Vector Vest Stock Valuation and Stock Market Cycles

Vector. Vest 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.

How The Market Works Rising Inflation Rising inflation causes stock prices to go lower.

How The Market Works Rising Interest Rates Rising interest rates cause stock prices to go lower.

How the Market Works Stock Prices go up when: Earnings go up Inflation goes down Interest Rates go down

0 1951 1953 1955 1957 1959 1960 1962 1964 1966 1968 1969 1971 1973 1975 1977 1978 1980 1982 1984 1986 1987 1989 1991 1993 1995 1996 1998 2000 2002 2004 2005 2007 Ratio of S&P 500 Earnings Yield and 30 -Year Bond Interest Yield: Jan. 1950 to Oct. 2007 7 6 / IY(%) EY(%) / IY(%) 5 EY(%) 4 3 2 1

How The Market Works Money Goes Where Money Grows EY vs. IY Earnings Yield vs. Interest Yield

Inherent Value If: Then: Or: And: EY = IY 100 x (E/P) = IY 100 x (E/V) = IY V = 100 x (E/IY)

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 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 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)

Doing the Dow…

The Current Situation The DJIA is Undervalued. Actual DJIA = 12, 216 VV DJIA = 17, 033* * Vector. Vest, 03/28/08

The Current Situation The Market, as a whole, is Undervalued. VVC Price = 26. 72 VVC Value = 29. 71* * Vector. Vest 03/28/08

Stock Market Cycles What Causes Bull & Bear Markets?

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

How The Market Works The Virtuous/Vicious Cycle • • Inflation Drives 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 Works The Investment Climate Vector. Vest Monitors Earnings, Inflation, Interest Rates, Market Direction, and Investor Sentiment.

The Truth Chart 1. 2. 3. 4. 5. 6. 7. 8. E F I P U U D D U D D U U U U D D Bull Mkt Begins Bull Mkt Thrives Rarely Happens Bull Mkt Ends Bear Mkt Begins Rarely Happens Bear Mkt Matures Bear Mkt Ends

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 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.

Vector. Vest Important Numbers Sales: 1 -888 -658 -7638 Seminars: 1 -800 -231 -0110 Product Support: 1 -888 -658 -7638