Tuesday, November 17, 2009

Tuesday Markets Update

This will be a brief comment, and postings will be diminished over the next several days due to travel and other annoyances.

Yesterday indeed proved to be manic in that stocks and bonds rose strongly in price, but gold rose more and the more speculative metals that I recently highlighted as having more upside potential than gold rose more.

Today, the strength in bonds continues, and I wonder if my hypothesis that the market is going to correct so that a more traditional relationship between stock dividend yields and Treasury bond yields re-establishes itself.

If they merely get back to the level of equality that was never seen before about 1960, consider that the S&P 500 yields under 2% (depends how you measure) and the 10-year Treasury yields whatever it is yielding when you read this- say 3.4%. Now, corporate dividend yields can in fact rise a lot if companies cease buying back shares and if some dividendlesss companies start paying dividends, but Treasury rates are historically low.

I almost invested in the Japan stock market a couple of years ago at much higher prices because even then, stock dividend yields were greater than bond yields. You never know, in other words. But I hate to bet against reversion to the mean.

In other words, business conditions may improve, but fundamentally there is a great deal of risk in the stock market. When rates are unnaturally low, high P/E's and very low dividend yields look OK; but the rates are low only because the economy is so weak, so that's ultimately a flimsy crutch for valuations. If rates rise a lot, dividends lag and then the disparity favoring bonds over stocks becomes tilted more against stocks.

Now, stocks are nowhere nearly as overpriced as at their all-time (possibly) overpriced peak about a decade ago. But that's not saying much. The technical action still favors precious metals, and you don't give up much current yield by owning them.

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