The Market Is Too Damn High
No, I’m not channeling my inner Jimmy McMillan. I’m just pointing out a fact a lot of “analysts” and “investors” out there are choosing to ignore. As of today, heck, even last month, stocks are the most expensive they’ve been in nearly 20 years.
I know what you’re thinking: This guy must be off his nut. The Nasdaq may be up for 2020 and kissing all-time highs, but the Dow and S&P 500 are both still down year-to-date and a good 16% and 12% off their late-February highs, respectively.
If you didn’t know what those prices really represent, you’d think they’re cheaper now than they were before the market dropped in March.
But they’re actually far more expensive…
A Discounting Mechanism
You’ll hear a lot of folks say that the “stock market has discounted that” or that “investors are discounting this.” But most of the time they use the word, they’re using it completely wrong.
It makes sense most people would be confused about what a discount means when it comes to stocks. I mean, the only discounts most people deal with is when there’s a sale on something at the store or car dealership.
But that’s not what discounting means when it comes to financial markets. The stock market is referred to as a discounting mechanism. But all that really means is that it takes into account (or discounts) new information when determining the price of a financial instrument. That information could cause the price to appreciate or fall. Either way, the information is being discounted.
That includes all information including present and potential future events. And it means that, if you believe the market discounts all information, the stock market is 100% efficient at determining fair value.
But most of the folks using the term “discounting” or saying things are “discounted” also tell you there are ways for you to beat the market by picking the right stocks. But if they really believe that the market has discounted all possible information, then they also believe that markets are efficient and there is no way to beat them.
That’s been proven wrong by countless stock pickers. And, not to toot my own horn, but I’m one of them. My investing service, The Wealth Advisory, has beat the market in 10 out of the past 11 years running.
So, you can trust me when I say that this market hasn’t discounted for potential future events. And you can trust that I actually know what discounting means when it comes to stocks.
Now that we’ve got the Finance 101 lecture out of the way, let’s talk about why I’m telling you stocks are more expensive than they’ve been in nearly two decades…
Prices and Projections
One of the ways the market tries to discount for future events is through projections or predictions on how stocks are going to perform. And one of the most-followed projections is earnings per share.
At the end of December 2019, the S&P 500 boasted an EPS of about $140. That’s just the earnings per share of all 505 component stocks added together. And at that time, the market was trading for about 23 times its EPS at 3,230.78.
Earnings are obviously going to be lower in 2020 pretty much across the board. How much lower still remains to be seen. So, let’s take three scenarios and model them.
Scenario One: The Best Case — EPS falls by 10% in 2020: If we get a small reduction in EPS of around 10%, that would put the S&P 500 earnings per share for 2020 at around $126. At current prices, that means the market is trading for 23.6 times 2020 EPS.
Scenario Two: A Worse Case — EPS falls by 20% in 2020: If EPS comes in even lower, we’re looking at S&P 500 EPS of $112. That would put the current market at a valuation of 26.5 times earnings.
Scenario Three: The Current Assumption — EPS falls by 32% in 2020: If EPS comes in where analysts currently expect it to fall in 2020, that would give the S&P 500 an earnings per share of $95.16 for the year. At current price levels, the S&P 500 is trading at a whopping 31.2 times EPS.
That means that, right now, the stock market is more expensive than it’s been since 2002. Right now, the market is saying stocks are worth more than they were back in February before the world closed its economy for two months.
Do you get what I’m saying here? You can call me a “Debbie Downer” or a “Negative Nancy” if you want, but I just don’t think that kind of valuation is justifiable. I didn’t think it was back in February, and I certainly don’t think it is now.
And I think it signals stocks are in for some serious trouble.
I know that sounds strange to say after how optimistic the market seems these days. But that’s being driven by a bunch of contradictory information.
You’ve got an entire generation of investors and traders who’ve never seen a stock market that didn’t go up. And while the market always goes up in the long term, it’s never a smooth ride.
But since 2009, every time the market dipped a little bit, it shot back up to new highs almost immediately. And a whole generation of Tesla fanboys and “BTFD/HODL” bros has been taught to buy the dip because it always comes back.
So, you’ve got all these armchair economists, Facebook forecasters, and Twitter traders talking about how the recovery is going to be super fast and how smart they were for buying the “dip” in March.
But their commentary and actions are in stark contrast to the actual experts — you know, the ones who’ve studied economics, the ones who are virologists, the ones who’ve seen a prolonged recession before, the ones with their fingers on pulses (both actual and economic). Those people are warning that this could get far worse before it gets better.
Dr. Anthony Fauci, the nation's top infectious disease expert, has warned that it's "inevitable" that the United States faces a second wave of coronavirus infections in the fall. He says that when (not if) it does, “How we handle it will determine our fate.”
But markets are pricing in a vaccine that’ll be available by August when we don't even have an approved treatment in a “science or bust” kind of move.
And Jerome Powell, head of the Federal Reserve, says that the crisis, “poses considerable risks to the outlook over the medium term,” before going on to define that period as “the next year or so.”
Yet markets are saying that six months from now, we’ll be back to normal all around, despite the fact that we don't even know what "normal" is going to look like when we get back to it.
Chief economist at RSM US, Joe Brusuelas, says that, “the worst of the unemployment crisis still lies ahead,” and that, “the distance between promise and reality for the working class of the economy has never been starker or more painful.”
But markets rally as more and more people go from being temporarily furloughed to permanently laid off. Even though that unemployment crisis could lead to another crisis as deflation hits the economy.
As Gus Faucher, chief economist at PNC Bank, wrote in a note to clients, "Extended deflation can wreak havoc on an economy, leading consumers and businesses to put off spending because they think prices will be lower in the future, weighing on asset prices."
In an economy where the main driver of growth is consumer spending (you know, like the United States), that won’t be a pretty picture.
I could go on and on, citing more experts that have a better understanding of what’s going on than you, me, or all the countless new “analysts” popping up every day. But I think you probably get the point.
What Am I Doing with My Portfolio?
It wouldn’t be fair for me to just give you a bunch of doom and gloom and then call it a day without at least trying to help you position yourself for what’s to come.
So, let’s talk a little about what I’m doing with my own investments.
Net, I’m long stocks. I’ve got a pretty extended timeline. Most of my investments are to carry me through retirement in style. But I don’t plan on retiring for a while.
So, I can stand a little short-term pain since I’m looking for long-term gains.
I’m also long gold via some mining stocks — because when both stocks and gold go up, one of them has to be right. Also, as my colleague Nick Hodge put it, “Just wait until the Robinhood traders find out about gold.”
I've also been taking advantage of the strength in the markets to rebalance my positions. I’m taking my profits on the last brick-and-mortar retail play I’ve got. I’m also selling some stocks I bought during the March rout and taking those gains off the table.
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Combined with the long-term holdings I’ve unloaded, those trades have me at about 20% to 30% cash. Yes, I’m probably cutting myself out of some gains we might get before the reckoning comes. But I’m also getting together dry powder so I can make strategic (long term) buys when that happens.
And I’m also taking advantage of the volatility to trade some stocks (tactical buys) and make a little extra loot to squirrel away for when the next drop comes. Markets are very expensive, but there are still some cheap individual stocks out there.
I’ve made some nice gains trading individual tanker stocks (TNP) and shorting oil prices with ETFs (USOD). I’ve traded into and out of and back into positions in uranium stocks (UEC) as they've been running like a scalded dog that stole a steak. And my partner, Brit Ryle, helped me get some nice options gains on stocks like Chewy (CHWY) and Pinterest (PINS).
Side note: If you’re interested in getting access to Brit and his options trades, click here to learn more.
And of course, I’m building my list of companies I think will be the new winners in the next generation of our global economy. There’s a major change coming, and this crisis has only accelerated that shift.
The Industrial Revolution — Part 4
Millions of people will be forced to find a new career as automation wipes out countless blue- and white-collar jobs. Robots will become a commonplace and a regular part of our lives. Connected cities will cease to be a dream of technophiles. People living in cities may never need to learn to drive a car.
It’s going to be a full on fourth industrial revolution. And it’s going to change the way we live in this world. Machines will take on more and more of the attributes of humanity. And in doing so, they’ll be able to complete tasks we once thought only humans were capable of.
The numbers are a little scary to look at: 50% of current jobs are automatable, 20% of the population will be forced to find a new career within the next decade, etc.
But they drive home the point that the only way to make sure you can take care of yourself and your families in the next new normal is going to be by investing with a long-term outlook.
That means ignoring the whipsaw of the markets in the short term and looking for the companies that will drive this new industrial revolution. And in case you think it’ll be Amazon or Google, think again.
Change is never kind to the incumbents.
Just this week, I recommended a company to members of The Wealth Advisory that could become the next trillion-dollar stock. It’s in a perfect place to capitalize on the changes guaranteed to come. It’s one of those companies where it’s highly likely everyone reading this article has used its services, but nobody reading this article realizes that they have.
Obviously, I can’t share that one here since TWA investors are paying members. That wouldn’t really be fair to them. But I can help you start building your fourth industrial revolution portfolio with another TWA stock…
The 5G Tollbooth
The one thing that all the changes of the fourth industrial revolution have in common is that they will all create and depend on massive amounts of data — data that needs to be stored and accessed with ease.
And a true 5G wireless network will be required to handle the strain all that new data will create. Wireless providers in the U.S. are all still scrambling to roll out 5G coverage in the U.S. but they’ve run into a snag, so to speak.
You see, in order for all of the data flowing over the 5G wireless network to be stored, there have to be some physical connections. Data storage centers don’t work on WiFi or cellular networks. They’re all hardwired for security reasons.
So, in order to get all that data from the fast 5G network into the data centers’ storage, you need an equally fast physical connection. And that’s why all of the carriers are vying for space on fiber optic networks across the country.
Fiber optics are the only connection that rivals the speeds 5G will enable. And they’re how data centers connect to the internet. So, in order for 5G to be a success, there also has to be an extensive network of fiber optic cables to connect it to.
So, all of the major carriers in the U.S. are racing each other to scoop up that desirable real estate. But there was one small company that saw all this coming and got ahead of the carriers and cable companies. It's been building out its network for years.
And now, it owns the most extensive fiber network in the country. And that means it’s got the telecom providers by the proverbial “short and curlies.” They need this network to get theirs up and running. And this company owns more miles of fiber than all of the wireless carriers and cable companies combined.
So, the company has already worked out deals with all the major carriers and most of the cable companies, too. They can use its fiber network to build their 5G networks, but they’ve got to pay rent on the real estate they’re using.
And those rent payments add up. So far this year, the company’s brought in over $184 million in rent payments alone. And that number is only going to keep on growing as the nationwide 5G network gets completed.
That’s going to drive a lot of attention and investor money into the shares of this little-known company. And it’s all but guaranteed to drive it from under $10 (where it is right now) to over $60 in no time at all.
But that’s not even the best part. You remember those growing rent payments? Well, this company has set up a deal with the U.S. government where it gets special tax treatment if it helps grow the U.S. 5G network and shares the profits with its investors.
So, not only can you lock in a potential six times the returns on the stock, you’ll get to collect 5G “tolls” the whole time as the company shares its rental profits with you.
Start Prepping Your Portfolio Today
We’ve put together a presentation with all of the details that explains how you can get involved and profit from the role this company will play in the fourth industrial revolution.
However you go about getting the information, make sure you don’t delay. Shares of this company have been moving even as the markets have stalled out recently. And every day, more investors discover the latent potential and plow more money into the stock.
If you act now, you can still capture the lion’s share of the growth. But if you wait, you may have to watch from the sidelines as others celebrate their massive gains.
To your wealth,
After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter, and co-authors The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.
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