It's that time of year again and I love it. I enjoy getting into the office pool and seeing how close I'll come to picking the winner of the NCAA Basketball Tournament. I don't follow college basketball that closely, so I Googled NCAA TEAM RATINGS. I got over 9,000,000 hits. Wow! Who has the time to go through all of that? Not me. So, I simply picked the lowest seed in every game.

I first wrote about this approach on March 19, 2004, and it worked very well. I used it again last year and it did OK. I didn't pick the big winner in either year, but I had a contender in the final game both times. Not bad for ten minutes of effort. I won 13 out of 16 games yesterday. I know anything can happen in any game, but I feel good about using a simple, sensible approach to getting to the final game of March Madness.

A FEAR INDEX.
An attendee at our recent Executive Premier Workshop in Phoenix asked why the Investment Climate has been unfavorable when stock valuations are so high. This is an extraordinarily good question and well worth some discussion.

Earnings, interest rates and inflation are used in both the analysis of the Investment Climate and in our stock valuation formulas. Each of these assessments tells a story of its own. The Investment Climate deals with trends and reflects the potential consequences of those trends. Stock valuation, however, deals with levels or magnitudes and quantifies their worth in terms of dollars per share.

In the Investment Climate, we track earnings, interest rates and inflation to see whether they are trending higher or lower. Stock Value rises when earnings go up and when interest rates and inflation go down. As shown in the table of Investment Climate Indicators, earnings are rising right now and that's good. Unfortunately, Interest rates have also been rising and that's bad. We got some good news from a benign CPI report this week and that makes the picture look better. Overall, the bad news on interest rates is making the Investment Climate unfavorable.

OK, that's fine, but it doesn't explain why stock values are so high. No, it doesn't, but we must remember that even though interest rates are rising, they are still low by historical standards. They are very low compared to earnings yields. The average earnings yield of stocks in the S&P 500 is 6.70%. This is 14.3% above the interest yield of 5.86% on AAA Corporate bonds and 40.7% higher than the yield on 10-year T-Notes. In addition, earnings are growing at an average rate of 11 percent per year. This is 87.7% higher than the yield on AAA Corporate bonds.

A better question to ask is, "Why aren't stock prices higher?" Ah ha! Now we have something to talk about. The geniuses on CNBC are going ga ga about the Dow going above 11,000 when they should be asking why isn't it at 15,000. The answer, of course, is that they don't have a clue of what stocks are really worth. We do, so why isn't the Dow at 15,000?

I have a theory, but that's all it is. I believe that stocks in this country are so undervalued because investors lack confidence in our leadership. One only need to go back to the Jimmy Carter era to see that earnings yields were much higher than interest yields back then even though interest yields were much higher than they are today. History tells me that EY goes above IY when things are not going well. So the ratio of earnings yield to interest yield is in fact A Fear Index.