Five Clues to Unlocking This Week’s Market
Tue Mar 18 2014
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Five Clues to Unlocking This Week’s Market

From time to time, we reach into our WSD Mailbag to address key concerns from our loyal readers. And it’s that time again.

Instead of droning on with my answers, though, I’m cutting right to the chase. No fluff – just the good stuff, if you will. I’m recruiting visuals to help convey the most important information, too.

My hope? That my answers will be informative, instructive and, of course, ultimately profitable. Let me know if I succeed by dropping me a line here.

While you’re at it, send us some fodder for a future WSD Mailbagcolumn. Any and all comments, questions and biting criticisms are welcome. So cue up the Pat Benatar and “hit us with your best shot!”

Question #1: How could you possibly assert that Americanconsumers are still pinching pennies? Based on the latest household net worth figures, we’ve never been wealthier!

Sorry, pal. We’re not as rich as we think we are.

While it’s true that household net worth climbed $ 2.95 trillion in the fourth quarter, most of the increase can be attributed to rising home values and stock prices. Mind you, most of those stocks are held in retirement accounts, too.

Translation: All of our wealth is on paper.

When it comes to spending, we need liquid assets. But when we look at disposable income as a percentage of net worth, the latest reading checks in at 15.6% – the second-lowest level in history.

So it’s clear that we just don’t have a lot of cash on hand right now.

Question #2: Emerging markets are dirt cheap. Are you ready to back up the truck and load up?

Not unless you’re fronting the capital for me!

It’s true that emerging market stocks are almost universally shunned, which smacks of a classic contrarian set up.

The valuations can’t be beat, either. Take Russian stocks, for instance. They’re trading for less than five times forward earnings. (That’s more than a 70% discount to U.S. stocks.)

However, cheaper prices can always get cheaper still. And we certainly don’t want to fight the downward price momentum.

The good news? We should be getting extremely close to the bottom. At least, based on history.

I say that because during previous crises, whenever price-to-book ratios dipped below 1.5, emerging market stock prices rallied shortly thereafter. And sure enough, we just breached that critical level.

Question #3: Day after day, financial gurus much smarter than you keep swearing we’re in a stock bubble. Give me one good reason you’re convinced otherwise.

I’ll give you more than one…

Almost no bull market has ever ended with price-to-earnings ratios in the high-teens like they are now.

Merger and acquisition (M&A) activity is finally picking up. As Joshua Brown of Ritholtz Wealth Management rightly observes, “It’s rare to see a bear market begin just as the M&A cycle first gets cooking.”

Stocks follow earnings. And guess what? Earnings keep increasing for S&P 500 companies. Fourth-quarter profits increased more than 20% year over year.

Only a handful of people ever correctly predict market tops. So the fact that so many people swear stocks are overvalued is probably a contrarian indicator that we’re not at a top.

In other words, there isn’t much wisdom in crowds.

For more information, check out my colleague Alan Gula’s take on the situation over at our Dividends & Income Daily division.

Question #4: Why are you so pessimistic about equity crowdfunding?

Because I’m not a sucker! Just because “mom and pop” can suddenly invest in companies typically reserved for venture capitalists doesn’t mean all of these companies will suddenly succeed.

The cold, hard truth is that almost 75% of “hot technology” startups fail.

The reason? Their “hot” product isn’t that hot after all. And all the capital in the world can’t change that.

Question #5: Kudos on calling the bottom in the residentialreal estate market. But why have you completely ignored the fact that the run-up in prices is being entirely driven by Wall Street firms buying up thousands upon thousands of homes for investment purposes?

Because that’s simply not true. In fact, I debunked this widely held myth in April 2013. Here’s some fresh data, though, which should help do the trick (again).

The top five institutional buyers of single-family homes, which include The Blackstone Group (BX), control less than 1% of the entire rental market.

That’s it for today. Don’t forget to send me some more fodder for a future question and answer column here.

Ahead of the tape,

Louis Basenese

A former Wall Street consultant and analyst, Louis Basenesehelped direct over $ 1 billion in institutional capital before founding Wall Street Daily where he serves as Chief Investment Strategist. In addition to being an expert on technology and small-cap stocks, Louis is also well versed in special situations, including Mergers & Acquisitions and spinoffs. Learn More >>


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