> -----Original Message-----
> From: Doug Henwood [SMTP:dhenwood at panix.com]
> Sent: Tuesday, March 30, 1999 2:59 PM
> To: lbo-talk at lists.panix.com
> Subject: Re: DOW 36,00 from J. O'Connor
>
> Barbara Laurence wrote on behalf of Jim O'Connor:
>
> >Doug, am I crazy or is Glassman and Hasset's calculations based on
> earnings
> >only, not capital gains from stock sales? If you assume that everyone
> will
> >stay in the market no matter what, and that more people will enter as
> more
> >join the labor force, then it would seem that they're right? or,
> again, am
> >I crazy?
>
> Their reasoning doesn't make much sense; according to Brad De Long,
> Glassman doesn't seem to understand basic arithmetic. But here's a
> choice
> paragraph:
>
> <quote>
> Contrary to Alan Greenspan's famous warning--made on Dec. 5, 1996,
> with the
> Dow at 6437--investors today are rationally exuberant. They are
> bidding up
> the prices of stocks because stocks are a great deal. Dow 10000 is
> just for
> starters. How high will the market go? We'll give you a hint: The
> title of
> our book, to be published this fall by Times Books, is "Dow 36,000."
> Using
> sensible assumptions, we are comfortable with prices rising to three
> or
> four times their current levels. Our calculations show that with
> earnings
> growing in the long term at the same rate as the gross domestic
> product and
> Treasury bonds below 6%, a perfectly reasonable level for the Dow
> would be
> 36000--tomorrow, not 10 or 20 years from now.
> </quote>
>
> They say a risk premium of 0 combined with earnings growth equal to
> trend
> GDP growth would justify a P/E of 100, or an earnings yield of 1%. But
> that
> would imply that once that "fair" valuation were reached, the price
> return
> on stocks should fall below 3% (assuming trend GDP = 2.5-3%). Given a
> dividend payout ratio of 50-70%, that would imply a dividend yield of
> 0.50%-0.75%, for a total return of well under 4% a year. Once, of
> course,
> the quadrupling were accomplished.
>
> A P/E of 100 with a dividend yield of 0.5% sounds like Tokyo, 1989.
>
> Doug