My photo
Andrew T. Gillies is Director of Communications at the Center for Audit Quality, an affiliate of the American Institute of CPAs, in Washington, DC. Based in Washington since 2002, he has also worked in editorial and communications roles at the Investment Company Institute, the World Bank, Forbes, and Vault.com. His policy-themed writing has focused on aerospace and defense, energy and environment, transportation, and financial services.

Wednesday, October 16, 2002

Bottom Fishing For Stock Bargains

According to Edward Yardeni's "Fed model," it's a great time to buy stocks.

An investment strategist with Prudential Securities, Yardeni derived this valuation technique from a 1997 monetary policy paper from the Federal Reserve. Roughly speaking, Yardeni's model (never endorsed by the Fed) says that the fair value price for the S&P 500 is equal to estimated earnings for the index divided by the yield on the ten-year Treasury note.

According to Thomson Financial, estimated next-12-month earnings for the S&P 500 now stand at $54.53 a share. Divide that by the 3.996% yield on the ten-year Treasury, and you arrive at a fair value price for the S&P 500 of 1,365. As of last night, the index closed at 881.

Thus, by Yardeni's model, the market is undervalued by 35%.

Full story at Forbes.com