Overvalued Stocks, Treasurys Make Case for Market-Timing

Monday, 22 Oct 2012 08:10 AM

By Dan Weil

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Both stocks and Treasurys are near record highs, but several statistics indicate they are well overvalued.

So investors might want to consider a strategy that many experts view as heresy — market-timing, writes Wall Street Journal columnist Brett Arends.

Market-timing in this case would involve selling U.S. stocks and Treasurys at these lofty levels.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

As for the signs of overvaluation, when it comes to Treasurys, the 10-year yield recently stood at 1.78 percent. But 12-month consumer price inflation is running at a higher rate — 2 percent through September.

That means investors are paying the government in inflation-adjusted terms to lend it money.

On the stock front, have a look at the price-to-earnings ratio based on average earnings for the last 10 years, which should smooth over aberrations. The measure has stood around 17 for the past 130 years, according to The Journal.

But now it reads about 22, a level that prevailed before the stock crashes of 1929 and 2008-09.

"Equities and bonds in America are seriously overvalued," Andrew Smithers, chairman of financial consultancy Smithers & Co, tells the paper.

So if investors are going to dump some stocks and Treasurys, what should they buy instead?

One possibility is gold, says David Rosenberg, chief strategist at Gluskin Sheff.

Gold should benefit from expectations that the Federal Reserve’s massive easing will spark inflation and from recent outbreaks of global trade tension, he wrote earlier this month in a report obtained by Business Insider.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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