A quick review of some traditional markets will give us some insight into where the value is hiding.
Stocks
A quick trip to S&P's website will allow you to take a historical look into some price/value relationships of the index.
based from the close of 5/29 of 903.47:
P/E EPS Yield Less Div Yield
EPS TTM 130.75 0.76% -1.62%
EPS 3 yr 18.02 5.55% 3.16%
EPS 5 yr 15.94 6.27% 3.89%
EPS 10 yr 18.56 5.39% 3.00%
P/B = 2 (end Q1)
The dividend yield is currently 2.39%, which means on the ttm basis, the S&P 500 payout is actually over 100%, a clearly unsustainable path. Even the more favorable 5 yr smoothed average is still slightly overvalued.
FINVIZ Screen
I ran a screen out of a possible universe of 6,731 stocks. The criteria were as follows:
Dividend Yield over 2%
P/E under 15
P/B under 2
Current Ratio over 1
Debt to Equity under 1
Sales Growth 5 yrs >0
EPS Growth 5 yrs >0
Return on Equity >10%
The criteria weren't overly conservative but conservative nonetheless. The screen resulted in 97 matches. This is just 1.4% of a large universe, suggesting widespread attractive common stock investments are lacking despite the monumental 40% lower values from the peak in 2007.
So called "Aaa" corporates have a fair yield of 5.75% and the highest yielding treasuries are at 4.31%.
The Question Posed
Stocks on a 10 yr smoothed basis offer a "deficit of safety" next to Aaa corporates and long treasuries that looks like this:
S&P EPS Yield 6% deficit of safety to Aaa corporate bonds
S&P EPS Yield 20% margin of safety over long dated treasuries
However, this doesn't take into account dividends. When factoring yields and margin of safety only reinvestible earnings should be considered since that is what determines future earning power. On the adjusted basis
S&P EPS Yield 91% deficit of safety to Aaa corporate bonds
S&P EPS Yield 43% deficit of safety over long dated treasuries
Either case Aaa bonds are clear winners. A word of caution! Rating agencies are an utter failure in model. It is advised that before rushing to buy bonds to study long term earnings records of the companies and to look for adequate earnings to interest coverage (maybe 3x's + at least), conservative capitalization structures, and little indication of "funny" accounting or nonrecurring items. Treasuries still have some attraction vs. stocks, especially if fear returns to markets.
The debate now is whether growth returns. This debate I'l leave to individual investors but my own opinion is there will be little in the department of revenue drivers in the economy for the foreseeable future.
Stocks
A quick trip to S&P's website will allow you to take a historical look into some price/value relationships of the index.
based from the close of 5/29 of 903.47:
P/E EPS Yield Less Div Yield
EPS TTM 130.75 0.76% -1.62%
EPS 3 yr 18.02 5.55% 3.16%
EPS 5 yr 15.94 6.27% 3.89%
EPS 10 yr 18.56 5.39% 3.00%
P/B = 2 (end Q1)
The dividend yield is currently 2.39%, which means on the ttm basis, the S&P 500 payout is actually over 100%, a clearly unsustainable path. Even the more favorable 5 yr smoothed average is still slightly overvalued.
FINVIZ Screen
I ran a screen out of a possible universe of 6,731 stocks. The criteria were as follows:
Dividend Yield over 2%
P/E under 15
P/B under 2
Current Ratio over 1
Debt to Equity under 1
Sales Growth 5 yrs >0
EPS Growth 5 yrs >0
Return on Equity >10%
The criteria weren't overly conservative but conservative nonetheless. The screen resulted in 97 matches. This is just 1.4% of a large universe, suggesting widespread attractive common stock investments are lacking despite the monumental 40% lower values from the peak in 2007.
Daily Bond Yields and Key IndicatorsData as of 28-MAY-09 Moody's Daily Long-term Corporate Bond Yield Averages
Moody's Daily Treasury Yield Averages
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So called "Aaa" corporates have a fair yield of 5.75% and the highest yielding treasuries are at 4.31%.
The Question Posed
Stocks on a 10 yr smoothed basis offer a "deficit of safety" next to Aaa corporates and long treasuries that looks like this:
S&P EPS Yield 6% deficit of safety to Aaa corporate bonds
S&P EPS Yield 20% margin of safety over long dated treasuries
However, this doesn't take into account dividends. When factoring yields and margin of safety only reinvestible earnings should be considered since that is what determines future earning power. On the adjusted basis
S&P EPS Yield 91% deficit of safety to Aaa corporate bonds
S&P EPS Yield 43% deficit of safety over long dated treasuries
Either case Aaa bonds are clear winners. A word of caution! Rating agencies are an utter failure in model. It is advised that before rushing to buy bonds to study long term earnings records of the companies and to look for adequate earnings to interest coverage (maybe 3x's + at least), conservative capitalization structures, and little indication of "funny" accounting or nonrecurring items. Treasuries still have some attraction vs. stocks, especially if fear returns to markets.
The debate now is whether growth returns. This debate I'l leave to individual investors but my own opinion is there will be little in the department of revenue drivers in the economy for the foreseeable future.
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