Sunshine Pumper Strategists

Chris Pavese's picture

In a short series titled The Truth About Valuation we explained that:

Fed Model has been embraced by Wall Street cheerleaders as a simple and
“reliable” method for estimating stocks intrinsic value.  Note that
simple is the key word in that last sentence, as it conveniently takes
less time to calculate which provides strategists with much more time to
shake their pom-poms.  In any event, the so called Fed Model is a
straightforward comparison of earnings yields (the inverse of
price-to-earnings multiples) and treasury yields.  When earnings yields
are higher than treasury yields, so we are told, stocks are attractive
and vice versa.  Sounds intuitive and is certainly easy to grasp.”  But,
there is almost no
relationship between the two data sets (earnings yields and Treasury
yields) with the notable exception of the period since around 1980. 
What an amazing coincidence that this is the only period that “the
street” has chosen to examine.”

The “Sunshine Pumper Strategists” are
out in full force today, with earnings yields on stocks spiking higher
than those available on bonds.  So we were pleased to see that Ron
Griess at The Chart Store
provided us with a couple of charts this morning that illustrate this
relationship (or lack thereof) over time.  Ron’s long term perspective
is critically important here, as any monkey can easily pick out a few
bananas that accurately predict the market at any given moment in time. 
But we would not invest our client’s capital (or our own for that
matter) based on one monkey’s bananas.  Instead, we’d prefer to focus on
those few characteristics (i.e. normalized valuation) that consistently
add value as a predictor of long-term returns, throughout history.  As
such, I sent Ron an email this morning complaining that if one more
strategist tells me that stocks are cheap because their “earnings yield”
is greater than the yield on bonds, I may puke.  As Ron was concerned
for my stomach, he  was kind enough to grant us permission to share this
charts with our readers.  And also offered up the following colorful

many of the “sunshine pumper strategists” draw their conclusion first,
then look for supporting evidence. I know of one, who is a subscriber,
and knew there must be others out there who were pounding the table with
the earnings yield argument because I was getting requests for charts.
I’m sure most of them are showing a chart of 10 or 20 years to make
their “positive” case to BUY stocks. I know another
portfolio-manager-type subscriber was very disappointed to learn that
yet another reason to “buy ‘em” did not hold water if one looks at “the
rest of the story,” i.e. far enough back in history.”


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pachanguero's picture

During a hastily-called Rose Garden event during which the sound system failed him, President Obama attempted today to communicate to the American public that his administration remains on top of the economic crisis.""""""

Obama is just throwing punches to keep his rope a dope going a few more rounds.  As he water boards America for the New World Order banksters the world is slipping into a real bad depression.  CNBC is licking the Fed's boots but the market is not buying it.

QE to the moon is the only answer which is really just going to blow us up further.  We are fucked and I don't remember anyone giving me a kiss


MiningJunkie's picture

Stock certificates are printed on newsprint and the last time I looked, newsprint was selling for $1.86/lb.

Bartanist's picture

Somebody forgot to tell the HFT arb computers. They apparently do not take dividends into consideration when adjusting prices across the market.

william the bastard's picture

Pisani just finished the sunshine pump-o-rama re equity yields. Barf bags are located behind the seat in front.

Boilermaker's picture

SPG is down 0.03% today.  Mmmmm, phantom yield...mmmmm

Boilermaker's picture

That's not true.  Leo hasn't posted all day! 

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