Wednesday, September 3, 2008

Equities are not overpriced

This model of equity valuation shares many of the features of the "Fed Model" and of Art Laffer's valuation model. It uses corporate profits from the National Income and Products Accounts, which tend to be more stable than the profits reported according to GAAP. The model shows the equity market to be extremely undervalued today. The market is very fearful of a recession, and of inflation. Valuations today assume a big decline in corporate profits and/or a big increase in interest rates. In other words, lots of bad news is already priced into equities today. If things don't turn out so bad, equities will rise. They are not overpriced and represent good value, in my view.

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