classical economics
for analysis,  forecasting
and policy design

Valuing Securities
    VALUING SECURITIES
By Wayne Jett
© October 27, 2008


    Are publicly traded corporate equities now selling too cheaply, and ought they to be bought? By some measures, they are historically low priced.
    In December, 2000, with the Dow Jones Index of 30 industrials near 11,500, the late Jude Wanniski considered the over-valued dollar and advised clients that, unless the dollar were promptly revalued lower, the DJIA would have to adjust to 7,500. The Federal Reserve did not adjust the dollar, and the DJIA plunged below 7,500 in October, 2002. Even after that drastic collapse of share prices, with gold priced at about $300 per ounce, the DJIA would buy about 25 ounces of gold.
    Today’s DJIA of about 8,300 at $730/oz gold would buy only about 11.4 ounces, meaning today’s 30 industrial stocks are valued in gold at about 45 per cent of the 2002 DJIA low. Who would not view that circumstance as astonishingly cheap? To match the DJIA valuation in December, 2000, at today’s gold price, the DJIA would have to be 28,000 today. The DJIA is 70 per cent below that level.
    Broader indices fare no better. What accounts for the bleak valuation of U. S. corporate equities? Income tax rates threaten to rise by 2010, if not sooner, but perhaps no higher than in 2000.
    The answer probably resides closer to the expense side of fiscal matters, as expenditures during 2008’s financial crisis have exploded. Yet even that is symptomatic of the real concern – not the cause – which is the lawlessness of U. S. financial markets and their blatant exploitation to serve pecuniary interests of factions influencing the federal government.
    Where lawlessness abides, share prices may be taken as low as predators wish. Fundamental analysis does not apply unless that analysis takes into account actual trading conditions affecting the firm. In that light, today’s stock prices cannot be termed cheap, nor can shares be termed attractive, until enforcement of securities laws applicable to trading is a known quantity.
    A new Inspector General is active at the SEC, replacing the IG who retired in disgrace in mid-2007 when the U. S. Senate reported he acted as a rubber stamp for apparently corrupt staff at the agency. The new IG already recommends that the SEC consider disciplining its director of enforcement for misconduct in undercutting work of her own staff, and has otherwise criticized the enforcement division for its favoritism towards Wall Street’s big players. Yet the enforcement division blithely issues its own press releases denying impropriety, as if it enjoys political protection from such scrutiny. Prospects for real reform do not appear to be near term, particularly so long as Treasury secretary Paulson calls signals on “economic policy” and congressional leaders remain pleased with SEC’s conduct. ~