Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

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Department of Scholarly Reviews

 

10/22/04
Tom Downing Reviews Ken Fisher's Article "When Earnings Are Cheap" [November Forbes]

Although he does not call it such, Fisher is clearly using the Fed Model. "General rule: When earnings yields are higher than bond yields, stocks are cheap."

For evidence, he cites two historical periods:
1) "Between 1974 and 1982 the earnings yield was steadily above the bond yield, a great long core period to buy stocks. The same was true in Britain and much of the Continent."
2) "...five years ago, when the earnings yield on the S&P 500 was only 3.5%, while ten-year government bonds were yielding 7.6%. Not a good time to load up on equities."

He notes that current forward P/E is 2 percent above 10 year rate in the US, and that earnings yields are greater than bond yields in most of developed world (and in Japan for first time ever). He says that "the best time of all to own stocks is when the earnings yield is good, yet mainstream expert opinion says stocks are overpriced... ...When the crowd comes to its senses, it will bid up the prices of the shares you own."

Finally, he recommends some low P/E stocks that he expects to do well.

All in all, his views are largely in line with Daily Speculations.

They differ in that:
1) He takes a more global perspective, but
2) He doesn't really show any compelling quantitative evidence to back up his assertions.

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