Re: U.S. deficits fine -- Nobel laureate

From: Igor (jjweatherby_at_houston.rr.com)
Date: 12/13/04 

Date: Mon, 13 Dec 2004 10:40:36 GMT

Robert Vienneau wrote:

> In article <JcIud.16044$yf.7349@fe2.texas.rr.com>, Igor
> <jjweatherby@houston.rr.com> wrote:
>
>
>>There was nothing idiotic about the paper. In fact if I recall the whole
>>thread had SERIOUS misunderstandings about what undervalued meant.
>
>
> This is true. Mr. Weatherby has no idea what McGrattan and Prescott
> mean by "undervalued".
>
>
>>The estimates show stocks were undervalued. That means prices were under
>>CURRENT EARNINGS PER A SHARE. This means something very clear.
>
>
> Mr. Weatherby continues to fumble.
>
> "we find that conservative estimate for the fundamental value of
> U.S.corporations in 1929 was ... 21.6 times 1929 after-tax
> corporate earnings."
> -- McGrattan and Prescott.
>
>

No your math skills are failing you Rob if prices are under earnings per
share which is one measure of the justified price. THEN PRICES ARE ALSO
UNDER A MEASURE THAT WOULD GIVE A NUMBER ALMOST 22 TIMES BIGGER!! You do
not understand what is being discussed. The value measurements are a
different way to calculate what a P/E ratio intends to do. My language
was a bit off but it was tradeoff for trying to explain something more
complex to an audience that has little education in economics.

>>PEOPLE
>>SAW THE RECESSION COMING AND REACTED. The argument supports rational
>>expectations in that people are intelligent to see indicators and REACT
>>to them. The stock market prices were dropping before the earnings
>>information became known and the statistics were gathered to see a
>>recession had occurred. There is nothing silly about saying a stock is
>>undervalued at the onset of a recession. It only seems silly when you
>>think undervalued means that stock prices MUST rise soon. Undervalued
>>does not say that. Undervalued says that people EXPECT earnings to be
>>LESS in the FUTURE than they are NOW. That means in 1929 investors
>>CORRECTLY PREDICTED THE COMING RECESSION.
>
>
> The above has nothing to do with the contents of:
>
> "The 1929 Stock Market: Irving Fisher Was Right," Ellen R. McGrattan
> and Edward C.Prescott
> <http://research.mpls.frb.fed.us/research/sr/sr294.pdf>
>
> A stock can be undervalued if people expect earnings to decline in
> the future. And it can be undervalued if people expect earnings to
> rise in the future. A stock can be overvalued if people expect
> earnings to decline in the future. And it can be overvalued if
> people expect earnings to rise in the future.
>

ROB THE KEY WORD IS EXPECT and your definition is WRONG. The stock price
is a CONCENSUS on future expectations of proformance. DEMAND FOR A STOCK
IN WHICH INVESTORS BELIEVE FUTURE EARNINGS AND THEREFORE DIVIDENDS WILL
FALL WILL DECREASE. Fewer people will want to buy the stock at each
price because they precieve a LOWER return. Supply of this stock will
increase as some of those holding the stock will be willing to sell more
at each price in order to liquidate the stock and buy something WITH A
HIGHER return. This says if people believe profits are dropping THEN THE
PRICE of the stock will drop. Therefore the Stock is unlikely to be
remain overvalued. Why because prices are dropping as people BELIVE
future profits are dropping. Theoritically if the expectation is CORRECT
then the stock will adjust to be niether over or under valued. If people
are wrong and profits drop less than expected then the Stock will be
undervalued at some FUTURE point. It could mean that the stock will
still be overvalued in the FURTURE. However, this means that the
expectations are off and earnings or values dropped more than expected.

A situation where stocks are undervalued and people believe that
earnings will rise CAN NOT last for wrong. People will begin to precieve
that the current price as a bargain and demand for the stock will rise
and supply will decrease increasing prices and eroding the undervalued
status. EXPECTATIONS SET PRICES IN THE STOCK MARKET.

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