Right now one can earn 7.9% on corporate junk bonds(JNK), what kind of PE ratio one would have happy to pay if he wanted to be compensated with a bigger return in order to take equity market risk? A bigger return like, lets say 10%? Assuming NGDP grows at a 4% rate into infinity(This is actually bellow the avg) and a 1:1 correlation between NGDP and corporate profit growth(Which historically is roughly correct), one should be pretty happy to buy US stocks at a 16.3 PE ratio, or a 5.78% earnings yield Currently US stocks are bellow this(13 PE according to yahoo). Truth is, with a long-time horizon equities are still the best investment. The shiller PE is 20 but there are some issues with that PE as a result of the financial crisis, it probably overstates the PE a bit(Some individual stocks announced huge losses that distort the PE, I believe AIG falls in that category) The only way this calculation(For those curious, I arrived at this number through the Dividend Valuation Model from Myron Gordon but used earnings instead of dividends) can be wrecked is if there is massive failure by the Fed and they don't hold NGDP at 4%(Like in the 30's when it turned negative) but I don't think that is a good assumption to make given their defacto inflation target forces the Fed to go all-in everytime inflation is too close to 0% This doesn't mean stocks are a good investment in the next 5 years however. I believe there will be some profit margin mean reversion that might affect the NGDP and profit growth correlation temporarily but I thought it was interesting that there IS some truth to the permabull CNBCs fund managers when they say 'interest rates are low, these PE ratios make sense'
And btw, the DVM is no financial engineering or some bogus 'model'. Its a simple NPV calculation with adjustments for growth rates in dividends
Not quite - you have to subtract average default losses, so the total return is somewhat less. Also, if yields fall significantly, many corporate bonds are callable, so the capital gains are capped too.
If I adjust for that I should also demand less in return for stocks because they have similar risks. A 8% minimum return gives out a PE of 25. Which makes my point even stronger
Belgium has to go to the markets one more time in 2011. Next week I believe to the tune of 3 Billion USD or so. Apparantly they are scared shitless cause they launched a major campaign to sell the bonds internally to it's citizens. Word has it the quest is a major succes at a 35% lower intrest then what the markets are asking today. How does this work? If enough bonds get sold this way the auction next week get's cancelled or what? Wouldnt' touch them myself with a 10 foot pole really...
http://www.efxnews.com/story/6494/snb-yet-be-tested-morgan-stanley Not sure if this will happen so fast! But now, after this week's bund auction and reading MS, this makes me think if buying some 1.10 puts on eurchf expiring in june 2012, is such a bad bet, better if i can buy them when eurchf goes to 1.24 or so? especially given the low vol in eurchf. Problem is not possible to do with IB.
If expectation is that we go below 1100 and take out the lows in ES, two interesting spreads might be long gold-silver (GoC's original idea), or even better long gold-copper.
Japan update: Japanâs Benchmark 10-Year Yield Set for Biggest Weekly Jump Since January http://www.bloomberg.com/news/2011-...ove-1-on-concern-debt-burden-will-worsen.html 10yr now 1.03% I'll be visiting Japan in early December so I'll post my thoughts when I return. If you don't hear from me again on ET you can assume I've been <i>fukiushima-de</i>. Hopefully all quiet during my visit on the natural disaster front...
Rumor mill churning and I've got to get out to the golf course (65 in Phila. today!) Out of everything in currencies except a handful of FXA puts.