| |
I understand the inverse correlation between stocks and interest rates and employment, but my hypothesis is correct. The higher the cost of labor, the more management will spend on capital that generates productivity. It's the capital versus labor theory. Up until the last five years much investment has gone abroad rather than remain here and be invested in capital. I believe the trend to invest here in capital will continue because computers are more productive than cheap foreign labor, especially when foreign political/currency risk is factored. Additionally rising shipping rates will further strengthen the trend to invest in capital here. Will rising labor rates hurt the service industry which is labor intensive? That is a mystery. But I believe that the employment numbers are biased downward. The inner cities are packed with unemployed who can be pressed into the service labor market. These people are apparently unemployable, but that is a myth. The employment numbers will bounce around as they are assimilated.
The inflection point is not fixed, but depends on the expected future return (or expected yield) on stocks, which is expected dividends plus expected capital gains. Right now, the S&P500 at 1068.47 doesn't yield much in the way of dividends and has discounted a substantial amount of expected future earnings, which means we're probably near fully valued +/- 50 points. If S&P500 moves up 50 points over the next year that's a yield of about 4% plus dividends. If 30 year bonds yield 6.5%, many institutional investors, especially insurance companies and pension funds, would prefer to lock in returns with bonds. There is a fear factor also at play where investors begin dumping holdings because they think others will. This happened when rates were last at 7.1% and it was a marvelous buying opportunity for both bonds and stocks. What worries me a little is bonds have fallen so dramatically from 7.1% to 5.9% and the market has risen only about 10% plus dividends. I really think the return should be a lot more. Buy bonds at 7% and watch the price of the bond increase 15%. What does that tell you about expected cash flows of the market? It tells me that the market is expecting cash flows to fall dramatically over the next year. The whole game is fraught with variables that are difficult to measure and understand. That's why I choose to ignore the numbers. I simply watch insider buys and sells, both in individual stocks and the market as whole. I let them do the dirty analysis. That's their job. And they don't have anyone to impress but themselves.
Jackson |
|
