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Subject:  Re: Evaluating a Stock with a "Higher" Date:  8/9/2008  2:16 PM
Author:  pauleckler Number:  3670 of 3816

I'm not convinced that historical PE ratios have much meaning.

When interest rates are high, investors can easily get nice returns on bonds and fixed income investments. Why invest in stocks? Similarly businesses have that more trouble borrowing funds to grow their businesses, finance expansions, etc, etc. It follows that earnings will be constrained. Growth rates are lower. Stocks are less attractive. So PE ratio will be lower.

We saw record low interest rates under Alan Greenspan, the lowest since the 1930s they say. We saw record high interest rates (CDs paying 18 to 20%) under Paul Volker during the Carter Administration in 1979. Comparing PEs between these two periods is apples and oranges. Averaging one into the other can give numbers all over the map.

Interest rates tend to track inflation. We have had very low inflation, but for now oil prices seem likely to be high for the forseeable future. As soon as the economy stabilizes, interest rates are going to rise.

People have been worrying about high PEs compared to historical values for quite a while. But making decisions based on that is so complicated. You may as well buy gold and put it under your mattress. (I wouldn't stock up on paper money but grocery store commodities that keep might be a great tax free investment.)
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