And I’m not just talking stock investors, either: Just about every asset class out there — from real estate to commodities to fixed income securities — are getting taken out back.

But mark my words: This is not going to last forever. It never does and it never will. The fact is I’ve been through a ton of crises and know how to handle them, no ifs, ands, or buts about it.

Does that mean I can tell you with absolute certainty what investments are headed higher? Nope: No one can. But I can tell you that — right now — the stock markets are ready to deliver simply mind-blowing bargains.

As you can see from the top part of this chart of the S&P 500 — a good proxy for the broader U.S. stock market — stock prices have taken a beating. While that’s painful for all of us, it’s far from news.

But take a look at the bottom part of the chart: The price-to-earnings (P/E) ratio for the S&P 500 is at historically low levels. In fact, it’s around 10 for the entire stock market. And that is news.

Remember, the P/E ratio takes a stock’s — or in our case, a market’s — price and divides it by the amount of earnings it makes. So, a P/E of 10 means that for every dollar in stock value, that company earned 10 cents.

Is that significant? You bet. With the stock market making 10 cents in profit for every dollar investment, it’s booking returns of 10% for stock investors. Those are stellar numbers, for sure, and blow away just about every other asset class out there.

But that’s not all. The chart also shows that when the market was at similar levels as today — which was way back in 2002 — the P/E ratios were much, much higher. In fact, the market’s P/E ratio of 45 in mid-2002 is nearly five times its current rate.

Meaningful? Yep. It shows that earnings are in much better shape than they are today. After all, when prices stay the same and P/E ratios decrease, earnings are on the rise.

But even more importantly, today’s relatively low market P/E means that it’s jam-packed with bargains – in fact, many more than in 2002. That means there are tons for stocks for sale at rock-bottom prices. And that’s a huge plus for a new bull market.

My Readers’ Portfolios are Going Gangbusters!

Let’s get down to brass tacks: While stock investors have had a tough time of it over the past few months, my portfolio has been delivering outstanding returns. Take a look for yourself…

As you can see from this chart, since April stock investors have booked a mind-blowing 29% in losses. This is based on a whopping 401-point loss from April to October on the S&P 500, a good proxy for overall stock market profitability.

Meanwhile, my Easy Money Options subscribers have amassed a solid 16% profit, on average, over the same time period. That means they’ve outperformed the average stock investor by a staggering 45%!

And don’t forget: They’ve collected these profits during one of the biggest financial messes of all time. To join my readers at Easy Money Options and find out how you can collect significant gains, even in this market, check out this free report. Even if you never tried options investing, I’ll show you how easy and profitable it can be.

Best Regards,
Wayne Burritt
December 3, 2008

Cheap Stocks and Mind-Blowing Bargains was originally featured in the Penny Sleuth.

The theory is simple: I’m scanning for companies with exceptionally strong earning power. You can roughly estimate a company’s earning power per share by taking the inverse of its price/earnings ratio. A stock with a P/E ratio of 8 can be said to have earning power of 12.5%.

Benjamin Graham points out that there’s a margin of safety in an expected earning power considerably above the going rate for bonds. So a 12.5% earnings yield on the stock offers you the investor a 7.5% average annual margin over the 4.85% bond rate.

So after finding 10 or so stocks, I would jump to the other side of the page to compare these earnings yields to the returns offered on their respective benchmark government bond. If I found a decent spread, I would dig deeper.

That’s a simple approach any reader can do over some wheat toast and a cup of coffee.

So it struck me yesterday as I was working my way from Taiwan to Thailand that the number of single digit P/E ratio’s across the globe has dwindled dramatically. Finding multiple securities that fit the bill used to be an easy task, especially in cases like Thailand and Israel where political risk carried significant weight. South Korea also offered up its fare share. But that’s no longer the case.

There were less than 80 today. And most of that bunch snuck in the 9+ category. Hardly the impressive double-digit earnings yield I’m looking for.

I equate this phenomenon to something Eric Fry touched on in yesterday’s Rude Awakening. And the cause, broadly speaking, is “liquidity.”

Eric points out, “Simply defined, it is that vast pool of cash, credit and derivatives that animate financial asset prices… All the world’s major financial assets, therefore, are floating on the same vast sea of liquidity — U.S. stocks as well as Chinese stocks, Kansas farmland, Brazilian bonds, and yes, even gold.”

The point is, the world’s sudden appetite for risk seemingly knows no bounds. This seeming impenetrable attitude has combined with mounds of excess cash to catapult stock prices across the globe well over the 20 times earnings mark. And I’m not just talking about emerging markets either…inflated asset appreciation is taking place in mature markets like Japan, Hong Kong, Switzerland and the United States. All four markets have P/E ratios above 20.

A price-to-earnings ratio of 20 offers a 5% earnings yield, or roughly, the same earning power as a government bond except these stocks carry significantly more risk.

Remember, successful investing will require a combination of patience, realistic expectations and, most importantly, buying shares of businesses at the right prices. I can’t stress that enough.

As investors, we’re looking for a margin of safety…companies trading near or below their intrinsic value with an established earning power.

That’s basically it.

It doesn’t take a financial genius to recognize that the Chinese market can’t go up forever… So brace yourself for the inevitable fall…it doesn’t take a white-shoed, Wall Street banking analyst to realize that shares of Bank of China shouldn’t trade for 35 times future earnings.

Mark Twain once said: “History doesn’t repeat itself, but it often rhymes.” That’s certainly true. But I doubt even he could imagine our tendency to repeat the same reckless behavior by paying too much for securities would happen so quickly. Our appetite for greed equals our appetite for destruction.

And even despite even our most blatant examples of irrational market exuberance (dot.com land, sub-prime lenders, etc.), many investors are already aggressively making the exact same mistake all over again by simply paying too much for a business.

They fool themselves into believing that there’s a greater fool prepared to pay an even greater price. They rationalize their behavior by saying it’s different this time. It’s never different this time.

But around and around we go.

Until Next Time,
Christopher Hancock
May 25, 2007

P.S.: I’ve found what could be the world’s greatest retirement stock. I’m talking about double-digit returns and income checks from a secret “pension-payout plan” that’s otherwise off-limits to everyday Americans.

Penny Sleuth Analysis of P/E Ratios was originally featured in the Penny Sleuth.

EXIM Bank, or Export-Import Bank of the United States, is an export credit agency. That means EXIM helps finance U.S. goods and services to international markets. And that makes the executives at the bank some of the most knowledgeable people when it comes to international trade.

The man sitting next to me was a senior official and an avid investor. I asked him where he sees investment opportunities. He said, “The hot markets like India and China have become too hot. Cooler markets will do better. Just look at global P/E ratios.”

He explained that the “hot” markets tend to have high GDP growth and that’s a bad thing. You read that right — high GDP growth is not necessarily good for the stock market. “You should read the study Triumph of the Optimist by Dimson, Marsh and Staunton,” he said. “They took data from 16 countries since 1900 and found a negative correlation between GDP growth and stock market returns. Can you believe that?”

“Japan had very high GDP growth as you know, but its stock returns were poor,” he explained as he cut into his steak. “Take South Africa. It has low GDP growth but was among the top performing stock markets.”

Why did the high GDP countries have poor stock performance? And what does this mean for investors? The answer lies in P/E ratios. Take a look at this map below: 

Countries in green have a P/E ratio between 5 and 10. These include Mexico, Brazil, Russia and South Africa.

Countries in blue have a P/E ratio between 10 and 15. These include Sweden, Italy, France, Spain, the Netherlands and Singapore.

Countries in pink have a P/E ratio between 15 and 20. These include Canada, the U.S.A., the U.K., India and Australia.

Countries in maroon have a P/E ratio of over 20. These include China and Japan.

The data on P/Es was taken from this article.     

Notice how all the high GDP countries (like the U.S., China and India) are all either maroon or pink on the map. That means they have high P/E ratios. And that makes sense. High growth always comes with high investor expectations. And high expectations drive the P/E ratio up.

When prices run up in relation to earnings because investors have high expectations of stocks in high GDP countries, the stocks eventually run out of steam.

It is also worth noting that most of Western Europe has a reasonable P/E of 10 to 15. But what’s most interesting are the green parts of the map. Mexico, Brazil, Russia and South Africa all have P/E ratios below 10. And these aren’t high GDP countries.

That means investor expectations are low in the green countries. When you buy stocks here, you’re buying value, not hype. Take Brazil for example. The country had negative GDP growth and high inflation in the 1990s. Yet $1,000 invested in Brazil in 1992 would be worth over $5,000 today. In the ‘90,s P/E ratios were in the single digits in Brazil. Great companies were thrown in the bargain bin. An intelligent investor would have jumped right in.

Take a look at that map again. What makes Mexico, Brazil, Russia and South Africa have low P/Es other than the fact that they have low GDP growth and therefore not hyped? What is common to these countries?

They have all had recent and significant political turmoil (elections, regime changes, etc). Could there be a “political discount” to the stocks in these countries?

I also think the fact that these four countries’ extraordinarily low P/Es have something to do with the commodities boom. The above four countries are home to some of the largest commodity stocks in world, and commodity stocks typically have low P/Es. That means as long as commodity prices rise and earnings are high, P/Es will stay low in these countries.

Does all this mean you should shun high GDP countries and those on the map that are pink or maroon? Absolutely not. But what this means is that you need to be a lot more selective when it comes to investing in the pink and maroon countries, because you don’t want to overpay for their growth.

In fact, at The Global Profit Hunter, we have two carefully selected Chinese stocks in our portfolio. But we also have two stocks that are poised to take advantage of the low valuations — one is a Mexican stock and the other is South African. To find out more, click here.

Regards,

Sala Kannan
August 04, 2006

Where in the World Should You Invest? was originally featured in the Penny Sleuth.