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How Did This Stay Hidden For 15 Years? (Must-See Story)
 From 7,476% on Monster Beverage Corp... to 2,941% on Terra Nitrogen... and 2,566% on Kingold Jewelry... For the last 15 years, this simple pattern has appeared alongside a series of exceptional market windfalls. And it was just spotted with two new companies. Their identities are [Continue reading...] | |
Eric Fry, thinking about selling high and buying low, reports...
A couple of weeks back, we suggested that investors "sell U.S. stocks and buy European stocks... as a 'pair trade.'"
We still like the trade... and apparently we are not entirely alone.
A handful of very successful investors are lightening up on U.S. stocks, as Newsmax reports:
[Warren Buffett's] Berkshire [Hathaway] sold roughly 19 million shares of Johnson & Johnson, and reduced its overall stake in "consumer product stocks" by 21%. Berkshire Hathaway also sold its entire stake in California-based computer parts supplier Intel.
Fellow billionaire John Paulson, who made a fortune betting on the subprime mortgage meltdown, is clearing out of U.S. stocks too. Paulson's hedge fund, Paulson & Co., dumped 14 million shares of JPMorgan Chase according to a recent filing. The fund also dumped its entire position in discount retailer Family Dollar and consumer-goods maker Sara Lee.
Finally, billionaire George Soros has sold nearly all of his bank stocks, including shares of JPMorgan Chase, Citigroup and Goldman Sachs. Between the three banks, Soros sold more than a million shares.
Bill Bonner, the founder of our parent company, also believes that U.S. stocks are better sold than bought at current prices. But even if U.S. stocks are a "Sell," says Bill, not all stocks are a "Sell."
To the contrary, in today's edition of The Non-Dollar Report, Bill offers a very controversial proposal: Sell U.S. stocks; buy Russian stocks.
Say "Nyet" to U.S. Stocks
As stock prices rise, the day nears when they must fall. Already, Warren Buffett's favorite indicator, market cap to GDP, tells us that the value of all outstanding U.S. shares is at the highest level relative to GDP that it's been in 100 years, except for at the peak of the dot-com boom.
The stock market cannot become infinitely large relative to the economy that supports it.
And the more expensive stocks become, the less attractive they are to seasoned investors. That's because the higher valuations go, the less of a chance investors have of buying low and selling high. And the idea is to buy low and sell high, not the other way around.
Therefore, broadly speaking, investors want to steer clear of pricey stock markets and allocate to lowly valued ones. After all, as study after study shows, asset allocation, not stock selection, is what determines most of your investment returns.
Buying low and selling high is not easy, of course. But often, the market most likely to give you a healthy return going forward is the one that gave you the weakest and most disappointing returns looking backward.
That's because high past returns typically mean an asset has become more expensive relative to its intrinsic value. And low past returns typically mean an asset has become cheaper.
Obviously, no one knows what the future holds, but everyone knows what the present holds... and everyone can determine the present-day valuations of a given foreign stock market.
To get a good handle on valuations, my old friend at OfWealth.com looks at the 12-month trailing price-to-earnings (P/E) ratio, the dividend yield and the price-to-book (P/B) ratio.
"Measured by P/E ratio," he observes, "the cheapest markets are Russia (6.7), Italy (8.5), China (10.1) and Greece (8.1), while Spain (22.3), Portugal (20.6), Canada (20.6), Switzerland (20.6) and the USA (20.3) are the most expensive."
Using dividend yield - in which the higher the yield, the cheaper the stocks - the bargains appear to be Russia (5.7%), Brazil (4.8%), Spain (4.6%) and Portugal (4.3%), and the worst yields are available in the USA (1.8%), India (1.5%), Japan (1.7%) and Greece (0.7%).
Based on price-to-book ratio, both Greece and Russia are trading below liquidation value, both with P/Bs of 0.7. Put another way, there was 43% upside to liquidation value in both markets (1 divided by 0.7 equals 1.43, or 143%).
That indicates an extreme bargain in both cases. Earnings can swing around from year to year, but book values are much more stable.
Our friend also looks at the Shiller P/E (aka the CAPE ratio or P/E10). This compares today's share price with the average of the past 10 years' earnings after adjusting for inflation.
"By this measure," he says, "there are four 'cheap' markets with P/E10s less than 10. Those are Russia (4.6), Brazil (8.8), Portugal (6.3) and Greece (2.4). At the expensive end, over 20, we find India (20.3), Switzerland (23.1), Japan (25.9), Indonesia (26.6), the USA (27.8) and Italy (29.6)."
Who's the winner?
Russia. It is cheap on all measures. It gives you the most value you can get.
And where do you get the least value?
"Only one country is expensive on all measures," concludes our friend. "The USA."
A simple investment formula: Sell the U.S. Buy Russia.
Good investing,
Bill Bonner
Founder, Agora Inc.
P.S. A version of this story originally appeared here in Bill Bonner's Diary of a Rogue Economist.
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