Jeff Saut: don't get too bearish.

Jeff Saut of Raymond James in his weekly piece:

the recent economic data clearly shows the economy is slowing and that the mortgage/housing situation is worsening. In our opinion, this leaves the Federal Reserve with little choice other than to reduce short-term interest rates until the yield curve steepens. A steepening yield curve should help financial institutions recapitalize and ameliorate some of the financial contagion. Recently, the markets seem to be telegraphing this outcome with the price of crude oil, gold, commodities, etc. all trading higher. The last time the Fed reliquidfied the system like this, equities were over valued, while bonds, commodities, and real estate were under valued. Today the opposite is true. Indeed, using the Fed Model, which compares equities “earnings yield” (earnings ÷ price) to the yield of the 10-year T’note, shows equities’ “earnings yield” is more than 4% greater than the benchmark T’note’s yield (according to a study of 29 various countries compiled by Lehman Brothers). The last time such a wide dispersion occurred was back in September 1974 right before the equity markets rallied strongly. While other valuation metrics (price-to-book, price-to-dividends, price-to-sales, etc.) are nowhere near as “cheap” as they were in 1974, it is worth noting the Fed Model’s current valuation in light of the probability of lower short-term interest rates. We mention the Fed Model this morning for while we are cautious, we think it’s a mistake to become too bearish.

There are some individual stocks mentioned in the article, but you have to follow the link for that.