When I was in the 10th grade, a new girl showed up at my school — Shenendehowa High in Clifton Park, New York.
In the mid-’80s, Clifton Park was a white, affluent bedroom community filled with GE engineers who worked in Schenectady and the flotsam that leached from the state government in Albany.
Her skin was olive. Her eyes were shaped like almonds, and the rest of her…. well, she was far and above the Christines and Lisas that I knew.
The funny thing was that everyone ignored her. She was different, or they were scared — I don’t know, but I talked to her in the free period in the library. She was from Persia. We had a nice and blooming friendship, and my friends were jealous.
Eventually, she was scooped up by Eric Redmond, and life went on. But I had my moment.
High School High
There are days when everything is like high school. The fast-talking kid with bluster and confidence can still fool the masses. Hot girls don’t have to work. The herd follows the trends. And the kids in the smoking area are on drugs.
It’s the same with the stock market. There are hot trends, scams, and dogs. But there is also incredible upside for those who have the cojones to make their move.
The Case for Emerging Markets
Investors have steered away from emerging markets over the past three years. Here is the chart that compares the S&P 500 Index ETF (NYSE: SPY) to the Emerging Market Index (NYSE: EEM):
The U.S. market (gold line) has beat the broad Emerging Markets Index (black line) hands down. But things are changing. U.S. stocks are rolling over.
Janet Yellen said recently, “The central bank is on track to raise short-term interest rates this year, but will likely proceed slowly and cautiously because the job market hasn’t fully healed, inflation is low and growth has again disappointed.”
Last week, the official U.S. Bureau of Labor Statistics said the U.S. economy created 280,000 jobs in May, with the unemployment rate at 5.5%. Yesterday, it was reported that job openings were at a 15-year high.
You can argue about the participation rate or U6 all you want, but these are the numbers Yellen watches. These are the numbers that matter. And they are pointing to a rate hike.
This is bad news for U.S. markets. In 13 of the 16 times the Fed raised rates after WWII, the market went into a correction in the six months before rates increased (negative 16% on average).
Janet Yellen is meeting with her cohorts on June 16 and 17, July 28 and 29, and September 16 and 17. The market thinks she will raise rates by half a point in September, if not sooner. Some think she will hike in June.
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Only Proven Way to Invest
The point of investing is to make money. The long-term successful investors from Graham and Dodd to John Templeton and Warren Buffett all used the same method. They ignored the fads of the day and tried to answer the question: What is value, and how do I determine it?
They created value metrics like the price-to-earnings ratio, price-to-book, price-to-earnings growth, etc. In this way, they could compare one company with another.
The methods of these super-rich and powerful men were simple: You don’t chase stocks; you look at your numbers to find the undervalued company. You buy low and wait for the market to agree with you.
I’ve been telling you about the value in Russian stocks for six months now. Below is the chart showing the S&P 500 (NYSE: SPY) versus the Russian ETF (NYSE: RSX) in gold:
The U.S. market has done nothing for the past six months. Russia went up 29% before pulling back. This dip is the perfect time to buy. Here’s why…
U.S. Market Crash Looming
The SPY has a P/E of 19 and yields 1.87%. The RSX has a P/E of 8 and yields 3.5%. In other words, Russian stocks could double and still be undervalued.
Not only that, but when Yellen raises rates, money will flood out of the U.S. markets and seek value elsewhere. Some of this money will land in Russia.
It is simple common sense that says you should sell some of your S&P 500 stocks and buy some in emerging markets.
But don’t wait. Yellen will speak in just five days.
Fortune favors the bold,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
