Spike in 10 Yr. Treasuries price now equates to 66.7X the interest yield! YIKES! This is either “stupid on steroids” or the world is coming to an end. Dramatic spikes in the 10 Yr. “P/E Ratio” in the past have been a prelude to above average stock market gains.

The 10 Yr. Treasury now trades for 66.7X times its annual interest yield.  Without getting into why the rate is so low- recognize that the 10 Yr. “P/E ratio” is now almost 55 points higher than the S&P 500 P/E ratio on forward twelve month earnings estimates.  We have NEVER seen it so much higher than the stock P/E ratio going back to 1970.  There have only been 10 episodes when we have seen sharp 6 month spikes in the Treasury P/E ratio of 25% or more since 1970.  The current move is a spike of 48% in the ratio over where it was 6 months ago.  There has only been one time in the prior 9 spikes when the market was down 9 months later.  The market was up an average of 15% 9 months later in the 8 positive episodes.  The only negative period was in 2008.  If there is such a thing as “reversion to the mean”, then interest rates should be rising soon and / or the stock P/E ratio should be rising sharply very soon. Experience suggests the rising stock P/E ratio will be derived soonest by a rising stock market.  Jeb Terry, Sr. July 14, 2012

Aberdeen Investment Management – a guide service for micro-cap technology investment

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