This Is One of the Great Buying Opportunities of the Last 30 Years
By Porter Stansberry
November 13, 2008
As longtime readers of my advisory can tell you, I haven't been bullish on the stock market in years.
In fact, for the last couple years, I've been warning that stocks, in general, were vastly overpriced. Investors were too complacent. They had too little fear. By February 2007, I was explicitly warning that stocks had become too expensive to buy safely and we were near an important peak in the stock market.
It turns out that was very close to a huge top in asset prices. Stocks, bonds, commodities, foreign currencies all peaked over the next several months.
It was easy to see this peak coming with three key points: the number of stocks trading at reasonable prices (a lack of value), the amount of insider buying in the stock market (a lack of knowledgeable buyers), and the spread between emerging-market bonds and U.S. Treasury bonds (a lack of fear). Reviewing these key data points today shows we're building an important bottom in stock prices. And it's why I'm telling everyone I know that this is one of the great buying opportunities of the last 30 years.
According to Bloomberg (the most comprehensive database on securities), 2,424 U.S.-listed equities now trade with enterprise values (market cap minus net cash) that equal less than 10 years of operating earnings, a price that's extremely cheap given the low interest-rate environment.
Looking through the list of cheap stocks, several great businesses jump out: ExxonMobil, Wal-Mart, Microsoft, Johnson & Johnson, McDonald's, etc. Any reasonable evaluation of the market would find plenty of safe and cheap stocks... thousands more than you would have found a year ago at the market's peak.
What about insiders?
Brian Heyliger covers insider buying and selling for my firm Stansberry Research. He follows corporate insiders on a full-time basis. He tells me insiders are buying more than ever.
Last month, the insider buy-sell ratio – which measures insider sentiment – reached its most bullish extreme in the last decade. Throughout this bear market, the ratio of buys to sells has been steadily increasing. In June, the ratio was in the high thirties – anything over 35% is bullish. But since then, the ratio doubled, hitting 63% in October... a level I've never seen before.
What about that lack of fear?
My favorite measure of fear is the spread between emerging-market debt and U.S. Treasury debt – the so-called "risk spread." Institutional investors consider U.S. Treasuries a "risk-free" asset. Emerging markets have much lower credit ratings, higher inflation, and a much greater risk of defaulting on their debts.
Investors normally demand much higher interest rates from emerging-market economies. But... in big bull markets, near the very top, investors become so complacent, they begin to assume holding emerging-market debt is tantamount to holding U.S. Treasuries. Looking back historically, you can see this spread is a great indicator of global tops and bottoms in stock prices. And as you can see below, after reaching a record low spread, this indicator is now moving back into bullish territory.
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In about a year, we've moved from a period of complete complacency to absolute terror. Paradoxically – and this is hard for most people to understand – you want to be a buyer of equities when everyone else is panicking.
None of these factors mean that stocks have to go up or that they will. No one can predict the future – but you don't have to be perfectly right to do very well in the market.
Yes, our economy is struggling right now with huge problems. Enormous risks threaten America's leadership in the world, the dollar's status as the world's reserve currency, our energy supplies, the rule of law in this country, etc. But all of these risks – all of them – existed a year ago, when stocks were almost 100% higher, on average. And all of these risks will exist 10 years from now, when stocks have gone up three or four times from their averages now.
To do well as an investor, you have to buy when stocks are cheap. And stocks only get cheap when most investors are afraid. So you have two choices: You can refuse to invest in stocks, or you can learn to buy stocks heavily when their prices offer you a reward for taking smart risks. That moment is right now.
Good investing,
Porter Stansberry
Editor's note: Porter Stansberry is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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IF IT'S THIS ROUGH ON GOOGLE, IT'S KILLING RADIO
The "world's best brand" is becoming worth a little bit less each day.
As we covered a few months ago, most folks consider Google the world's best brand. It's revolutionized access to information and consumers. Heck... the company is so good, it became its own verb.
Good as it is, Google is an advertising business. And when companies conserve cash in an economic crisis, ad budgets are the first thing to get slashed. Google is also hugely popular with mutual-fund managers. When investors get disgusted with these managers, they ask for their money back... so popular stocks like Google are sold to raise cash. This is why Google just broke the $300 barrier as predicted... and why it's going even lower.
Looking at how the weak economy is hurting Google – the most effective, most targeted marketing avenue in the world – one has to wonder... is it also hurting less effective media like newspapers, cable TV, and radio?
Answer: Let's just say we know why one of the world's greatest investment analysts, Jim Chanos, is betting against most of America's radio and cable companies.
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Please remember, all these billions of dollars that the government is throwing at entities – all this money represents additional DEBT.
How the US dollar will hold up against this building-tower of debt is the question. Ultimately, the trillions of newly-created dollars could lead to hyper-inflation. Then why isn't gold reflecting the chances of hyper-inflation?
Gold is hitting new highs in terms of other currencies, Canadian, Australian, Russian, Britain, Europe, India, Turkey. But the strong dollar (artificially strong) has held back the dollar price of gold. Moreover, sales of "paper gold" or GLD has also served to hold back the price of gold.
In the end, gold will do what it's supposed to do, but true to the market, gold will not do what it's supposed to WHEN it's supposed to do it.
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– Richard Russell
Dow Theory Letters
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Goldman Sachs laid off 13 analysts as part of its 10%, 3,200-employee reduction.
Some of the companies those analysts covered will be picked up by other analysts, but many will be dropped indefinitely. Among the companies losing coverage are Freeport-McMoRan (the world's largest publicly traded copper producer) and Peabody Energy (the world's largest publicly traded coal producer).
Goldman also fired the analysts responsible for covering the financial-services industry, shipping, newspapers, and other media. "We regularly match our research coverage to our resources and our clients' needs," said a Goldman spokesperson, and nobody is interested in these declining industries right now.
When investor sentiment gets so bad the world's premiere bank stops coverage on the world's largest publicly traded copper and coal companies, newspapers, and financial-services firms, it might be time to look into those industries.
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