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A 2011 Investment Forecast Unlike Any Other You've Read

By Dan Ferris, editor, The 12% Letter
Tuesday, January 4, 2011

If you needed a reason to become bearish on the stock market, perhaps the best one appeared on the front cover of USA Today last month...
 
On the cover, the headline read, "5 Wall Street Heavyweights say 'It's Time To Get Back Into Stocks.'"
 
Yes, this is a signal to get bearish... not bullish. Why should you disagree with "heavyweights" who make millions of dollars on Wall Street?
 
Let's be clear about something. Wall Street brokerage firms and their so-called research departments and asset-allocation models are absolutely, positively worthless to you. They're best at destroying value for investors, not creating it.
 
So when they say it's time to get back into stocks, it really means they believe they can sell investors new stock fund products because the broad market sentiment is bullish enough. They hear the ducks quacking, and they plan to feed them. When everyone wants stocks, it's a sign there's too much speculation in the market... and you should be cautious.
 
Another sign of speculation is investors are becoming more and more bullish on stocks... even though stocks have soared since March 2009 and are now overvalued. Mark Hulbert tracks the bullish and bearish sentiment of newsletters. When all the newsletter editors agree, it's usually a sign that whatever trend they agree on is over.
 
Right now, Hulbert says stock market sentiment among newsletter writers is "disturbingly high," meaning way too bullish. In his most recent MarketWatch column, Hulbert says the current level of wildly bullish sentiment is one "on which market declines typically thrive."
 
Hulbert also reports corporate insiders are selling stock at their highest rate since early 2007... just months prior to the market's all-time peak in October 2007.
 
Ned Davis Research also tracks investor sentiment through its Crowd Sentiment Poll. The poll is currently at 69% bullish, which Ned Davis Research describes as "Excessive Bullishness."
 
Excessive optimism and speculation produces excessive, dangerous valuations. And this market is overvalued by every measure you can find. I use three such measures: price/earnings (P/E) ratios, dividend yields, and the ratio of the stock market to GDP. All three tell me to avoid the overwhelming majority of stocks.
 
The U.S. stock market is trading at around 18 times earnings. That means the average U.S. stock portfolio bought today might double your money in 18 years (with a good crash or two in between). I don't have that long to wait, so I'll pass.
 
Stocks are yielding about 1.85%. Dividends on a basket of U.S. stocks bought today will pay back your initial investment in 54 years. I'm 49. I'll be 103 in 54 years. Again, I don't have that long to wait. So I'll pass (unless I can get huge dividend growth, in which case I'll buy all I can get if the price is right).
 
In addition to P/E ratios and dividend yields, I also use a favorite indicator of one of the world's greatest investors, Warren Buffett (who learned it from his mentor, Ben Graham). The U.S.'s GDP is about $14.75 trillion. The Wilshire 5000 index contains about 98% of U.S. stocks by market cap. If you add the missing 2% to the Wilshire, the U.S. market is worth about $14.9 trillion.
 
So the U.S. stock market is now priced higher than the entire output of the U.S. economy. That's like saying the entire U.S. economy consists of nothing but a few thousand publicly traded companies. Stocks aren't truly undervalued until the market is around 80%-85% of GDP. At 100%-plus, they're absurdly expensive.
 
The best way to handle an overpriced, overly bullish stock market is to hold a large chunk of cash in your account. In other words, it's a horrible time to buy almost any conventional stock or bond. It's an especially bad time to own the great majority of the standard income-producing securities.
 
This isn't exciting or fun. It's not the glamorous "2011 investment guide" you're seeing everywhere else... But I believe sticking with only the safest blue-chip dividend paying stocks – and holding plenty of cash and gold – is better than losing a big chunk of money in a dangerous market.
 
Good investing,
 
Dan Ferris




Further Reading:

As Dan wrote in October, there's a way to make money in a sideways market, even if "the stock market essentially goes nowhere for years." Learn more about how to get paid even if a stock stands still here: Make a Fortune in Stocks... Even If the Market Goes Nowhere.
 
With bonds becoming more popular and interest rates falling to zero, "we're simply not able to earn big, safe yields like we did last year," Doc Eifrig writes. "Fortunately, there's a solution..." Read more here: Don't Buy Bonds Now... Buy These Instead.

Market Notes


THE GREATEST TREND IN THE WORLD

Last Friday, gold added another year onto the greatest streak in the world of finance. It registered its 10th year in a row of higher prices...
 
This "hot streak" is generating plenty of interest in the yellow metal... enough interest that some folks are calling gold a "mania" and a "bubble." As we proclaimed with our "Ultimate Gold Bubble Test" essay back in 2009, these folks simply don't understand what's going on...
 
We can't say for sure if 2011 will produce yet another year of gains. It's hard to keep such steadiness going. We can say from listening to the standard CNBC talk and speaking with lots of individual investors, we know both Wall Street and the average individual are ignorant of gold.
 
They don't know gold isn't really a conventional investment. They don't know it represents "real money" that can't be faked like a Greek financial statement. This attribute makes it an attractive place to park money instead of euros or dollars. They don't know there is zero political will to stop out-of-control sovereign fiscal irresponsibility. This means even if gold doesn't add an 11th year onto its streak, higher gold prices eventually lie ahead.

Ten years in the making: The amazing bull market in gold

In The Daily Crux



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