The Northern Trust Company Economic Research Department Positive Economic Commentary by captainrhoades


									             The Northern Trust Company
             Economic Research Department
             Positive Economic Commentary
             “The economics of what is, rather than what you might like it to be.”
             50 South LaSalle Street, Chicago, Illinois 60675
        Web Page -- (See Economic Research)
               Paul Kasriel    (312)-444-4145                   Fax   (312)-444-4132

                                                                          February 05, 2004

    Stocks Fairly Valued According To “Kasriel” Market Valuation Model

It has been almost a year since I have updated the “  Kasriel”stock market valuation
model. To refresh your memory, I calculate a theoretical market capitalization for
the stocks of nonfinancial corporations. Then I compare this theoretical market cap
with the actual market capitalization of these corporations. To calculate the
theoretical market capitalization, I discount by the Aaa-rated corporate bond yield a
smoothed NIPA profit series of these corporations. For a more detailed description
of the process, see my March 28, 2003 weekly commentary entitled “     Kasriel Stock
Market Valuation Model Update”(available at

 The profits data are reported by the Bureau of Economic Analysis and are only
available through 2003:Q3. The actual market capitalization data are reported by
the Federal Reserve Board and also are only available through 2003:Q3. So, I have
had to estimate the over/under valuation of nonfinancial corporation stocks for
2003:Q4. I assumed that the actual market capitalization of these stocks in last
year’ fourth quarter increased by the same percentage as did the combined
market capitalization of stocks traded on the New York Stock Exchange and the
NASDAQ. I assumed that nonfinancial corporate profits in the fourth quarter grew
at the same rate as they did in the third quarter. This last assumption probably
biases upward 2003:Q4 theoretical market capitalization inasmuch as the economy
grew at only half the pace in Q4 as it did in Q3.

The chart below shows my estimates of the over/under valuation of nonfinancial
corporations’stocks in the aggregate. From 2002:Q3 through 2003:Q3, the
aggregate value of these stocks was consistently undervalued in a range of –7.4%
to –15.2%. However, by fourth quarter of last year, stocks became overvalued by
1.9%, which is close enough to being deemed fairly valued for private sector work.

              Nonfinancial Corp. Mkt. Cap: Over (+) Under (-) Valuation





              1990      1992       1994       1996       1998       2000       2002

                           note: 2003:Q4 datum is estimated.

Given that 2003 ended with this subset of the stock market being fairly valued by
my model, given that profit growth is likely to slow somewhat in 2004, and given
that the Aaa corporate bond yield is likely to drift up some in 2004, it is difficult to
see stocks advancing as rapidly in 2004 as they did in 2003.

Paul L. Kasriel, Director of Economic Research (

Note: The “Kasriel” valuation model is not used by the investment policy
committee of the Northern Trust Global Investments.

The information herein is based on sources which The Northern Trust Company believes to be reliable,
but we cannot warrant its accuracy or completeness. Such information is subject to change and is not
intended to influence your investment decisions.

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