For the cynics (the ‘wait-and-see’ crowd) this table should be an eye-opener.  Just to recap:

• On Sept 29th I posted Asset Allocation points to RALLY!
• On November 17th I recommended Euro-Crisis is just noise – BUY American!

Forget the headlines regurgitating old news, and rest assured being patient with your investment strategy will deliver crappy rates of return.  If you remain in denial, you’ll miss the rally that’s already begun.

Over the past couple months (as I’ve promised) the U.S. market is leading the pack to prosperity.  With Long Treasuries yielding 3%, it will take a few years to earn what the North American (particularly the U.S.) stock markets have provided equity investors (>10%) in two short months.

And for those about to argue it’s only because of the US$ being strong……that’s the whole point isn’t it?  Way back in the late Spring of this year I wrote the following:

There’s a number of trends I’ve discussed in earler postings that I believe support the turnaround in favour of the buck:

• as economies improve globally they require raw materials, and these are priced and traded in US$.
• investors are leaving emerging countries (where they invested mostly in local currency bonds), and must therefore channeling their funds into more developed countries (both equities and bonds) – like the United States?
•  most important of all, NOBODY likes the U.S. dollar, which means it has nowhere to go but up (who’s left to sell them?)

Although most countries’ stock markets (Latin America is up there), excepting the Far East and Japan are showing signs of life – despite an overall lousy November – a skewing of assets invested in favour of U.S. equites was and is still the most prudent bet early in this brand NEW global cycle.

You might ask why I have been and still am so confident in a strong equity market?  About a year ago I was mulling over the outlook for interest rates – my own issue was that so much liquidity destruction has taken place, beginning with the meltdown of asset backed securities, that it could take much longer to restore global money supply than might be expected.   This has proven to be true in spades, and the subsequent Eurozone fallout from global deleveraging (exacerbated considerably by ill-timed austerity measures from the consumer to corporations and governments)  continues to dampen efforts to restore liquidity.

The good news is that first the other central banks finally realized that Europe can only be stabilized with outside help (see my post Why Europe needs America!) and there’s finally rumours that the IMF will “show Europe the money.”

As my bond guru friend keeps insisting (and he’s been right for longer than I can remember) there’s still no immediate threat of rising global interest rates – efforts remain directed at just loosening the noose – the global financial system will be borderline choking for some time to come.  This explains in part why yields on risky assets are so whacky.

The relative yields of risky assets like equities (stock markets), corporate and long term government (safest) bonds are usually easy to understand.  Subject to higher volatility of course, stocks should have an earnings yield above or below the long term Treasury yield depending on the outlook (expected future earnings) for corporate profitability.  Corporate bonds should pay a premium to long term government bonds since they are riskier.

The earnings yield on U.S. stocks (and some other stock markets) is NUTS at current levels.  One of two things can happen……bond yields rise dramatically or the earnings yield on equities comes down.  I’ve already suggested that bond yields MUST remain low, so that means the earnings yield (EARNINGS/PRICE) should fall.  How?

• Earnings forecasts coming out of a recession are always way too pessimistic.   Rising earnings will actually increase the yield………therefore…..
• Stock prices must rise even more dramatically than corporate earnings for the earnings yield to decline to more normalized levels.

ERGO……..BUY EQUITIES!

As a reminder….it makes sense to sell HI and buy LO!  Watch video for a chuckle.