Comments on: A Reason to Sell Stocks Amid the Rally

By: David Harris

David Harris — Wed, 10 Dec 2008 14:37:49 +0000

In reference to Richard Bernstein’s observations, has anyone looked at negative 10 year periods on a real-return basis as opposed to nominal? That would expand the data set.

By: David Merkel

David Merkel — Wed, 10 Dec 2008 05:01:38 +0000

Grantham is assuming that the financing difficulties go away, and is assuming that profits recover in my opinion. My model uses 1-year and 10-year trailing earnings. (note to Shiller fans — the 1-year earnings have a larger impact).

Regarding the 3-month treasury yield , the series doesn’t go back that far. 12-month inflation is probably a good proxy.

By: Daniel S

Daniel S — Wed, 10 Dec 2008 03:04:31 +0000

What happens if you add in the 3-month Treasury yield?

I suggest the 3-month might send a significantly different message than the 10-year, for two reasons. One reason is empirical, the other theoretical.

The empirical reason to use 3-month yields: Pu Shen at the Federal Reserve showed in 2001 that the spread between earnings yield and 3-month Treasuries was significantly predictive of stock market performance — and that the spread with 3-month Treasuries was more predictive than the spread with 10-year Treasuries. (Pu Shen’s paper is online: http://www.kc.frb.org/Publicat/Reswkpap/PDF/RWP02-01.pdf)

The theoretical underpinning: the 3-month Treasury is distinctively the “flight to liquidity” security, and thus can be a better measure of the ratio of fear versus greed in the market than the less liquid 10-year Treasury.

If you add the 3-month Treasury yield into the regression, what changes?

By: mb

mb — Wed, 10 Dec 2008 03:01:34 +0000

we blew 2 major bubbles in the last 10 yrs, and in real dollars are flat, in inflation adjusted dollars are strongly negative.

we had ZERO real GDP growth over last decade.

Now, someone please step up and explain why our stock market should grow significantly, current depression aside?

The answer is , there is no reason. Select companies involved with china and indias growth will have tremendous success though.

Anyone simply parroting statistics from other time periods is a fool. There are too many variables to be considered that arent.

By: bill

bill — Wed, 10 Dec 2008 01:48:42 +0000

i think the reason that dp has a negative coefficient could be a high correlation between it and ep (which you would expect). if so, ep is ‘taking credit’ for the effect of dp, and has a too highly positive coefficient.

By: James Cullen

James Cullen — Tue, 09 Dec 2008 23:12:50 +0000

GMO’s last asset class forecasts were pretty bullish on stocks:
http://seekingalpha.com/article/106905-grantham-expect-12-annual-return-from-quality-u-s-equities-actively-managed

Maybe you’re both right, and we’re just in for another crash eight or so years out…

By: gloomboom.com

gloomboom.com — Tue, 09 Dec 2008 19:01:54 +0000

This is getting really scary! I think I will follow your advice and sell.

By: David Merkel

David Merkel — Tue, 09 Dec 2008 18:42:22 +0000

Ben — Nominal.

By: Ben Williams

Ben Williams — Tue, 09 Dec 2008 17:27:00 +0000

Is the forecast return real or nominal? (I presume nominal since inflation is an input, but just wanted to check.) Thx

By: matt_swansojeiker

matt_swansojeiker — Tue, 09 Dec 2008 16:31:23 +0000

Wow. That would not be good news. We’re starting to merge here with another of your other key themes, the Looming Pension Crisis. If the principles of the the Pain Trade hold true, that 2.26% return will come with gut-churning volatility and could be further eaten away by transaction costs, depending on your investment horizon.

But as we attempt usher the largest demographic swell our nation has ever known into its retirement, I suppose it’s natural we’ll observe some model-busting anomalies.

Looking forward to the results as you noodle this through…….