Juggling Dynamite

Good article this week on the sales pitch hogwash served by the long-always-stocks crowd urging equities are cheap and attractive today relative to bonds. (Actually they say this everyday at every price, since they are always in the business of selling people the dream of long-term equity returns.) Most often (and especially during secular bears) the dream proves a nightmare for gullible clients.  The much espoused “Fed model” is one of many misleading arguments used to herd clients into risk.

“Is it true that stocks are cheap “when compared with bonds”? That’s the line on Wall Street. If you haven’t heard it from your broker yet, you will. Indeed, in a recent report, some investment strategists from big brokerages, in their enthusiasm for stocks, argued that they were at record lows compared with bonds…

Consider what that means in practical terms. Bond yields are low today because the market is expecting very low growth and low inflation. But if that materializes, corporate earnings will rise more slowly than in the past, or may even fall. That’s grounds for caution, not optimism, about stocks. It’s also the case that today’s profit margins are near record highs. The only way earnings are likely to grow from here is if inflation picks up. If that happens, good luck with those bonds, whose prices would plummet.

When I heard someone pushing the Fed model recently, I started to think about overseas comparisons. By the model’s logic, in early 2008, both the Italian and Greek stock markets were an absolute bargain. Both sported earnings yields of about 10 percent, more than twice the yield on their country’s 10-year bonds. Oops…”

See: Stocks are cheap? Logic says otherwise

This morning stocks are rallying again on the fumes of bailout funds expected out the IMF meetings this week. Nonsense aside, Spanish bond yields are back above the completely unpayable level of 6% this morning. At the same time, the Spanish stock market (IBEX) ended just 1.3% above its March ’09 closing low and 3.1% above its intraday March ’09 low. March 2009 lows remain within the realm of probabilities for the other highly correlated global stock markets. Equity investors who have no exit plan in advance, place their financial health in grave danger.

James Bianco, president of Bianco Research LLC, Lincoln Ellis, managing director at Linn Group, and Barry Knapp, head of equity strategy at Barclays Capital Inc., talk about Spain’s non-performing loans and the outlook for the nation’s auction of two- and 10-year debt.  They also discuss why this game is likely to blow out the next phase of the global credit crisis.  Here is the direct video link.

Wall Street wants to free itself from the past decade’s regulatory reforms, and Eliot Spitzer says President Barack Obama is too willing to oblige. The former New York attorney general says, with the passing of the JOBS Act, banks are at the public trough once again. Here is the direct video link. At the end of the clip, click the play arrow again for the second part–a very lucid discussion of the counter-productive ideas behind the President’s much heralded JOBS Act.