it is interesting to note...

[gapcap1]

the 10-year yield/dividend yield ratio is ~0.15 basis points

[Pascal]

the 10-year yield/dividend yield ratio is ~0.15 basis points

Indeed.

This tells us that investors are looking for safety and not yield.


Pascal

[ilonaross]

So I did a quick search looking for a graph of this ratio and nothing turned up with the search terms I used. Is there a table or a graph or some sort of call letters that we can check out to see historical averages?

tnx

[gapcap1]

hope this helps...

[ilonaross]

Holy crow. Not only is the ratio odd, but both yields are extraordinary by comparison with their historical values. You keep hearing things about this or that yield being at an all time low, but this picture is definitely worth a thousand words.

Also, gotta wonder whether debt-fueled buybacks figure in to the yield chart or whether the buybacks are in companies that don't throw off cash.

Tnx.

[adam ali]

Always think it wise to look at lower grade bonds as well govies when doing these sorts of comparisons. Don Hays used the "Fed Model" in his allocation work and got scrunched in 2008 because he failed to account for the "flight to safety" modality.

[ilonaross]

Would you please explain further, especially about that model?

I took a look at the div yield and price history of HYG and they've gone in opposite directions since 2009, so it's followed the same trajectory as govies, although HYG tanked in 09 and its yield peaked in April 09.

Right now HYG price is down and in the past two weeks, yield is up.

How should this all be interpreted? And lastly, is HYG the kind of stand-in you're talking about for lesser quality bonds? And how do we use this information?

tnx

[gapcap1]

when this ratio is negative, it is only natural that money moves out of treasuries and back into dividend stocks - pascal

the ratio went negative in 09 when the current bull market (recovery) began and again in 2012 prior to the second major leg of the current rally

bought 19's a little while ago

[nickola.pazderic]

you getting long here?

[gapcap1]

you getting long here?

that would be es

bought 19s and 30s, scalped some out 36, 38.25, & 41.75, then touched the position up @ 43.50, 51.25, 53.50, and covered the bulk of the position @58.50 - went home long 2 units and just bought 43.50s to add

[nickola.pazderic]

Thanks. Had my eye on the small caps, too. But we need to break the pattern of lower lows and lower highs; it seems to me. I'll be interested to read what Pascal writes tomorrow.

[Harry]

that would be es

To be clear, when gapcap1 stated 'es' he was referring to S&P futures.

[adam ali]

Would you please explain further, especially about that model?

I took a look at the div yield and price history of HYG and they've gone in opposite directions since 2009, so it's followed the same trajectory as govies, although HYG tanked in 09 and its yield peaked in April 09.

Right now HYG price is down and in the past two weeks, yield is up.

How should this all be interpreted? And lastly, is HYG the kind of stand-in you're talking about for lesser quality bonds? And how do we use this information?

tnx

It's actually quite simple: in unstressed markets, you would expect the dividend yield of stocks to follow bond yields (meaning as bond yields go down, the yield on stocks becomes more attractive relatively speaking, and stock prices move up to reflect that).

However, when investors begin to question the fundamental underpinnings of markets it is reflected in a shift away from riskier assets (lower grade bonds and stocks) and a shift toward safety, i.e., into government bonds. Which is what we're seeing currently.

So you can't always look at govies and dividend yields alone; spreads in other parts of the credit market may be blowing out (in a flight to safety move) and that tells you to be wary of ANY risky asset (in this case, stocks). This subtlety was missed by many who used the traditional "Fed Model" to purchase stocks in 2007-8 and got crushed.

[gapcap1]

It's actually quite simple: in unstressed markets, you would expect the dividend yield of stocks to follow bond yields (meaning as bond yields go down, the yield on stocks becomes more attractive relatively speaking, and stock prices move up to reflect that).

However, when investors begin to question the fundamental underpinnings of markets it is reflected in a shift away from riskier assets (lower grade bonds and stocks) and a shift toward safety, i.e., into government bonds. Which is what we're seeing currently.

So you can't always look at govies and dividend yields alone; spreads in other parts of the credit market may be blowing out (in a flight to safety move) and that tells you to be wary of ANY risky asset (in this case, stocks). This subtlety was missed by many who used the traditional "Fed Model" to purchase stocks in 2007-8 and got crushed.

yeah, timing is everything. but, anyone acquainted with the triumphal trip of dimson, marsh, & staunton would convince you that the 50,000 fold rise since 1899 in the index was not due to unusual anomalies related to expectations, but was due to the return on capital of 15% and compounding . such a compounding is particularly alluring during times when the earnings price ratio and the return on capital are so much greater than the long term interest rate, as would be consistent with theory and the Fed model. someone will eventually, put their finger in the dyke, and the market will be bought. it's one of the immutable laws still left standing.

[adam ali]

yeah, timing is everything. but, anyone acquainted with the triumphal trip of dimson, marsh, & staunton would convince you that the 50,000 fold rise since 1899 in the index was not due to unusual anomalies related to expectations, but was due to the return on capital of 15% and compounding . such a compounding is particularly alluring during times when the earnings price ratio and the return on capital are so much greater than the long term interest rate, as would be consistent with theory and the Fed model. someone will eventually, put their finger in the dyke, and the market will be bought. it's one of the immutable laws still left standing.

Don't disagree - only that a broader view of credit markets should be taken into account when using this kind of model