By This Measure, Stocks Are Still Incredibly Cheap

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		Tech Entertainment Wall Street Markets Strategy Sports Lifestyle Politics Europe Video Latest Monday, February 27, 2012 By This Measure, Stocks Are Still Incredibly Cheap Citi's Tobias Levkovich has become a bit skeptical of this rally, but overall he's still quite bullish on where stocks might head. One reason for that? The spread between the S&P 500 earnings yield vs. the 10-year Treasury rate. The basic idea is that if you imagine that stocks could theoretically pay out 100% of their earnings as dividends, you can easily compare stocks to bonds based on yield. If the S&P had an average PE of 20, then you could say that you're getting a 5% earnings yield. If bonds were only paying 1%, then you're obviously getting way more meat buying equities, with a fat 4% spread between them. Anyway, it turns out that using this method shows that stocks are still incredibly cheap, even after their runup. In the chart above, Levkovich is using the S&P 500 10-year rolling earnings (so it includes the earnings collapse of 2008/2009), and comparing that to the yield on the 10-year, which remains remarkably low, as we've been pointing out all year. The gap is currently between 2 and 3 standard deviations away from the average (going back tio 1971), and based on this, the average 12-month gain from here is a stunning 24.0% for equities, according to Levkovich. You can see the value in this technique. In 1999, when stocks were near a peak, the spread was exactly the opposite, as investors were getting FAR more yield from risk-free Treasuries than they were from equities. Bottom line today: Even with the runup, and some yellow warning signs, the outlook is extremely bullish.  Read » Also On Money Game Today: UK Chancellor: 'The British Government Has Run Out Of Money' Warren Buffett's Greatest Fear: An Inevitable Nuclear, Chemical Or Biological Attack On The US The 10 Big Stocks That Mutual Funds Are Crazy About A Complete Guide To Greece's Selective Default Next Month Advertisement CHART OF THE DAY: The People-Snowed-In Index Is At Its Lowest Level In A Decade CHART OF THE DAY: A Major Warning Sign From Small-Cap Stocks CHART OF THE DAY: Doug Kass Says This Divergence Is A Big 'Warning Sign' Share this: Facebook Twitter Digg Reddit StumbleUpon LinkedIn The email address for your subscription is: ipat39@gmail.com Change Your Email Address | Unsubscribe | Subscribe | Subscribe to the Money Game RSS Feed Business Insider. 257 Park Avenue South, New York, NY 10010 Terms of Service | Privacy Policy

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