Abby Joseph Cohen. The fundamental strength

Abby Joseph Cohen. The fundamental strength

Abby Cohen has made a name for itself as a recognized market analyst and a prominent Wall Street bulls 90s. In recognition of its excellence, "Goldman, Sachs & Co." awarded it in 1988, making partner, an advance that many thought too late. After graduating from high school in Queens in 1969, Cohen went to Cornell University where he majored in economics and computer science. Her first job after graduation was as a junior economist at the Federal ReserveBoard in Washington, DC. While working in management she received a master's degree in economics from George Washington University. In 1976 she moved to a "T. Rowe Price Associates," where she worked as an analyst.

Six years later, she returned to New York and became an investment strategist at the firm, "Drexel Bernem Lambert." There Cohen has developed its own method of forecasting, including the study of economics, individual companies and global issues. It also adapts its models to the changing times - the lesson learned while working at the Federal Reserve System. "Some components of the economic model used by the Fed stopped working - she said - because they do not reflect the adjusted changes in the economy. For me it was an amazing lesson to learn to be flexible in the analysis and look beyond the usual practices in the underlying the basis of the driving forces. "

While the mid and late 90s were more bearish sentiment stick, she did not go down this path because it believes that the economy has now become the root of s on the other. One of these differences, the changing nature of business cycles have become, as she believes, is longer and less susceptible to drastic fluctuations. Actually, Cohen dubbed the U.S. economy the 90s as "the economy Simi Patti" when she was busy with the children playing with putty, "Simi Patty." She put some putty to the image of a standard business cycle, and then stretched his hand to, until it became more elongated and muffled. It compares the U.S. economy from supertankers, "It may not be the fastest ship, but off course it is difficult to bring down." Article fundamental strength, "written in 1996, Cohen discusses the importance of GDP growth, inflation and corporate profits, among other factors, explaining its bullish outlook on the future.



A little over seven weeks it took the Dow Jones industrial enterprises achieved a mark of 6.500, after passing the psychological barrier of October 4 in 6000. During this time, the pessimists are never as sharp in their predictions of imminent end of the bull move on Wall Street, which has continued for six years

And yet I believe that recent increases in well-supported fundamental parameters of the U.S. economy and America's leading companies, are not only far from the end of the expression of warnings about the bull market, but they look ready to continue for some time in the same spirit.

U.S. stock prices generally move in a stepwise model. Significant rises in prices (eg gravity) are placed in short periods of time, followed by a long corridor in prices, in which the indices of stock prices are erratic, but no trend. Investors calmed down to think about the movement of the market and wait for the future of news on the economy called the results of corporate activity. At such times there is movement between the sectors, as investors gradually build the most likely scenario for the coming months.

I believe that the catalysts for future market activity is mainly positive. The primary will be moderate growth, which causes an increase in profits and a slight upward pressure on inflation.

The most recent upward movement in stock prices began in late July, when investors realize that earnings growth is continuing despite the economic slowdown. In the third quarter real GDP growth was 2 percent, operating profits of companies included in the "Ogandard & Poor's 500" increased by 7 percent compared with last year, while inflation has remained unchanged. Inflation fears subsided, the yield of the 50-year Treasury bonds fell from 7.2 to 6.4 percent, while stock prices rose.

It was an appropriate response to favorable news. As for most of the past six years, a growing market is supported by the fact that the rise in economic activity rather long and mnogopribylny than particularly energetic.

Earnings growth was stretched like putty "Almost Patty," but overall significant increase in profits - it has doubled since 1991. Profits brought by companies, for example, included in the "Bar 500" continues to surprise investors, their duration and quality.

This duration is associated with long-term nature of economic growth and an increase in operating profit since the mid-80s.

Quality due to several factors. First, low inflation means that the income provided by the companies, "real", with very little influence of inflation or errors associated with inventory,

Second, changes in accounting policies made by the Council of Financial Accounting Standards Board in the 90s, supported by conservative accounting approach to several important issues, including the benefits of employees.

For example, in the early 90's, when double-digit inflation was assumed health care costs, many companies have written off large expenses from income and net capital in the future costs of health care. Inflation in health care is now less than five percent, which means that the recalculation of certain prior costs.

Third, the amount described by corporations on past mistakes and restructuring, decreased and now represents less than 10 percent of reported profits, compared with 40 percent in 1991.

The gap between moderate growth in gross domestic product and more vigorous growth in corporate profits, the list is "$ & P 500," has inspired some people to believe that the latter can not last long. But the gap can be explained by three factors that are not soon end:

• "S & P 500" index of actively managed (sorry for the oxymoron). These companies are among the best in America, and are not intended to represent an ordinary mid-sized companies.
• Growth in gross domestic product slowed the stagnation of public spending in a decade. However, growth in private sector gross domestic product, which produces revenue of the private sector, was more energetic.
• The volume of large offshore direct investment committed by U.S. companies, raised the GDP of the host countries, but the resulting profits increased revenues and U.S. stock prices the United States.

How investors should be willing to pay for corporate profits? Some skeptics have argued, that the estimated value of U.S. stocks is too high, even with that strong fundamentals would continue to exist.

I readily admit that U.S. stocks are estimated not as attractive as before. In the "Goldman Sachs" we now recommend that U.S. portfolios placed 60 percent of their assets in equities, down from 70 - 75 percent in 1995. But the proportion of 60 percent reflects our belief that stocks can provide income at least in line with growth in corporate profits and cash flows - and thus the stock at current levels is not overrated.

Evaluation methods vary depending on the market. In some countries, methods based on yield, statistically the most difficult. In the U.S., evaluation methods, focused on profits, the most useful.

U.S. market shares of the nominal yield is low enough for the S & P 500 is 2.2 percent. But this is due to low inflation and record low cash payment of profits to 35 percent.

Simply put, dividends are not low because companies can not afford to raise them, but because they decide not to do it. Leadership of most companies prefer to reinvest funds in the operation of the company, but it's certainly a reasonable action, which gives an average return on capital of 20 percent.

In addition, used to repurchase shares as an effective alternative to the tax on dividends in cash, which is often favored investors, paying taxes. Beginning in the late 50s, when the income of ordinary shares for the last time exceeded the income on bonds, investors are increasingly investing in common stocks of growth for the sake of profits and capital gains, not income.

Now the index "S & P 500" is trading at 16 times lower than the estimates, "Goldman Sachs" for operational profit in 1997, while annual growth in the consumer price index was 2.8 percent. While in the past 45 years, inflation was 3.5 percent or less, the P / E ratio was the mean value of 16.2.

However, even this may lead to an underestimation of the amount by which U.S. stocks are undervalued, many economists believe the CPI overstates inflation, and a truer picture can be obtained using other criteria, such as the GDP deflator, which is currently assessing the inflation in a , 8 per cent.

In the past, prolonged periods of inflation of 2 per cent were associated with P / E ratio of 18 to 20. Our analysis says, stock prices could rise as compared to current levels - even without an increase in P / E ratio - based on an additional increase in profit expected in 1997.