Comments on: Exploiting ZIRPonomics in a Worldof Ultralow Interest Rates

By: Catherine Wood

Catherine Wood — Tue, 10 Jul 2012 13:54:49 +0000

As you correctly point out, there are two possible ways in which the misvaluation of equities in relation to bonds could be resolved: either through equity prices going up, or through bond prices going down. In reality, we’d expect a combination of both. But we still think equities are likely to do well, in part because the valuation gap is so big. Even if Treasuries moved back to a yield of 3.5%, they would still effectively be valued on a PE of 28 times—twice the price/earnings multiple for the S&P 500 (the historic PE is 13.7 times—the level of PE that we’d be dealing with if earnings remained flat). As the chart in the blog shows, gaps of this size have been rare in the past.

By: Drew Dimond

Drew Dimond — Fri, 06 Jul 2012 16:05:49 +0000

I have read several articles on the same argument comparing stock valuations to the risk free rate of return. The conclusion is that stocks are undervalued based on the gap between earnings ratios and Treasuries. I would be interested to hear opinions regarding if anyone is considering that maybe that it isn”t that stock”s are cheap rather that bonds are expensive. Ten year treasuires last year were around 3.5%, due to monetary policy and most likely European purchasing of US treasuries that bonds yields are artificially low. If treasuries were left to find their equilibrium and rise, and earnings were flat, would that change the valuation metrics used in the article?

By: bryan murphy

bryan murphy — Fri, 06 Jul 2012 12:51:45 +0000

well done, would like to hear more