New Rules Can't Cure Ailing Wall Street

A glance at the stock market is enough to make the case that, despite all the losses and all the moaning of the last two years, we're still witnessing unthinkable recklessness. Amazon and Yahoo!, to take two New Economy names, continue to trade as if filled with helium.

Let's be a little more scientific. Stocks should "yield" the same as a Baa-rated corporate bond, currently 7.4%. That means that earnings should be equivalent to 7.4% of the value of the S&P 500 index. They don't come anywhere close. Here are the numbers. Let's assume operating earnings on the S&P 500 next year will be 10% lower than analysts' current estimates of $54.10, which would give us $48.70. On the S&P 500's index value of around 800, you get a yield of 6.1%. To have stocks yielding 7.4% on these earnings would mean the S&P 500 moving down to about 660.

If investors worried more about prices and less about the rule book, they'd be a lot better off.