Ratajczak- stock market undervalued 19%

The Rome (GA) News Tribune ^ | 7/26/02 | John M. Willis

[ruppertdog]

A well-respected economist tells Rotarians that a Federal Reserve model shows stocks are undervalued

07/26/02

Donald Ratajczak said he does not expect the stock market’s slide to continue much longer. “My gut feeling is that the market is bottoming out,” the well-respected economist told members of the Rome Rotary Club on Thursday. “We will be able to tell in a couple of days if Wednesday’s rally (when the Dow Jones industrial average regained more than 490 points) was enough to stabilize this market,” Ratajczak said. If the market has found the bottom, it spent much of Thursday skipping along it, with the Dow swinging from 118 points down in midday trading into positive territory before closing up 4.98 points at 8,186.31. “The stock markets and investors are upset,” Ratajczak said. “Investors have been selling off the market.” Ratajczak said the market’s decline is less about economic fundamentals and more about the continuing revelations of improper accounting practices at a number of major firms. “Is the stock market telling us something about the economy?” Ratajczak asked. “Probably not. It is telling us something about corporate governance.” He said his economic models show the stock market is undervalued by about 19 percent. “The Dow recovered about 5 percent on Wednesday, so at some point in the not too distant future, it should be 14 percent higher than it is now,” he said. An economic model used by the Federal Reserve Board also shows the market is undervalued.

[ruppertdog]

Time to BUY BUY BUY!

[Thane_Banquo]

To what economic models is he referring? Economic profit analysis (economic profits are different from accounting profits)? Discounted cash flow?

I'm an undergraduate double-majoring in Finance and Economics, so I'm particularly curious. Any thoughts would be appreciated.

[Stentor]

Donald Ratajczak

He needs to provide evidence that he is putting his money where his mouth is and not simply distributing schtock to J6P.

[Wyatt's Torch]

There are some models that show some sectors are undervalued. The S&P/Treasury Yield Gap model shows the S&P is the most undervalued since 1989 -

The tech sector is still overvalued as related to it's average since 1984 -

These models look at forward earnings yield (the inverse of the 12-month forward looking PE). Look how low they were in early 2000 and 1987 when things started imploding.

That being said, Ratajczak is a typical Keyensian and completely didn't see this coming (I'm a GSU MBA grad so I'm a little familiar with his work).

Check out these two sites for some very good, pure supply-side education - Trend Macrolytics Supply Side University

Good luck!

[ruppertdog]

I don't know what models they use, but if you look at the P/E (price over earnings)ratios of many individual stocks compared to their historical ratio and industry average over the past few years, they all seem to be very low at the moment compared to where they have been and should be. If these companies are accurately reporting earnings then there is no reason to expect the P/E to remain so low since the equity positions will be more valuable once what Ratajczak calls "corporate governance" issues are put to rest. The assumption is that Enron, Worldcom et al. are isolated cases and not representative of all of corporate America. I noticed particularly some very solid financials and REITs are trading with very low P/E while posting record earnings.

[ruppertdog]

I noticed that too- I moved a lot into S&P index funds last week and upped my 401k into them as well.

[Boonie Rat]

Boonie Rat

MACV SOCOM, PhuBai/Hue '65-'66

[madvlad]

the model of Voodoo Economics.

Mad Vlad

[Thane_Banquo]

Is this yield gap based on dividend payouts or on actual earnings. If it's based on actual earnings, your chart cannot possibly be right, because there is no way companies could stay in business if they on average earned less than the return on a 30 yr treasury. No one would invest in them.

[madvlad]

I just love how the Fed is now in the business
of talking the market back up.

Abbey Joseph Cohen's model has shown that the
market is undervalued since 1993 and maybe before.

The trailing PE on the DJIA is around 22. That
is fairly rich. Unless of course, you believe that
earnings will double over the next 6-8 quarters,
then it is a veritable bargain. Does anybody really
believe that corp capex is going to recover to a large
extent en masse over the next 12 months?

The Fed and Wall St are pitching what they think
the avg investor wants to hear. Buy, buy, buy
and don't sell. Maybe that is good advice for
some folks. But markets rise and they fall and
the talking heads haven't been able to stay the
inevitable. Bears come and bears go. This one
will go when people are completely lacking interest
and when pessmism is rampant. By the Investors
Intell sentiment poll this week, bullishness is
moving back to 40% whereas bearishness is mired
at a similar level. Short int on the NYSE remains
well off 5yr highs. In fact, it is closer to 5-yr
lows. So much for fear and loathing running
rampant among short players.

Looks like another headfake, folks.

Mad Vlad

[staytrue]

I think the fly in the ointment is that his model is based on current interest rates which are low. But if the market improves, interest rates are likely to rise.

[Wyatt's Torch]

It is based on forward earnings. For example, if the forward P/E of the S&P was 40, the yield would be 2.5%. However, if the forward P/E was 20 then the yield would be 5%. What you say about yields under the 30 year treasury are borne out by the model. When the S&P yield was greater than 2% lower than the 30YrT, we had violent corrections.

[Wyatt's Torch]

Yes the rates are low but it looks at the gap between the two and P/E's are still high from an historical perspective. BUt as the economy improves and rates increase, the equities indices will also increase. if they do as they typically do, they will increase faster than earnings and therefore will increase the P/E and decrease the yield and the gap will narrow. If the bond market collapses for some reason, then the gap will narrow but only on one side.

[Wyatt's Torch]

Good points, BTW, the firm that established these models is not long in equities except a slight position in the S&P index. They are long on Treasuries against a short position on the NASDAQ 100. They still feel there is way to much uncertainty in the markets to make a larger stake in equities.

[madvlad]

Well, tell me what you think of this analysis.

The market has been moving down for much of the yr
since the end of the sucker's rally which began in
Oct 2001. Why is the market moving down if GDP is
robust (according to Greenspan & Co, the econ is
recovering from recession) and consumers continue
to spend as if there is no tomorrow?

The talking heads claim that it is due to fears of terrorist attacks. Well, we lived in fear of
complete destruction assoc w/ all-out nuclear war
w/ the Ruskies for damn near 50yrs. Learning to love
the bomb as it were.

The talking heads claim that is it due to fears
of corp chicanery and fraud. This one may have some
merit.

What is going on w/ this disconnect? The economy
is improving but the market continues to erode despite
a half dozen or more cuts in int rates. I submit the
following.

Uncle Allan & Co claimed that we had a recession
and that we are now moving into the promised land of
econ recovery. Well, as I understand it, the
daffybition of recession is two consec quarters of
negative GDP growth. The last I checked only one
quarter of the last 6 was negative. That would be
3Q01 I think. That's not an official recession!!

In addition, the consumer has stayed strong despite
the withering corp capex. Now, given that the market
moves in anticipation, might the market be saying that
the consumer is pulling away, and once the consumer
pulls away, the second shoe will have dropped, thus
pushing the econ into recession marked by at least
2 consec quarters of neg GDP?

Basically, I submit that we haven't seen the recession
yet. And the market is behaving logically by
selling down.

Mad Vlad

[Wyatt's Torch]

While GDP is positive, the underling numbers show a good deal of weakness. For example, the growth was driven by large increases in government spending and by a slowdown in inventory liquidations. Capital spending was rather weak and that is the driver of the next boom. And because productivity is "output", or GDP, divided by hours worked and the inflated "good news" of GDP and the fact that hours actually declined, it made the productivity numbers look better than they actually were.

Couple that with the lack of meaningful earnings growth (espicially in the economy driving tech sector) and the Streets fear that Congress was going to outlaw capitalism (note that the markets rallied the second there was a deal on a somewhat benign "corporate responsibilty" bill) and there you have your market decline. I still expect another bottoming after the next earnings season but for now we will probably enter a trading range until something else happens.

[maestro]

Your#2)...............

I'm an undergraduate double-majoring in Finance and Economics, so I'm particularly curious.
Any thoughts would be appreciated.

:-)

Buy at 2500

[maestro]

Dump-BUMP!