As usual, I don't place too much emphasis on this sort of forecast, but to the extent that I make any comments at all about the outlook for 2006, the bottom line is this: 1) we can't rule out modest potential for stock appreciation, which would require the maintenance or expansion of already high price / peak earnings multiples; 2) we also should recognize an uncomfortably
large potential for market losses, particularly given that the
current bull market has now outlived the median and average bull, yet at higher valuations
than most bulls have achieved, a flat
yield curve with rising interest rate pressures, an extended period of internal divergence as measured by breadth and other market action, and complacency at best and excessive bullishness at worst, as measured by various sentiment indicators; 3) there is a moderate but still not compelling risk of an oncoming recession, which would become more of a factor if we observe a substantial widening of credit spreads and weakness in the ISM Purchasing Managers Index in the months ahead, and; 4) there remains substantial potential for U.S. dollar weakness coupled with «unexpectedly» persistent inflation pressures, particularly if we do observe economic weakness.
When comparing two securities with the same
current yield, the one with the longer maturity (e.g. a perpetual preferred share) will have a
larger duration
than one with a short maturity.
And yet the
current share price means that the dividend
yield is higher, and the long - term price to earnings ratio is lower,
than most other mid and
large - cap companies.