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 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. IY EY vs. IY Earnings Yield vs. Interest Yield Earnings 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 / Share V = $51.72 / Share Closing Price = $55.48 / Share* Closing Price = $55.48 / Share* * 03/28/08 * 03/28/08

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.

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)

Doing the Dow… 20000 Doing the Dow with VectorVest 19000 18000 1970 to 2008 17000 16000 15000 14000 13000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 Actual VV-DJIA 2000 1000 0

The Current Situation The DJIA is Undervalued. Actual DJIA = 12,216 VV DJIA = 17,033* * VectorVest, 03/28/08

The Current Situation The Market, as a whole, is Undervalued. VVC Price = 26.72 VVC 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.

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