Monday, April 21, 2008

reasons to be optimistic about higher stock prices in the future

yes, for the time being, earnings estimates will continue to come down, but valuations of equities in general remain very inexpensive, especially relative to interest rates. the so-called ‘Fed Model’, which compares the earnings yield (the inverse of the P/E ratio) on stocks to the yield on the 10-year U.S. Treasury. equities are cheaper today than they were at previous market bottoms in 10/02 and 3/03.

i think that stock prices will be higher by the end of the year and, more importantly, i believe that they will be significantly higher three-to-five years out. in addition to factors outlined above, reasons for my continued optimism include:

1) Tremendous amount of pessimism gripping investors
2) $3.4 trillion that is sitting in money market mutual funds
3) Lack of significant insider selling (and the increase in actual buying) by corporate executives
4) The relative health (outside the financial and housing sectors) of corporate balance sheets
5) The buy list for value investors such as The Prudent Speculator newsletter now contains a near-record 200 undervalued stocks
6) The fact that emerging and other foreign markets have not proved to be much of a safe haven for those who have shunned U.S. equities.

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