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Re: The sky is falling, the sky is falling
Old 08-19-2005, 01:08 PM   #101
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Re: The sky is falling, the sky is falling

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Originally Posted by HaHa
Not really-stock buybacks for the most part do not reduce stock outstanding, at best they only partially offset the dilution caused by excessive option grants.


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Depends on the industry and the company under consideration. Personally, I try real hard to avoid options hogs and find companies that spew enough cash to buy back a lot of stock.
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Re: The sky is falling, the sky is falling
Old 08-19-2005, 04:12 PM   #102
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Re: The sky is falling, the sky is falling

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Originally Posted by HaHa
Dividends, and even smoothed earnings of aggregates are among the most predictible of all economic time series.
By who's definition of predictable?* Here are the last 30 years of the S&P 500 aggregate earnings and dividends:

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Re: The sky is falling, the sky is falling
Old 08-19-2005, 04:27 PM   #103
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Re: The sky is falling, the sky is falling

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Originally Posted by wabmester
By who's definition of predictable?* Here are the last 30 years of the S&P 500 aggregate earnings and dividends:

Maybe I am blind, but when I look at this I see dividend yields and earnings yields. Not the same series as earnings and dividends themselves. No one, least of all me, would deny that prices bounce around, trend, crash, etc.-thus producing chaotic looking charts of the yields.

Also, with respect to earnings themselves, I said smoothed aggregated earnings. Lots of year to year and quarter to quarter bouncing around, but amazingly stable peak to peak, or trough to trough.

Ha
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Re: The sky is falling, the sky is falling
Old 08-21-2005, 04:42 PM   #104
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Re: The sky is falling, the sky is falling

Wabó

* * * * * Sorry to take so long getting back to you but I got a little busy.

I ran your numbers through Donnerís little S&P fair value calculator just for fun to see what would come out as Wabís* fair value for the S&P.

You plan to hold to the grave and pass the portfolio on to your kids.* You* are hoping this will be in about 80 years when you are 120.* *This is a noble sentiment and I hope you get to do it that way.* *There are ways to make that happen.* I am not a trust expert, but my trust is set up to not let the kids get their hands on the corpus of the estate until they turn 35.* Martha could help you on this I bet.*
*
My* little model is based on a 30 year holding period.* *So I just stuck with that for a quick and easy look at your other assumptions.

You are looking for a real growth in earnings and dividends of between 2% and 4%.* *Nominal growth of S&P earnings and dividends over the past 15 years has averaged 6.77% and 4.0%, respectively.* Assume about 3% inflation and your range is a little conservative for earnings and a little aggressive for dividends.* But letís work with it.

Your capitalization rate is also between 2% and 4%.* The cap rate is what you demand that the users of your capital pay you in return for the privilege of using that capital.
It is the key factor, along with the holding period and the size of the annual flows you are valuing, in arriving at a fair market value estimate.*

I gather that where* you place your* personal cap rate is a function of the risk free rate.* You infer that since the risk free rate is so low folks shouldnít* expect or demand a much higher return in equities or real estate.* You have what they call an appetite for risk.* You are quite willing to* assume it and you donít need to be paid a whole lot for it.* This is ok.* This is an entirely personal, private and individual determination that each and every market participant has to make on his or her own.* It is done either explicitly or implicitly but it is done one way or the other.* * I believe a vast majority of market participants are following your approach today.* *But this is not my view and thatís why our views of what a fair value for the market should be is so widely divergent.* I have far less appetite for risk and I demand a much higher return Ė something considerably above risk free for equities.* If I canít get it, and I canít in this market Ė then I opt for the risk free return.* *This doesnít make me right and you wrong, or vice versa.* *It just means that everybody has his or her own idea of what is ďfair marketĒ.

Having said all that where does Wab come out on Donnerís calculator?

P/E* 19
Dividend Yield* 1.7%


Earnings and Dividend Growth 2%
Capitalization Rate 2%:* * *Fair Market/Earnings* * * * * Fair Market/Dividends
* * * * * * * * * * * * * * * * * * * * * * * * * * *1750 * * * * * * * * * * * * * * * * * 1877
Capitalization Rate 4%* * * Fair Market/Earnings* * * * * Fair Market/Dividends
* * * * * * * * * * * * * * * * * * * * * * * * * * *1278* * * * * * * * * * * * * * * * * * *1185
* * * * * * * * * * * * * * * * *

Earnings and Dividend Growth 4%
Capitalization Rate 2%:* * *Fair Market/Earnings* * * * * Fair Market/Dividends
* * * * * * * * * * * * * * * * * * * * * * * * * * * 2678* * * * * * * * * * * * * * * * * * * *2989
Capitalization Rate 4%* * * Fair Market/Earnings* * * * * Fair Market/Dividends
* * * * * * * * * * * * * * * * * * * * * * * * * * * 1864 * * * * * * * * * * * * * * * * * * *1840

Given your inputs Wab, the market is undervalued by anywhere from 500 to 1700 points depending on how your range of* earnings and dividend growth and cap rates works out.* The rational bottom line by your lights out to be buy all you can get your hands on.*

If we input* a* historical 7% earnings and 4% dividend growth rate against various cap rates (depending on your appetite for risk) we get the following:

* * * * * * * * * * * * * * *Fair Market: Earnings Analysis* * Fair Marketividend Analysis
Capitalization Rate 4%* * * * * * * * * * * *3468* * * * * * * * * * * * * * * * * * *1840
* * * * * * * * * * * * * * * * 6%* * * * * * * * * * * *2455* * * * * * * * * * * * * * * * * * *1172
* * * * * * * * * * * * * * * * 8%* * * * * * * * * * * *1881* * * * * * * * * * * * * * * * * * * *775
* * * * * * * * * * * * * * * *10%* * * * * * * * * * * 1551* * * * * * * * * * * * * * * * * * * * 534
* * * * * * * * * * * * * * * *12%* * * * * * * * * * * 1360* * * * * * * * * * * * * * * * * * * * 389
* * * * * * * * * * * * * * * * 14%* * * * * * * * * * *1249* * * * * * * * * * * * * * * * * * * * 288

General rule ought to be pretty obvious here Ė the lower your cap rate the more you are going to be willing to pay.* Your cap rate is low and you are willing to pay almost anything to get your hands on the S&Pís future earnings and dividend flows.* Personally I donít trust the earnings projections anywhere near as much as the dividends.* *Dividends are real.* You get them in your pocket.* Consequently,* I would allow a lower cap rate on dividends than earnings.* *Even on that basis I have problems.* At 1200 on the S&P, Mr. Market is telling me I should accept a cap rate on future dividend flow of something less than 6%.* Given a risk free rate of 4% I* wonít take that deal.* Iíll take the risk free return and sleep good at night.* You will take the 1.5% to 2.0% premium to risk free deal in a heartbeat.* Doesnít make me right and you wrong.* It just makes us different. Vive la difference!* *


Donner











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Re: The sky is falling, the sky is falling
Old 08-21-2005, 05:04 PM   #105
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Re: The sky is falling, the sky is falling

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Originally Posted by Apocalypse . . .um . . .SOON
Donner:* I believe that debt is the underlying financial problem, both personal debt and gov't debt.* The inability to feed this monster (with timely payments) will probably bring us down.*

* What are the governmental weapons to keep this economy/debt bomb going?* We have to get money to people so that they can keep making their monthly payments--keep the machine going.* Lower taxes.* Not much chance of that happening soon.* War?* Yep, lots of money being spent there to stimulate the economy by stimulating war.* Increased wages?* Nope.* China keeps getting more of our labor money.* Refinance the home?* Yep, more money now, more debt to feed.* Lower capital gains tax?* Yep, already done.* Economy still stalling.* Give money to corporations?* Yep, free money for big farmers, ADM, energy companies, pharma companies (this list is long).* Trickle down gone wild.
You are right about this. Has everybody worried. My feeling is that we are another Argentina in the making. The Argentine government went wild ruinning deficits and boosting the economy with borrowed money -- mostly from Ney York banks. Bill Gross says that fiscal discipline is only imposed from the outside. And the outside imposed it at last on the Argentines. Look what happened. It wasn't pretty. Government froze everybody's bank accounts and re-issued the currency. Wiped out everybody's savings. In our case the Chinese, Japanese and other saver nations will impose the discipline on the US at some point in time. Will be ugly when it happens.

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Re: The sky is falling, the sky is falling
Old 08-21-2005, 05:28 PM   #106
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Re: The sky is falling, the sky is falling

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Originally Posted by Donner
Nominal growth of S&P earnings and dividends over the past 15 years has averaged 6.77% and 4.0%, respectively.* Assume about 3% inflation and your range is a little conservative for earnings and a little aggressive for dividends.* But letís work with it.
Thanks for running the numbers. I guess it shows that the market is reasonably valued if you have reasonable expectations, for some values of "reasonable."

But it also shows that even the most mainstream valuation tools have to make a lot of assumptions, which is why I find them of questionable value.

The fact that this board is populated mostly by "early" retirees means that our investment horizon is pretty damn long. So, the approach I take is a bit different. Rather than looking backwards at growth numbers and extrapolate them forward, I try to look forward at things that might make a big difference to future stock market values.

In the short-term, I think the current administration's actions (huge deficit spending, cheap capital, low taxes, "ownership society") are bullish for the market, which is why I'm not too worried about the short-term market value.

In the long-term, I'm much more worried. The changes made during this administration will come back to haunt us. Demographic trends don't look good. We've had a nasty shift from manufacturing to services that doesn't bode well for long-term economic growth.

Bottom-line: don't sweat the small stuff (like DDM), but consider laying a foundation for what may come down the road. Earnings fluxuate like crazy. Demographic trends, for example, are much more predictable.
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Re: The sky is falling, the sky is falling
Old 08-21-2005, 05:32 PM   #107
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Re: The sky is falling, the sky is falling

Hmmmm

I believe the last time - it was the French who - tryed - then Nixon took us off the gold standard - Breton Woods - then Volker. 1973 - to 1982 was er ah interesting. Actual history - was more complex and subject to much debate - but you get the general idea. LBJ was accused of starting the ball rolling with 'guns AND butter' - ie Vietnam AND The Great Society.

Watch out for those flying chickens trying to come home.

Rather than be cute like when I was young in the 70's with asset class and sector investing - this time - balanced index - buckle up and take the ride - as bumpy as I expect it will be. In other words - no change in investment policy for me - except hurry up and just stand there.

Putzing at the edges - well - that's just male and hormonal.
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Re: The sky is falling, the sky is falling
Old 08-22-2005, 09:57 AM   #108
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Re: The sky is falling, the sky is falling

Interesting article by Hussman today. It answers some of the questions about the high PE ratios currently evident to me in the market. At the end he said his bond fund had an average duration of 2 years. If I add my MM funds to my bonds in the smartypants, then I'm pretty close to his duration point. Outside of that, pretty risky business.

http://www.hussmanfunds.com/wmc/wmc050822.htm

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Re: The sky is falling, the sky is falling
Old 08-22-2005, 01:17 PM   #109
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Re: The sky is falling, the sky is falling

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Originally Posted by Apocalypse . . .um . . .SOON
Interesting article by Hussman today.
Interesting aspect of the Hussman Funds is that at least one of them is managed using something similar to what is being described in another thread on this board as a collar. Hussman has a variable hedge, that he puts in full force when he is negative, but lifts in various degrees when he is more positive. He accomplishes this by buying index puts, and offsetting the cash drain of the put premiums by selling calls. Thus a "collar".

Ha
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Re: The sky is falling, the sky is falling
Old 08-24-2005, 12:33 AM   #110
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Re: The sky is falling, the sky is falling

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Originally Posted by HaHa
He accomplishes this by selling index puts, and offsetting the cash drain of the put premiums by selling calls. Thus a "collar".

I thought a collar was selling calls and BUYING puts, preferably with the premiums from the calls. Thus, if the market goes down, you exercise (or in the case of index puts, sell) the puts, thus protecting you from the big downturn. But you cap your potential upside due to the calls you have sold. Either you used the wrong word, or I have a gap in understanding. Regrettably, at this time of the evening, and at this blood-alcohol level, either is possible.
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Re: The sky is falling, the sky is falling
Old 08-24-2005, 02:17 AM   #111
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Re: The sky is falling, the sky is falling

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I thought a collar was selling calls and BUYING puts, preferably with the premiums from the calls.* Thus, if the market goes down, you exercise (or in the case of index puts, sell) the puts, thus protecting you from the big downturn.* But you cap your potential upside due to the calls you have sold.* Either you used the wrong word, or I have a gap in understanding.* Regrettably, at this time of the evening, and at this blood-alcohol level, either is possible.* *
You are right- I just wrote is incorreectly. I'll edit my post.

hah
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