Dow Trend Earnings (aka Fed model)

Credit for the chart below goes to  Mike Susak of La Jolla Trading, Inc. (West Coast Options Fund, L.P.) (Any errors and omissions are mine)
How to read the chart below?
Premise: $100 yielding 5% in Bonds=$5, and $100 invested in a Company with a P/E (Price/Earnings)of 20=$5 - is the same thing.
Example: On 10/21/02 the Dow's 52 week earnings = $389 & 10 Year T-Note = 4.13%  Based on the chart below, the DJIA should be trading between 9262 and 9725. Why are we are trading at 8323? These are "trailing" earnings - and the future for Dow earnings is always uncertain (risk premium).Ten Year T-Notes are guaranteed.
The current numbers as of  Mar. 31,  2008 are $237.72 in  Earnings and Ten Year Notes have a yield of 3.39
After rounding things up and down a bit - the Dow should be trading at $7012










Notes & Links                                                       

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Risk Premium
 
Date:
Dow
Earnings:
Ten Year Notes yield:
Dow "should be" trading at:
Dow "is" trading at:
Risk Premium:
Mar 31
2008
237.72
3.39
7012
12216.4
+5204 =
(43%)
Dec 29
2007
283.62
4.23
6714
13365.87
+6651 = (50%)
Aug 31 2007
830.94
4.60
18065
13357.74
-4708 = 35%
Mar 30
2007
729.18
4.60
15848
12354.35
-3494 = 28%
Dec 31
2006
571.84
4.70
12167
12463
+296= (2.5%)
June 5
2006
532.85
5.05
10657
11048.72
+391 = (3.5%)
Dec. 26
2005
568.59
4.44
12793
10883.27
-1910 = 18%
Aug. 14, 2005
581.69
4.23
13,735
10,600
-3135 = 30%
Jan. 31, 2005
600.65
4.13
14,528
10,489
-4039 = 39%
Oct. 24,  2004
583
3.98
14,630  
9,944
-4686 = 47%
Oct. 21, 2002
389
4.13
9,419
8,323
-1096 = 13%