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VectorVest
Stock Valuation and Stock Market Cycles
AAII Chapter Meeting April 12th, 2008 Alexandria, Virginia
VectorVest Stock Valuation and Stock Market Cycles AAII Chapter - - PowerPoint PPT Presentation
VectorVest Stock Valuation and Stock Market Cycles AAII Chapter - - PowerPoint PPT Presentation
VectorVest Stock Valuation and Stock Market Cycles AAII Chapter Meeting April 12 th , 2008 Alexandria, Virginia How The Market Works What Causes Stock Prices to Rise and Fall? How The Market Works Rising Earnings Rising earnings cause
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How The Market Works
Rising Earnings
Rising earnings cause stock prices to
go higher and higher.
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How The Market Works
Rising Inflation
Rising inflation causes stock prices
to go lower.
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How The Market Works
Rising Interest Rates
Rising interest rates cause stock prices
to go lower.
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How the Market Works
Stock Prices go up when: Earnings go up Inflation goes down Interest Rates go down
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How The Market Works
Money Goes Where Money Grows
EY vs. IY EY vs. IY Earnings Yield vs. Interest Yield Earnings Yield vs. Interest Yield
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Inherent Value
If: EY = IY Then: 100 x (E/P) = IY Or: 100 x (E/V) = IY And: V = 100 x (E/IY)
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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 / Share V = $51.72 / Share Closing Price = $55.48 / Share* Closing Price = $55.48 / Share*
* 03/28/08 * 03/28/08
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Stock Value
V = 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.
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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 $/Share V = $86.85 $/Share
V V Value = $71.74 $/Share, (03/28/08) V V Value = $71.74 $/Share, (03/28/08)
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Doing the Dow…
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 16000 17000 18000 19000 20000
Doing the Dow with VectorVest 1970 to 2008
Actual VV-DJIA
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The Current Situation
The DJIA is Undervalued. Actual DJIA = 12,216 VV DJIA = 17,033*
* VectorVest, 03/28/08
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The Current Situation
The Market, as a whole, is Undervalued. VVC Price = 26.72 VVC Value = 29.71*
* VectorVest 03/28/08
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Stock Market Cycles
What Causes Bull & Bear Markets?
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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.
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How The Market Works
Bear Markets Begin when the economy is strong, inflation and interest rates are high and earnings are expected to fall.
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How The Market Works
The Virtuous/Vicious Cycle
- Inflation Drives Interest Rates
- Interest Rates dictate the Strength
- f the Economy
- The Economy affects Earnings
- Lower Earnings ultimately cause Stock
Prices to Rise or Fall
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How The Market Works
The Investment Climate
VectorVest Monitors Earnings, Inflation, Interest Rates, Market Direction, and Investor Sentiment.
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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
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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
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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.
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