deutsche bank - asset valuation allocation models 2001

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hDeutsche Banc Alex. Brown

Deutsche Bank

Global

Strategy

August 13, 2001

Dr. Edward Yardeni

Chief Investment Strategist(+1) 212 469 [email protected]

Amalia F. Quintana

Equity Strategy Analyst(+1) 212 469 [email protected]

Asset Valuation & Allocation Models

/ August 13, 2001 / Deutsche Banc Alex. Brown US Stock Valuation & Allocation Models

- Introduction - I. Fed’s Stock Valuation Model How can we judge whether stock prices are too high, too low, or just right? The purpose of this weekly report is to track a stock valuation model that attempts to answer this question. While the model is very simple, it has been quite accurate and can also be used as a stocks-versus-bonds asset allocation tool. I started to study the model in 1997, after reading that the folks at the Federal Reserve have been using it. If it is good enough for them, it’s good enough for me. I dubbed it the Fed’s Stock Valuation Model (FSVM), though no one at the Fed ever officially endorsed it. On December 5, 1996, Alan Greenspan, Chairman of the Federal Reserve Board, famously worried out loud for the first time about “irrational exuberance” in the stock market. He didn’t actually say that stock prices were too high. Rather he asked the question: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions….”1 He did it again on February 26, 1997.2 He probably instructed his staff to devise a stock market valuation model to help him evaluate the extent of the market’s exuberance. Apparently, they did so and it was made public, though buried, in the Fed’s Monetary Policy Report to the Congress, which accompanied Mr. Greenspan’s Humphrey-Hawkins testimony on July 22, 1997.3 The Fed model was summed up in one paragraph and one chart on page 24 of the 25-page document (see following table). The chart shows a strong correlation between the S&P 500 forward earnings yield (FEY)—i.e., the ratio of expected operating earnings (E) to the price index for the S&P 500 companies (P), using 12-month-ahead consensus earnings estimates compiled by Thomson Financial First Call.—and the 10-year Treasury bond yield (TBY). The average spread between the forward earnings yield and the Treasury yield (i.e., FEY-TBY) is 29 basis points since 1979. This near-zero average implies that the market is fairly valued when the two are identical: 1) FEY = TBY Of course, in the investment community, we tend to follow the price-to-earnings ratio more than the earnings yield. The ratio of the S&P 500 price index to expected earnings (P/E) is highly correlated with the reciprocal of the 10-year bond yield, and on average the two have been nearly identical. In other words, the “fair value” price for the S&P 500 (FVP) is equal to expected earnings divided by the bond yield in the Fed’s valuation model:

1 http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm 2 “We have not been able, as yet, to provide a satisfying answer to this question, but there are reasons in the current environment to keep this question on the table.” http://www.federalreserve.gov/boarddocs/hh/1997/february/testimony.htm 3 http://www.federalreserve.gov/boarddocs/hh/1997/july/ReportSection2.htm

Deutsche Banc Alex. Brown US Stock Valuation & Allocation Models / August 13, 2001 /

2) FVP = E/TBY Excerpt from Fed’s July 1997 Monetary Policy Report: The run-up in stock prices in the spring was bolstered by unexpectedly strong corporate profits for the first quarter. Still, the ratio of prices in the S&P 500 to consensus estimates of earnings over the coming twelve months has risen further from levels that were already unusually high. Changes in this ratio have often been inversely related to changes in long-term Treasury yields, but this year’s stock price gains were not matched by a significant net decline in interest rates. As a result, the yield on ten-year Treasury notes now exceeds the ratio of twelve-month-ahead earnings to prices by the largest amount since 1991, when earnings were depressed by the economic slowdown. One important factor behind the increase in stock prices this year appears to be a further rise in analysts’ reported expectations of earnings growth over the next three to five years. The average of these expectations has risen fairly steadily since early 1995 and currently stands at a level not seen since the steep recession of the early 1980s, when earnings were expected to bounce back from levels that were quite low.

The ratio of the actual S&P 500 price index to the fair value price shows the degree of overvaluation or undervaluation. History shows that markets can stay overvalued and become even more overvalued for a while. But eventually, overvaluation is corrected in three ways: 1) falling interest rates, 2) higher earnings expectations, and of course, 3) falling stock prices—the old fashioned way to decrease values. Undervaluation can be corrected by rising yields, lower earnings expectations, or higher stock prices. The Fed’s Stock Valuation Model worked quite well in the past. It identified when stock prices were excessively overvalued or undervalued, and likely to fall or rise:

1) The market was extremely undervalued from 1979 through 1982, setting the stage for a

powerful rally that lasted through the summer of 1987. 2) Stock prices crashed after the market rose to a record 34% overvaluation peak during

September 1987.

3) Then the market was undervalued in the late 1980s, and stock prices rose.

4) In the early 1990s, it was moderately overvalued and stock values advanced at a lackluster pace.

5) Stock prices were mostly undervalued during the mid-1990s, and a great bull market

started in late 1994.

6) Ironically, the market was actually fairly valued during December 1996 when the Fed Chairman worried out loud about irrational exuberance.

/ August 13, 2001 / Deutsche Banc Alex. Brown US Stock Valuation & Allocation Models

7) During both the summers of 1997 and 1998, overvaluation conditions were corrected by a sharp drop in prices.

8) Then a two-month undervaluation condition during September and October 1998 was

quickly reversed as stock prices soared to a remarkable record 70% overvaluation reading during January 2000. This bubble was led by the Nasdaq and technology stocks, which crashed over the rest of the year, bringing the market closer to fair value.

II. New Improved Model The FSVM is missing a variable reflecting that the forward earnings yield is riskier than the government bond yield. How should we measure risk in the model? An obvious choice is to use the spread between corporate bond yields and Treasury bond yields. This spread measures the market’s assessment of the risk that some corporations might be forced to default on their bonds. Of course, such events are very unusual, especially for companies included in the S&P 500. However, the spread is only likely to widen during periods of economic distress, when bond investors tend to worry that profits won’t be sufficient to meet the debt-servicing obligations of some companies. Most companies won’t have this problem, but their earnings would most likely be depressed during such periods. The FSVM is also missing a variable for long-term earnings growth. My New Improved Model includes these variables as follows: 3) FEY = CBY – b •• LTEG

where CBY is Moody’s A-rated corporate bond yield. LTEG is long-term expected earnings growth, which is measured using consensus five-year earnings growth projections. I/B/E/S International compiles these monthly. The “b” coefficient is the weight that the market gives to long-term earnings projections. It can be derived as -[FEY-CBY]/LTEG. Since the start of the data in 1985, this “earnings growth coefficient” averaged 0.1. Equation 3 can be rearranged to produce the following:

4) FVP = E ÷÷ [CBY – b •• LTEG]

FVP is the fair value price of the S&P 500 index. Exhibit 10 shows three fair value price series using the actual data for E, CBY, and LTEG with b = 0.1, b = 0.2, and b = 0.25. The market was fairly valued during 1999 and the first half of 2000 based on the consensus forecast that earnings could grow more than 16% per year over the next five years and that this variable should be weighted by 0.25, or two and a half times more than the average historical weight. III. Back To Basics With the benefit of hindsight, it seems that these assumptions were too optimistic. But, this is exactly the added value of the New Improved FSVM. It can be used to make explicit the

Deutsche Banc Alex. Brown US Stock Valuation & Allocation Models / August 13, 2001 /

implicit assumptions in the stock market about the weight given to long-term earnings growth. The simple version has worked so well historically because the long-term growth component has been offset on average by the risk variable in the corporate bond market. IV. Stocks Versus Bonds The FSVM is a very simple stock valuation model. It should be used along with other stock valuation tools, including the New Improved version of the model. Of course, there are numerous other more sophisticated and complex models. The Fed model is not a market-timing tool. As noted above, an overvalued (undervalued) market can become even more overvalued (undervalued). However, the Fed model does have a good track record of showing whether stocks are cheap or expensive. Investors are likely to earn below (above) average returns over the next 12-24 months when the market is overvalued (undervalued). The next logical step is to convert the FSVM into a simple asset allocation model (Exhibit 1 on front cover). I’ve done so by subjectively associating the “right” stock/bond asset mixes with the degree of over/under valuation as shown in the table below. For example, whenever stocks are 10% to 20% overvalued, I would recommend that a large institutional equity portfolio should have a mix with 70% in stocks and 30% in bonds. Stocks/Bonds Asset Allocation Model

More than 20% overvalued 60% stocks, 40% bonds

10% to 20% overvalued 70% stocks, 30% bonds

Less than 10% overvalued or undervalued 80% stocks, 20% bonds

10% to 20% undervalued 85% stocks, 15% bonds

More than 20% undervalued 90% stocks, 10% bonds

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02-40-35-30-25-20-15-10-5051015202530354045505560657075

-40-35-30-25-20-15-10-505

1015202530354045505560657075

#1ED YARDENI’S ASSET ALLOCATION MODEL: STOCKS/BONDS(for large equity funds)

Stocks overvalued when greater than zero Stocks undervalued when less than zero

60/40

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85/1590/10

8/10

* Ratio of S&P 500 index to it’s fair value (12-month forward consensus expected operating earnings per share divided by the 10-year US Treasury bond yield) minus 100. Monthly through March 1994, weekly after. Source: Thomson Financial

yardeni.com

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79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 0375

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97511251275142515751725

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FED’S STOCK VALUATION MODEL(ratio scale)

Fair-Value Price*

S&P 500 Price Index

* 12-month forward consensus expected S&P 500 operating earnings per share divided by 10-year US Treasury bond yield. Monthly through March 1994, weekly after. Source: Thomson Financial

yardeni.com

#2

According to the Fed model, when stock prices are overpriced, returns from stocks are likely to be subpar over the next 12-24 months. Better-than-average returns tend to come from underpriced markets.

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03-40

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FED’S STOCK VALUATION MODEL*(percent)

Overvalued

Undervalued

* Ratio of S&P 500 Index to its Fair-Value (52-week forward consensus expected operating earnings per share divided by the 10-year US Treasury bond yield) minus 100. Monthly through March 1994, weekly after. Source: Thomson Financial

yardeni.com

#3#3

- Valuation Model -

Deutsche Banc Alex. Brown Asset Valuation & Allocation Models / August 13, 2001 /

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 032

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S&P 500 EARNINGS YIELD & BOND YIELD

10-Year US TreasuryBond Yield

Forward Earnings Yield*

* 12-month forward consensus expected S&P 500 operating earnings per share divided by S&P 500 Index. Monthly through March 1994, weekly after. Source: Thomson Financial

yardeni.com

#4

This chart appeared in the Fed’s July 1997 Monetary Policy Report to the Congress. It shows a very close correlation between the earnings yield of the stock market and the bond yield. Another, more familiar way to look at it follows.

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 035

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Actual Fair Jun 29 21.7 18.9 Jul 6 21.8 18.5 Jul 13 21.4 18.8 Jul 20 21.7 19.4 Jul 27 21.5 19.4 Aug 3 21.9 19.5 Aug 10 21.5 19.7

8/10

P/E & BOND YIELD

Fair-Value P/E=Reciprocal of10-Year US Treasury Bond Yield

Ratio of S&P 500 Price to Expected Earnings*

* 12-month forward consensus expected S&P 500 operating earnings per share. Monthly through March 1994, weekly after. Source: Thomson Financial

yardeni.com

#5

The S&P 500 P/E (using expected earnings) is highly correlated with reciprocal of the bond yield.

- Valuation Model -

/ August 13, 2001 / Deutsche Banc Alex. Brown Asset Valuation & Allocation Models

I II III IV I II III2000 2001

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S&P 500 EARNINGS PER SHARE(analysts’ average forecasts)

Consensus Forecastfor 2002



Forward Earnings*

* 52-week forward consensus expected S&P 500 operating earnings per share. Source: Thomson Financial

yardeni.com

#6

Expected forward earnings is a time-weighted average of current and the coming years’ consensus forecasts.

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200310

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Q1 8/9

S&P 500 EARNINGS PER SHARE: ACTUAL & EXPECTED

S&P 500 Earnings Per Share________________________

Operating Earnings(4-quarter sum)

Forward Earnings*(pushed 52-weeks ahead)

* 52-week forward consensus expected S&P 500 operating earnings per share. Monthly through March 1994, weekly after. Source: Thomson Financial

yardeni.com

#7

Bottom-up 52-week forward expected earnings tends to be a good predicator of actual earnings, with a few significant misses.

- Earnings -


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200220

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S&P 500 CONSENSUS OPERATING EARNINGS PER SHARE(analysts’ bottom-up forecasts)

Consensus Forecasts__________________

Annual estimates

12-month forward

Actual 4Q sum

91 92 9394

95

96

97

98

9900

0102

Source: yardeni.com. Do not reprint without permission.

yardeni.com

#8

Analysts always start out too optimistic about the prospects for earnings.

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 199110

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35S&P 500 CONSENSUS OPERATING EARNINGS PER SHARE(analysts’ bottom-up forecasts, ratio scale)

Consenus Forecasts_________________

Annual estimates

12-month forward

Actual 4Q sum

80

81

82 8384

85 86 87

88

89

90

Source: yardeni.com. Do not reprint without permission.

yardeni.com

#9#9

- Earnings -


I II III IV I II III2000 2001

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S&P 500 EARNINGS PER SHARE

Consensus GrowthForecasts*_______________

2001/2000

2002/2001

* Based on consensus expected S&P 500 operating earnings for years shown. Source: Thomson Financial

yardeni.com

#10

The data on consensus expected earnings can be used to derive consensus earnings growth forecasts.

1994 1995 1996 1997 1998 1999 2000 2001 2002-20

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Q4

S&P 500 OPERATING EARNINGS PER SHARE*(yearly percent change)

Consensus Forecast (Proforma)*

Actual

* S&P 500 composition is constantly changing. Actual data are not adjusted for these changes. Proforma forecasts are same-company comparisions. Source: Thomson Financial

yardeni.com

#11

Earnings growth is highly cyclical.

- Earnings -


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2000NEW IMPROVED STOCK VALUATION MODEL

5-year earningsgrowth weight_____________

.25

.20

.10.25

.20

.10

S&P 500 Index

Fair Value* Jul

* Fair Value is 12-month forward consensus expected S&P 500 operating earnings per share divided by difference between Moody’s A-rated corporate bond yield less fraction (as shown above) of 5-year consensus expected earnings growth. Source: Thomson Financial

yardeni.com

#12

This New Improved Model builds on the simple one by adding variables for long-term expected earnings growth and risk.

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200210

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LONG-TERM CONSENSUS EARNINGS GROWTH*(annual rate, percent)

S&P 500

S&P 500Technology

Ex Technology

* 5-year forward consensus expected S&P 500 earnings growth. Source: Thomson Financial

yardeni.com

#13

Long-term earnings growth expectations rose sharply during 1990s. Now they are coming back down to the Planet Earth.

- New Improved Model -


1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002-5

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MARKET’S WEIGHT FOR 5-YEAR CONSENSUS EXPECTED EARNINGS GROWTH*(percent)

Average = 13%

Weight market gives to long-term earnings growth________________________________________

value > 13% = more than average weight

value < 13% = less than average weight

* Moody’s A-rated corporate bond yield less earnings yield divided by 5-year consensus expected earnings growth.

yardeni.com

#14

Investors have on average over time subtracted 13% of their long-term earnings growth expectations from the corporate bond yield to determine earnings yield.

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002.8

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S&P 500 PEG RATIO

P/E ratio for S&P 500divided by 5-year consensusexpected earnings growth*

Average = 1.2

* P/E using 12-month forward consensus S&P 500 expected earnings and prices at mid-month. Source: Thomson Financial

yardeni.com

#15

Historically, S&P 500 sold at P/E of 1.2 times long-term expected earnings growth, on average, with quite a bit of volatility.



1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20026

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CORPORATE BOND YIELD(percent)

A-Rated

* Source: Moody’s Investors Service

yardeni.com

#16

Corporate bond yield variable in New Improved Model captures risk that earnings will be weaker than expected.

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CORPORATE SPREAD(basis points)

Moody’s A-Rated corporate bond yield minus10-Year US Treasury bond yield

Average = 156

Source: Moody’s Investor Service

yardeni.com

#17#17



#18

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UNITED STATES

Overvalued

Undervalued

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UNITED KINGDOMOvervalued

Undervalued

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JAPAN

Overvalued

Undervalued

1995 1996 1997 1998 1999 2000 2001-40

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GERMANY

Overvalued

Undervalued

1995 1996 1997 1998 1999 2000 2001-40

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FRANCE

Overvalued

Undervalued

1995 1996 1997 1998 1999 2000 2001-30

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CANADAOvervalued

Undervaluedyardeni.com

- Global: Stock Valuation -


#19

89 90 91 92 93 94 95 96 97 98 99 00 01 0225

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UNITED STATES (S&P 500)

Expected EPS*(dollars)

89 90 91 92 93 94 95 96 97 98 99 00 01 0275

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GERMANY (DAX)

Expected EPS(euros)

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CANADA (TSE 300)

Expected EPS(Canadian dollars)

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FRANCE (CAC 40)

Expected EPS(euros)

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UNITED KINGDOM (FT 100)

Expected EPS(pounds)

* 12-month forward consensus expected operating earnings per share. Source: Thomson Financial

89 90 91 92 93 94 95 96 97 98 99 00 01 0220

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JAPAN (TOPIX)

Expected EPS(yen)

yardeni.com

- Global: Expected Earnings* -


#20

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STOCK VALUATION MODEL

Industrial Production(1987=100)

Expected Earnings Per Share*For S&P 500 (dollars)

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Fair-Value P/E

Forward P/E

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 0275

425

775

1125

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775

1125

14751825

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Fair-Value Price(ratio scale)

Stock Price Index (S&P 500)(ratio scale)

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* Source: Thomson Financial

yardeni.com

- Global: United States (S&P 500) -


#21

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002150

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Expected Earnings Per Sharefor FT 100 (pounds)


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Forward P/E

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630071007900

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630071007900

JulStock Price Index (FT 100)(ratio scale)

Fair-Value(ratio scale)

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Overvalued

Undervalued

yardeni.com


- Global: United Kingdom (FT 100) -


#22

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115

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Expected Earnings Per Sharefor TOPIX (yen)


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Fair-Value P/E

Forward P/E

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Stock Price Index (TOPIX)

Fair-Value

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0

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Jul

Overvalued

Undervalued

yardeni.com


- Global: Japan (TOPIX) -


#23

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200275

100

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90

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Jul


Expected Earnings Per Sharefor DAX (Euros)


1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002810121416182022242628303234

810121416182022242628303234

Jul

Fair-Value P/E

Forward P/E

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20021000

3000

5000

7000

9000

11000

1000

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5000

7000

9000

11000

JulStock Price Index (DAX)(ratio scale)


1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002-40

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Overvalued

Undervalued

yardeni.com


- Global: Germany (DAX) -


#24

1995 1996 1997 1998 1999 2000 2001100

125

150

175

200

225

250

275

98

100

102

104

106

108

110

112

114

116

118

120

Jul


Expected Earnings Per Sharefor CAC 40 (Euros)


1995 1996 1997 1998 1999 2000 200111

13

15

17

19

21

23

25

27

29

11

13

15

17

19

21

23

25

27

29

Jul

Fair-Value P/E

Forward P/E

1995 1996 1997 1998 1999 2000 20011500

2300

3100

3900

4700

5500

630071007900

1500

2300

3100

3900

4700

5500

630071007900

JulStock Price Index (CAC 40)(ratio scale)


1995 1996 1997 1998 1999 2000 2001-40

-20

0

20

40

60

-40

-20

0

20

40

60

Jul

Overvalued

Undervalued

yardeni.com


- Global: France (CAC 40) -


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200280

100

120

140

160

180

200

80

100

120

140

160

180

200

Jul

GLOBAL G6 EARNINGS INDEX*(Jan 1989=100)

* Half US and half G5 (Canada, France, Germany, Japan and United Kingdom) 12-month forward consensus expected operating earnings.

yardeni.com

#25

The yearly percent change in our Index of Global G6 Earnings is highly correlated with the growth of G7 industrial production.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002-4

-2

0

2

4

6

8

-15

-10

-5

0

5

10

15

20

25

30

Jul

GLOBAL G6 EARNINGS & PRODUCTION(yearly percent change)

G6 Earnings Index*

G7: Industrial Production

* Half US and half G5 (Canada, France, Germany, Japan and United Kingdom) 12-month forward consensus expected operating earnings.

yardeni.com

#26#26

- Earnings & Output: G6 -


80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 0410

15

20

25

30

35

40

45

50

55

60

65

70

80

90

100

110

120

130

140

150

160

8/10

S&P 500 EARNINGS & INDUSTRIAL PRODUCTION

S&P 500 Forward Earnings*


* 52-week forward consensus expected operating earnings per share. Monthly through March 1994, weekly after. Source: Thomson Financial

#27

Strong correlation between US industrial production and S&P 500 forward earnings.

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04-20

-15

-10

-5

0

5

10

15

20

25

30

-20

-15

-10

-5

0

5

10

15

20

25

30

8/10

Jun

S&P 500 EARNINGS & PRODUCTION(yearly percent change)

S&P 500 Forward Consensus Earnings*

Industrial Production

* 52-week forward consensus expected earnings. Monthly through March 1994, weekly after. Source: Thomson Financial First Call

yardeni.com

#28#28

- Earnings & Output: US -


86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04-15

-10

-5

0

5

10

15

20

25

74

75

76

77

78

79

80

81

82

83

84

85

86

Jun

8/10

S&P 500 EARNINGS & CAPACITY UTILIZATION

Total Capacity Utililzation(percent)

S&P 500 Forward Earnings*(yearly percent change)

* 12-month forward consensus expected operating earnings per share. Monthly through March 1994, weekly after. Source: Thomson Financial.

#29

Growth in S&P 500 forward earnings highly correlated with US capacity utilization rate. Profits tend to increase (decrease) whenever utilization rate is above (below) 79%.

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02-20

-16

-12

-8

-4

0

4

8

12

16

20

24

28

32

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

Apr

8/10

S&P 500 EARNINGS & G7 INDUSTRIAL PRODUCTION(yearly percent change)

G7 Industrial Production

S&P 500 Forward Earnings*

* 12-month forward consensus expected operating earnings per share. Monthly through March 1994, weekly after. Source: Thomson Financial

yardeni.com

#30

2-to-1 is the unusual ratio between growth in S&P 500 forward earnings and growth in G7 production.

- Earnings & Output: US -


1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002-40

-30

-20

-10

0

10

20

30

40

50

-40

-30

-20

-10

0

10

20

30

40

50

JulJun

GERMANY: EARNINGS & ORDERS(yearly percent change)

Total Manufacturing Orders

Forward Earnings*

* 12-month forward consensus expected operating earnings per share for DAX. Source: Thomson Financial

yardeni.com

#31

German corporate profits highly correlated with factory orders and business confidence.

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002-40

-30

-20

-10

0

10

20

30

40

50

-40

-30

-20

-10

0

10

20

30

40

50

Jul

Jun

GERMANY: EARNINGS & IFO INDEX(yearly percent change)

IFO Business Climate Index

Forward Earnings*

* 12-month forward consensus expected earnings per share for DAX. Source: Thomson Financial

yardeni.com

#32#32

- Earnings & Output: Europe -


1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002100

125

150

175

200

225

250

275

92

94

96

98

100

102

104

106

108

110

112

114

116

118

120

Jul

FRANCE: EARNINGS & PRODUCTION

Forward Earnings*


* 12-month forward consensus expected earnings per share for CAC 40. Source: Thomson Financial

yardeni.com

#33

Industrial production is key variable driving profits in France and UK.

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002180

200

220

240

260

280

300

320

340

88

90

92

94

96

98

100

102

104

106

108

110

Jul

UNITED KINGDOM: EARNINGS & PRODUCTION

Forward Earnings*


* 12-month forward consensus expected earnings per share for FT 100. Source: Thomson Financial

yardeni.com

#34#34

- Earnings & Output: Europe -


1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200220

30

40

50

60

90

95

100

105

110

115

Jul

JAPAN: EARNINGS & PRODUCTION

Forward Earnings*


* 12-month forward consensus expected operating earnings per share for TOPIX. Source: Thomson Financial

yardeni.com

#35

Japan is falling into recession again. Weak yen boosts exporters’ earnings. But profits are likely to weaken along with economy.

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200220

30

40

50

60

-50

-25

0

25

50

75

100

Q2

Jul

JAPAN: EARNINGS & TANKAN BUSINESS CONDITIONS

Tankan Business Conditions:Major Manufacturers(diffusion index)

Forward Earnings*

* 12-month forward consensus expected earnings per share for TOPIX. Source: Thomson Financial

yardeni.com

#36#36

- Earnings & Output: Japan -


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deutsche bank - asset valuation allocation models 2001

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