Leuthold Weeden Institutional Research's monthly research book, Perception for the Professional (a.ka. The Greenbook, so called because of its color), is always a fun read. In its October issue, Leuthold, although bullish, lists four bullish arguments that you should not fall for, as they were merely "contrived tools" to justify stock valuations during the "nosebleed levels of the late 1990s."
1.) "Quantitative easing two" (QE2) will life all boats, including commodities and stocks." Leuthold suggests, a.) that the Fed may not print more money, because b.) "the U.S. economy is stronger than the summer 'noise' let on.
2.) "Earnings yields are high relative to bond yields." Leuthold says this metric was made famous by the Federal Reserve, and as sensible as it sounds, the "Fed Models have no predicitive value in short, intermediate or long-term horizons (although we have yet to test them over Warren Buffett's favorite holding period --- 'forever')." [The earnings yield is the inverse of the p/e ratio; the higher the earnings yield the more undervalued a stock looks.] Leuthold and his research team said in the early 1980s --- the most wonderful time in history to get long shares --- the earnings yield ratio versus bond yields indicated that stocks were overvalued.
3.) "Low inflation justifies dramatically higher P/E ratios." "There have been times," says Leuthold, "that depressed P/Es coincided with high inflation, but "there have been many more periods of U.S. history when low P/E multiples coincided with low inflation." P/E multiples expand along with investors' expanding confidence, Leuthold's research suggests.
4.) "The market is dirt cheap on forward earnings." That's true, the research outfit says, but then "the market is always cheap on forward earnings." Leuthold points out that MSCI World Index looks cheap now "until one considers this is the same multiple [12.1x] that prevailed in mid-March 2008 ---- before that index plummeted another 51 percent into its March 2009 low."
You don't need those relative metrics these days, Leuthold argues. "Global stocks (especially outside the U.S.) are attractive on an absolute or 'stand alone' basis and would still need to rally another 20 percent to return to their bear market valuation lows of 1990 and 2002."
Oh, I should disclose that I am invested in Leuthold's Core Fund (LCORX). which is up 1.4 percent, year-to-date. (The Dow Industrials are up about 7 percent YTD.)