Aug

12

Wall of Johnson and Johnson BuildingJohnson & Johnson just sold $1.1 Billion in new debt, which according to their underwriters (Citi) have "the lowest 10-year and 30-year coupon on record." Their 10-year came at 2.95% and their 30-year came at 4.5%, a 43 and 68 basis-point spread to Treasuries. Their stock currently yields 3.69% and it's trading at about 12x earnings.

This historical moment is not a market call on bonds, stocks or Johnson&Johnson, but rather an observation that 1958 (the last year when the stock market yielded more than the bond market) is just around the corner.

Does the "crowding out" effect only impact stocks? And not bonds?

Scott Brooks writes:

In 1958, the market had, with a few exceptions, been consistently rising since the market lows in the 1930's. The economy was greatly improving, employment was constant and/or improving. Educated people were entering their late 30s/early 40s, new technologies abounded and the US was at peace and had been at peace for well over a half a decade.

Demographically, we were on a rise as the "Bob Hope Generation" was maturing and entering into the peak of it's power base.

Tyler Mclellan writes:

Yeah and the dividend pay out ratio was twice what it is now, so… not so obvious. The theoretical answer is that equity prices do not in fact get crowded out because it's so hard to know what an equity price means given the whole capital stock gets revalued at the last transaction priceSimple example, how much money does it take to add x billion in stock market wealth? Infinite number of answers. How much money does it take to finance 10 billion in capital expenditure? 10 billion. 

Jim Sogi writes:

And bank accounts paid 5% interest, and we were on the gold standard, and the rest of the world had just been destroyed.

Stefan Jovanovich adds:

(1) in 1958 the great Age of Retirement Trust investing had barely begun; most holders of stock were corporations, trusts and individuals whose income from interest, dividends and capital gains was fully taxable (except for the dividends-received exemption);

(2) on all taxable income over $50,000 corporations paid 52% tax; for individuals the highest marginal tax rate was 90%, and it only required $32,000 of AGI for a married couple filing jointly to be in a 50% bracket.

Jeff Sasmor comments:

And I recall that at that time 32K AGI was a huge amount of money. 10K was an exec salary IIRC.

At this point (as someone else pointed out) with sales tax, property tax, State income tax, local income tax, etc etc etc the total tax is pretty mind boggling. IMO all that stuff is very inflationary over time since after all we have to pay for food and such too.

Kim Zussman writes:

A partial explanation is altered investor preference for risky assets post 2008. The attached chart compares the ratio HYG/TLT (etf's of high-yield bonds / 20Y treasuries, respectively), to a scaled version of SP500 (SPY*0.007), 4/07-present.

Going into the melt-down, stocks and HYG/TLT moved more or less in tandem. However since bottoming, HYG/TLT has recovered more; suggesting investors have become more comfortable with risky bonds than risky stocks.

A note from the President of the Old Speculator's Club:

It's interesting that Rocky should bring this up. In a 12/2/08 column, Mark Hulbert comments on Peter Bernstein's views on this "anomaly:

In a recent issue of his newsletter Economics & Portfolio Strategy, Bernstein recounted what it was like in 1958 when T-note yields — for the first time in U.S. history — jumped above the stock market's dividend yield:

"This … was unprecedented. The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back…." When this inversion occurred, my two older partners assured me it was an anomaly. The markets would soon be set to rights, with dividends once again yielding more than bonds…because stocks were riskier than bonds and should have the higher yield.


The article goes on to discuss the conflicting views on why one or the other deserves ought to offer the better yield. Is the Fed model a johnny-come-lately?

Stefan Jovanovich chimes in:

Peter BernsteinWhat Bernstein's older partners and most people could not see was that the "risk" in both stocks and bonds was no longer corporate or national insolvency but the decline in the exchange value of the currency in which the interest, dividends and bond principal would be paid. When Nixon and Connolly "took the U.S. dollar off the gold standard", the market had already begun discounting the exchange value of future dollar claims for nearly a decade. The U.S. equity market knew in 1958 which only a few cranky Frenchmen were foretelling about the U.S. dollar and its economy: nominal growth, which could outstrip inflation and could have the taxes on its gains deferred, would be more important than cash income, which was immediately taxable and would have to be invested back into stocks if its exchange value was to be preserved. 


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