Found this pretty interesting; Thanks David Rosenberg
What’s priced in five months and 50% later? Call it $70 on operating EPS for the
coming year and +4.0% real economic growth. In other words — the stock
market is fully priced and then some. But for the time being, the technicals and
sentiment — the high level of enthusiasm — and the risk of a “buying panic” by
lagging portfolio managers are very likely going to make folks, like Walter
Murphy, look prescient.
At the same time, be mindful of some non-corroborating variables:
1. The Treasury market should be selling off if we are in the midst of a
reflationary or a major asset allocation shift. Instead, the yield on the U.S.
10-year Treasury note is some 50bps below its recent highs.
2. The “real” yield, as measured by the TIPS market, has fallen 20bps since
July 9, to sub 1.7% ( a proxy for “real growth expectations”) — during
which the S&P 500 has rallied 16.0%
3. The Baltic Dry Index slid 10% last week and down 26% so far in August
and is now at a three-month low. Combined with the news of the sharp
25% falloff in Chinese copper imports in July, this could be an early sign
that the global inventory cycle has proven to be a one-quarter affair. (This
by no means is intended to detract from the positive secular story in
China — see the article in the Sunday NYT titled
Highlights China’s Ascendance
Corporate spreads have begun to widen out (by 24bps from the recent
lows in the investment-grade U.S. market and by nearly 80bps for the
high-yield sector) — these spreads, in the past, have proved to be reliable
leading indicators (in both directions).
5. Finally, not only do we currently have a puny sub 4.0% earnings yield on the
S&P 500, but look at the dividend yield — all the way down to 2.3%. At the
March lows in the market, the dividend yield was sitting at 3.6%, which
compared very favourably at the time to a 1.8% yield on the 5-year Treasury
note and a 2.8% yield on the 10-year note. Now, the 5-year note is 2.5%
and the 10-year at 3.6% — both back at a premium to the dividend yield.
The most appealing yield, however, may be Baa corporate bonds, which is
now at 6.5% or a juicy 8.6% in “real” inflation-adjusted terms.