Bearish and Bullish Views on Stock Markets

by: Larry MacDonald

“By a yardstick that I consider very important, namely the spread between bond yields and stock earnings yields (the inverse of the price/earnings ratio), global stocks are 75% too cheap. The S&P 500 should earn $90 … which comes to 6.4% of the index's price of 1414. Compare that with a ten-year bond yield of 4.6% …. This spread is driving both cash-based stock buybacks and debt-financed takeovers of companies …. Until that gap gets closed the bull market will live on.” Kenneth Fisher in Jan 29 Forbes column.

“ … the recent spate of corporate takeovers and the resultant reduced supply of investment grade securities has provided a natural buffer to any price weakness.” Irwin Michael in ABC Fund’s March 29 Monthly Commentary

“2007 is the third year of the presidential term, and third years tend to be bullish … we haven't had a negative third year of a President's term since 1939 ….” Kenneth Fisher in Dec 11 and Jan 29 Forbes columns


“Sell on news” is becoming a trend on Wall Street. S&P 500 companies have consistently seen their share price move higher prior to and just after release of first quarter earnings reports. However, shortly thereafter, they have come under profit taking pressures.” Don Vialoux in April 18 edition of Tech Talk

“Currently the spreads between the higher risk securities and U.S. treasuries are at near historic lows. Other indicators also are showing that investors are in a euphoric mood and so are chasing yields and/or returns without giving due weight to the risk of potential market disruptions which could result in permanent loss of capital.’ Francis Chou in 2006 Annual Report for Chou Group of Funds

“The fact that the S&P 500's earnings yield is higher than the 10-year Treasury yield suggests that either stocks are undervalued or bonds are overvalued. We think it is the latter rather than the former and that the valuation gap in the chart below will likely be closed primarily by rising bond yields.” J.D. Steinhilber of Agile Investing in April 18 Seeking Alpha post.

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