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Author: PaulEngr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1670  
Subject: Re: Discount conundrum Date: 6/20/2011 9:29 PM
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1. I use the long term S&P 500 historical average minus around 0.5% as my discount rate. Why? Because my decision is between investing in an index mutual fund or directly in individual stocks. If I can't beat the average, there's no reason to play. That being said using the short term average is fraught with obvious difficulties. So in other words, I use a constant 10%.
2. The stocks do seem undervalued. Same with the S&P 500. Most of the jitters are over Greek debt and/or whatever the feds are going to do because their debt game is almost expired. The concern is that it will spark another recessionary cycle. My problem is this:
A. If the Europeans default, the result in the U.S. will be that certain financials (Goldman-Sachs) will go nuclear. At this point it's uncertain how much additional effect this can really have.
B. If the U.S. defaults or virtually defaults (Treasury can't sell any more bonds which is almost true now, and the federal reserve can only buy them by devaluing the currency...hence a virtual default which has the same effect...runaway inflation), then only equities will have any value at all. The bond market turns into a black hole sucking in almost everything except some corporate bonds.
C. If neither happens eventually the fed is going to be forced to raise interest rates in a severe way. They've already fallen into the zero-interest black hole with no way out. This is unsustainable over the long term...again, runaway inflation.
3. Regardless of whether we somehow muddle through or go into inflation (deflation is basically mathematically impossible at this point), pretty much ANY equity except financials is a safe bet. Recession plus high inflation is certainly a very real possibility (think back to 1970's) but in this particular case, the government isn't in the driver's seat and at least with equities, not all the winds are blowing against us.
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