• Chart of the week: Fed's Stocks vs. Bonds Model in historic territory
• Fund Focus: iShares MSCI All Country World Index (ACWI)
• Revisions, asset flows & short interest
• 2011 Sales per share estimates, annual change, and P/Sales ratios for major ETFs
• Market monitor - movers & categories

The so-called Fed Model is a simple indicator showing the relative attractiveness of stocks versus bonds. It compares the earnings yield of the S&P500 (the inverse of the P/E ratio) to the yield on 10 yr UST.  A ratio above 1.0x implies stocks are relatively attractive; a ratio below 1.0x implies the opposite. But with historically low 10 yr Treasury yields of just 2.06% in the denominator, almost any value for earnings yield would result in stocks looking absurdly attractive (Figure 1)!

Nonetheless a modified version of the Fed model which subtracts 10yr UST yields from the S&P earnings yield shows that the spread between the two is now at its highest levels since the depths of the financial crisis in 2009, itself record stretching back half a century (Figure 2). This implies U.S. stock valuations are relatively attractive, as do recent P/E trends for global equities (see analysis of ACWI on page 2).

We're still a bit nervous about equities near term as we can't see the European debt crisis getting resolved without further drama, but it certainly cements our bearishness with respect to US Treasuries.