James Grant in his "Buy beer, sell bonds" article in the May 28, 2010 edition of his excellent Grant's Interest Rate Observer said the following:
"Mr. Market delights in switching labels. When he thinks nobody's looking he sticks the "risky" label on the safe asset, and the "safe" label on the risky asset. Yet, not infrequently, it's the supposedly risky asset that winds up preserving capital or even delivering capital gains. It all depends on price."
Isn't that the truth? The super safe U.S. Treasury is priced for perfection with a cellar dwelling yield of around 3.20%!!! Just think of the price investors are paying for an asset that no one concedes will be in short supply going forward and is denominated in a currency that can be created with the stroke of a key and in incredible amounts. Mr. Market has put the label of safe on it.
If you listen to the geniuses at CNBC like Maria Bartoroma (I don't know the exact spelling of her last name.), who told everyone watching NBC nightly news on Friday that "Her advice" is for people to step aside. Maria, NBC and CNBC are now advising investors. One would suppose that they and Mr. Market have put the label of "Risky" on stocks.
How risky are stocks? Well back of the napkin simplistic analysis using Bloomberg.com for data puts the following points out there:
The Dow Jones Industrial Average has a trailing P/E of 14.54 and a forward estimated P/E of 12.94. This puts an earnings yield (I did not calculate Enterprise Value, and just doing the rough calculation of dividing earnings and earnings estimates by price.) of 6.877% on the trailing P/E and a 7.72% on the forward estimated P/E. The Dow has an average dividend yield of around 2.75%.
We can now compare some apples so to speak. The Dow Jones offers an earnings yield of around 7% and the 10-year Treasury bond has a yield of around 3.20%. Of course the bond is before tax and the estimated earnings yield is after tax, we can get a better comparison by adding about a third to the earnings yield to compensate for the corporate taxes. We then get an estimated earnings yield for the Dow Jones Industrial average of around 9% versus the 10-Year Treasury Bond Yield of around 3.20%!!!!
Wow, 9% vs 3.20%!!!
Of course, one has no potential for future growth for possible inflation protection and the other has none. One has a historical yield of around 5.5 to 6% (How much is that going to hurt when yields move back towards normallcy? Can you say Ouch!!!) and that was before debt to GDP was at these levels and multiples when one adds in Obamacare, social security and of course the two wars.
Has Mr. Grant who some may remember accurately pointed out the mess in housing and when no one was calling for a strong reversal in the economy in the depths of the gloom and doom and put it in his letter and on the front page of the Wall Street Journal's Saturday Money and Investing Section directly confronting consensus and people like Nouriel Roubini (Again, I don't have the exact spelling.) and the so-called CNBC All-stars made another valuable point?
I think he is right about Mr. Market!!! Just take a look at some of the Dow Components like CVX, KO, JNJ and KFT to get an even more pronounced view. Definitely, think about going and subscribing to Grants Interest Rate Observer. In my opinion, its advice is far superior to the "Financial Pornography" of CNBC. www.grantspub.com
Happy investing to all.
(Editor Note: Maria's last name is "Bartiromo")