Are you bullish yet?

Regards

Tony

I see no reference in your article to the different interest rate environment this year versus last year. Interest rates determine the discount rate at which earnings and dividends should be measured.

Comparing today's 30 year T bond Yield of 3.03% with the 3.62% yield of a year ago, the yield on the S&P 500 is too high at 2.01% relative to the 2.02% of last year.

The rise in the S&P over the past year from 1,760 to 1,946 is attributed to the 11.7% increase in the dividend.

Adding in just the change in the interest rate environment the S&P 500 should be trading at 2,325.

If one argues that interest rates are too low then short the bond market and hedge that by being long the S&P 500 or better still the DJII where the dividend discount VALUE stands at 29,626 versus its closing PRICE on Friday last of 16,805.

Please see my previous posts for more details

Tony Hayes CFA

Irrational fear has been in the equity market since Lehman. This accounts for the DJII PRICE remaining below its dividend discount VALUE since then. If there were no fear then the price would be in line with its value.

Unlike equities there is no fear in the bond market. If bonds are correctly priced then the DJII has a long way to move up to match its value of 30,000 and higher to 39,000 if the dividend payout ratio were to return to its historic level of 42%

I am aware of the risks if trying to catch a falling knife. However, the dividend discount value of the DJII is so high both on an historical basis and relative to price that it is worth the risk.

As there was no meaningful catalyst that sent the market down and with the 30 Year T bond rate hitting 2.75% on Wednesday while the price of the market was under 16,000 and falling I could not resist the opportunity of yelling "BUY" with value rocketing upward.

Tell me when you decide buy

"they stockpiled a record volume of $2.5 trillion in excess reserves at the Federal Reserve for which they are reaping 0.25% interest – higher interest than they give their mere mortal customers." I am glad to see that others are starting to pick up on this point. In June I published the following article which looked at the same huge build up of excess reserves by the commercial banks that has far reaching consequences which I am sure were not intended but have happened anyway. http://www.talkmarkets.com/content/us-markets/fed-pushes-on-proverbial-string-but-commercial-banks-unwilling-or-unable-to-attract-borrowers?post=44496 I am still trying to find someone who will argue against my findings and this encourages me to believe that my work on the dividend discount model is correct and that we have a long way to go on the upside before the values of bonds and equities are back in equilibrium. Furthermore, it should take some considerable time before the excess reserves are put to work where they should be and that is in the economy. In view of this long bond yields should remain low for at least until the end of the decade and probably until well beyond. Regards Tony Hayes CFA 905 468 0130

According to the late Milton Friedman - "Inflation is always and everywhere a monetary phenomenon." This time around it is just taking a great deal longer for the expansion of the monetary base to make its way into the economy at large and to show up in the what is generally thought of as inflation WPI, PPI, CPI etc. It is coming but it may take a good few years for the AWMB to grow to match the reported monetary base.