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I think generally the charts and accompanying comments speak for themselves,
however a few comments seem to be in order. The purpose of using TBill's is
that they are virtually risk-free - today's crop of investors appears to be
convinced that there is virtually no risk in stocks because they will always
go up. I have a system which relies heavily on the EY/TBill ratio and it
backtests extremely well over the past 60 years of both bull and bear
markets. I also backtested the same system using DY/TBill ratio and,
although it backtested well, it did not come close to the system using
DY/TBill ratio. Certainly it's true that employee (and especially executive)
stock option plans provide great incentive to run the stock as high as
possible, and this influences payouts. However it is well to remember that
bull markets do not forever last, especially those rising at ever faster
rates. My historical charts, which go back to early part of this century,
include long periods where the dividend yield far exceeded the TBill yield
because investors believed stocks had high risk. I believe that the markets
will see that day again, when I can not say but it will happen after another
major crash.
I would hope that the very last conclusion one might make from my charts is
that "one stands a greater risk of losing money by being out of the market
than by staying in it". When I look at the market with my trader hat on
(about 20% of portfolio), I don't care where it goes, I simply attempt to
keep in synch with it. When I look at the market with my investor hat on
(about 80% of portfolio), I try to buy assets which are in low demand and
sell assets which are in high demand and there is no question that my models
indicate US stocks are at historically high valuations. Investment assets
I've bought during past six months, or expect to be buying soon, include
Asia/Yen, oils, metals, possibly more bonds. Investment assets I've sold
heavily during past six months include US Stocks, US Stocks, and US Stocks.
My exposure to US Stocks now comes almost entirely from day trading S&P
futures.
Earl
-----Original Message-----
From: BruceB <bruceb@xxxxxxxxxxxxx>
To: eadamy@xxxxxxxxxx <eadamy@xxxxxxxxxx>; RealTraders Discussion Group
<realtraders@xxxxxxxxxxxxxx>
Date: Sunday, December 27, 1998 4:28 PM
Subject: Re: MKT S&P EYld/TBill Ratio et al
>Earl, very interesting info, as usual. In looking over the charts I
>thought of a few things you might want to take into account in putting
>together these charts.
>
>The first potential problem I see is in using both S&P dividends and
T-Bills
>as inputs. Over the past few years there have been significant fundamental
>changes that have made companies heavily favor stock appreciation over
>dividends. More and more corporate officers are now compensated using
stock
>options. This gives them an enormous incentive to buy back outstanding
>stock (in order to put the options "in the money") in lieu of increasing
the
>stock dividend. Second, the spread between the rate at which dividends are
>taxed and the rate at which capital gains are taxed has increased. This
>also gives companies an extra incentive to reward their stockholders with
>price appreciation rather than increased dividends. Analyzing current
>dividend yields relative to past yields can therefore be very misleading.
>Having said this, I see no problem with using S&P earnings, and you seem to
>have given that chart more emphasis.
>
>The problem I see with using T-bill yields is two-fold. First, short term
>interest rates are heavily influenced by the actions of the Fed, and
>therefore don't necessarily represent the true sentiment of the free
market.
>Second (and closely related) is that T-Bills seem to be more and more of a
>"business" vehicle rather than a long term investment vehicle. They are
the
>instrument of choice when people or companies are deciding what to do with
>their money or are looking for a short term safe haven. However, long term
>rates are much more reflective of the value investors are putting on bonds
>relative to equities. Long term bonds also react to and incorporate
>inflation expectations more accurately. For these reasons, I'd be very
>interested in seeing your earnings yield ratio (EYR) chart using T-bonds
>rather than bills. Any chance? :)
>
>Lastly, even using these inputs shows something very interesting on the top
>chart where you have marked the danger zones since 1968 with 7 red arrows.
>If the arrows are closely examined, you notice that the DURATION of the
>corrections following these EYR spikes has been consistently getting
shorter
>and shorter. I realize this is a log chart, so I'm not necessarily talking
>about the magnitude of the drops, just the TIME it took to go from peak to
>trough. In fact, the duration of the correction of the last spike in 1997
>was so brief it barely registered on the chart.
>
>It seems to me this trend sends a clear message to the LONG TERM investor
>that trying to time the market using interest rates is rapidly becoming a
>futile effort, and that one stands a greater risk of losing money by being
>out of the market than by staying in it. I emphasize long term investor
>because this info can still be very valuable to a short term trader, but
>it's still nice to know what the masses might be thinking.
>
>Thanks again for taking the time to present it, Earl.
>
>Bruce
>
>-----Original Message-----
>From: Earl Adamy <eadamy@xxxxxxxxxx>
>To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
>Date: Sunday, December 27, 1998 2:43 PM
>Subject: MKT S&P EYld/TBill Ratio et al
>
>
>>I post one of these periodically when something worthy of note occurs. We
>>just surpassed the July high in the S&P Earnings/TBill ratio. We have
>>reached this lofty level only 3 times previously in the past 40 years
>>(actually since my S&P earnings history begins in early 30's) and in each
>>case a significant correction has followed. The alternatives would be
>>another huge cut in interest rates (unlikely) or huge gains in S&P
earnings
>>for the quarter (also unlikely). Also of note is the ratio decline
>following
>>each time the ratio has crossed the "Extreme Danger" level - the latest
>>decline is the only time that the ratio did not fall to the "Opportunity"
>or
>>"Extreme Opportunity" levels. Does all of this guarantee a sell-off? No,
>but
>>the odds are extremely high. Does it mean we should be shorting stocks?
Not
>>until we see some downward momentum. Does it mean that Buy and Hold is
>>extremely risky? You bet!
>>
>>Other tidbits from my weekly chart review:
>>
>>1) My 10 week moving average of special short sales ratio indicates that
>the
>>NYSE specialists have continued to liquidate inventory into this rally and
>>are averaging short positions at the highest levels in a decade.
Specialist
>>short sales reports are delayed two weeks.
>>
>>2) The transports have been unable to confirm the new highs in the
>>industrials in spite of the lowest real fuel prices in nearly 50 years
>>
>>3) The Amex Broker/Dealer has lagged the S&P 500, however it has recently
>>sprung back to life which could be bullish.
>>
>>4) The small caps still have not sprung to life to expand breadth as
>>evidenced by daily and weekly a/d numbers as well as the Value Line Geo.
>The
>>Ru2000 futures shows a very interesting "W" price pattern with a double
top
>>in the top middle of the W and appears poised to breakout to upside -
>either
>>way, this bears watching as this has been a seasonally strong time for
>small
>>caps.
>>
>>5) Bonds should get a bounce in here, however bonds appear poised to (at a
>>minimum) retest the November low of 124^23. More likely are declines to
fib
>>price objectives of 120^25 or 114^16.
>>
>>6) Recent chart patterns in bonds seem to be tracking the US$. The dollar
>>appears to have put in a failure and top, however this won't be confirmed
>>without a break below 9106 and a rally above 9681 would call the failure
>>into question.
>>
>>Earl
>>
>
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