Today I got my first ever (illegal) financial spam e-mail from France, plugging the forthcoming 8% 6-yr bonds to be issued by a tiny provincial company,Cybergun, which makes airguns. The issue, aimed at retail investors with a minimum bond purchase of euros 100, comes out Oct. 11. Sender was an outfit called newsinvest.com which either picked up my email address from our www.global-investing.com website, or from legitimate French small cap sites from which we get news. This is of course a violation of both US and French investor protection laws. They even cited the AMP, a French savers’ protection agency!
David Bianco, head of U.S. Equity Strategy at Bank of America-Merrill Lynch writes that the S&P 500 EPS (earnings per share) yield is now equal to the average junk (HY) bond yield, which he calls a “disconnect”. Here’s why:
1) this has never happened before. “Until 2003, the IG bond index yield was higher than S&P 500 EPS despite a decline in long-term inflation expectations from over 4% in the late 1980s to 2.5% in the late 1990s as equity risk premiums remained low.
“2) HY bonds are in general more risky than S&P 500 stocks. Only a shift in long-term expectations from inflation to significant deflation can explain HY bond index yields equal to the S&P EPS yield. If [we] assume a long-term future inflation rate of 0%, then the current offered real yield on HY bonds and S&P stocks is both 8%. Is S&P 500 risk now equal to junk bonds?
“3) Only 5.2% of the S&P 500 market cap (68 stocks) has a HY bond outstanding. The HY bond index [is] far more sensitive to US GDP and US consumer spending than the S&P 500, which is more sensitive to global GDP and business spending. Record high S&P 500 EPS yield vs interest rates suggests stocks are priced for an EPS decline, unlikely without a US recession.
“4) For an individual company, expected EPS yields should exceed the expected (not promised) real yield on its bonds given the seniority of debt. If one assumes a 0% long-term future inflation rate, then the current S&P 500 EPS yield exceeds the IG bond’s real yield by 4%, which we find very attractive. We screen for S&P 500 stocks with net debt/market cap under 30% whose 2011E EPS yields exceed their long duration bond yield by more than 4%. 61 stocks are buy-rated by BofAML”
More for paid subscribers follows with actionable news from Brazil, China, Portugal, Mexico, Quebec, Britain, Japan, and Colombia about companies in the drug, oil, telephony, property, airplane, cement, IT, security, and mass transit businesses.
