Investors Getting Excited About ERP Analysis - Business Insider

Yesterday on CNBC, bullish hedge fund manager David Tepper held up a chart from the New York Fed, which basically showed that relative to bonds, stocks are very cheap, and that therefore it made sense to continue to buy stocks.

As we noted later in the day, a number of investors are using the same rationale to invest in stocks. Big names like Birinyi, Damodaran, and Goldman's Jim O'Neill are also keen to look at stocks this way (which is called the Equity Risk Premium).

In his latest "Closing Print" email, Mike O'Rourke of JonesTrading expresses surprise that so many investors are all making the same relative-value argument.

There were two metrics today over which the market became excited.? We highlighted the Fed study about Equities being inexpensive when it came out.? The number of investors who have piled on to this analysis is remarkable.? As we noted last week, the NY Fed even noted it was not on account of the earnings or dividend outlook, but it was the low interest rate outlook.? ?We find that the equity risk premium is high mainly due to exceptionally low Treasury yields at all foreseeable horizons.?? Thus stocks are inexpensive because investors are extrapolating the current artificially low interest rate environment into the future indefinitely.?

None of this is to say that stocks are going to fall, but O'Rourke sees the same thing that we did, that with stocks continuing to push to all-time highs, a lot of big names are making a relative-value case, rather than a case based on fundamentals.

Source: http://www.businessinsider.com/investors-getting-about-erp-analysis-2013-5

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