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How the Market Works

What causes stock pricesto go up and down?

How the Market Works

The Efficient Market Theory

States that it is impossible to “beat the market” because share prices incorporate and reflect all

relevant information as soon as it becomes available.

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How the Market Works

The Efficient Market Theory

Implicit in this theory is the condition that all participants receive and act on all relevant information

at the same time.

How the Market Works

Stock Market Reality

The Efficient Market Theoryis not true.

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How the Market Works

Stock Market Reality

All market participants do not receive and act upon all relevant information at the same time.

How the Market Works

Stock Market Reality

Any news that causes a change in stock value is relevant information.

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How the Market Works

Three Powerful Forces

All news events are ultimately reflected by changes inEarnings, Inflation and Interest Rates

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How the Market Works

Earnings

Stock Value goes up whenEarnings go up.

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TSX P/E vs. CPI: Sept. 2003 to March 2013(20-week average)

CPI Percent ChangeTSX P/E Ratio

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How the Market Works

InflationStock Value goes up when

Inflation goes down.

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EY a

nd IY

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TSX Earnings Yield vs. Long-Term Bond Interest Yield:Sept. 2003 to March 2013

EY

IY

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How the Market Works

Earnings Yield

EY = 100 / (P/E)EY = 100 * (E/P)

How the Market Works

Interest RatesStock Value goes up when

interest rates go down.

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How the Market Works

Stock Value goes up when:

Earnings go up,Inflation goes down, andInterest Rates go down.

How the Market Works

How Do Investors Decide where To Put Their Money?

Stocks vs. Bonds

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How the Market Works

Money Goes Where Money Grows

EY vs. IYEarnings Yield vs. Interest Yield

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EY / IY

TSX Earnings Yield and Long-Term Bond Interest Yield: Sept. 2003 to March 2013

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How the Market Works

The Yield Premium

Ideally: EY = IY

In Reality: EY = IY + YP

Where: YP = Yield Premium

How the Market Works

Inherent ValueIf: EY = IY + YPThen: 100 x (E/P) = IY + YPOr: 100 x (E/V) = IY + YPAnd: V = 100 x [E/(IY + YP)]

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How the Market Works

Value of Magna Int’l., MG

V = 100 x [E /(IY + YP)]V = 100 x [7.15/(6.60)]V = $108.33 / Share

Closing Price = $86.22 / Share, 09/17/2013

Stock Value

V = 100 x [E /( IY + YP)]x Sqr [((R + G)/2) / (IY + YP +F)]

whereE = Earnings in $ / shareIY = Interest Rate in % R = % Return on Total Capital G = Earnings Growth in % / yr.F = Inflation Rate in % / yr.

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How the Market Works

Value of Magna Int’l., MG

V = 100 x [E /(IY+YP)] x Sqr[((R+G)/2) / (IY+YP+F)]V = 100 x [7.15/6.60] x Sqr[((4.20+15)/2)/(6.60+2.3)]V = 108.33 x Sqr (9.60/8.90)V = 110.61 x 1.04V = $112.66 / Share*

* VV = $115.68 / Share, 09/17/2013

How the Market Works

The Current Situation:

Actual TSX Composite = 12,834.11VV TSX Composite = 12,805.33*

The TSX Composite is Fully Valued.

* VectorVest CA, 09/17/2013

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How the Market Works

The Canadian Market, as a whole,is Fairly Valued.

VVC/CA Price= 16.65VVC/CA Value = 16.69*

* VectorVest CA, 09/17/2013

How the Market Works

What CausesBull & Bear Markets?

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How the Market Works

Bull Markets are Born when the economy is weak, inflation and interest rates

are low and earnings are expected to rise.

Think March 2009

How the Market Works

Bear Markets Beginwhen the economy is strong, inflation and interest

rates are high and earnings are expected to fall.

Think September 2007

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How the Market Works

The Virtuous/Vicious Cycle• Inflation Drives Interest Rates.• Interest Rates dictate the Strength of the Economy.• The Economy affects Earnings growth.• Earnings growth ultimately causes Stock Prices to

Rise or Fall.

How the Market Works

The Investment ClimateVectorVest Monitors Earnings, Inflation,

Interest Rates, Market Directionand Investor Sentiment.

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The Truth Chart

E F I P1. U U D U Bull Market Begins2. U D D U Bull Market Thrives3. U D U U Rarely Happens4. U U U U Bull Market Ends5. D U U D Bear Market Begins6. D D U D Rarely Happens 7. D D D D Bear Market Matures8. D U D D Bear Market Ends

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How the Market Works

The Current Situation:*The Canadian Market is in a

Case Four Bull Market Scenario.Earnings, Inflation and Interest Rates

are Rising.

*VectorVest CA 09/13/2013

How the Market Works

The Outlook:The Bull Market will continue as long

as it is perceived that earnings are rising.

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Mission Statement

Our Mission is to provide the best stock market guidance available anywhere at any price.

VectorVest

Important Contact Information

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