Battipaglia and Acampora

04/11/2003 12:00 am EST


Joe Battipaglia

Market Strategist-Private Client Group, Stifel Nicolaus

“We have pointed out for some time the valuation disparity between equities and other asset classes,” says Joe Battipaglia of Ryan, Beck & Co. ”First is the yield spread.  Based on the most recent data from First Call, the S&P 500 forward earnings yield is now 6.4% vs. a ten-year Treasury yield of 3.8%. Thus, the earnings yield is now 260 basis points higher than the ten-year Treasury, which is far above the historic norm. (Note that the market bounced 20% in the months following trough readings of this measure last summer and again in the fall.) Next is the equity risk premium. The observed equity risk premium (ERP), which is the excess return over risk free rate required by investors to incur risk, has widened to 5.6% from 0% in 1996. This risk premium is higher than the 3.5% - 4.5% historic range from 1872-1999. The heightened equity risk premium suggests that equity valuations have been sufficiently reduced to reflect investor concerns in our opinion. Finally, we look at alternative yields, which are unattractive. The benchmark ten-year Treasury yield, when adjusted for inflation and taxes, is now just 1% if bought today and held to maturity. This yield is not likely to attract much additional investor interest over the long-term. Equities offer a more compelling risk/reward scenario.”


We expect the market to enjoy further upside progress, with reasonable expectations that the leading averages could move back up toward the upper end of their nine-month ranges,” notes Ralph Acampora. “But, the real question is whether the current rally can develop into something even greater? We think yes! In fact, if the military operation in Iraq ends more favorably than most think, we envision the first ‘quality rally’ for the S&P 500 in more than three years. We expect all that is needed is for the S&P 500 to close above its August 22nd high of 965.00. For the DJIA, a close above 9077.01, should do it. And then the cyclical bull market should begin. Conclusion: We believe that the current volatility is part of the bottoming process and will eventually lead to another upleg that could carry to at least the upper end of the nine month trading range for the market’s leading averages. That would call for targets into the 9000 area for the DJIA, 965 area for the S&P 500 and to the 1400 area for the Nasdaq Composite. We also took the liberty of reviewing the recently released lists of attractive ideas in the mid-cap area of the market that was provided by analyst Steve Desancti.  We used a combination of absolute and relative price trends to conducts our analysis.  Each of these ideas are technically buy-rated on at least a short and intermediate term basis, with several showing up favorably on a long-term basis too.  Among mid-caps (as of 4/1/03), we have isolated four stocks with technical rankings of 1 or 2:  International Game Technology (IGT NYSE), Bunge Ltd. (BG NHYSE), Valero Energy (VLO NYSE) and Countrywide Credit (CFC NYSE).”

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