Thursday, August 5, 2010

The Debts of the Spenders: The Stock Bulls Do Have a Case. Kind Of.

The stock bulls have a fair value case. I know its not trendy to talk fundamentals anymore but bear with me. With interest rates so low, the P/E values don't look so bloated anymore.

If interest rates are double digits, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4% (which happens to be the rate of a 30 year treasury). In other words, a dollar of future profit becomes that much more valuable.

There has also been much talk about Bernanke restarting the bond purchase program again. This is synonymous with steady low rates.

And many companies are sitting on cash hoards. That means they wil either have to invest in plant/equipment, labor (hah!), or start giving out bigger dividends.

In fact, with bond yields so low and some asset classes like mortgage securities trading above par, then it seems buying a bunch of blue chip stocks that yield consistent divvies is the way to go. Just stuff them in your IRA and wait for capital appreciation. Few financial advisors will tell you this because they can't make any commissions off this strategy.

I also urge readers to look at this article for some historical context. Note the year it was published:
*Credit goes to Kauneongal for the IRA strategy.
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