Stock Market
All comments and Stock Market Ananlysis are made by Guy Brumley. Guy has been trading the Stock Market daily since 1992.
Trading, evaluating stock prices and predictions
Stock Market Commentary 5-28-2009
The DOW gave back 173 of the 196 points from Tuesday. Wednesday’s trading range was 8300-8500, an inside day, and a wait and see day. The sell off followed the drop in the 10-year treasury bonds. The 10-year yield has risen to 3.75, six-month high, triggering fears of higher cost of financing for mortgages and business expansion.
The US government has $162 billion in debt to sell this week. This coupled with the additional shares of stock of financial companies issued in the last month, and the market is eating up all the new money re-entering. The truth of the bank bailout, AIG bailout, automotive bailout and whatever other bailouts, (insurance, freight), is somewhere someone has to take the other side of this bet.
One scenario has hyperinflation keeping the recession around for 1 to 5 years, which would lead to little or no growth, and depressed prices.
The key to market valuation is the PE ratio. How many years’ earnings do you put into a stock’s price? Do we use a 15 PE, a 22 PE or an 8 PE?
An actual example of this PE multiplication can be shown in the stock of Coca-Cola, symbol KO.
If you look at a long-term graph of KO, in 1985 the stock sold for $3.00. By 1998, it had become everyone’s favored stock for global growth, and the stock sold for $85.50. It had a PE ratio of 54. This is still the historic high price for KO. From this peak, the stock retreated to $40.00 in 2004-2005, and today is at $46.00. Today’s PE ratio is 18. I hope you are not holding stock from 1998.
Looking at the numbers, to purchase KO stock at $85.50 meant you expected the sales and earnings of KO to grow at more than double every year for the next 10 years. They would need sales in every country on Earth, plus some of Mars and Venus. This is how the market looses perspective. This how hot stocks get overpriced.
If we get no growth for the next X number of years, stocks will be no higher than today, and probably lower.
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