The 30-YR Bond Test

My custom-made database is almost functioning at 100%. Special thanks to the India-based programmers who are making it all possible at affordable prices!

I was going through all the records I've made so far in efforts to debug the program. And I started noticing something about a special feature that I had requested: a red flag that signals when a company's initial rate of return (ROR) is less than the current 30-yr bond (or T-Bond) rate.

First, let me explain how I make this comparison. I treat the current diluted EPS as a yield. To find the yield rate, the yield is divided by the price, just like bonds. If a company's initial ROR turns out to be less than the highest-yielding bond rate (usually the T-Bond unless you have an inverted yield curve), then you might as well put your money into the bonds until either earnings rise or the stock price falls... OR until the T-Bond rate drops. DISCLAIMER: This is treating your stock like a bond, and ignores potential earnings growth and any other factors that could influence the future price of the stock.

I noticed a lot of companies were giving me this red flag mentioned above. So I decided to count how many companies are "worse than bonds" right now. I got 21 out of 44, that's 48%. About half of my companies are estimated to give out less money than the 30-yr Bond! And many of those that did beat the T-Bond were not much higher. Those that excelled greatly in initial ROR included financials like CFC, LFG, FMT, & NEW (but not CBH), and housing stocks like BMHC, HOV & KBH. The losers included technology, healthcare, pharmaceuticals, and insurance, while retail and manufacturing is right about at the same level. I also noticed that a company's P/E had nothing to do with my results; some companies that failed the test had lower P/E's than those that passed.

This makes me think that I should look into buying some bonds soon. I'm still looking for signs to prove the theories I've been hearing on another market correction within the next few months. If this happens, bonds should be in demand until the 4th quarter recovery (also part of the theories). Other theories predict a soft recession for the rest of the year, with no guidance after that. So, as I said, I'm still looking for rules on reading the tea leaves.

For your information, right now I have only 47 companies on file. This isn't much, but considering the Dow Industrial Average contains only 30 companies, I'd wouldn't worry too much about it. 4 of my companies are also on the Dow: HPQ, JNJ, PG, & UTX, and there's a few more I'd like to add; only JNJ passed the T-Bond yield. I eliminated 3 companies from this analysis because of their questionable earnings conditions: KKD, SLR, & SUNW.