vectorvest stock valuation and stock market cycles aaii chapter meeting april 12 th, 2008...
TRANSCRIPT
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
Sales: 1-888-658-7638Seminars: 1-800-231-0110
Product Support: 1-888-658-7638