VBIL

Some math on my largest holding

VBIL — I have some stocks on my list that I think are pretty cheap. However, I’m 100% cash because I believe the stock market is at a dangerous level.

Here is some math on the relative attractiveness of Treasury bills.

If the S&P 500 increases 33% to bullish targets of 10,000 over the next three years (June 2029), and is followed by a light bear market (20% drop) over the course of a year (June 2030), the index would trade at 8,000.

That entire path would deliver only a 1.6% compounded annual return for the S&P 500. Treasury bills yielding 3.7% would, of course, win, and stocks would still be overvalued.

The Shiller is currently at 42. This multiple needs to collapse by 62% just to reach its long-term median of 16.

Applying the Shiller’s long-term median multiple of 16 to the S&P’s ten-year average inflation-adjusted earnings of $178.84 puts the index’s fair value at 2861.44.

The S&P’s trailing P/E is 32.4; the long-term median P/E of 15 puts the index’s fair value at 3641.82.

The index closed at 7511.35 yesterday. It could fall 30% to 5257.95 and still be expensive.

This is only the second time in history the Shiller ratio has exceeded 40 — the first being the dot-com bubble.

For context:

The S&P 500 declined 49.7% from its March 2000 peak to its October 2002 trough. After halving, the Shiller reached 21 in 2003 -- still 31% above the long-term median of 16.

In October 2007, the Shiller stood at 27. Then the GFC hit, the S&P dropped 56.8% and bottomed in March 2009, with the Shiller at 13.3.

Overall, the Shiller fell from 44.2 in December 1999 to 13.3 in March 2009 — a 69.9% total decline at a compounded annual rate of -11.7%. From the March 2009 low to now, it has increased 217%, or +6.9% per year.

I’m preparing for difficult times ahead. If they come soon, the relative payoff will be good. If they don’t, I’ll still have my money with some interest earned.