Random Finish

After listening to bubblevision this morning (that would be CNBC), I was left wondering how the pm's don't believe it is a bubble in bonds (but stocks should move higher); how the 4% mortgage rate is being discounted as useless; and why nobody is talking about stocks - that last point was somewhat amazing to me that there was little mention on what one is buying in equities! If you add in the fact that Bank Credit Analysts have taken a more balanced appraoch (taking risk off the table and allocating more to bonds) and the argument this morning that lending is not happening - the latest figures from the fed show a turn - one has to wonder how much more bearish this market can become! The simple fact that people are buying bonds with 10yr yields at 2.50% tells me all I need to know - there is panic in the streets and stocks are cheap.

Now I don't normally give valuation arguements for stocks. I used largely price and time based models for the given asset. But there is one measure I use that I find very useful and it is the PEG ratio. Assuming the market earns $92 on a forward basis which is roughly 20% higher that the current level of earnings in the market, you arrive at a trailing PEG of roughly .75 - essentially the market is trading cheap to growth because the market participants do not believe that number is attainable. Further, if you add in dividends per share, you come to a number that is trading at less that .60x growth - a major discount for stocks. Last point: 10s at 2.50% is about 36x earnings or 4x the current adjusted PE plus dividend figure. Bottomline - too much money has flowed into bonds making stocks extremely cheap!

So what resolves this? I think the stabilization of the Nikkei 225 over in Japan and the selloff of the Yen globally. These two variables right now, in going the other way, are putting severe pressure on the Japan economy even with super low rates across the spectrum. They are bordering on technical default as many banks (I believe) own equities and the rising yen has choked off exports driving down taxable revenue thus making it more difficult to service the enormous government debt load (200% of GDP). A default by Japan would cause a major run into treasuries initially - then I believe a move out of them as debt all over the globe has risk priced into it.

Will the default happen? Not sure. I need to do some more research on the topic which I will do when I start my two week vacation tomorrow. Thus there will be very few posts between now and the week before labor day as I venture off to the island for some R&R.