Wednesday, October 22, 2008

Stat of the Day: S&P 500 Earnings Yield at 9.88%



Considering that the 10 year note is at only 3.76%, this is a considerably wide and unheard of spread between the note and the S&P500 earnings yield. This is the widest spread in the last 30 years and maybe in history if I could find a report going back that far.

What this data shows is that anybody invested in a S&P500 stock would earn 10% on his investment while only earning 3.76% on a safe government note. Meaning that if credit was available, the market would see a high amount of leveraged buyouts. Borrow using cheap credit and make money on the spread. Basically a continuation of the private equity buyouts that began in 2002 when the market first got really cheap. Bankstocks.com has a nice little article that summarizes the bullishness now being seen in the private equity realm due to these very, very attractive valuations. When Henry Kravis and Steve Schwartzman become bullish on valuations, you should expect a big flurry of deals to be announced. Its only a matter of the credit markets freeing up.

Low valuations will continue to be a big theme. Lots of talking heads on CNBC continue to discuss the potential for another 20% drop in the markets. For that to happen, the markets would reach valuations never seen before. Thats a gamble worth taking.

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