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Wall Street's financial mechanics created chaos in the high grade corporate bond market last month. With exceptions, the LBO frenzy has destroyed, at least for the time being, the usefulness of bond quality ratings. The damage done to many bond portfolios was massive.

Comparing cash flow yields with bond yields we find that stocks are not significantly overvalued compared to bonds. Stocks are not yet comparatively cheap, but they come out much better in this stock/bond comparison than in the dividend yield/bond yield comparisons or in the earnings yield/bond yield comparisons.

In our view, the 1988 payout ratios below 40% do not (and should not) represent the start of a new contracting period in payout ratios. Rather, this current contraction is almost solely the result of the 1988 earnings explosion.

New Dow Jones Industry Groups Unveiled...Another View of Gold, In Dollars and In Francs

From mid-July through mid-September, the status of our Major Trend Index has been cause for some concern. However, during the last two weeks this work has improved significantly.

For the month of September, the S&P 500 gained 4.0%, with the Value Line Composite up 2.9% and the DJIA up 4.0%. Consumer related, growth, and blue chip groups dominated the leaders list last month.

In 1988, corporate profits have been surging ahead, but the stock market has paid little heed. Investor psychology is still negative. Good earnings reports are greeted with a sell off more often than a rally.

This technique has an almost perfect record in identifying low risk long term buying points. It doesn’t provide signals very often (only 12 since 1949), but when it does, it pays to pay attention.

The Gods of the bond market were kind in September, with the bond market performing exactly as we thought it would.

We thought last month might be the end of this bond/stock comparative series. However, a recent note from a client has prompted us to undertake an additional study comparing common stock cash flow yields with bond yields.

Never before, in the history of this publication have we invested such a large percentage in a single stock. But never before has a virtual institution like IBM been so cheap.

About two thirds of the sectors beat the S&P 500 and DJIA in August (by not going down as much). Secondary stocks, as a class, also went down less than the big stock averages.

Based on past history, future long-term earnings growth assumptions of 7% (much less 10%) border on being out of touch with reality.

For the month, the net loss for long T-bonds amounted to a half a point or less. All things considered, I thought it was an impressive performance, even though it took place in the dog days of August.

In the August issue, we examined the historical relationship of bond yields and common stock earnings yields, looking at it in terms of a ratio. In this issue, we make the same comparison in terms of a basis point differential.

Special Situations Stock Update...The Social Security Confusion…Another Panacea, the Aging of the Baby Boomers…Evel Knutson, the Daredevil Norwegian Trader, Moves on to New Horizons and is Replaced by “The Amazing Lefty”

A significant intermediate term stock market rally may soon be getting underway. As of our August 29th calculation, the Early Warning Index of intermediate bottoms gave a Buy signal. The response of our Major Trend Index in this expected rally is now critical.

Political Overreaction to the Drought...Grain Markets Reveal Improved Crop Expectations...Japanese Stock Market Update...DeBeers and South Africa

The stock market in July was a dull listless affair....at least until the last two days of the month. However, at this point, even this rally has not been impressive. Not much breadth and not much conviction.

Not many sectors beat the S&P 500 and DJIA in July. Secondary stocks lagged in the month end rally. For the month, only five of our indices registered gains. But there were not any very big losers either.