September 27, 2001

This commentary is an update of the successful May 1999 "Best Opportunity."

Our study is based on relationships between the S&P 500, the US Treasury Long Bond and Municipal Bonds.  In the study, we compare the yields (dividend yield for the S&P 500) of each of the categories by graphing them relative to each other (graphs are at the bottom of this article) over a long period of time.  In hindsight, our original study in May 1999 correctly predicted that municipal bonds were a much better investment than stocks.   This updated study shows that success and makes a compelling case that:

Stocks are still expensive relative to bonds – They were their most expensive at the end of 1999 (about eight months after our initial study).  If you look at graph #1, you will see that the S&P dividend yield divided by the U.S. Treasury Long Bond Yield is still very low on a relative basis.  Thus, stocks (as measured by the S&P are still very expensive verses bond yields (as measured by the U.S. Treasury Long bond).

Municipal bonds are still cheap relative to U.S. Treasury Yields.  If you look at graph #2, you will see that the yield of the Bond Buyer 40 Index divided by the yield of the U.S. Treasury long bond is still high at 92%.  A more normal level is in the high 80 percent range with a U.S. Treasuries being a bargain when municipal’s (as measured by the Bond Buyer 40 Index) yield less than 85% of the U.S. Treasury long bond.  So municipals are still cheap (even though they have already outperformed by contributing more income for high tax-bracket holders).

Municipal bonds are still even a better value relative to stocks.  “The Clincher”- graph #3 shows that on a relative value basis municipal bonds became the most attractive relative to stocks at the end of 1999 (same as for U.S. Treasuries) and they have already performed very well on a relative basis.  But, based on this analysis, stocks still have a ways to go (down) before normal historical relationships are reached.

Thus, our original contention from April 1999, which has already paid off, still holds:

U.S. Treasuries are still cheap to stocks and Tax-Free municipal bonds are still cheap to U.S. Treasuries.  Therefore, Municipal Bonds are still a considerable value compared to stocks!

And the best part is that you get paid a bigger yield if you own bonds (even better with municipal bonds) while waiting for stocks to drop (as you did over the past two and a half years)!!!

The lower the number, the more unattractive stocks are relative to long-term US Treasuries.

The higher the number, the more attractive munis are relative to US Treasuries.

The higher the number the more attractive munis are than stocks.