Media Star

If you caught Kudlow & Company on Friday, no, that wasn’t an imposter. It was really me! Thanks for all the e-mails. I was nervous, but once it started, it was a lot of fun.
Here are some interesting numbers that I wanted to pass along. Right now, a one-year Treasury note is yielding 5.18%. That means you can “lock in” the equivalent of 563 Dow points for the next 12 months. The important point is, while doing this, you’re greatly reducing your market risk.
Think about it. You can walk away from stocks right now, and say “enough of you.” You wouldn’t have to worry about oil prices or Hezbollah or elections, or any icky stuff like that. Those 563 points are locked in and it translates to a future Dow of over 11,430.
Don’t worry. I’m not saying that investors ought to pull up stakes and head for the hills, but I want to show you how the markets work. There’s a constant battle going on between the stock and bond markets for your money. When bond yields creep up, and earnings growth slows, investors rotate out of stocks and gobble up bonds. When the opposite happens, investors drive stocks higher.
Earnings growth has been impressive, and I think it will continue to be strong. But Price/Earnings ratios have been compressed. In fact, they’ve compressed and compressed, and compressed some more.
That’s a rough environment for stock investing. It’s like a runner trying to fight a strong headwind. Even very profitable companies have seen their stocks flat line. But the reason I still like stocks is that earnings are projected to grow by 14.1% for this year, and 10.5% for next year. Plus, that 10.5% number seems a little low. This means that the Dow could advance by, say, 7% and P/E ratios would still have compressed.
It’s never safe to expect earnings multiples to expand, but even if P/E ratios continue to fall, stocks can still beat bonds. The next thing to watch for is earnings guidance from companies for the third quarter.
This week, six more Buy List stocks report earnings. Brown & Brown (BRO) reports later today. AFLAC (AFL) and Fiserv (FISV) are up tomorrow. Fair Isaac (FIC) and Varian Medical (VAR) follow on Wednesday. Then Respironics (RESP) on Thursday.

Posted by on July 24th, 2006 at 6:46 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.