Tuesday, December 02, 2008
Let's face it, the last time Bill Gross, manager of the $800 billion Pimco Total Return Fund, was bullish on stocks was a long-time ago. Indeed, in 2002, he said stocks were on their way to 5,000. Shortly thereafter a bull market began that drove stocks, ultimately, to 14,000. But then again, why would a bond manager ever put in a good word for stocks. That's not his "job." His job is to tout bonds. Today Mr. Gross said that bonds were a better buy than stocks. I agree that corporate bonds and some preferred stocks, which have bond-like qualities, are very good values, and we have been nibbling on them and will continue to do so. Having said this, stocks, in my mind, are dirt cheap compared to riskless US Treasury bonds. For the first time since 1958, the dividend yield on the Dow Jones Industrials at 3.65% is higher than the 2.7% yield on a 10-year T-bond. In addition, the Dow Jones Industrials are now trading at a P/E of about 11 times operating earnings. If you invert P/E, you get what is called earnings yield. A P/E of 11 equates to about a 9.9% earnings yield. The importance of earnings yield being this high is that if you owned the averaged company in the Dow, you would be earning about 9.9% yield on your investment from the income alone, irrespective of any future capital appreciation. In the lexicon of Warren Buffett and big investors of his ilk, earnings yield is seen as owner's income -- the money they can make from buying the whole company. In short, stocks as cheap as they are today will at some point kick off a buying spree from big money players. The only reason it has not happened yet is because stock prices have not been able to find a bottom. When the bottom is formed and tested, I predict a wave of takeovers will begin that will carry stocks to higher levels than most people would now believe. These are my personal thoughts. Please do not act upon anything I have said here. I'm just passing on my thoughts for what they are worth. Please consult your own investment advisor.