Expected Return Valuation Models

excerpts from this week's report:

"For the most part, market prognosticators start with a point of view and then declare the market to be in or out of synch with that view. What happens less often is when an investment strategist starts first with what the market says is the expected return (based on variety of inputs) and then asks the question, "Do these scenarios make sense?"


On the following pages (see report) you have exactly this second approach described in the form of two valuation models – adjusted Fed Model and the Discounted Cash Flow Model.

Beginning with the assumption that the market return over any given twelve month period for large cap issues such as the S&P 500 approximates its historical long-term rate of 12%, the earnings and interest rate assumptions produce that expected return of 12% in a range of scenarios. This is expressed in the adjusted Fed Model.

From this point, we now have an easy-to-view framework from which such assumptions can now be compared with the assumed growth rate in earnings beyond the next twelve months and the implied Return on Equity that such an assumed sustainable growth would infer. This is noted in the Discounted Cash Flow Model.

As you will note, in both cases the current level of the S&P 500 assumes earnings growth, interest rates, sustainable growth, and return on equity that is at odds with most recessionary forecasts and more in line with the doomsday scenarios of deflation and depression..."

also in this week's report:

* Valuation Models
* Model Growth Portfolio
* Investor Sentiment Data
* Chart Focus: Styles
* Sectors and Styles Market Monitor
* Key Economic Indicators

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