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VectorVest. Stock Valuation and Stock Market Cycles AAII Chapter Meeting April 12 th , 2008 Alexandria, Virginia. How The Market Works. What Causes Stock Prices to Rise and Fall?. How The Market Works. Rising Earnings Rising earnings cause stock prices to go higher and higher.

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vectorvest
VectorVest

Stock Valuation

and

Stock Market Cycles

AAII Chapter Meeting

April 12th, 2008

Alexandria, Virginia

how the market works
How The Market Works

What Causes Stock

Prices to Rise and Fall?

how the market works3
How The Market Works

Rising Earnings

Rising earnings cause stock prices to go higher and higher.

how the market works5
How The Market Works

Rising Inflation

Rising inflation causes stock prices

to go lower.

how the market works7
How The Market Works

Rising Interest Rates

Rising interest rates cause stock prices to go lower.

how the market works8
How the Market Works

Stock Prices go up when:

Earnings go up

Inflation goes down

Interest Rates go down

how the market works10
How The Market Works

Money Goes Where Money Grows

EY vs. IY

Earnings Yield vs. Interest Yield

inherent value
Inherent Value

If: EY = IY

Then: 100 x (E/P) = IY

Or: 100 x (E/V) = IY

And: V = 100 x (E/IY)

value of mcd
Value of MCD

V = 100 x (E /IY)

V = 100 x (3.00/5.80)

V = $51.72 / Share

Closing Price = $55.48 / Share*

* 03/28/08

stock value
Stock Value

V = 100 x (E / IY)

x Sqr [(R + G) / (IY + F)]

where

E = Earnings in $ / share

IY = Interest Rate in %

R = % Return on Total Capital

G = Earnings Growth in % / yr.

F = Inflation Rate in % / yr.

vv mcd
VV - MCD

V = 100 x (E /IY) x Sqr[(R + G) / (IY + F)]

V =100 x (3.00/5.80) x Sqr[(6.6 +21.0 ) / (5.80 + 4.00)]

V = $51.72 x Sqr (2.82)

V = $86.85 $/Share

V V Value = $71.74 $/Share, (03/28/08)

the current situation
The Current Situation

The DJIA is Undervalued.

Actual DJIA = 12,216

VV DJIA = 17,033*

* VectorVest, 03/28/08

the current situation17
The Current Situation

The Market, as a whole,

is Undervalued.

VVC Price = 26.72

VVC Value = 29.71*

* VectorVest 03/28/08

stock market cycles
Stock Market Cycles

What Causes

Bull & Bear Markets?

how the market works19
How The Market Works

Bull Markets are Born

when the economy is weak, inflation and interest rates are low, and earnings are expected to rise.

how the market works20
How The Market Works

Bear Markets Begin

when the economy is strong, inflation and interest rates are high and earnings are expected to fall.

how the market works21
How The Market Works

The Virtuous/Vicious Cycle

  • Inflation Drives Interest Rates
  • Interest Rates dictate the Strength

of the Economy

  • The Economy affects Earnings
  • Lower Earnings ultimately cause Stock Prices to Rise or Fall
how the market works22
How The Market Works

The Investment Climate

VectorVest Monitors Earnings, Inflation,

Interest Rates, Market Direction,

and Investor Sentiment.

the truth chart
The Truth Chart

EF I P

1. U U D U Bull Mkt Begins

2. U D D U Bull Mkt Thrives

3. U D U U Rarely Happens

4. U U U U Bull Mkt Ends

5. D U U D Bear Mkt Begins

6. D D U D Rarely Happens

7. D D D D Bear Mkt Matures

8. D U D D Bear Mkt Ends

how the market works24
How The Market Works

The Current Situation:*

As of March 28, 2008, the U.S. Market

was in a Case Five Bear Market Scenario.

Inflation and Interest rates were Rising,

Earnings were Falling.

*03/28/08

how the market works25
How The Market Works

The Outlook:

The Bear Market is well entrenched. Our data show that earnings are falling, and there is considerable doubt that they will be rising soon.

vectorvest26
VectorVest

Important Numbers

Sales: 1-888-658-7638

Seminars: 1-800-231-0110

Product Support: 1-888-658-7638

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