alt.politics.economics

"John Galt" wrote:

>
>"alexy" wrote in message
>news:j37mg35guheon3uba7o92vhe0a6r3kaacg@ ...
>> "John Galt" wrote:
>>
>>>
>>>"alexy" wrote in message
>>
>>>> I didn't read the article that way. I thought it was saying divide
>>>> current price (unaffected by "irrational exuberance past prices) by
>>>> ten-year average earnings. Make some adjustment for inflation and that
>>>> seems to make sense, at least market-wide.
With a little digging, I confirmed that is what was being done. See
below.

>>>> Of course for any single
>>>> stock, the tendency will always be to be forward-looking.
>>>
>>>Take another look. If anything, it's saying that the average annual PE
>>>over
>>>the last 10 years is .
>> Okay. I reread it, and still don't see it that way. Specifically, I
>> read the paragraph:
>>
>>>>>> So they argued that P/E ratios should not be based on only one year's
>>>>>> worth of earnings. It is much better, they wrote in "Security
>>>>>> Analysis," to look at profits for "not less than five years,
>>>>>> preferably seven or ten years."
>> as talking about averaging the earnings, not the price.
>>
>>> That number makes sense,
>> I beg to differ.
>
>It makes sense in the context that if you average the annual PE's over the
>last 10 years, you'll probably get -ish. Take a look at the trailing 12
>month PE's:
>
>1997: 20
>1998: 27
>1999: 30
>2000: 30
>2001: 25
>2002: 52
>2003: 29
>2004: 23
>2005: 20
>2006: 17
>
>Average .
I think that is coincidence.

>In short, the posted article is some guy's opinion that this
>number means means something scary, and he juxtaposes this contrived factoid
>with some quotes from Dr. Graham to make the reader THINK that Dr. Graham
>would agree. Media rubbish, as I see it.

I think you are being unfair to the writer. This guy might not be a
professional economist, but neither is he a clone of Vid or Democracy
Highlander; he appears to have a clue, deals with facts, and
understands how to do simple financial calculations.

His article has a link to this data:
/~shiller/data/

Copy it into a spreadsheet, and you won't get the formulas, but you
will be able to duplicate the P/E10 column by dividing the indexed
price by the average of the previous 120 months of indexed annual
earnings. All numbers are indexed with CPI. And contrary to the
discussion here, it is a P/E10 of the S&P 500, not of the DJIA.
--
Alex -- Replace "nospam" with "mail" to reply by email. Checked infrequently.