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Lifting this excerpt from from piece today by Justin
Lahart in, and respecting his copyright.
Thought those still puzzling over the valuation thing
might find it of interest.

"….But though he once worked under Morgan Stanley
Dean Witter's Byron Wien -- a guy who's among the
worriers -- Tom McManus, equity portfolio strategist
for Banc of America Securities, doesn't buy the
stocks-are-overvalued talk.

"When people say the market is historically
overvalued," said McManus, "they're comparing
apples to oranges. Valuations are in the stratosphere
-- compared to what? What they were in the '60s?
What they were in the '40s?"

Things have changed. Even 10 years ago, the S&P
500 was stocked with far more industrial concerns --
manufacturing was a far greater part of our economy.
With the shift to more of a services-based economy
and the advent of information technology, the S&P is
a very different index. Microsoft, the company that is
now the largest component, traded (split-adjusted) at
less than a buck 10 years ago.

"If you can understand why General Electric
(GE:NYSE) carries a higher P/E than General
Motors (GM:NYSE)," said McManus, "you can
understand why today's P/Es are higher than in the
past. I would contend that a service business is a
higher quality business than a manufacturing

People who do valuation work have tried in various
ways to capture the shift in the S&P, but things have
moved at such a quick pace that they may not have
altered their models quickly enough. "When
something as revolutionary as harnessing the power
of millions of computers networked together has
occurred," said McManus, it's hard to keep up with
the pace of change."
(J. Lahart,, 7/18/99)

Good point.


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