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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: pater tenebrarum who wrote (97670)4/24/2001 5:43:43 PM
From: Box-By-The-Riviera™  Read Replies (1) of 436258
 
he had to throw a bone in there somewhere.... or he'd be out of a job all together... look who he works for!

here's a Hussman comment to richard russell today about the market, its valuation, and risk/reward vs. risk/free rates.... (jeepers do those still exist?)

"You mentioned the New Era notion about stocks warranting a zero risk premium. In addition to your own reservation, here is mine. No market that earns part of its long-term return in the form of growth should have a zero risk premium.

"As a simple example, suppose that bonds yield 6%, and stocks are priced to deliver a long-term return of 6% as well (say, 5% as long-term earnings growth - which would produce the same rate of price growth if the P/E stays constant - and 1% in dividend yield).

"Now suppose that bond yields rise to 7%. Well, for a 30-year bond, that 1% increase in yield would drive the price down by just over 12%. But look at stocks. Since the long-term growth of earnings hasn't changed, the only way to kick the long-term return up to 7% is to drive the dividend yield from 1% to 2%, implying that stocks would fall by half.

"The lower the yield on a long-term security, the more volatile prices must be in order to keep that yield competitive. And the only way to dampen that volatility is to build a risk premium.

"All of which underscores your views about the risk of a dividend-less market. If long-term interest rates continue to press higher, I suspect that the current 1.25% dividend yield will not stay at that level for long.

"Best wishes,

John Hussman."
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