Re: Greenspan's Ponzi Scheme

[Jurriaan Bendien <bendien@xxxxxxxxxxxx>]

I've got the 'flu, but are you serious :-)

See:
http://www2.standardandpoors.com/NASApp/cs/ContentServer?pagename=sp/Page/In
dicesBrowseMethodologyPg&l=EN&b=4&s=6&ig=48&i=56&r=1&xcd=500&f=3

There is nothing to explicate, because the math you cite is gobbledygook,
the assumptions questionable and on inspection of the Index (which I hadn't
studied before) the statement is meaningless without further specification
(for instance, how is productivity defined ?).

Standard & Poor's 500 is a value-weighted index of the stock value of 500
publicly listed US corporations, apparently those with the largest market
value within their industry (?). It is thus supposed to be a proxy for the
share market and dividend returns as a whole. The index is said to include
400 industrial firms, 20 transportation firms, 40 utilities, and 40
financial firms.

The total market value of a company is obtained by multiplying the price of
the stock by the number of ordinary shares issued. Between the end of 2000
and now the index actually lost about quarter of its value (the trend in
market capitalisation seems to be about the same). The dividend yield
figures provided are based on the anticipated or actual annual dividend rate
for each stock included in the Index. The indexed dividend itself is
obtained by dividing total dividends per year by the index divisor.

The price/earnings ratio is the tradeable market value per share, divided by
the earnings per share. It tells us how much investors are willing to pay
per dollar of earnings (the "multiple" of a stock). The company P/E ratio is
basically an indicator of the level of confidence about a company's growth
prospects and consequently company profitability. Thus, an above-average P/E
suggests expectations of increased turnover in the future, and thus a
greater distributed profits volume. Time series of the P/E ratio are a
better indicator of the trend in the value of a stock, because they include
the actual or anticipated earnings on the stock.

The Standard & Poor P/E ratio is reported on the basis of earnings over the
past year, or, as projected earnings for the current year. Traditionally, it
is said a Standard & Poor P/E ratio of lower than 10 was thought to be an
"attractively valued market", a P/E of 14-15 represents a "fairly valued
market", and a P/E of 20 represented an "overvalued market".

If a company's profitability is zero, or it operates at a loss, then the P/E
ratio is basically meaningless. If a company's assets, turnover and revenue
grows slowly, but it has a large P/E, then this suggests a discrepancy
between the real value and earnings potential of a company and its perceived
value and earnings potential as reflected in stock trading. The stock might
thus be "overpriced" relative to real asset value or future earnings
potential, but of course the individual investor can appropriate income from
fluctuations in stock values of publicly listed companies, buying cheap and
selling dear, and indeed influence fluctuations in share values by purchases
or sales. "Overpriced" merely indicates that the market value of a publicly
listed stock is likely to fall in the future (usually because of lower
realised profits or lower anticipated profits), i.e. that a company is
over-valued in this sense.

But, comparing company P/E ratios for investor's purposes is really
meaningful only if they are in the same branch of industry. Thus e.g.
utilities normally have low P/E ratios because they are low growth, stable
industries not prone to a lot of fluctuation, whereas e.g. hi-tech stocks
fluctuate much more. Just how good a synthetic indicator of average dividend
returns and share values the Standard & Poor 500 is, I don't know.

J.