|Sell USA, Buy Russia
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- By Bill Bonner
Gualfin, End of the Road, Argentina
The proximate news is that Janet Yellen has taken the word "patient" out of the forward guidance she provides investors and business people. But just so you are clear on how valuable this forward guidance really is, she explains what it means. Bloomberg reports:
The new signals were contained in a policy statement that ended an era by dropping an assurance that the Fed will be "patient" in raising rates, and in a fresh set of estimates that lowered the median for the federal funds rate the end of 2015 to 0.625 percent compared with 1.125 percent in December.
Patient and impatient are not the only possibilities. In between is a vast space in which one can get things done, but without being in a hurry about it.
"Just because we removed the word patient from the statement doesn't mean we are going to be impatient," Chair Janet Yellen said in a press conference Wednesday in Washington.
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Besides, we can think of many other adjectives that far better describe Ms. Yellen's position - fearful, ignorant, conceited, arrogant, trapped...
Most likely, she does not let rates return to normal not because she is patient or not impatient, but because she's afraid of what might happen if she did. She knows the economy is not really recovering as advertised. What would happen to the stock market if she suddenly decided to let savers earn some real yield? We don't know. Neither does she. But the financial world has become very accustomed to free money. Like a young adult, living at home, he is likely to become indignant if he is suddenly asked to do his own laundry.
And so...the mollycoddling and spoiling of the financial sector continues. The meltdown will have to come later.
But yesterday, we promised to tell you where to find value in the investment world. We will not disappoint you.
If you've been following our comments, you know that your major investment decision is where to put your money, your beta decision. Asset allocation, not stock selection, is what determines most of your investment returns. And if you've been following Chris's comments, you also know that the market most likely to give you a healthy return going forward is the one that gave you the weakest and most disappointing returns looking backward. Today, we put the two together, turning to a collaborator in Buenos Aires, Rob Marstrand, for guidance:
"We can't know with any certainty exactly how much profit any one company or group of companies will make in future years. But we do know how the current price of a company's shares compares with its recent finances."
The question is: is the price high, or low? To figure that out, you need to look at it from several directions. Rob compares the price to the earnings, to dividend yield, to book value and to Shiller's 10 year adjusted earnings.
"Measured by P/E this indicates that Russia (P/E 6.7), Italy (8.5), China (10.1) and Greece (8.1) are cheapest and Spain (22.3), Portugal (20.6), Canada (20.6), Switzerland (20.6) and the USA (20.3) are the most expensive.
"Using dividend yield the bargains appear to be Russia (5.7%), Brazil (4.8%), Spain (4.6%) and Portugal (4.3%), and the worst yields are available in Greece (0.7%), Japan (1.7%), India (1.5%) and the USA (1.8%).
"By [the price to book value] both Greece and Russia are trading below liquidation value, both with P/Bs of 0.7. Put another way, at the end of December there was 43% upside to liquidation value in both markets (1 divided by 0.7 equals 1.43 or 143%). That indicates an extreme bargain in both cases. Earnings can swing around from year to year, but book values are much more stable.
Rob also uses Shiller's P/E10 to compare the price to the earnings over the last 10 years.
For a longer-term backward look at earnings.
"By this measure there are four "cheap" markets with P/E10s less than 10. Those are Russia (4.6), Brazil (8.8), Portugal (6.3) and Greece (2.4). At the expensive end, over 20, we find India (20.3), Switzerland (23.1), Japan (25.9), Indonesia (26.6), the USA (27.8) and Italy (29.6)."
Who's the winner? Russia. It is cheap on all measures. It gives you the most value you can get.
And where do you get the least value?
"Only one country is expensive on all measures," says Rob, "the USA."
A simple investment formula: sell the USA, buy Russia.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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