Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why You're Crazy to Buy an Stock Index Fund Right Now

Stock-Markets / Stock Markets 2010 Mar 18, 2010 - 12:53 PM GMT

By: DailyWealth

Stock-Markets

Best Financial Markets Analysis ArticleDan Ferris writes: I doubt you wake up every morning saying, "Gee, if only someone would pay me 4.37% on my life savings."

Nobody does. Getting paid 4.37% isn't nearly enough. But that's what the stock market is offering you right now. And plenty of people are buying.


In fact, I have three ways to gauge value in the stock market... and none of them get me excited to buy stocks right now. Let's start with that 4.37%...

The Wilshire 5000 is an index of U.S. stocks. It holds everything from huge companies like ExxonMobil all the way down to stocks of less than $1 million in market cap. It's the broadest measure of American stock prices around. Today, the Wilshire 5000 is selling for about 22.9 times earnings. This is expensive.

To calculate just how expensive, divide 100 by the price-to-earnings level. At 22.9 times earnings, stocks have an "earnings yield" of 4.37%. Think of it this way: If corporate earnings don't shrink at all below the current level, the stock market is offering to pay you about 4.37% a year on your money. That's pathetic.

(For that matter, so is the 4.67% government bonds are offering to pay you. And so is the yield on corporate bonds: Moody's triple-A bond yield forecast for the month of March is 5.53%, or about 18.1 times pretax earnings.)

We're in a "sideways" market right now. That's when the market ratchets sharply up and down for many years, gradually getting cheaper, on average. Sideways markets historically have been a good deal at earnings yields of 9%-14%. That's what I'll look for before I say stocks as a group are cheap.

Aside from earnings yields, the second number I use to gauge value in the market – cash dividend yields – offers investors nothing to look forward to.

The Wilshire 5000's cash dividend yield is still under 1.9%. At that level, you'll double your money... every 52 years. A knowledgeable, rich investor only gets excited about the broad market when cash dividend yields are up around 5%-7%.

A third way to look at stocks is to compare their total market value to the size of the U.S. economy. This value gauge is a favorite of superinvestor Warren Buffett.

As of the latest report by the Bureau of Economic Analysis, the United States' current dollar GDP is $14.3 trillion. The entire market cap of the Wilshire 5000 is approximately $13.3 trillion. So stocks are around 93% of GDP.

Stocks aren't really cheap until they're less than 80% of GDP. And they've been as cheap as 50% of GDP.

Altogether, that's (1) low earnings yields on businesses, (2) low cash dividend yields for holding stocks, and (3) a stock market that purports to be very nearly as valuable as the entire U.S. economy.

The stock market is not compensating you adequately for the risk it's asking you to take. It's not offering enough earnings, enough dividends, or enough value.

You should only invest when you can get terrific value for your money. And buying a broad swath of the market right now – like you do when you own an index fund – isn't providing you with great value for your money. Not even close.

That's not to say there are absolutely zero stocks cheap enough, safe enough, and just plain good enough to buy today. There are.

Microsoft is a great example of a stock that's safe and cheap enough to buy right now. Microsoft is the single company rated triple-A by the only credit ratings agency I trust, Egan-Jones Ratings. (Egan-Jones isn't paid by securities issuers. It's paid by investors who use its ratings, like you and me.)

Microsoft is also very cheap... cheap enough and rich enough to pay the interest on enough bonds to buy all its outstanding shares. In short, it makes so much cash it could afford to buy itself.

It's selling today for about 12-13 times the amount of free cash flow I expect it to generate in the fiscal year ended June 30, 2010. In other words, this blue-chip World Dominator is much cheaper than any broad index fund you'd buy today.

And if you think you can't make big money buying big-cap stocks like Microsoft, think again. I recommended Intel about a year ago, and it's up 50% since. Microsoft is as cheap today as Intel was a year ago.

Good investing,

Dan Ferris

P.S. Even with the market as a whole selling for much more than it's worth, I've been able to find several hugely undervalued stocks. In just the last 12 months, my Extreme Value readers have made high double- and triple-digit gains with a little-known health care IT company, a small precious-metals royalty firm, and even with big caps like Intel.

We have several more supercheap companies in the portfolio that will do just as well or better. Click here to learn more about Extreme Value.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2010 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in