E Things Are Different Post Lehman, Even If They Shouldn't Be

In Search of Yield Look no Further than DJII

The pre-tax DJII yield of 2.47% stands at 95% of the 30 year T Bond yield. After-tax the DJII yield is at a solid premium to that of the 30 year T Bond. This begs the question why anyone in a position to not hold bonds, by reason of trust indentures, would be mad enough to do so? The only explanation has to be fear even though there would appear to be “nothing to fear but fear itself”. With apologies to FDR.

The attraction of equities is so great and this, more than anything else, accounts for the huge “W” price formation that has developed over the past three quarters. A breakout from this on the upside appears to be the path of least resistance as irrational fear dissipates, perhaps in a hurry, and the next leg up of the long-term bull market should get underway.   

Being short the DJII is not an option, particularly when the hedgies are covering short positions as it appears they had to do so in October and November last and the latest run since February 11, 2016.  

No more waiting for the market to pull back. Dividends yields and long bond yields are the key to value and the dividend-discount value of the DJII is 40,607 while its price is only 17,926. As Oscar Wilde put it so aptly in 1890:

Nowadays people know the price of everything and the value of nothing.”

Investors should take advantage of the huge disparity between the two that has been in place since Lehman and buy equities that pay dividends which are growing.

Data Sources: U.S.. Federal Reserve, Dow Jones and Bloomberg

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Moon Kil Woong 5 years ago Contributor's comment

Dividends are much more stable, however, even these stocks will be rocked by a downturn caused by the Fed's low rate policy that has created an even greater asset boom than Greenspan. Sadly, this spike has made it that much more impossible for the Fed to correct the downturn when it hits. Rather than learning its lesson it seems to be actively trying to recreate the last downturn and Yellen seems to be fashioning another great depression rather than trying to take measures to prevent one.

Gary Anderson 5 years ago Contributor's comment

The Fed can't correct downturns and can't even create a booming society because it can't stop inflation anymore either.

Moon Kil Woong 5 years ago Contributor's comment

The Fed should be able to help downturns by lowering rates. I agree, the way the Fed has made things now this is impossible. Likewise, I agree the rise of inflation, although the Fed takes credit for it, is not in the Fed's power and limits their ability now. Worse even has been the rise in bond rates which preceded the Fed's rate hike. The Fed is now behind the curve.

Gary Anderson 5 years ago Contributor's comment

I don't think long bonds will react much to little rate hikes. The demand for long bonds is insatiable.

Gary Anderson 5 years ago Contributor's comment

What if banks think they can't make money funding non energy projects? Won't that slow the entire economy? Just wondering, Tony.

Tony Hayes CFA 5 years ago Author's comment

Dear Gary,

If the banks will do nothing but sit on their $ 2.5 trillion of excess reserves then long rates will fall further pushing up the dividend discount value of the DJII. At some point the banks will have to move either into the real economy or into the equity market.

For more thoughts on this please visit:


Kind regards


Gary Anderson 5 years ago Contributor's comment

I hope the banks do take a greater interest in the real economy, but not with so many toxic loans as last time. Thanks Tony.