Please answer the following two questions:

(1) You are working at a global asset allocation division for Merrill Lynch. Your task is to identify the undervalued capital markets and then picking the undervalued firms within these undervalued markets. PE ratios across different country markets are estimated with long-term interest rate (10 yr rate), the term structure between (10 yr rate and 2 yr rate), a dummy for emerging markets as below:

P/E = 22.51 - 67.78*(10 year rate) + 96.85*(Term Struc.) 4.83*(Emerging) + e

Using EPS growth rate, payout ratio, and beta estimation, you have within-market estimations of PE for each category of countries as below:

PE(US) = 7.62 + 77.98 gEPS + 7.67 Payout -5.37 Beta

PE(Europe) = 10.07 + 27.51 gEPS + 7.78 Payout -5.23 Beta

PE(Japan) = 9.28 + 11.62 gEPS + 42.29 Payout -4.50 Beta

PE(Emerging) = 5.63 + 13.05 gEPS + 9.65 Payout + 0.62 Beta

Based on the above estimations, describe the procedure to implement your job of identifying undervalued market and then picking undervalued stocks within the market.

(2) In November 2015, the S&P 500 was trading a multiple of 29.09 times earnings. At the same time Ford, DaimlerChrysler, and GM are trading at 7.05, 8.95, and 6.93 times earnings, respectively. Compare their relative PE ratios. Do the relative PE ratios suggest Ford and GM are undervalued than DaimlerChrysler? Discuss right approach of using relative PE ratios to detect undervaluation or overvaluation.