That doesn't mean stocks will tumble, although some expect a correction after a summer rally. But the degree of overvaluation suggests the bond and stock markets are speaking different languages. The bond market still depends on the old paradigm, while the stock market has bought into a new one- that economic growth doesn't necessarily lead to inflation. The Fed's ability to translate, more than anything, may explain why fixed-income and equity investors alike remain sanguine for now.

June 14, 1999

    The near-term problem for stocks is that, absent a rate decline, equities look very pricey relative to bonds. Many investors dismiss the mathematical models used by Street strategists as old-fashioned barometers. But the models become tougher to dismiss when they show that the S&P 500 is 31% overvalued relative to bonds, as does Morgan Stanley Dean Witter strategist Byron Wien's market gauge. At the start of the year, Wien's model showed stocks to be just 7% overvalued. Wien's model would be even deeper in overvalued territory if Morgan Stanley didn't carry one of the highest S&P earnings estimates on Wall Street.

    Jim Paulsen, chief investment strategist at Wells Capital Management, observed that the S&P 500 has bested the return from the Treasury 10-year note by an amazing 50 percentage points in the eight months since the market bottom on October 9, 1998. The S&P is up about 35% since then, while the 10-year note has dropped about 15% in price. A similar 50 percentage-point advantage for the S&P over the Treasury note occurred in the first eight months of 1987., Paulsen says, noting that stocks peaked in August 1987. "It's an interesting and chilling coincidence," Paulsen says, adding that he now favors bonds over stocks.
 

NOBODY, WE'RE SURE, WAS MORE RELIEVED TO see the market pull itself out of the quicksand than the beleaguered day traders. Not only were they compelled to cope with sharp losses and insistent margin clerks, they also had to suffer the indignity of being the subject of some quite unflattering observations by a task force assembled by state securities regulators.
        Not, of course, that those trusty watchdogs set out to denigrate day traders.  Their purpose was simply to size up day trading, the brokerage outfits that specialize in it and the good folks who indulge in its practice.
        The North American Securities Administrators Association, which comprises the various and sundry state regulatory bodies, spent seven months probing the nooks, crooks and crannies of the day-trading world, poking into such delicate subjects as commissions, suitability standards and where are the customers' yachts. It issued its findings last week in a 46-page report that might been entitled, "The Shearing of the Lambs."
        What the state securities gumshoes uncovered in their probe received wide, prominent and thorough exposure by our colleagues in the press. The stories were particularly effective in pointing out what a mug's fame day trading is- at least for the poor suckers who play it.
        One of the conclusions, for example, that got lots of ink was that an estimated "70% of public traders will not only lose, but lose everything they invest". That was based on an extended analysis of accounts in the now infamous office of All-Tech in Massachusetts.
        When Rhonda Brammer asked David E. Shellenberger, Massachusetts regulator and chairman and principal author of the NASAA study, whether that 70% was typical of the industry experience as a whole, he answered drily: "I have no knowledge of All-Tech sending all its poor traders to Massachusetts."  What's more, his feeling is that, if anything, 70% is probably an understatement.