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Liquidity In Control



Editor's Note: Minyanville is a community of people who share an interest of fiscal literacy. As perspective is an important aspect of our daily routine, we share this email with hopes that it adds balance to your process.

Professor Succo,

I have my own multifactorial 'oscillator' (range -100 to +100) including things like VXO stretch, TRIN5 readings, Lowry's ten day, moving averages of the advance-decline, CCI, percent oversold of S&P 500 stocks, and some proprietary stuff.

For what it's worth, it's at -56 today, the most negative (overbought) since I started it in March. In fact at the March high it was -43.

So, I know that it's all good, but at least from my standpoint it's too
good. The Fed Model (1 / interest rate versus earnings yield) stuff is potent garbage plus the need for speed.


Minyan Ron


I think your work confirms the fact that it is pretty much only liquidity driving this market.

I am glad you brought up this thing called "earnings yield": taking the earnings (all projected that is) and dividing them by the index level. People then say, hey, stocks look more attractive than bonds! Morgan Stanley and Prudential currently are advising clients to own 100% stocks and zero bonds because of this.

What would you say if a company offered you a bond with a floating coupon based on earnings? Well, I hope you would understand that there is risk there, that the company would not pay the coupons you expect.

And that is the weakness of comparing the "earnings" yield of the S&P 500 to treasury or corporate yields: it does not incorporate risk.

And we have said this before (and Scott Reamer has made this his livelihood) that the risk premium investors associate with assets is the primary driver of relative asset prices.

Right now, investors are not associating much risk to stocks relative to bonds. We can see that in volatility as bonds have become more volatile than stocks.

Prof. Succo

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