Wednesday, May 21, 2008

Are stocks under-valued, or is our model wrong?

Our valuaton model for stocks is dependent on a historical relationship between the Earnings price ratio (what you "earn" by holding stocks) and the 10 year treasury bond (what you earn by holding bonds).

Historical Model: 10 yr bond - Earnings/Price ratio = 1.75%
Current relationship: 3.77% - 4.23% = -0.46%.

The last time that this relationship was negative for this long was before Reagan.

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