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From: ins_aam@jhunix.UUCP (Abhijit Mazumder)
Newsgroups: net.invest
Subject: Re: Why are things they way they are??
Message-ID: <1961@jhunix.UUCP>
Date: Fri, 21-Feb-86 11:57:15 EST
Article-I.D.: jhunix.1961
Posted: Fri Feb 21 11:57:15 1986
Date-Received: Mon, 24-Feb-86 07:39:43 EST
References: <123@tetra.UUCP> <36500008@convex>
Organization: Johns Hopkins Univ. Computing Ctr.
Lines: 38

> 
> The current high market indices have been attributed to the poor market
> witnessed over the last ten or so years in the sense that many of the 
> major stocks have been grossly undervalued for quite some time in terms
> of their book values and earnings potentials. The stock prices which seem
> so high to some are deemed reasonable by others who say that such a climb
> was inevitable.

The stock market is simply a giant present value machine (to quote a few
professors).  A stock represents a potential income stream (the dividends
it pays).  The price of the stock is the value today of that future income
stream.  It is related to interests in the following way:

PV= X            X                  X
   ----   + ------------  + ------------------ + .......
   (1+r1)   (1+r1)(1+r2)    (1+r1)(1+r2)(1+r3)

where X is the dividend and rn is the interest rate in year n.
As the interest rate goes down, the present value goes up, and the price
goes up.  Also as the expected dividends rise, the present value goes
up.  Recently, both of these things have been happening.  Interest rates
have been falling (as is evidenced by new car commercials offering even
lower finance rates) and expected yields have been rising (due to
the recent boom in the economy).  These are the fundamental reasons for
the recent rise in the stock market.

See, there reason behind this madness.

Paul

------------------------------------------------------------------------------
Paul Markowitz
"A pessimist is someone who won't call on G-d because he is certain 
he will get an answering machine"  -- my sister

"Another tea time,          ..!seismo!umcp-cs!jhunix!ins_aprm
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