Interestingly, the combination of lower stock prices and higher Treasury prices caused the dividend yield on the S&P 500 to exceed the yield on the 30-year Treasury bond for the first time since 1958. That means that a shareholder of the S&P 500 needs no capital gains to outperform the holder of long-dated government bonds. And maybe, just maybe, those valuation metrics are what caused Vivan Watsa, CEO of Fairfax Holding (FFH) and one of the few investors who have played this downturn to a tee, turning $500 million into more than $2 billion in the past year, to remove all of his downside stock hedges.

Specifically Mr. Watsa stated:

“Given the unprecedented decline of the equity markets during the past several months, we felt it was prudent to promptly inform our shareholders that we closed out our equity index total return swaps this week and effectively eliminated our equity portfolio hedge. While we believe the recession may be long and deep, we also believe that stock prices may have already discounted the worst of the economic decline. As value investors, we are finding an incredible number of investment opportunities across the world.”

For the past four weeks, my firm has also spoken about finding numerous investment opportunities, citing things like The Wall Street Journal story that stated there are currently 1 in 10 listed companies trading for less than the value of the cash and marketable securities on their balance sheets, as well as a list of companies that have increased their dividend every year for the last 20 years.

And then there was this email of 2 weeks ago from one particularly bright portfolio manager: “I now have over 100 stocks on my watch list that are trading at, or below, book value and with superior fundamentals. Stocks, therefore, are too cheap and I m starting to buy for the first time this year.”

Despite such investment opportunities, last week the DJIA slid below its October 10th low of 7882 that I had expected to mark the short/intermediate “low,” thus activating downside targets between 7200 (approximately the 2002 low) and 7500 (50% retracement of the 1982 to 2007 Dow Wow.)


Click to enlarge

On Thursday and Friday of last week, the DJIA traveled well into that target zone, leaving only 13 stocks in the S&P 500 above their respective 200-day moving averages, and extremely oversold, as can be seen in the chart on page 4 from our friends at the invaluable Thechartstore.com. The Wednesday through Friday morning swoon lopped 1000 points off of the senior index, leaving participants in “crash mode.” But Friday afternoon ushered in the “Geithner Gotcha.”