On page 14 of my book, Stocks, Strategies & Common Sense, I said, "Money goes where money grows. Stock prices go up when corporate earnings go up, and go down when interest rates go up." Hmm, we've had a stellar earnings reporting season in April and another in July. The S&P 500 average EPS is now 55% higher than it was this time last year and interest rates have been hitting historic lows. So why is the SPX down 2.24% so far this year? Shouldn't stock prices have gone up?

The short answer is yes, but things have happened which have affected investors' psychology. Right now, investors are fearful. They don't know what's going to happen and fear is dominating their investment decisions. People know their money isn't going to grow much at 1-3% interest rates, but they're afraid of losing what they have.

The WSJ article, "The Great American Bond Bubble," which I cited in my 08/20/10 essay, stated that investors buying bonds with 1% interest yields are likely to experience the same sorry fate as those who bought "Dot Com" stocks with P/E's of 100 or more 10 years ago. It also suggests that investors bet on stocks, particularly high dividend paying stocks, instead of bonds.

This presents the classic investment decision: does one invest in stocks or bonds? How does one decide? It's a matter of one's state of mind. If one is greedy and looking for capital appreciation, he/she buys stocks. If one is fearful and looking for capital preservation, they buy bonds. I answer this question by comparing the Earnings Yield, EY, of stocks to the Interest Yield, IY, of bonds, i.e., EY vs. IY. As of Wednesday's close, the average EY of the stocks in the S&P 500 was 7.41%. The IY of AAA Corporate Bonds was 3.58% and that of 10-Year T-notes 2.58%. So the EY of stocks was 107% and 187% higher than those of AAA Corporate Bonds and 10-Year T-Notes, respectively. With stocks so undervalued, why would anyone want to buy bonds?

The level of fear is very high. I measure this level by dividing EY by IY and wrote about it in my essay of March 17, 2006, called A Fear Index. I show a 50-year chart of this index and speak about it in my presentations on "Stock Valuation and Stock Market Cycles" at Money Shows and other events. As for the reasons for this state of mind, I recommend the following two articles: "The Decline of the P/E Ratio," WSJ, pg. C1, August 20, 2010 and "Shellshocked Investors Quit the Market," USA TODAY, pg. B1, September 3, 2010.

Note that all of these articles were written very recently. Is now the time to recall Mr. Warren Buffett's famous words, "The time to be fearful is when everyone else is greedy, and the time to be greedy is when everyone else is fearful?" If Mr. Buffett is right, it's Time To Be Greedy.

THE FASTEST HORSES.
Wouldn't it be nice to simply read the Daily Views and know exactly when to bet on the Derby Winner with the fastest horses? Of course, we've been working on this goal since the Derby was released more than a year ago. So visit the VectorVest University to see how Mr. Jerry D'Ambrosio does it in this week's "Strategy of the Week" presentation, "The Fastest Horses."