A TIME TO REMEMBER--1982!

Twenty three years ago, in the spring and summer of 1982, the real earnings yield of the S&P 500 exceeded the real earnings yield of the long-term treasury bond. What happened next was an explosion in stock prices. Small cap stocks lead the way in the summer of 1982 and by August the big caps sky-rocketed. The average S&P 500 stock by the end of 1986 had grown at a five year compounded rate of 19.87%! Say it again brother!

THE AVERAGE S&P 500 STOCK APPRECIATED AT A COMPOUNDED RATE OF 19.87% DURING THE FIVE YEARS ENDED IN 1986!

IN THE TEN YEARS FROM 1982 THROUGH 1991, THE AVERAGE S&P 500 STOCK PRODUCED A RETURN OF 17.59% COMPOUNDED!

Although stocks yielding more than bonds is a rare event but they have for the past several months. This is the main reason that I keep writing BUY THE BIG BULL BOOM BUBBLE.

The spreads are not large so most folks ignore them. The recent real S&P 500 earnings yield has been around 2.78%. The real yield (or inflation adjusted yield) on the long-bond is 2.39%. Both of these numbers are probably low because the CPI index over-states the inflation rate in times of easy substitution. The exact numbers are not the important point. The important point is that because a fundamental economic law is that money flows to where it gets paid the most and because stocks are paying more than bonds or real estate, money is starting to flow into stocks.

How far can stocks go? If there were no growth ahead and stocks simply returned to the historic ratios, stocks would go up by 35 to 40%. Odds are very much in favor of growth in the economy--it happens about 8 out of 9 years. If stocks need to go up 35% without any growth and if growth occurs 88% of the time, don't you think it is a good time to buy stocks?

Put another way, in 1982, the last time we had this inversion of rates, a $100,000 investment in the average stock grew to more than $240,000 in five years and to more than $550,000 in ten years. Say it again brother!

THE LAST TIME WE HAD THIS INVERSION OF RATES, A $100,000 INVESTMENT IN THE AVERAGE STOCK GREW TO MORE THAN $240,000 IN FIVE YEARS AND TO MORE THAN $550,000 IN TEN YEARS!

The answer to the readers question, "why can't I make a steady 10%?" is that you must make the occasional 30% profit in order to compensate for the occasional 10% loss. The most important factor in getting a decent long-term average return is in not missing the "sky-rocket in flight". The ten year period above included black Monday, October 19, 1987. I must say it again--IN THE TEN YEARS ENDING IN 1991, THE AVERAGE COMPOUDED RETURN ON LARGE CAP STOCKS WAS 17.59% AND THIS AVERAGE INCLUDED THE "GREAT CRASH OF 1987".

BUY THE BIG BULL BOOM BUBBLE, THE FROGS ARE GOING TO BOIL IF THEY DO NOT JUMP OUT OF THE POT! (EXTRAORDINARY LEVELS OF SHORT SELLING IS GOING TO BURN THE SELLERS BADLY IF THIS MARKET GOES HIGHER--SHORT SELLERS NEED TO BUY STOCKS NOW!)