Relative Valuations Favor Stocks Over Bonds

To wit, the yield on the three-month T-bill is currently 0.04%! That's about the same thing as just shoving the money under your mattress. I guess the only reason investors are opting for T-bills is that physically handling all that cash is just too much of a hassle.

Getting back to the model, with the S&P 500 at roughly 850 and forward earnings estimates of $80 (using S&P's estimates), the model shows stocks extremely undervalued. Before you jump out of your seat about that earnings figure, I'll address it. I've heard lots of estimates bandied about, so let's be conservative and ask what would happen if we punched in a $65 estimate for forward earnings on the market. The answer is that there is very little change. The model would still show stocks are being roughly 55% undervalued relative to what it calls fair value.

Let me make two additional points. First, I am the first to admit that this model is absolutely useless as a market-timing model. But as it reaches extreme levels, you should at least put it on your radar.

Second, think about the implications. A 10-year T-note currently yields 3.00% -- that's it. And that's your total return, no capital appreciation. Conversely, the dividend yield on the S&P 500 is about 3.3%, and the odds favor additional capital appreciation over the next 10 years. In that context, the asset allocation choice for the long-term investor seems pretty clear cut.

I am not trying to call a bottom here, but I do believe we will see some outsized rallies that investors would do well to participate in. I also realize that while there is a bubble in Treasuries, this is not the case across the rest of the fixed-income spectrum. Nonetheless, given the extreme low level of interest rates combined with low (and falling) inflation, one could argue for some P/E expansion once the Great Panic of 2008 subsides, and that makes equities the most attractive asset class right now, in my book.

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Know What You Own: In midday trading on Monday, volume leaders among stocks include Citigroup (C - commentary - Cramer's Take), Ford (F - commentary - Cramer's Take), General Motors (GM - commentary - Cramer's Take), General Electric (GE - commentary - Cramer's Take), Bank of America (BAC - commentary - Cramer's Take), Microsoft (MSFT - commentary - Cramer's Take) and Cisco (CSCO - commentary - Cramer's Take).

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At time of publication, Kahn had no positions in the stocks mentioned.

Jordan Kahn, CFA, is a portfolio manager with Bevery Investment Advisors, a Beverly Hills, Calif., money manager. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Kahn appreciates your feedback; click here to send him an email.