No. My model gives a cyclical movement which dips below the mean and then ascends (far) above it in the next period. The dynamics are such that the P/E is never in equilibrium.
>Battipaglia claims that they are not overvalued because previous
>earnings models are just that: previous. For this you call him a
>liar?
On this list I would expect readers not to raise eyebrows over this. I think the probability of a leading Wall Street pundit having ulterior motives when talking reassuringly about the market, is quite high. But as I also said, Mr. Battaglia may truly believe in his own assertions, and I made that the premise of the rest of message. OK?
>He might not be right, but are you sure?
Fairly sure, but not 100% since I don't have a perfect crystal ball. My bet is that there will be a major crash (euphemistically: "correcion") within a year.
>In fact, his claim
>goes more to the idea that these prices are _not_ based on hope
>for 'better times', but rather that the'better times' are already
>here.
I think we should stick to his actual words as referred in the SMH:
>Market valuations are justified because they are not
>anticipating better times...we're in better times.
He says NOT ANTICIPATING better times.
My native language is not English. With that reservation, I understand this to mean that further serious appreciation of stock prices are not to be expected. If this is a correct interpretation on my behalf, he must mean that today's prices are flattening out, but will stay stably high, so that the public should not withdraw from stocks in the fear that they will lose money. In my paper i argue that for P/E ratios to remain at levels far above what corresponds to realistic (P/E = 12 - 14?) rates of return, then here must be a continuous appreciation of stocks going on, so that the low rate of return that corresponds to a P/E of - say - 25, is compensated by further stock price appreciation. When prices flatten out, the only factor remaining to support the price level of stocks, is the earnings, which at this P/E level are obviously to low in relation to prices. Therefore the pressure for falling prices (and even panics) increases. And there is a positive feedback at work here, due to the psychology of the market. A slowdown in price growth engenders further slowdown. And a flattening out engenders price decrease, or even panic.
This is argued in detail in the paper, which may be downloaded from the Web, at
http://www.itk.ntnu.no/ansatte/Andresen_Trond/dwnld/stock-market.pdf
(It is 563 kbyte. Wait until Monday evening GMT, there is some temporary hassle with the web server that won't be fixed until then).
>I think this statement gives you away as someone who thinks that
>there is structural support for a "reasonable" return on a stock.
Of course it is. Why do you think the market is so much more nervous now than a couple of years ago? Because everyone knows deep down inside that there are some sort of "fundamentals" (or call it what you like) that by today are outrageously violated. Do you deny this?
>Other than past performance (which I'm sure is found in your
>"model"), do you have information to support this claim about the
>future?
Let me ask a counter-question: Why should an investor buy stock at a price which gives a risky return on his investment at the puny magnitude of -say- 3%, when he can buy risk-free gvt. bonds or even deposit his money in the bank at higher rate of return?
>That is: if a P/E of 30 is unreasonable, is 15 reasonable?
>
>If a 9100 DJIA is overvalued, was it also overvalued at 7000?
>5000? 34?
Any stock is overvalued when the P/E is so high that the risk premium + gvt. security return rates are higher than the return rate on the stock. But, responding to the line of your questioning, it of course is very much an issue of the DEGREE of overvaluation. One should not expect panics at P/E's of - say - 18. But when you get to 30, that is another issue.
>If you're a bear, I'll take the other side of that trade.
My only stock are 50 shares in a Norwegian left-wing newspaper, KLASSEKAMPEN. I bought them for NOK 1000 (133 USD) a piece. They are listed as being worth NOK 2,50 (33 cents) a piece. They have never given any dividend, and will never do so. So I am a real sucker.
Concerning the stock market, I could just as well go to the Sydney Casino and play black jack.
Trond Andresen