Jeff QuinnSpecial to the Bonanza

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January 2, 2013
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Market Pulse: A look back ... and forward

INCLINE VILLAGE, Nev. - Who would have imagined one year ago that stocks would be where they are today? After all, a year ago one could have listed a dozen reasons why they'd fall (the weak economy, fiscal cliff, etc.). Many people made a case for lower prices only to be surprised. Some say prices are far too high now. I disagree. They are not high relative to rates and investment alternatives. In fact, just the opposite is true.Fed chair Ben Bernanke all but said that interest rates won't be rising for years. When, or if, the unemployment rate falls to 6.5 percent or inflation rises beyond 2.5 percent that might be enough to trigger a rise. Might be. Dallas Fed chief Richard Fisher said on CNBC that it also matters how the unemployment rate declines to 6.5 percent and the Fed discussed that at their recent meeting. If the unemployment rate declines because people are dropping out of the work force -- the case recently -- that would probably not trigger a rise.Is the Fed really saying, in holding rates down until 2015, that it doesn't expect the unemployment rate to fall to 6.5 percent for a few years? Probably. And is the benchmark for inflation now 2.5 percent, not 2.0 as they had said earlier? I believe so. That would explain why long-term Treasury rates rose after Bernanke's comments even though the Fed will be buying $85 billion in Treasurys and mortgage-backed securities every month until ... well, a long time.Investors can take heart from Bernanke's comments. Better-yielding stocks with dividend growth potential will be even more attractive and income vehicles such as the equity preferreds I'm discussed will also do well. What will be the alternative? Cash pays virtually nothing and is guaranteed to be a loser due to inflation and taxes. Short-term Treasurys and CDs are no better. Bond yields are low. Investors will ignore all the concerns and buy stocks.Some say the market is overpriced due to all the potentially negative developments. I've been hearing that for a few years and for a few years I've disagreed. Stocks, in fact, are still undervalued even though the S&P has risen 12 percent this year. While historically stocks have traded at 15 times earnings, in periods of low rates their p-e multiple was higher.And now? JPMorgan is forecasting S&P 2013 earnings of $110 and $117 in 2014. That means the S&P 500 is trading for 13 times next year's earnings and 12 times 2014's. Overvalued? Far from it. Treasury bonds are overvalued. The 10-year Treasury, with a yield of 1.75 percent, is trading for 57 times earnings and unlike stocks there is no potential for income growth. I'll take stocks.- David Vomund is an Incline Village-based fee-only money manager. Information is found at or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.

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Tahoe Daily Tribune Updated Jan 2, 2013 09:54PM Published Jan 2, 2013 09:53PM Copyright 2013 Tahoe Daily Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.