If someone were to ask me my opinion on Junk Bonds at present, fool that he would be to ask me because I know real experts elsewhere, I would say this: They are good for a speculative trade, but dumb money has arrived.  Be ready to sell when the momentum fails.

High yield ETFs sell at decent premiums which leads to the creation of more units.  High yield closed-end funds — 73% trade at a premium.  You could issue a new high yield CEF, and come out at a lower premium than the current average.  I think I smell smoke.

Hmm….  If I owned junk bonds I would hold, and wait for momentum failure.  Buying now seems risky to me.  Most of the risk stems from global conditions.  We don’t know what will happen in the Eurozone. The rest of the risk stems from speculation.

I am a fan of junk bonds when nobody likes them, but there are too many fans now, and for bad reasons, most of which boil down to “I am old and I need income.  The fed has eliminated good choices for income, but I need income anyway, so get me yield.”

I had a conversation with a friend of mine in her upper 70s today where she asked “why are you suggesting I sell my funds that provide the most income?”  I said that I did not trust junk bonds at present and would look to lighten up, besides, the fund she owned has underperformed over the last 10 years.  If she really wanted income from junk bonds, I would look for a new fund for her.  So I am looking for a new HY fund, with an arm twisted behind my back.  It’s not the right idea, but she won’t listen.  (She’s not paying me.  I help my friends as best I can.)

The illusion of yield drives many older investors; they need income, and the delusional Fed thinks that low yields will yield prosperity.  It may make some people take more risk, but it will not yield prosperity.  There will be a lot of impoverished old people at the end of this, and they will be angry — at themselves, their advisors,  and the powers that be.

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This is not to say say that junk spreads are low; they are moderate to high at present.  But the spread relationship is manipulated by the Fed at present, making spreads seem high.  No market is truly free, but the Treasury market is affected by the Fed to a high degree.  The high quality bond market follows Treasuries closely.  Junk bonds don’t.  Junk bonds follow a hybrid of what Treasuries and common stocks are doing.  With stocks doing well, junk bonds run as well.

But we are still in an environment where more things can go wrong than right.  Until the US government figures out how to finance itself, we are in dangerous territory.  Given present political conditions, I don’t see how that works out; everything looks like a stalemate at present.

So be wary, and don’t overcommit to risk assets.  I would be neutral on risk assets at presemt, but ready to be bearish if there are problems in Europe or China.

Comments

• So they extend the period of accommodation by a little more than a year.  Sends financial markets flying, and especially TIPS prices, but will have little impact on the economy.  (Do they want the yield on 30 year TIPS to go negative?  Looks that way.)
• GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.  Inflation has moderated, but whether it will stay that way is another question.
• In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself.
• Also, the reinvestment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
• The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
• The Fed is out of good policy tools, so it will use bad policy tools instead, and for longer than before.

Questions for Dr. Bernanke:

• Why do think extending the period of accommodation by a little more than a year will have any significant effect on the economy, aside from stock and bond prices?
• Is it possible that you don’t really know what would have worked to solve the Great Depression, and you are just committing an entirely new error that will result in a larger problem for us later?
• Discouraged workers are a large factor in the falling unemployment rate. Why do you think the economy is doing so well at present?
• Why do you think that holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself?
• Why will reinvestment in Agency MBS help the economy significantly?  Doesn’t that only help solvent borrowers on the low end of housing, who don’t really need the help?
• Couldn’t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets?
• Isn’t stagflation a possibility here?  I mean, no one expected it in the ‘70s either.
• Could we end up with another debt bubble from keeping short rates so low?
• If the Fed ever does shrink its balance sheet, what effect will it have on the banks?

There have been a lot of articles dealing with use of corporate free cash flow lately:

• Dividends — get them, are they sustainable?
• Buybacks — do they add value or not?
• Acquisitions — are they overpaying?  What are the synergies?

But you never hear about the last one — internal investment for organic growth.  There is a simple reason why — it is silent as night.  No one makes announcements on it.  If done properly, it is as quiet as a plant growing.

Dividends are simple — is there enough free capital to issue them, and do the other three priorities?  It is useful to ask how much room there is to increase the dividend, and how well the company can grow its earnings at the present rate.  Companies that pay a dividend understand that equity deserves a return, and are more careful with their capital as a result.  They often grow faster than companies that do not pay dividends.

But I never analyze a company primarily on its dividend yield.  I would rather look at the full set of the drivers of value.

Buybacks are harder because we don’t really know what the company is worth, and buybacks add value when you buy below the value of the company, and lose value when you buy above it.  In the reinsurance industry, it is understood that buybacks above 1.3x tangible book destroys value.  The threshold will be different in other industries because the value of intangibles will differ — but for industries where intangibles mean little, that 1.3x tangible book can be a useful limit.

We can do pro-forma analyses on acquisitions to see if they add value or not.  The best simple proxy is how large the acquisition is relative to the acquirer.  Small acquisitions typically add value  because they add a complementary product, a new marketing channel or region, lower costs, or raise product quality.

Large acquisitions typically lose value because acquirers overpay and integration is difficult.  One exception: negotiated sales by large private sellers.  There is no auction, and no winner’s curse.

The best acquisitions are small, but lead to an increase in organic growth.  Also, the best acquisitions are early; the worst acquisitions are imitative and late.  Typically the best deals get done first.

But much as I like managements who think that the equity deserves a return, via dividends and intelligent buybacks, the hard stuff gets done in organic growth: how are last year’s profits being increased on the existing infrastructure?  In mature industries, this is tough, which is why they typically return free cash flow to shareholders.  But when you find a company that can eke out improvements in a mature industry, finding changes that no one else does, hang onto that company, because it is driving profitable change in the industry.  (And probably taking share from others…)

The less mature the industry, the more room for organic improvement, and thus more free cash flow is dedicated to internal investment, and less to rewarding current shareholders.  In such a situation, it pays less to look at dividend yields, and more at dividend growth, adjusted for ability of growth to be sustained.

-=-=-=- begin rant mode -=-=-=-

This is why I am not crazy about simple articles that say:

• Here are the five highest yielding companies of this industry, or
• Here are the seven highest yielding investments of [famous investor, or company], or
• Here are the companies that are buying back stock rapidly, or
• Look at the combined dividend plus buyback yield of these companies…

Everyone wants to squish value investing into one simple metric and from what I have seen, it does not squish well.  That is one reason why I try to view companies off of the competitive dynamics of the industry in question, and adjust the metrics accordingly.  After all, no matter how cheap a company looks in an industry that is obsolete, like newspapers, it is rarely a good idea to buy.

Thus, I am skeptical of the many articles that are spit out by inexperienced investors that have a computer and can crank out a few simple ratios, and spew out some canned facts about a company — these articles are widespread, and not limited to writers on Seeking Alpha, or Zacks, or those that submit to Yahoo! Finance, and they have some canned and wrong way of identifying competitors.

Avoid these articles, and instead, look for some degree of qualitative reasoning — some depth that shows genuine industry knowledge, and not an ability to automate the provision of web “content.”

-=-=-=- end rant mode -=-=-=-

Maybe I should be quiet.  After all, the provision of bad advice on the web is a good thing for me.  The more people are misled, the better value investors with broader skill sets do.

But that’s not why I started writing on investments.  I was not a professional investor until I turned 39.  I read widely, and spent a lot of time reading the works of many different investors as I worked to develop a theory that encompassed most of it.  No, I don’t see how to encompass all of it… and what I can encompass is understood with some amount of error.

My view as I write is not so much to give “buy this” or “sell this” ideas so much as to get people to think differently about investing.  I recently looked at the amount of business/economics/finance/investment books that I have read over the past 25 (post-academic) years, and it would fill 3-4 bookcases.

So try to think of the companies that you own, or might own, like businesses.  Look at the dividends, and to buybacks at bargain prices, and analyze sustainability and growth prospects, but also look at opportunities for growth.  Many aspects of value can’t be encapsulated in simple ratios or rankings, but sadly, the majority of articles touting stocks will do just that, and for the most part, they are useless.

There.  I said it.  But it needs to be said.  The practical question to me is whether I should stop submitting my content to sites like Seeking Alpha, which to me have become a lot of noise, and which I wish I could get Yahoo! Finance to allow users to filter out of the news stream.

I let almost anyone republish my content, so dropping anyone would be unusual for me.  Or, should I drop all external users of my content, and allow no republishing?  If you have a strong opinion, submit it in the comments.  I’ve been a nice guy with all of this, but if you have good reasons for exclusivity, let me know, and I will consider it.

But to close I will say, look at a full range of valuation and performance metrics when buying a stock, and consider the industry dynamics to understand what matters most given the maturity of the industry.  That takes some work, but guess what?  Working intelligently and hard leads to better profits in investing.

In the recent run-up, there was talk of the infallibility of equities.  This led to a higher level of variable compensation in the economy through option and share issuance and low pressure to raise fixed wages.  This was yet another form of hidden leverage, which hid the unprofitability of enterprises through share dilution.

That was written in 2001, after the flop of the Nasdaq.  I have sometimes said that bubbles are financing phenomena.  That’s true, but we can phrase it more generally: bubbles occur because of an asset-liability mismatch.  People go long a long-duration asset with short-duration funding.  The short duration funding can be borrowing, or vendor finance, or it can be a labor commitment in order to get equity or option awards.

People chase the long-term asset that seems so valuable, and give up time and interest (money’s version of time) to get it.  They give up more than they imagine for something of uncertain value.  In other words, a mania.  Give up something relatively certain in the short run for something with uncertain long run potential.

The attitude could be summed up with a conversation I heard in early 1998 between my boss and his best salesman, where the salesman said, “It’s a no-brainer, have the market pay your employees.”  His idea was that a constantly rising stock market would provide compensation to employees through stock awards, options, 401(k)s, etc., even as the market was straining at valuation limits.  It is probably a sign that the market is overheated, when market-based rewards become common.

Startups by their nature require that employees be flexible, and give up a lot of fixed guarantees.  What payments they receive at the beginning are small, and less than their work might deserve in most established contexts.  But there is the possibility of the big payoff, and the possibility of total loss.  The asset in question has a lot of variability, but the liability, the work that must be put in, is big, and may not vary much for success or failure.

In the tech bubble, many parties extended vendor credit because there were big profits to be made in the future.  Alas, but they lent to those with very uncertain prospects, and in March of 2000, the chain of leverage started to collapse, both for vendors, and for those that worked in the industries.  Just as hedge funds have a hard time holding onto good employees when performance goes bad, so it is for tech companies when financing dries up, and the stock price craters.  Rats desert the sinking ship.

“Free money” brings out the worst in people.  Do something small in the present and reap a huge future.  Sadly, it rarely works that way, except at the very beginning of a boom.  At the end of the boom, it is a maelstrom, with many people demanding to throw their money away in search of riches that will never be.

From a dated piece:

Crowd-following is common to humanity.  It takes a lot to stand apart from highly correlated behavior.  I’ve told this story before, but in late 1999, I was talking with my mother (a very good self-taught investor), she told me about many of my cousins who were speculating in tech stocks.  I said to her, “They don’t know anything about investing!”  My mom replied, “Oh, David.  You’re such a fuddy-duddy.  I just bought some Inktomi!”

Now, to set the record straight, that was just 1% (or less) of my mom’s assets, so an occasional flyer is acceptable.  Call it “Mad Money.”    For my cousins, it was most of their investable assets.  My mom is fine, and the fuddy-duddy did all right also, but the cousins swore off stock investing.

I am close to concluding that it is impossible to teach the average person how to do well in investing.  They don’t have the patience or the willingness to learn. (Few want to be called “fuddy-duddy” by their mothers.)

Getting rich quick is very rare, but it entrances some people several times in their lives, and rarely does it end well.  It is far better for most people to work hard in areas of the economy that are being rewarded, and invest excess cash in a mix of  stocks, long-dated investment grade bonds, money markets, and a little gold.

After all, it’s not what you make, it’s what you keep.

I can’t remember who gave me this idea, but sometimes I troll through the raw PPI data to get ideas on pricing power.  Here’s a list of the top 50 rising items in the PPI:

A few notes:

• Checks and Undergrades are chicken eggs of low grade.
• Breaker Stock are eggs that are slightly better, but not good enough for retail.
• Greige = Un-dyed
• Vealers = Calves, used for veal
• Barrows and Gilts = Hogs

When I look at the top 50 risers, I think the following are in demand:

• Specialty hydrocarbons
• Dried peas, beans, nuts, etc.
• Fertilizer
• Eggs
• Some types of meat

Most of it boils down to a demand for food and energy.  These are very basic things, and to me indicate that there is demand for the basics.  I think this demand is global, as middle classes arise over much of the globe, food and energy will become more expensive.  A pity that the FOMC does not consider what people need to be material to their monetary decisions, despite the fact that food and energy have always had higher inflation rates, and there are better ways to deal with volatility (median, trimmed mean).

But what about the bottom 50?

One note: Finfish = real fish, as opposed to shellfish

When I look at the bottom 50 risers, I think the following are not in demand:

• Melons
• Many other fruits and vegetables.
• Low grade paper
• Some fish and shellfish
• Copper and other base metals

PPI File 12-2011

The above file contains all of the data for all categories in the PPI report.  My view of the data tells this story, which is consistent with what I have been writing for the last eight years: Resources are in short supply relative to capital and labor, for the most part, but not absolutely.

I still think that energy is an investable theme, agriculture and fertilizer may be so also.

I’ve long admired ECRI for their timely and accurate forecasts, and their willingness to stick by their models when things don’t seem to be immediately going their way.  I have also appreciated their lack of willingness to divulge their model elements; my thoughts were, “Hey, it’s probably a simple model that no one has ever thought of.  Would I reveal the model if I were in their shoes.  No.”

But I’m not in their shoes, and I know one of the ECRI pair, so I asked for some insight into the models, which he coldly refused.  Okay, fair enough, I’m not a paying subscriber, but we had had good conversations in the past, so I thought I might have some relational capital, but no.

Tonight, I bring you my kludge that should be close to the ECRI Weekly leading index.  I am not saying that I reverse-engineered it because in econometrics there may be many fits with equal probability that explain the dependent variable well.  But here we go.

Yesterday, I read a post at the Bonddad Blog that said it had all of the variables for ECRI’s Weekly Leading Index.  I decided to gather the data, or reasonable proxies of it, and I ended up using the following variables to estimate the ECRI WLI:

1. M2 YOY % increase, SA
2. AAA yields from Moody’s
3. BAA yields from Moody’s
4. S&P 500 price YOY % increase
5. Initial Jobless Claims SA
6. Real Estate Loans from all Commercial Banks, SA YOY % increase
7. PPI for Industrial Commodities

I realized the the independent variables had to go up and down because the WLI does as well.  I normalized the variables against their long run averages, which would have no impact on the fit if the regression, but would enable sorting out the size effects.  Anyway here are the results:

That’s a really high R-squared (normalized F), with highly significant t-coefficients.  What is more, the coefficients sum to materially one in this regression that constrains the intercept to zero.

So, we have a good guess at what drives the ECRI WLI: two items, Corporate interest rates and industrial commodity prices.  The other items are significant, but less material.   BAA bond yields could be expressed as spreads against AAA yields, but the mathematical results would be the same.

So how does my model fit against the ECRI WLI:

If anything, my estimated model is more sensitive than ECRI’s model.  I could have a new business here, except that I have given the model away for free.

Comments are welcome.

Every now and then an idea strikes me, and I wonder if it would be worth trying.  Here’s one: much of the stuff that passes for analysis of stocks on the web leaves me cold.  It feels like a computer spit out a few ratios, with standard verbiage.

What if I chose some stocks at random, and analyzed them?

I set up a random selector for 10 stocks relative to their market capitalization.  My first group of 10 came out as follows:

1. Sun Life Financial Inc. (USA)
2. Vodafone Group Plc (ADR)
3. ORIX Corporation (ADR)
4. C.H. Robinson Worldwide, Inc.
5. Nippon Telegraph & Telephone C
6. Ms&Ad Insurance Group Holding
7. National Grid plc (ADR)
8. Greenhill & Co., Inc.
9. Carnival Corporation
10. TTM Technologies, Inc.

I’ve heard of #10, but don’t know what it does.  I have not heard of #6, despite my knowledge of the insurance industry.  The other 8 I know something about.  My inclination would be to go for the ones I know nothing about.  Odds are there is no coverage of them at all, at least in the US.  I would likely choose #6.  So what is it?

MS&AD Insurance Group Holdings, Inc. is a Japan-based holding company. Through its subsidiaries and associated companies, the Company operates four business segments in both domestic and overseas markets. The Domestic Non-Life Insurance segment is engaged in non-life insurance businesses. The Domestic Life Insurance segment is engaged in the life insurance businesses. The Overseas segment is engaged in the overseas related businesses. The Financial Service and Risk Related segment is involved in two divisions. The financial service division is engaged in the asset management, financial security, 401 k, alternative risk transfer (ART), personal loan and venture capital businesses. The risk related service division is engaged in the risk management, nursing care and asset evaluation businesses, among others. As of March 31, 2011, the Company had 121 subsidiaries and 28 associated companies.

It’s not a small company.  The market cap is $11 billion.  This one seems complex — looks like fun.

Run the random selector again, and I get this:

1. Gladstone Commercial Corporati
2. Alliant Techsystems Inc.
3. Cemex SAB de CV (ADR)
4. 3D Systems Corporation
5. Canandaigua National Corporati
6. Goodyear Tire & Rubber Company
7. PHI Inc.
8. Royal Bank of Canada (USA)
9. Edison International
10. Rayonier Inc.

I know something about 7 out of 10. Numbers 1, 4, and 5 are a mystery to me, and respectively, they are a REIT, a 3D printer company, and a small bank holding company.  I would probably choose #4 for the analysis, because it is more fun for me to analyze a nonfinancial company.  Maybe I should choose differently because I understand financials better than many.  Advice is requested.

I filter out companies with less than $10 million of market cap, and CEFs & ETFs.  Now, I’m not sure how much time it would take me to write these out.  If it’s too much, I won’t do it.  But if I did do it, how much interest would you have?

Now, the natural inclination is for those with some interest to write me, and those with no interest to be silent.  I’d really like to hear from those with no interest.  Regardless, let me know in the comments section.  Thanks.

I’m working on my quarterly reshaping — where I choose new companies to enter my portfolio.  The first part of this is industry analysis.

My main industry model is illustrated in the graphic.  Green industries are cold.  Red industries are hot.  If you like to play momentum, look at the red zone, and ask the question, “Where are trends under-discounted?”  Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted.  Yes, things are bad, but are they all that bad?  Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled “Dig through.”

If you use any of this, choose what you use off of your own trading style.  If you trade frequently, stay in the red zone.  Trading infrequently, play in the green zone — don’t look for momentum, look for mean reversion.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh?  Why change if things are working well?  I’m not saying to change if things are working well.  I’m saying don’t change if things are working badly.  Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes.  Maximum pain drives changes for most people, which is why average investors don’t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy — no one thinks of changing then.  This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year.  It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology names here, some energy some healthcare-related names, P&C Insurance and Reinsurance, particularly those that are strongly capitalized.  I’m not concerned about the healthcare bill; necessary services will be delivered, and healthcare companies will get paid.

A word on banks and REITs: the credit cycle has not been repealed, and there are still issues unresolved from the last cycle — I am not interested there even at present levels.  The modest unwind currently happening in the credit markets, if it expands, would imply significant issues for banks and their “regulators.”

I’m looking for undervalued and stable industries.  I’m not saying that there is always a bull market out there, and I will find it for you.  But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive.  I don’t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting.  The red zone is pretty cyclical at present.  I will be very happy hanging out in dull stocks for a while.

P&C Insurers and Reinsurers Look Cheap

After the heavy disaster year of 2011, P&C insurers and reinsurers look cheap.  Many trade below tangible book, and at single-digit P/Es, which has always been a strong area for me, if the companies are well-capitalized, which they are.

I already own a spread of well-run, inexpensive P&C insurers & reinsurers.  Would I increase the overweight here?  Yes, I might, because I view the group as absolutely cheap; it could make me money even in a down market.  Now, I would do my series of analyses such that I would be happy with the reserving and the investing policies of each insurer, but after that, I would be willing to add to my holdings.

Do your own due diligence on this, because I am often wrong.  One more note, I am still not tempted by banks or real estate related stocks.  I am beginning to wonder when the right time to buy them as a sector is.  As for that, I am open to advice.

(Note: Nominal = Real + Inflation)

This article is meant to tie up some loose ends, and suggest the outline of what might be a clever way to do asset allocation.  Who knows?  At the end, there might be a surprise.

I’ve done two articles recently on the effects of inflation expectations and real interest rates on two asset classes in the short run — gold and stocks.  Tonight, I want to extend that two directions, to bonds and cash, and whether the effects aren’t different in the long run.

First, bonds in the short run.  Interest rates rise, bond prices fall.  Interest rates fall, bond prices rise.  Doesn’t matter whether that comes from real rates rising, or inflation.  That’s pretty simple, because most bonds are mostly interest-rate driven.

Second, cash in the short run.  Leaving aside financial repression, for the most part cash assets return in line with inflation.  Cash is simple… so what happens in the short run is also what happens in the long run.

Okay, now let’s lengthen the time horizon.  In the long run, gold keeps pace with inflation, nothing more, nothing less.  Bond returns rise if interest rates rise over the long term because of higher reinvestment rates for cash flow, and again, it doesn’t matter whether that comes from inflation or real rates.  Opposite if interest rates fall.

Think of 1979-82: by the time bond yields were nearing their peak levels, bond managers were making money in nominal terms with rates rising because the income from the coupons was so high, and it set up the tremendous rally in bonds that would last for ~30 years or so.

In that same era, stock multiples collapsed.  But eventually stock prices stopped going down even with competition from bond yields, because the earnings yields were so large that book values roared ahead, supporting prices.  That also set up the tremendous rally in stocks that would last for 18 years, until it finally overshot, giving us the present lost decade-plus.

But high rates, whether from inflation or real rates, presage high future bond and equity returns.

One nonlinearity here: in the intermediate-term, rises in real rates kill stocks, but rises in inflation nick stocks.  Why?  Inflation may improve nominal revenues at the same time that it raises the cost of capital, but rises in real rates indicate capital scarcity, raising the cost of capital with no increase in revenues.

=-=–=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-==-=–=-=-=-=-=-=-=-=-==-=-=–==-=-=-

Harry Browne proposed a “permanent portfolio” back in 1981, composed of equal portions of cash, bonds, gold, and stocks.  Reading about the idea in Barron’s in the late 1980s, I did not think much of the idea.  I think differently now.  After my last few articles on related issues, mentioned above, I realize that each of the four asset classes react differently to macroeconomic stimuli in the short run, with a lot of overshooting.  A mean-reverting strategy has a lot of power in this context, and it is double-barreled, in that it lowers volatility and raises returns.

My clients will receive the full details on this as an asset allocation strategy, but my readers have enough from this that if you want to do a little work you can figure this all out yourselves.

All that said, I am surprised at how well the strategy works.  Too easy, and easy strategies rarely work.

Eddy Elfenbein wrote a good post recently on the stock market versus inflation expectations.  When I read it, I said to myself, “Wait, is the relationship between nominal and real rates really 1:1, or is it more complex?”  Though it is not certain, the regressions that I ran indicated that 1:1 was not falsified by the data.  The regression:

Inflation expectations determined the much of the value of the S&P 500 for the last nine years.

And you can see the relationship here as well:

The short answer is “yes, inflation expectations have driven stock valuations for the last nine years.”

I’ve been spending time on issues like this for a variety of reasons, and I’ll try to explain them in the near term, but that’s all for now.