Fundamental Analysis - About Sector and Stocks

GROUP SELECTION

If the prognosis is for an expanding economy, then certain groups are likely to benefit more than others. An investor can narrow the field to those groups that are best suited to benefit from the current or future economic environment. If most companies are expected to benefit from an expansion, then risk in equities would be relatively low and an aggressive growth-oriented strategy might be advisable. A growth strategy might involve the purchase of technology, biotech, semiconductor and cyclical stocks. If the economy is forecast to contract, an investor may opt for a more conservative strategy and seek out stable income-oriented companies. A defensive strategy might involve the purchase of consumer staples, utilities and energy-related stocks.

To assess a industry group's potential, an investor would want to consider the overall growth rate, market size, and importance to the economy. While the individual company is still important, its industry group is likely to exert just as much, or more, influence on the stock price. When stocks move, they usually move as groups; there are very few lone guns out there. Many times it is more important to be in the right industry than in the right stock! The chart below shows that relative performance of 5 sectors over a 7-month time frame. As the chart illustrates, being in the right sector can make all the difference.

NARROW WITHIN THE GROUP

Once the industry group is chosen, an investor would need to narrow the list of companies before proceeding to a more detailed analysis. Investors are usually interested in finding the leaders and the innovators within a group. The first task is to identify the current business and competitive environment within a group as well as the future trends. 

How do the companies rank according to market share, product position and competitive advantage?  

Who is the current leader and how will changes within the sector affect the current balance of power ?  

What are the barriers to entry ?  

Success depends on an edge, be it marketing, technology, market share or innovation. A comparative analysis of the competition within a sector will help identify those companies with an edge, and those most likely to keep it.
SELECTING THE SECTOR :- 
STOCK MARKET SECTORS

A sector refers to a group of stocks representing companies in a similar line of business or industry. All of the stocks on the S&P TSX can be broken down into 10 different categories (sectors) based on their line of business or industry.

As you can see from the pie chart below, the Financial and Energy sectors dominate the Canadian landscape, with more than 50% of the TSX comprised of companies in these sectors. The Materials sector is also quite large and these three sectors alone comprise over 75% of the companies on the TSX. Meanwhile, the small weightings of health care, utilities and consumer staples provide investors with very little domestic exposure to these important sectors.

SECTOR ROTATION

Sector rotation is an investment strategy that consists of moving money from one industry sector to another in an attempt to beat the market. At different stages in an economy, an investor or portfolio manager may choose to shift investment assets from one investment sector to another, based on the current business cycle(since different sectors are stronger at different points in the business cycle).

CYCLICAL STOCKS
Cyclical stocks, on the other hand, cover everything else and tend to react to a variety of market conditions that can send them up or down, however when one sector is going up another may be going down.

Here is a list of the nine sectors considered cyclical:

· Basic Materials 
· Capital Goods
· Communications
· Consumer Cyclical
· Energy
· Financial
· Health Care
· Technology
· Transportation

Most of these sectors are self-explanatory. They all involve businesses you can readily identify. Investors call them cyclical because they tend to move up and down in relation to businesses cycles or other influences.

Basic materials, for example, include those items used in making other goods – lumber, for instance. When the housing market is active, the stock of lumber companies will tend to rise. However, high interest rates might put a damper on home building and reduce the demand for lumber.

DEFENSIVE

Defensive stocks include utilities and consumer staples. These companies usually don’t suffer as much in a market downturn because people don’t stop using energy or eating. They provide a balance to portfolios and offer protection in a falling market.

However, for all their safety, defensive stocks usually fail to climb with a rising market for the opposite reasons they provide protection in a falling market: people don’t use significantly more energy or eat more food.

Defensive stocks do exactly what their name implies, assuming they are well run companies. They give you a cushion for a soft landing in a falling market. 

SEVEN TESTS OF DEFENSIVE STOCK SELECTION --- KEYS TO PUTTING TOGETHER A CONSERVATIVE PORTFOLIO OF COMMON STOCKS Each autumn, I read Benjamin Graham's Intelligent Investor.  It's principles are timeless, unquestionably accurate, and contain a sound intellectual framework for investing that has been tested by decades of experience.  As I considered the content of my weekly article, I decided to focus on the seven tests prescribed by Graham in Chapter 14, Stock Selection for the Defensive Investor.  Each of these will serve as a filter to weed out the speculative [or 'risky'] stocks from a conservative portfolio.

1. Adequate Size of the Enterprise

In the world of investing, there is some safety attributable to the size of an enterprise. A smaller company is generally subject to wider fluctuations in earnings. Graham recommended [in 1970] that an industrial company should have at least $100 million of annual sales, and a public utility company should have no less than $50 million in total assets. Adjusted for inflation, the numbers would work out to approximately $465 million and $232 million respectively.

2. A Sufficiently Strong Financial Condition

According to Graham, a stock should have a current ratio of at least two. Long-term debt should not exceed working capital. For public utilities the debt should not exceed twice the stock equity at book value. This should act as a strong buffer against the possibility of bankruptcy or default.

3. Earnings Stability

The company should not have reported a loss over the past ten years. Companies that can maintain at least some level of earnings are, on the whole, more stable.

4. Dividend Record

The company should have a history of paying dividends on its common stock for at least the past twenty years. This should provide some assurance that future dividends are likely to be paid. For more information on the dividend policy, read Determining Dividend Payout: When Should Companies Pay Dividends?.

5. Earnings Growth

To help ensure a company's profits keep pace with inflation, net income should have increased by one-third or greater on a per-share basis over course of the past ten years using three-year averages at the beginning and end.

6. Moderate Price to Earnings Ratio

For inclusion into a conservative portfolio, the current price of a stock should not exceed fifteen times its average earnings for the past three years. This acts as a safeguard against overpaying for a security.

7. Moderate Ratio of Price to Assets

Quoting Graham, "Current price should not be more than 1 1/2 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5 (this figure corresponds to 15 times earnings and 1 1/2 times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)"

More Information on the Intelligent Investor
You can find more information and a book review of the Intelligent Investor in the top picks section.

HOW TO USE

Stocks sectors are helpful sorting and comparison tools. Don’t get hung up on using just one organization’s set of sectors, though.MorningStar.com uses slightly different sectors in its tools, which let you compare stocks within a sector.

This is extremely helpful, since one of the ways to use sector information is to compare how your stock or a stock you may want to buy, is doing relative to other companies in the same sector.

If all the other stocks are up 11% and your stock is down 8%, you need to find out why. Likewise, if the numbers are reversed, you need to know why your stock is doing so much better than others in the same sector – maybe its business model has changed and it shouldn’t be in that sector any longer.

ATTRACTIVE STOCK

Naturally, investors want aboard this gravy train. To find a seat, they are willing to pay a premium. There is nothing wrong with wanting a piece of this type of company.

The problem comes when you are a late arrival and the price of admission (stock price) has climbed too high.

How high is too high? That’s a question that every investor must asked and answer.

Too often, investors jump when they should stand back and take a hard look. Investors who have a chance for success look for good companies, companies like

1 HCL Infosystems Ltd. IT – Hardware                                                                            
2 PSL Ltd.                             Steel & Iron Products
3 SRF Ltd. Textile              – Manmade  Fibres
4 Andhra Bank                   – Public
5 Corporation Bank           - Public
6 Aarti Industries Ltd.        - Chemicals
7 Allahabad Bank              – Public
8 Balmer Lawrie & Company Ltd - Diversified
9 Graphite India Ltd.                       - Electrodes & Welding Equipment
10 Indian Bank                                – Public
11 Deepak Fertilisers & Petrochemicals Corpn. Ltd - Fertilizers
12 Syndicate Bank                                                        – Public
13 Jammu & Kashmir Bank Ltd.                         -- Private
14 Bajaj Holdings & Investment Ltd Finance     – Investment                                                 

that have superior management and consistently throw off earnings quarter after quarter. But that is only half the work needed to find a good investment.

CONCLUSION

You never want to be making investment decisions in a vacuum. Using sector information, you can see how a stock is doing relative to its peers and that will help you understand whether you have a potential winner or loser. 

As you begin your search for investment candidates, you should consider which industrial sectors offer the best prospects for growth (or value) investments.

Industrial sectors are groupings of similar types of companies. These groupings are important because they give stock investors an idea of how well (or poorly) individual companies are performing relative to their industrial peers.

When you have a sense of where the economy and stock market are headed, you can use that information to begin considering those industrial sectors in the best position for growth.

By comparing the relative performance of the various industrial sectors you can gain some insight about where to begin looking for investment candidates. You can also use sector performance information to measure an individual company's numbers.

Once you have identified one or more industrial sectors, you can use stock screening tools to help you narrow the search down to individual companies.

If you already own individual stocks (or stock mutual funds), use industrial sectors to make sure you are not over-invested in any one sector. Diversification will help you better weather ups and downs.

Here are three initial steps to better stock investing:

·                        Your personal financial goals and means

·                        The state of the economy and the stock market

·                        Identifying industrial sectors with prospects for growth  

Fundamental Analysis - Role of Stock Exchanges

WHAT IS THE PART OF STOCK EXCHANGES FOR THE COUNTRIES ECONOMICAL GROWTH? 

Stock market is an important part of the economy of a country. The stock market plays a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. 

That is the reason why the government, industry and even the central banks of the country keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view.

Whenever a company wants to raise funds for further expansion or settling up a new business venture, they have to either take a loan from a financial organization or they have to issue shares through the stock market. In fact the stock market is the primary source for any company to raise funds for business expansions. 

If a company wants to raise some capital for the business it can issue shares of the company that is basically part ownership of the company. To issue shares for the investors to invest in the stocks a company needs to get listed to a stocks exchange and through the primary market of the stock exchange they can issue the shares and get the funds for business requirements. 

There are certain rules and regulations for getting listed at a stock exchange and they need to fulfill some criteria to issue stocks and go public. The stock market is primarily the place where these companies get listed to issue the shares and raise the fund. In case of an already listed public company, they issue more shares to the market for collecting more funds for business expansion. 

For the companies which are going public for the first time, they need to start with the Initial Public Offering or the IPO. In both the cases these companies have to go through the stock market.

This is the primary function of the stock exchange and thus they play the most important role of supporting the growth of the industry and commerce in the country. That is the reason that a rising stock market is the sign of a developing industrial sector and a growing economy of the country.

Of course this is just the primary function of the stock market and just an half of the role that the stock market plays. The secondary function of the stock market is that the market plays the role of a common platform for the buyers and sellers of these stocks that are listed at the stock market. It is the secondary market of the stock exchange where retail investors and institutional investors buy and sell the stocks. In fact it is these stock market traders who raise the fund for the businesses by investing in the stocks.

For investing in the stocks or to trade in the stock the investors have to go through the brokers of the stock market. Brokers actually execute the buy and sell orders of the investors and settle the deals to keep the stock trading alive. The brokers basically act as a middle man between the buyers and sellers. Once the buyer places a buy order in the stock market the brokers finds a seller of the stock and thus the deal is closed. All these take place at the stock market and it is the demand and supply of the stock of a company that determines the price of the stock of that particular company.

So the stock market is not only providing the much required funds for boosting the business, but also providing a common place for stock trading. It is the stock market that makes the stocks a liquid asset unlike the real estate investment. It is the stock market that makes it possible to sell the stocks at any point of time and get back the investment along with the profit. This makes the stocks much more liquid in nature and thereby attracting investors to invest in the stock market.

a) To basically start a Company / Organization money is required. 
b) Apart from initial investment , for further development of the Company / Organization also       

     money is required. 
c) For their requirement of money can be collected from stock markets by the way of offering 

     I.P.O and ( INITIAL PUBLIC OFFER ) F.P.O ( FOLLOW ON PUBLIC OFFER ) from the      

     investors. 

d) By this I.P.O. several lakhs to crores of small and all type of people enter and invest their 

     money from their savings. 
e) Either through share capital or Debt capital funds collection is possible through Stock 

     market. 
f) An Organization can be well grown up, by collecting money from these ways. 
g) Being absence of Large companies, the countries Economy cannot grow speedy. 
h) Without the help of stock exchange, single persons can never be able to commission a large 

     Organization. 
i) In general for the countries overall growth, stock market considerably does its part, can never 

    be objected.

Fundamental Analysis - About Organization

HOW AN ORGANIZATION / COMPANY YIELDS GAIN ?

HOW MUCH DO ORGANIZATIONS STAND TO GAIN?
 

An Organization, may be manufacturing one or more products( productions ), Marketing, Exporting, one or some specific products ( with Quality) able to sell with gain in a marginal profit. Moreover it can expand its operations locally, nationally, or even internationally, limiting its expenses. The debts being able to maintaining within the limit or even Zero. 

Above all are possible only in a growing economy of a country especially India. Since the population is more the demand also is more for any product. By all these reasons , there are various possibilities for any certain organization to run profitably. Excellent marketing Techniques are followed to popular any Brand of product. Any product can be produced for the Indian people at very reasonable price,

a)      No people can say that some products are not available. It’s a positive point

         for the running Government. Lakhs of small, medium, and Large companies

          are present of those few are manufacturing a same product. 

b)      Due to these production / service they all are paying Direct / Indirect taxes to

          the government.

c)      Those taxes can be used for several Welfare schemes for the poverty people

          and for other purposes.

d)      Un-employment problem can be solved somehow.

e)      Due to Employment opportunities increasing , the life style of people increases.

          Due to those, further more products / services are purchased.

         Taxes are continuously redempted by the companies. Gains to the government. 

f)       If the production increases , then the exports also increases. Foreign Exchange reserves            increases in Hand. In turn essential products Imports are also increasing.       

Apart from these,

The popularity of CRM is due to its fundamental and increased focus on customers. CRM benefits include its ability to help to ensure excellent customer service as it is aware of customer needs and is able to react to them effectively. It enables an organization to anticipate and respond to its customers needs in the right way.

A LOOK AT SOME OF THE BENEFITS OF CRM

( CUSTOMER RELATIONS MANAGEMENT ) :

• It is a business strategy that applies to almost every organization; therefore almost all organizations stand to gain from its use.
• Customers are motivated to return again and again as they receive good customer service and continue to do business
• Since acquiring a new customer is far more costly than retaining an existing customer more and more companies are turning to CRM as it is able to achieve this. Companies need this in order to stay competitive.
• Many forms of advertising are not as effective as they need to be. CRM enables a company to target their audience more precisely and gain customer retention, all at a lesser cost. CRM helps your business as it lets you do more for your customer and gain more from them.
• Since every organization needs to understand the importance of cross-selling and since CRM does that they are able retain their customers for longer periods.
• CRM delivers company-wide access to customer information.
• Using CRM applications can lead to increases in revenue from almost all areas.
• Reductions in operating costs is a by product of CRM implementation.
• Simplification of marketing and sales processes is achieved in organizations implementing CRM by their understanding of customer needs
• Better customer service is achieved through improved responsiveness and understanding. This builds customer loyalty and decreases customer loss.
• CRM enables a company to build a database about its customers so that management, salespeople etc could access information, match customer needs with plans and offerings, render better customer service etc.
• It enables an organization to create detailed profiles such as customer likes/dislikes etc.
• CRM gains the trust of customers by meeting their needs in a more personalized way.
• CRM delivers personalized, informed service that customers expect. This is because of a system that contains and provides a complete profile of the customer, including all past and present behavior patterns.
• A higher percentage of cross-selling is possible in companies opting for CRM
• With globalization CRM offers companies a chance at increased customer loyalty, higher margins and customer retention 
• Companies achieve more success in attracting new customer on account of their quicker and more efficient responses to customer leads and customer information.
• CRM helps an organization to develop better communication channels
• CRM helps an organization to collect vital data, like customer details etc. This data can be used for customer interaction.
• Companies opting for CRM find it easy to identify new selling opportunities.
• The traditional systems used by Customer Service, Sales and Marketing can now be done away with and the gaps filled with CRM implementation

Customer relationship management is gaining importance as a management tool globally and is ranked as the second most important management tool. On account of CRM benefits, its position as the customer centric strategy of the decade is slowly gaining ground. Despite the huge costs involved companies prefer to opt for it on account of the tremendous benefits of CRM.

Fundamental Analysis - About Index

HERE A QUESTION MAY ARISE FOR EVERYONE? 
HOW THE STOCK MARKET INDEX RISES? 

Stock market traders are always concerned about which way the market is moving. A strong movement to buy is a good indicator that stocks price will continue to rise, while a strong movement to sell suggests a downturn is coming.

But how do you know which way the overall market is moving ?
One to the tools traders use is called market internals. These indicators can be early warning systems for the whole market.


One of the most common of the market internals is the TICK or TICK index.


This tool compares the number of stocks on the New York Stock Exchange that are rising to the number of stocks that are falling.


Also a stock price is mainly based upon Supply and Demand. If the supply is low and the demand is more then the stock prices rises. If the supply is more and the demand is low then the stock prices lowers. 


Similarly, depending upon the Weightage of the sector / stock ( also by the various news upcoming throughout the world, the price varies ) the stock prices are valued by the investors. 

The calculation is very simple. You take the upticking (or rising) stocks and subtract the downticking (or falling stocks).


If the number is positive, that means more stocks are rising than falling. If the number is negative, that means more stocks are falling than rising.


When the TICK approaches +1,000 or -1,000, watch out. These extremes indicate a severely overbought or oversold condition.


In either case, expect the market to abruptly reverse itself.


Understanding the TICK can help you decide when to buy or sell.


If you have been thinking about selling a particular stock and notice the TICK is approaching +750 or more, it may be time to sell since conditions are ripe for the market to reverse itself and begin falling.


That could bring down the price of your stock.


Always use the TICK in connection with other factors to make your decision. However, as a quick read on market sentiment, the TICK is a valuable tool.

Fundamental Analysis - Economy

The stock market does not work the way most people think. A commonly held belief — on Main Street as well as on Wall Street — is that a stock-market boom is the reflection of a progressing economy: as the economy improves, companies make more money, and their stock value rises in accordance with the increase in their intrinsic value. A major assumption underlying this belief is that consumer confidence and consequent consumer spending are drivers of economic growth.

A stock-market bust, on the other hand, is held to result from a drop in consumer and business confidence and spending — due to inflation, rising oil prices, high interest rates, etc., or for no reason at all — that leads to declining business profits and rising unemployment. Whatever the supposed cause, in the common view a weakening economy results in falling company revenues and lower-than-expected future earnings, resulting in falling intrinsic values and falling stock prices.

This understanding of bull and bear markets, while held by academics, investment professionals, and individual investors alike, is technically correct if viewed superficially but is substantially misconceived because it is based on faulty finance and economic theory.

In fact, the only real force that ultimately makes the stock market or any market rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered.

Since stock markets can fall — and fall often — to various degrees for numerous reasons (including a decline in the quantity of money and spending), our focus here will be only on why they are able to rise in a sustained fashion over the longer term.

The following factors are considered as necessary points of Fundamental Analysis ! There are two types of stock:

 Common stock

 Preferred stock

Most of the stock held by individuals is common stock.

Common Stock

Common stock represents the majority of stock held by the public. It has voting rights, along with the right to share in dividends.

When you hear or read about “stocks” being up or down, it always refers to common stock.

Preferred Stock

Despite its name, preferred stock has fewer rights than common stock, except in one important area – dividends. Companies that issue preferred stocks usually pay consistent dividends and preferred stock has first call on dividends over common stock.

Investors buy preferred stock for its current income from dividends, so look for companies that make big profits to use preferred stock to return some of those profits via dividends.

Liquidity

Another benefit of common stocks is that they are highly liquid for the most part. Small and/or obscure companies may not trade frequently, but most of the larger companies trade daily creating an opportunity to buy or sell shares.

Thanks to the stock markets, you can buy or sell shares of most publicly traded companies almost any day the markets are open.

ECONOMIC FORECAST:-

First and foremost in a top-down approach would be an overall evaluation of the general economy. The economy is like the tide and the various industry groups and individual companies are like boats. When the economy expands, most industry groups and companies benefit and grow. When the economy declines, most sectors and companies usually suffer. Many economists link economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading indicator for the stock market as well.  

Below is a chart of the S&P 500 and the yield on the 10-year note over the last 30 years. Although not exact, a correlation between stock prices and interest rates can be seen. Once a scenario for the overall economy has been developed, an investor can break down the economy into its various industry groups.

Generally if the stock market index rises, stock market is functioning well. And if the index goes down then the stock market position is not better. Considering from the past years the index is going on rising. It means that the companies stocks of say NSE – 50 Stocks, BSE – 30 Stocks, performs better or moderate (not lower than the average) 

Here if the sensex or Nifty rises or lowers then the stock market varies! But an another point is to be noted that only 50 and 30 stocks alone are not present, and more than several thousands of stocks are present both in NSE and BSE. 

So that the Index is not an actual Replica of the entire stock market.

     

The primary link between the stock market and the economy — in the aggregate — is that an increase in money and credit pushes up both GDP and the stock market simultaneously.

A progressing economy is one in which more goods are being produced over time. It is real "stuff," not money per se, which represents real wealth. The more cars, refrigerators, food, clothes, medicines, and hammocks we have, the better off our lives. We saw above that, if goods are produced at a faster rate than money, prices will fall. With a constant supply of money, wages would remain the same while prices fell, because the supply of goods would increase while the supply of workers would not. But even when prices rise due to money being created faster than goods, prices still fall in real terms, because wages rise faster than prices. In either scenario, if productivity and output are increasing, goods get cheaper in real terms.
Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant, the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).

This alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.[5] Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.

"Consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate."

The same concept would apply to the stock market: if there were a constant amount of money in the economy, the sum total of all shares of all stocks taken together (or a stock index) could not increase. Plus, if company profits, in the aggregate, were not increasing, there would be no aggregate increase in earnings per share to be imputed into stock prices.
In an economy where the quantity of money was static, the levels of stock indexes, year by year, would stay approximately even, or drift slightly lower[6] — depending on the rate of increase in the number of new shares issued. And, overall, businesses (in the aggregate) would be selling a greater volume of goods at lower prices, and total revenues would remain the same. In the same way, businesses, overall, would purchase more goods at lower prices each year, keeping the spread between costs and revenues about the same, which would keep aggregate profits about the same.

Under these circumstances, capital gains (the profiting from the buying low and selling high of assets) could be made only by stock picking — by investing in companies that are expanding market share, bringing to market new products, etc., thus truly gaining proportionately more revenues and profits at the expense of those companies that are less innovative and efficient.
The stock prices of the gaining companies would rise while others fell. Since the average stock would not actually increase in value, most of the gains made by investors from stocks would be in the form of dividend payments. By contrast, in our world today, most stocks — good and bad ones — rise during inflationary bull markets and decline during bear markets. The good companies simply rise faster than the bad.

Similarly, housing prices under static money would actually fall slowly — unless their value was significantly increased by renovations and remodeling. Older houses would sell for much less than newer houses. To put this in perspective, consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate — but just about everything would increase in price, as it does in countries with hyperinflation The amount by which a home "increases in value" over 30 years really just represents the amount of purchasing power that the dollars we hold have lost: while the dollars lost purchasing power, the house — and other assets more limited in supply growth — kept its purchasing power.
Since we have seen that neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher, we can now clearly understand that an improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.

This is not to say that a link does not exist between the money that companies earn and their value on the stock exchange in our inflationary world today, but that the parameters of that link — valuation relationships such as earnings ratios and stock-market capitalization as a percent of GDP — are rather flexible, and as we will see below, change over time. Money sometimes flows more into stocks and at other times more into the underlying companies, changing the balance of the valuation relationships.