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6.73%, from Steve Ellison

September 8, 2010 |

Where can one find a decent return on investment? 3-month U.S. Treasury bills yield 0.13%. 10-year U.S. Treasury bonds yield 2.71%.

The expected earnings of the S&P 500 over the next four quarters are 74.30. At current prices, the expected earnings yield is 6.73%, nearly 2 1/2 times the 10-year bond yield. This "Fed model" ratio was below 1 for years in the 1990s.

Alston Mabry writes:

In early 2000, if you aggregated the top 10 companies in the NASDAQ 100 into a single virtual company, that company had a market cap of $1.6T and sold for 14.7 times revenues and 83 times earnings, for an earnings yield of 1.2%. It seemed like a pretty rich valuation, but people were willing to pay it– for a time. Who's to say the yield on the 10-yr won't go to 1.2%?

Tim Melvin writes:

While not disputing that there are opportunities in today's market, anyone who bases any decision on expected earnings is making a foolish mistake. The margin of error on these estimates is incredibly wide. 

Stefan Jovanovich writes:

Big Al's speculation about how rich the valuation of bonds can get finds some confirmation in the modeling of Marcelle Chauvet — another of California's intellectual property imports.

Rocky Humbert writes:

Quick, back of the envelope, the R-squared between the professor's recession index and the closing monthly bond price is 0.18. The r-squared between the professor's recession index and the closing monthly spx price is .16. If I lag the bond price, the r-squared drops to 0.03

The Professor's Index seems to be as useful as a blind man looking in the mirror….

Which means ….that bonds may yield 1.2% … or 3.2% … or …. ???

Tyler McClellan writes:

Time for the repeating track,

The real return to bonds in the 20th century (relatively long time horizon) ex post does not substantiate the claim that we are at an unusual place vis a vis the return to savings in the government bond market, which is the market for which there is much ability to coerce the means of paying this debt regardless of the source of economic prosperity from which it does or does not arise (I am quite confident unique in that stead, and the reason why anyone who has done a deep study of social security/etc… know that there is very trivial difference in the end between fully funded, pay as you go, etc..we get the prosperity we get, period.)

Future inflation expectations do seem to be very historically unusual in both their low mean level and the historically unusual international dispersion around this level.


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1 Comment so far

  1. douglas roberts dimick on September 6, 2010 12:03 pm

    Rules: The Answer

    In politics, one is taught…

    1. If they like you, then they will vote for you.
    2. It is the economy, stupid.
    3. Even it they like you, it is the economy.

    Jobs, in my estimation. We have been exporting our job base (input) for the past 35 years for the efficiencies (or profitability) of output (consumerism).

    Enough said…

    dr

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