7-Sep-12 WV-European Central Banks opens the floodgates

Discussion of Web Log and Analysis topics from the Generational Dynamics web site.
John
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7-Sep-12 WV-European Central Banks opens the floodgates

Post by John »

7-Sep-12 World View -- Stocks go crazy as European Central Bank opens the money floodgates

60 migrants drown in smuggling attempt from Turkey to Greece


** 7-Sep-12 World View -- Stocks go crazy as European Central Bank opens the money floodgates
** http://www.generationaldynamics.com/cgi ... 07#e120907




Contents:
ECB announces huge new unlimited bailout program
Stocks returning to height of 2007 bubble levels
Hungary rejects IMF/EU's austerity demands for a bailout
60 migrants drown in smuggling attempt from Turkey to Greece


Keys:
Generational Dynamics, Mario Draghi, European Central Bank, ECB,
Long-Term Financial Operation, LTRO, Greece, Spain, Italy,
Dow Jones Industrial Average, Hungary, Viktor Orbán,
International Monetary Fund, IMF, Turkey, Aegean Sea

mannfm11
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Joined: Thu Oct 09, 2008 11:14 pm
Location: DFW Texas
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Re: 7-Sep-12 WV-European Central Banks opens the floodgates

Post by mannfm11 »

I believe your model may actually understate the inflated values of the market. I did a lot of financial calculations on data put out by Robert Shiller back in 2003. What I found, using the famous 1926 standard, along with the CPI figures Shiller posted was that inflation had averaged 3% from 1926 to 2003 and that real growth was somewhat lower than 1%. I used dividends as the model in that the formula for the value of a stock when I studed finance was D/k-g, D being dividends, K the cap rate and g the rate of growth. The dividend rate in 1926 was 4.76%, if my memory serves me correctly and the model produced roughly have the return in dividends and half in growth. The model is pretty cut and dried in that if you use a stable capitalization rate, the price increase should reflect the growth of the general dividend. My observation is the dividend rate plus the long term growth rate should equal the rate of risk. When considering the SPX was trading with a 1% dividend at its 2001 peak (it was a little over), its theoretical risk was below that of treasuries. Being we are looking at a projected return of 9% or so and an inflation rate of 3%, then the real rate, reflected by growth and dividends should be in the 6% range. Currently we are in the 3% range and as your data reflects, in a stable environment, the SPX should be trading at about 50% of its current value. It is being viewed as a risk free asset. Once risk shows up, the value will end up on the other end of the spectrum. In 2003, I estimated the value of the SPX to be in the 370 range. We made it down to 769 interday.

They have gamed these indexes as well. I recall that Alcoa split twice in the 1998 to 2002 period. It went from around 80 to 40 twice. In doing so, it amplified the value of a Dow point by reducing the divisor. Had it not split, it would have been at 160 or so at it split peak and now been trading at around 40. Thus we had a decline of 120 points turned into a decline of 30, leaving arouond 600 points in the Dow that were gained, but not lost. The same thing happened with GE, split 3 for 1 in June 2000 and Intel, split at around 160 to 80 and now down to the mid 20's. The fall from 160 to 50 would have had a much more severe effect on the Dow than from 80 to 25. The Dow has been a really good portfolio manager. The SPX is even more stealth, as it relies on a divisor in the form of dollars. They haul out a corpse and the investor has to make a new investment, thereby increasing the divisor. In lieu of paying dividends, many of these companies have bought back stock, which reduces the number of shares and thus reduces the divisor itself. This has allowed them to understate the losses of the buy and hold investor, as they took the losses of companies that went to zero, while the people who sold the stock to the companies got off with the money. It would probably take me a month to figure the losses that have gone on in the SPX, but I can tell you that CSCO once traded for $600 billion and now is well under $200 billion and all the stock bought back has effectively inflated the rest of the SPX by reducing the divisor from shrinking CSCO. There is a lot of slight of hand in these numbers.

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