From the Wall Street Journal (Europe) The Source blog:
Dollar bears should soon be hiding their faces.Last week the Journal's Mark Gongloff (we are fans*) looked at the issue in "Are Bonds Expensive? Stocks Cheap? Both?":
A combination of soft U.S. economic data, over cautious Fed officials and sliding Treasury yields have all raised expectations of more quantitative easing.
As a result, the dollar has been sold heavily over the last few weeks as investors have turned elsewhere for higher returns.
However, the whole dollar-selling exercise has been overdone.
Chances that the Fed will actually ease policy further at its open market committee meeting on Tuesday are slim, to say the least.
Even if the Fed does surprise financial markets with a move, there is growing evidence that other central banks will have to follow suit.
This is hardly a reason for bears to continue selling the U.S. currency against other majors.
One of the unusual and telling developments in recent weeks has been the diverging performances of U.S. Treasurys and U.S. equities.
While Treasury yields have edged steadily lower to new record lows, with the two-year yield reaching a new nadir of 0.51% this week, equity markets have continued to rally.
Now, it looks more and more that the buoyant equities are right....MORE
Bonds continue to trounce stocks, sending mixed signals to investors and raising the question: Are stocks too cheap or are bonds too expensive?When Mark was Markets Editor at the Online WSJ he was also proprietor of their energy blog, Energy Roundup. He gave us a link the first week CI was on the WWW and helped get us off to a running start. We said thanks:
After consistently lagging behind bond performance this year, stocks appear historically cheap compared with bonds, offering investors reason to favor stocks, particularly if they are optimistic about the economic outlook. But stocks may be cheap because the outlook is dim, meaning bonds—from Treasurys to corporate debt—could continue to outperform for the foreseeable future.
So far this year, the stock market's total return is slightly negative, while normally staid investment-grade corporate bond returns are up nearly 8%, according to Bank of America Merrill Lynch indexes. Even risk-free Treasury returns are up 6%.
Stocks made up some ground with a 7.1% rally in the Dow Jones Industrial Average in July. But such stock rallies have stalled repeatedly in recent months as weak economic data have outweighed signs of hope from corporate earnings. The yield on the 10-year Treasury note has dropped below 3% as investors scramble for safe havens, and the demand for corporate bonds is booming.
One way to compare the relative value of stocks and bonds is to compare their yields, or the amount of cash each asset generates on a regular basis.
Bond yields are easy to see; stock yields are trickier. Many analysts like to use something called an "earnings yield," which is the inverse of a company's price/earnings ratio. While imperfect, earnings yield measures how much cash a company generates for itself and its shareholders as a percentage of its price. As with bonds, higher yields represent lower prices, and vice-versa.
At the end of trading Friday, the earnings yield on the Standard & Poor's 500 index was 6.6%, based on the past four quarters' operating earnings, the highest since 1995.
The gap between that yield and the 10-year Treasury yield—a measure of the cheapness of stocks relative to Treasury bonds—is the widest about 30 years, according to Jason DeSena Trennert, chief investment strategist at Strategas Research Partners.
To Mr. Trennert, this suggests that stocks are too cheap, bonds are too expensive after a strong rally this year, or both.
"People are so risk-averse now that a tremendous potential opportunity is being created in stocks," he said.
He warned, however, that it could take time for that opportunity to be realized, given the high levels of uncertainty about the economic outlook. "The reasons we're seeing this are secular in nature," he said. "They reflect very long-term problems that are not easily fixed."...MORE
WSJ Energy Roundup
We got a mention in Mark Gongloff's WSJ Energy Roundup yesterday.
The reasons we linked to the Energy Roundup from our first day?
"Gongloff, a master of any medium he chooses...Energy Roundup will be a case study of the craft."
-COLUMBIA BLOGGING REVIEW
"Energy Roundup has a lot under the hood, tight and fast". -CAR AND BLOGGER
"Energy Roundup-It's a smash, number one with a bullet!" -BlogBillboard
"Energy Roundup is intelligent; To use a tired cliche, a must read."
-NEW YORK REVIEW OF BLOGS
"Just two weeks on the scene, Mark Gongloff's WSJ Energy Roundup is redefining what a business blog should be." EDITOR & BLOGGER.
Seriously Mark, thanks for the link-back.
Edited 6:34 p.m.-and Kudos to the wsj.com staff.
