Monday, April 13, 2009

Jeremy Seigel responds to his stock valuation critics

here (via Greg Mankiw). I've cherry picked a couple of his thoughts:
  1. Liabilities do indeed cross the divisions of a single firm, and that is why the New Products Division of AIG tanked the many other profitable divisions of the insurance giant. But these losses do not cancel the earnings of profitable firms.
  2. Back in 2002 the aggregate earnings of the S&P 500 Index also plummeted when a few firms, such as AOL and JDS Uniphase, took huge writedowns on some of their Internet investments. Reported P/E ratios soared into the 60s in the second quarter of 2002, yet rather than being overvalued, the market was just approaching its bear market low.

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