Dear Investors: China's Problems Are Your Problems
Investing for a China Crisis
Other warning signs include the high level of stock-market capitalization in relation to gross domestic product. At 141 percent, it’s almost back to the mid-2000s housing-bubble peak of 144 percent, which was only surpassed at the end of the dot-com bubble in early 2000, when it reached 174 percent. Furthermore, betting that the stock-market rally will persist, investors are shifting toward stocks with low price-earnings ratios. Sector rotation often occurs at market peaks.
Later, I forecast a drop to a 3 percent yield; then, too, many forecasters thought I was crazy. And my prediction of declining Treasury bond yields has been continually challenged, even though yields have fallen on balance for more than three decades. Beginning in 1981, a 25-year, zero-coupon Treasury, rolled into another 25-year bond annually to maintain the maturity, beat the S&P 500 by 5.5 times on a total return basis.
DYI Comments: Despite the sub atomic low interest rates bond investors have a high probability of out performing the stock market for monies invested today and held for the next ten years. We are once again back in bubble territory. This of course will not end well as DYI is forecasting a 45% to 60% decline for U.S. stocks from peak to bottom.
Our EYC Ratio continues to alert investors that over the long haul bonds are the better play. Until valuations improve stocks are no bargain.
Ben Graham's Corner
Margin of Safety!
Central Concept of Investment for the purchase of Common Stocks.
"The danger to investors lies in concentrating their purchases in the upper levels of the market..."
Stocks compared to bonds:
Earnings Yield Coverage Ratio - [EYC Ratio]
EYC Ratio = [ (1/PE10) x 100] / Bond Rate
2.0 plus: Safe for large lump sums & DCA
1.5 plus: Safe for DCA
1.49 or less: Mid-Point - Hold stocks and purchase bonds.
1.00 or less: Sell stocks - rebalance portfolio - Re-think stock/bond allocation.
Current EYC Ratio: 0.91
As of 06-1-14
PE10 as report by Multpl.com
Bond Rate is the Moody's Seasoned Aaa Corporate bond rate as reported by the St. Louis Federal Reserve.
DCA is Dollar Cost Averaging.
DYI
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