Quarterly Review and Outlook - Second Quarter 2014

Thirty-year treasury bonds appear to be undervalued based on the tepid growth rate of the U.S. economy. The past four quarters have recorded a nominal “top-line” GDP expansion of only 2.9%, while the bond yield remains close to 3.4%. Knut Wicksell (1851-1926) noted that the natural rate of interest, a level that does not tend to slow or accelerate economic activity, should approximate the growth rate of nominal GDP. Interest rates higher than the top-line growth rate of the economy, which is the case today, would mean that resources from the income stream of the economy would be required to pay for the higher rate of interest, thus slowing the economy. Wicksell preferred to use, not a risk free rate of interest such as thirty-year treasury bonds, but a business rate of interest such as BAA corporates.

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Stock Market Indicators: Bull/Bear Ratios

Sir John Templeton, one of the most famous investors, once observed that Bull Stock Markets are characterized by four distinct phases of investors' emotions: Pessimism, Skepticism, Optimism and Euphoria. With investor confidence (and complacency) hitting 27 year highs, which phase are we in today?

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