Wednesday, May 9, 2007

Keeping It Simple

The Fed Model referenced in the most recent Sectors and Styles weekly report described the closing of the valuation gap to the point where, based on one’s assumptions of risk, the market is either 24% undervalued or less than 6% undervalued (see updated model on May 23rd blog entry).

If an investor assumes that a 80 to 100 basis point premium is warranted (which has been the case for the past several years) and that $92 is the appropriate 2007 operating earnings number for the S&P 500, then the best case return potential for stocks is little more than that which one can receive owning a US Treasury.

Investment Strategy Implications

The analytical process may involve a very complex set of data, but the valuation process is quite simple. It’s the getting the inputs as well as investor perceptions and expectations correct that’s the hard part.

1 comment:

Anonymous said...

Mr. BULL himself. Let me tell you when gas reaches $4.00 and we all start sticking it too each other that will skyrocket inflation. That crap you are telling CNBC about this frothy market tells me you have been sucking on too much of that frothy stuff yourself