Fed, Yardeni - undervalued, overvalued

[hei.so]

I don’t know why I’m having such a hard time understanding this topic. But when are the stocks under/over valued according to the Fed and Yardeni model? I don’t want to just memorize it. I want to understand the intuition behind it.
Fed
If E1/P0 > yT, then undervalued
Yardeni
If E1/P0 > yB - d * LTEG, then undervalued
I think it’s easier for me to understand P/E (and intrinsic values according to Gordon Growth). I’m wondering if I should just take the reciprocal and if the number in the model is lower (cheaper) compared to the market value, then it is undervalued.

 

[Grrreg]

I don’t see any reason why it would not work, but it would require you to reverse each number in the rush of the exam, those are precious seconds you may not want to loose (not mentioning the small but real unecessary risk of fat finger).
Earning yield cheapness is mainly about whether you are earning too much or not. The following is academically wrong I guess but think of it like arbitrage, if the yield on the market is higher than on Fed/Yardeni model, people will buy the market which will increase its price and decrease the yield, bringing it back to “fair value” which is the level stated by the Fed/Yardeni model. Hope that help

 

[MrSmart]

Normally, stocks have a higher yield than bonds, if the stock has a lower yield, then it’s a bad buy (overvalued).

 

[Warren Buffett]

If equities are yielding 5% and bonds are yielding 3% which one would you buy?
Hopefully you chose to buy equities because they gave you a higher yield.
Now if you if you think about, something with a high yield has a low price. So in this case the equities have a higher yield and consquently a lower price compared to bonds.
Therefore, compared to bonds, equity is undervalued.

 

[MrSmart]

Warren Buffett wrote:
If equities are yielding 5% and bonds are yielding 3% which one would you buy?
Hopefully you chose to buy equities because they gave you a higher yield.
Now if you if you think about, something with a high yield has a low price. So in this case the equities have a higher yield and consquently a lower price compared to bonds.
Therefore, compared to bonds, equity is undervalued, and according to the FED model.

This is important to point to out, since it’s one of the biggest limitations of the model.