Monday, June 12, 2006


My favorite investment advisory service is produced by Don Hays A three day free trial is available at Hays Advisory. The cost is a couple of hundred per year or so, but well worth it.

Hays presents a number of measures that show psychology, valuation and monetary policy. Right now, valuation is screaming buy, buy, buy. The IBES valuation model shows stocks to be undervalued by 31.2%! On the other hand, as we all well know, monetary policy is throwing cold water on the market which in turn has put the psychology indicators strongly in the buy camp. The futures markets indicate that there is about a 75% chance that the FOMC will throw more cold water at the June 29th meeting. However, this could change in a hurry. More signs of slowing inflation or more weakness in the worlds economies could make the FOMC decide to hold rates where they are.

Look at bond market rates today and you will see that investors are paying no risk premium to lock in their funds for 10 to 20 years. The market says that interest rates are going down soon. Maybe not by June 29 but soon.

The following is a list of Hays indicators that are in the "green buy zone":

NYSE Volume relative to NASDQ Volume
Rydex Bulls to Bears Ratio
ARMS 10 day movement measure
ASII Bulls to Bears
OEX Put to Call
ISEE PUT to Call
Total Put to Call (historically high numbers)
26 Week Bond Momentum
Rule of 20
Inflation Indicators-Gold, Silver, Oil, Copper, Lumber

Again, the monetary numbers are not so good. A flat yield curve with little growth in money supply. This would be quickly cured should bonds continue last weeks rally.

The rule of 20 is a simple but powerful little gage. It is currently in a rare and beautiful spot. Here is the way it works, you subtract the ten year bond rate from 20 and compare to the S&P forward earnings yield. The spread is currently screaming BUY STOCKS!

Another way of presenting the data is that the 10 year bond is currently paying 4.97% while the average big stock is paying a 7.23% earnings yield. Sure, many folks, particularly in tax free accounts, might prefer 4.97% in cash over 6% projected capital gains. However, 7.23% tax advantaged is a big number over 4.97%. Rational long term investors must go for the 7.23%.

I hope the "old members" did not mind a repeat of things already said in the past few days. I repeated some things because I want to make it absolutely clear that there is a huge opportunity available. It is a rare day to see such wide gaps in valuation. There will be convergence. Either interest rates are going to go up very much or stock prices are going to go up very much. The current slow down in housing, autos and emerging country economies will not support many more interest rate increases. The third possibility is that interest rates will come down some and stocks will go up some. There is room for a lot of movement! My bet is on stocks, BUY THE BULL!