vectorvest stock valuation and stock market cycles aaii chapter meeting april 12 th, 2008...

VectorVest

Stock Valuation

and

Stock Market Cycles

AAII Chapter Meeting

April 12th, 2008

Alexandria, Virginia

How The Market Works

What Causes Stock

Prices to Rise and Fall?

How The Market Works

Rising Earnings

Rising earnings cause stock prices to go higher and higher.

How The Market Works

Rising Inflation

Rising inflation causes stock prices

to go lower.

How The Market Works

Rising Interest Rates

Rising interest rates cause stock prices to go lower.

How the Market Works

Stock Prices go up when:

Earnings go up

Inflation goes down

Interest Rates go down

How The Market Works

Money Goes Where Money Grows

EY vs. IYEY vs. IY

Earnings Yield vs. Interest YieldEarnings Yield vs. Interest Yield

Inherent Value

If: EY = IY

Then: 100 x (E/P) = IY

Or: 100 x (E/V) = IY

And: V = 100 x (E/IY)

Value of MCD

V = 100 x (E /IY)V = 100 x (E /IY)

V = 100 x (3.00/5.80)V = 100 x (3.00/5.80)

V = $51.72 / ShareV = $51.72 / Share

Closing Price = $55.48 / Share*Closing Price = $55.48 / Share*

* 03/28/08* 03/28/08

Stock ValueV = 100 x (E / IY)

x Sqr [(R + G) / (IY + F)]

where

E = Earnings in $ / share

IY = Interest Rate in %

R = % Return on Total Capital

G = Earnings Growth in % / yr.

F = Inflation Rate in % / yr.

VV - MCD

V = 100 x (E /IY) x Sqr[(R + G) / (IY + F)]V = 100 x (E /IY) x Sqr[(R + G) / (IY + F)]

V =100 x (3.00/5.80) x Sqr[(6.6 +21.0 ) / (5.80 + 4.00)]V =100 x (3.00/5.80) x Sqr[(6.6 +21.0 ) / (5.80 + 4.00)]

V = $51.72 x Sqr (2.82)V = $51.72 x Sqr (2.82)V = $86.85 $/ShareV = $86.85 $/Share

V V Value = $71.74 $/Share, (03/28/08)V V Value = $71.74 $/Share, (03/28/08)

Doing the Dow…

0100020003000400050006000700080009000

1000011000120001300014000150001600017000180001900020000

Doing the Dow with VectorVest1970 to 2008

Actual VV-DJIA

The Current Situation

The DJIA is Undervalued.

Actual DJIA = 12,216VV DJIA = 17,033*

* VectorVest, 03/28/08

The Current Situation

The Market, as a whole, is Undervalued.

VVC Price = 26.72VVC Value = 29.71*

* VectorVest 03/28/08

Stock Market Cycles

What Causes

Bull & Bear Markets?

How The Market Works

Bull Markets are Born

when the economy is weak, inflation and interest rates are low, and earnings are expected to rise.

How The Market Works

Bear Markets Begin

when the economy is strong, inflation and interest rates are high and earnings are expected to fall.

How The Market Works

The Virtuous/Vicious Cycle• Inflation Drives Interest Rates• Interest Rates dictate the Strength

of the Economy• The Economy affects Earnings• Lower Earnings ultimately cause Stock

Prices to Rise or Fall

How The Market Works

The Investment Climate

VectorVest Monitors Earnings, Inflation,

Interest Rates, Market Direction,

and Investor Sentiment.

The Truth Chart

E F I P 1. U U D U Bull Mkt Begins 2. U D D U Bull Mkt Thrives 3. U D U U Rarely Happens 4. U U U U Bull Mkt Ends 5. D U U D Bear Mkt Begins 6. D D U D Rarely Happens 7. D D D D Bear Mkt Matures 8. D U D D Bear Mkt Ends

How The Market Works

The Current Situation:*

As of March 28, 2008, the U.S. Market

was in a Case Five Bear Market Scenario.Inflation and Interest rates were Rising,

Earnings were Falling.

*03/28/08

How The Market Works

The Outlook:The Bear Market is well entrenched.

Our data show that earnings are falling, and there is considerable

doubt that they will be rising soon.

VectorVestImportant Numbers

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