Doug Kass: 10 questions for the bears
A few days ago Doug Kass asked 10 questions for the bulls, and he now asks 10 questions addressed to bearish investors. The answers to these questions could help us determine the outlook for equities over the balance of the year and into 2012.
Here is his question on valuation:
“Over the last 50 years the S&P 500 has averaged 15x (while the yield on the 10-year U.S. note averaged 6.67% during that period). Today, the market’s multiple is about 12x on projected 2011 profits of $95 per share (while the yield on the 10 year U.S. note is only about 2%). The risk premium (earnings yield less corporate bond rates) is at a multi-decade high, placing stocks statistically (very) inexpensive on a quantitative basis. In fact (relative to interest rates), the U.S. stock market seems to be discounting 2012 S&P profits of around $60 a share, a level of profits that seems incomprehensible.
“Given that interest rates will be low as far as the eye can see, shouldn’t we give interest rate dependent valuation models more weight, and shouldn’t we be attracted to a 12x multiple within the context of a 2% 10-year bond yield?
“Finally, stocks are even cheaper today than in late 2008 relative to sales, cash flow and earnings.”
Click here for the full article.
Also, see the Yahoo! Finance interview with Kass below.