 460 as compared to todays 1213.

Why the big difference? Well, to my way of thinking the markets implied capitalization rate is ridiculously low right now. The dividend yield is hovering around 1.7%. And that hasnt moved much in the last 15 or 20 years. All of us investors as a whole, the market, is saying to the thing we call the S&P 500 hey, its ok to return about 1.7% on this risk capital we give you year after year. We know something you dont know. We know these earnings and dividends are going to explode some day and we are going to get a really big payout somewhere (indefinite) down the line. We trust you managers of the S&P 500 to do the right thing by us investors sometime somewhere someplace in the future. That being the case, we as the market, can pay a lot more than any individual investor in his right mind would pay for this thing. While Donner with his 10% required rate of return is only willing to pay you $3 trillion for your reasonably expected stream of dividends over the next 30 years, we, the market, are willing to pay you something like $10 trillion for that stream. Plus you know what, we the market are always going to remain optimistic for ever and ever and we are going to put a market valuation on that $939 billion of dividends that Donner projects in year 30 reflecting the same 1.7% dividend yield implying a $55.2 trillion market capitalization in year 30. I wont bother telling you what the market, as a rational being, should be willing to pay today for a $55.2 trillion asset 30 years from now with a 1.7% capitalization rate. It doesn’t make any sane sense at all.

Something really big and bad is going to have to happen to this market to get it anywhere near a reasonable capitalization for the individual investor. The current market cap of $11.3 trillion reflects a reasonable intrinsic value of about half that ( depending on your individual required rate of return and your expectations of dividend growth) Now it is reasonable to assume that the market price of the S&P 500 is always going to reflect some premium to the reasonable intrinsic value of the thing. But even given that there is a pretty hefty layer of a few trillion of fevered imagination, irrational exuberance, bubble mania, speculative excess or whatever you want to call it in the current market cap. I believe it remains to be unwound in a pretty big correction coming sooner or later. Want to bet your retirement on it?

Cut- Throat asks: What if you are wrong? I would ask: What if I am right?
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 06:12 PM   #70
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
What if I am right?
Then, you'll probably die with more money than me. - I don't care what the market does, I'm still going fishing.

Most all of the posters' portfoilos here survive the Stock Drop of the 1929-1934 period where stocks lost 90% of their value. So, I am more worried about getting run over by a truck tomorrow than what the market is going to do in the next 10 years.

You're obviously worried about it, otherwise you would not have expended all of the efforts in the past couple of posts. Are you sure you want to live this way?
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 07:03 PM   #71
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Re: Stock Market Valuations and Entry Point.......

Cut--

You think maybe I am obsessive compulsive about market risk?

You are probably right. I should just have a tall cool one and go with the market flow and fuggedabout it!

Besides all this heavy thinking is wearing me out. Its late here on the high cost East Coast. Time for a good night's sleep which I will get with my fixed income portfolio.
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Re: Stock Market Valuations and Entry Point.......
Old 12-29-2004, 10:09 PM   #72
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Re: Stock Market Valuations and Entry Point.......

Quote:
No use whining.
Quite the contrary. I actually think the trends I mentioned could allow a person to make quite a lot of money in the market over the next few years, if they play it right.
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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 03:51 AM   #73
 
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Re: Stock Market Valuations and Entry Point.......

Yeah Michael, and I might win the lottery. Come to think of it, that is exactly how I would view investing in
common stocks,
in my case.

Cut-Throat.............you continue to impress.
"So?" is one of your best comebacks ever (to Donner's post). I read his ruminations, but hurt my head when I dozed off
and fell on the keyboard . Anyway, brevity really
is the soul of wit, and I agree. I just want to go fishing and ignore the DJIA.

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 04:31 AM   #74
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Re: Stock Market Valuations and Entry Point.......

Most all of the posters' portfoilos here survive the Stock Drop of the 1929-1934 period where stocks lost 90% of their value.

It's not just the size of the drop that matters. You also need to consider how long the drop is likely to remain in place. The historical stock-return data shows that, the higher valuations are at the beginning of a 30-year returns sequence, the more damaging any price drop that occurs is likely to be. Valuations were a good bit higher in the late 1990s than they were prior to the 1929 price drop. So it is entirely possible that we will see a more damaging price drop than the one experienced from the top of the late 1920s, although it is of course exceedingly unlikely that we will see another 90 percent price drop.
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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 06:37 AM   #75
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Re: Stock Market Valuations and Entry Point.......

Quote:
I just want to go fishing and ignore the DJIA.
Then you should do that because it makes you happy. I ponder stocks because I enjoy pondering them.
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Sorry, Donner, I'm with Michael & Cut-Throat.
Old 12-30-2004, 08:06 AM   #76
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Sorry, Donner, I'm with Michael & Cut-Throat.

Anyone capable of creating such a mind-numbing negative analysis of the market should be able to figure out how to make some money from it. As Michael points out, interested retail investors can ponder stocks and exploit the cracks in the efficient market hypothesis.

You're clearly able to identify overvalued stocks-- are you claiming that all 20,000+ of them worldwide are overvalued? Are you shorting any of the overvalued ones or even their indices? Instead of kvetching about overvalued stocks, have you found non-stock investments that could rise in value? Put your negativity toward a positive goal! But meanwhile at least you're providing a valuable service-- chronic worriers like you keep the market climbing up that wall.

Or just keep working until you drop-- it's your life (whatever quality & length is left of it) and you're personally responsible for making your own decision. We can offer helpful suggestions about how to load the cartridges, but we're not gonna pull your trigger.

I'm glad I've been retired BEFORE reading your morale-sapping analysis of why you can't retire. I think you're overdoing your "devil's advocate" approach to ER. Instead of pointing out all the reasons that you're unable to retire (and nitpicking our responses!), from this point forward you should try to identify at least one positive reason to ER for every reason that you "can't". Mortgages & health insurance are just a start and you probably have plenty of other choices.

Until then, I'm not going to sail any more trial balloons over your anti-aircraft batteries.

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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 10:18 AM   #77
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Re: Stock Market Valuations and Entry Point.......

Notice to all new posters: Musings about overvalued markets go over about as well in these parts as standing up at the PTA meeting and describing the great date you had last night with a 19 year old girl.

So unless you are a famous author, or very witty and charming, better to move to other topics.
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Re: Sorry, Donner, I'm with Michael & Cut-Throat.
Old 12-30-2004, 10:19 AM   #78
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Re: Sorry, Donner, I'm with Michael & Cut-Throat.

[quote]Anyone capable o

I'm glad I've been retired BEFORE reading your morale-sapping analysis of why you can't retire. *I think you're overdoing your "devil's advocate" approach to ER. *Instead of pointing out all the reasons that you're unable to retire (and nitpicking our responses!), from this point forward you should try to identify at least one positive reason to ER for every reason that you "can't". *Mortgages & health insurance are just a start and you probably have plenty of other choices. *

Until then, I'm not going to sail any more trial balloons over your anti-aircraft batteries.

Nords: I think you'd be perfectly safe with trial baloons flying above this guy. By the time he figured out whether to pull the trigger or not, you'd be long gone :),
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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 11:11 AM   #79
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Re: Stock Market Valuations and Entry Point.......

Better to move to other topics.

I understand where you are coming from, Mikey. I have a bit of a different take on this.

My sense is that there are a good number who are uneasy with the "All Stocks All the Time" approach. The problem is that those who have doubts are not as sure of themselves as those who feel confident that stocks are always the best asset class. We are at the tail end of the greatest bull market in history. The media has been pumping out ammunition supporting the bull case for a long time now. It hasn't been too easy for the past 20 years to hear the other side of the story. So for now we have to accept that those arguing for caution are going to be more tentative in their expressions of their viewpoints.

It is a healthy development, however, for those with alternate viewpoints to begin to assert themselves a little. It's good for everyone when that happens. Say that stocks really do take a big drop in prices in coming days. You know what people will be saying? That the Retire Early idea was just a bull market fad. I don't want that. I want our discussions to continue through both bull and bear markets. For that to happen, we need more balance in the investing discussions. I believe we should offer gentle encouragement to those trying to put some new ideas on the table.
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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 11:42 AM   #80
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
We are at the tail end of the greatest bull market in history.
You forgot to add 'In your Humble Opinon' to the end of this statement.

No one knows what is going to happen - Invest accordingly.
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