Bill Miller Says Large Caps "Once In A Lifetime" Buying Opportunity.... And He Has Many Of Them To Sell To You
Bill Miller says: "U.S. large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951." That's funny, because according to our regression analysis (recreated below), the fair value of stocks is 750. But who needs facts when you have propaganda and a massively underwater stock position to offload. Bill Miller's desperation letter to sucker mom and pops in buying his dangling tech holdings can be found below, but here is a quick refutation of his point, which we discussed as recently as three weeks ago. And just in case there is any confusion, the dividend yield on the S&P compared to that of 10 Year Bonds, implies a fair value for the S&P of... 655! Perhaps Bill was experiencing a "Warren Buffett" moment and actually meant stocks are a once in a lifetime opportunity to short?
Bond Yields Imply The Fair Value Of The S&P Is 750
One of the less discussed topics by the propaganda machine is that
with bond yields approaching record yields, and in the case of the 2Y below
them, the S&P has no place trading over 1,000. There was a
time when bonds and stocks would correlate, and as bond prices surged,
equities would plunge and vice versa. Now that we live in HFT days where
stock values are completely disconnected from fundamentals, and even
the bond market, courtesy of the Fed's seemingly endless market
interference, it makes sense to extrapolate what the fair value of
stocks would be implied purely based on bond yields stripping away for
the Fed. Attached we present a very simple regression analysis between
simple 10 year spreads and the S&P, and the 2s10s (steepness between
the 2 and 10 Year) and the S&P. What both analyses indicate is that
stocks are approximately 30% overvalued, at least based on historical
regression patterns relying on yields to imply stock prices. Yet even
though this analysis is purely statistical, here is a simple extension:
with US stocks at about $13 trillion in market cap, if one assumes the
suggested 30% haircut the result is $9.1 trillion in fair market value.
Considering that the Fed has pumped $2.5 trillion in the form of
monetary stimulus, and Obama's various fiscal stimuli now amount to just
over $1 trillion, that explains the delta. Bonds are implying where
stocks should be almost to the dot, absent the $3.5 trillion pumped into
stocks by the administration and the Chairman. Fair value of
stocks, when stripped away from the printer and Congress, is 750.
Below is a regression of the S&P to the 10 Year:
And this is a regression of the
2s10s to the S&P:
Both imply stocks are overpriced
between 25 and 35%. And the Fed will do everything in its power for
stocks to prevent going back down to their fair value of 750, which
would nullify the entire impact of both monetary and fiscal
intervention. Yet should it fail, look for the next $2.5 trillion in QE
to push stock up once again to a 25% overvalued level compared to where
bonds should be. Of course, should the Fed admit defeat and print, bond
yields will likely drop thus resetting the baseline lower once again. We
wish our Central Banking overlords all the luck in the world as the
continues their attempts to fool US investors that stocks are even
remotely fairly priced. We, on the other hand, will stick with the
"alternative" central bank, which more and more are turning to - gold.
And just in case there is any confusion on how overrated stocks are, here is a comparison of 10 Year Yields versus the S&P dividend yield of 2.03%.
For those unsure how to read the chart, assuming static yields, for 10 Year UST bond yields to imply the dividend yield on the S&P is fair, the price of stocks has to drop from 1083 to.... 655!
In other words, please completely ignore the letter below, from yet another run of the mill book pusher.
Bill Miller letter: