Muse Newsletter
Comment of the Day

September 02 2010

Commentary by Eoin Treacy

Muse Newsletter

Thanks to a subscriber for the July edition of the Muse Capital's fund report which is no less relevant today. Here is a section
As we wrote in May stocks remain very undervalued this being most recently confirmed by the Barclays Equity-Gilt study, which shows that dividend yields on shares are higher than gilt yields, for the first time since 1958 on an annual basis rather than just on a monthly basis.

That said despondency amongst many investors in growing all the time. Many investors have now made no money in over a decade and thus they feel quite rationally that they would be better in almost any asset class like property, bonds or even cash which is inherently less risky. That said as Warren Buffet famously remarked the rear view mirror is a lousy indicator of the future. If in 2000 you had looked at all asset classes you would have concluded you needed to be fully invested in technology stocks as the NASDAQ market rose a heady 24.5% compound over the decade. Needless to say that was exactly the wrong time to buy into tech shares.

Eoin Treacy's view This above cited premium of dividend yields on UK shares relative to Gilts mirrors a similar condition for US equities versus Treasuries mentioned by Bill Miller, in his article for the Financial Times which David posted yesterday. Rather than the much forecast collapse in equity prices, this condition has been created by the manic purchasing of Gilts and other sovereign bonds which has led to yields testing historic lows. Expectations of an imminent recession have dulled somewhat of late and current high prices look vulnerable to at least a reversion towards the mean.

Such acceleration is an ending signal of at least short-term duration. Prices had surged to top the 2009 peak and have encountered at least short-term resistance in the region of 125. The reaction is so far relatively similar in size to that which occurred between June and late July. Follow through with a sustained move below 124 would help to confirm that more than a short-term peak has been reached.

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