Tuesday, November 8, 2011

The market was pressured in the early going and then again at midday.

It broke but did not break. A very good win for the bulls today.

Many are focusing on the ever-rising yield on the 10-year Italian bond, which is at 6.68%. Other maturities are higher as well.


1. An imbalance between demand and supply in the U.S. housing market as a large shadow inventory of unsold homes would weigh on home prices (and on consumer balance sheets).
2. Divided and divisive political leadership unable to agree to and enact hard-hitting, pro-growth fiscal policy.
3. Structural disequilibrium in the labor market, which would lead to an elevated unemployment rate.

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is."

-- Warren Buffett

The S&P 500 sells at roughly the same price as it did in December 1998 (13 years ago).

As a result, I do not feel as though I am paying up for stocks today.

Current valuations are attractive. Risk premiums (the earnings yield less the risk-free rate of return) stand at a multi-decade high, placing stocks, in theory, even cheaper than at the March 2009 bottom. Looking out longer term in history, over the past 50 years the S&P 500 has averaged a 15.2x P/E multiple while the yield on the 10-year U.S. note averaged 6.67%. Today, the S&P 500 trades at only 12.5x (2012 earnings) while the yield on the 10-year U.S. note stands at only 2.05%.

Right now, the hardest trade is not to buy and trade opportunistically; the hardest trade is now to buy and hold.