No. of Recommendations: 9
"Just as after the long 1970's bear, people get used to a new level of valuations, and they seem normal. In 1980, a market p/e of 8 seemed normal, and only people like Richard Russell and Warren Buffett (and me)were saying that it was a good time to buy stocks." - EddieLuck

Things are significantly different today than in 1980. If you will recall, in 1980, the 10 year Treasury bond yield was soaring. By 1982 it peaked at almost 15%. Doing the math, the P/E of the 10 year treasury bond in that era was 6.7:1. If an investor could get 15% on a government bond, why would stocks be a great investment? That makes no sense.

However, as the Reagan economic plans took hold, the Treasury bond yields started down and they have continued down until this year. There have been some slight reversals along the way, but the trend has been down and down and then down some more. We were looking at a Treasury yield below 4% just a few months ago...the P/E of the 10 year Treasury was 26.7:1! Growth stocks with a P/E of 30 still look decent compared to that figure. The question is, "Where will the money go?" I think I know exactly where it will be going.

Back in 1982 the money was flowing to the high yield bond market. That is what drove the yields down. Heck, I was buying high grade municipal tax-free bonds yielding over 11%! Why risk buying stocks?

But, today the picture is completely different. Who will buy 10 Year treasuries at 4% when there are blue chip, growing businesses paying a 4% dividend or better? There are many, many great businesses out here paying swell dividends with P/E ratios below 8! The driving force is toward these businesses and toward growth stocks with escallating earnings potential. The key is not what is going on today but what will be going on in six months to a year. As the economy continues to strengthen, the earnings should ramp up as the "lean and mean" businesses flow the revenues through to the bottom line.

In my opinion, today's P/E ratios are bogus reference points because there is no way to know what is going to actually be there a year from now. If the earnings do as they very well may, a P/E of 30 today might well be P/E of 10 in a few years. It all depends on the business and the economy...but mainly it has to do with the alternatives. Even if the 10 year treasury bond kicks back up to 6%, that represents a P/E of 16.7:1...still pretty high compared to a great growth stock with increasing earnings.

What will actually happen? That is the real question. I can see it both ways. The economy can falter and earnings can disappear once again...or the economy can continue growing at a decent clip and the earnings picture may be very rosy. I just know that I am not going to bet against the momentum I see today. With the low interest rates and the booming growth, stocks seem like the best bet right now. Especially, the ones that were unfairly driven down along with the overpriced ones. The market threw the babies out with the bathwater as everyone fled the bubble and ran to bonds, driving the yields to 50 year lows. The key today is to buy the real babies. They are still out here if you will just look for them.

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