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Why Stocks Could Go 50% Higher From Here

By Dr. Steve Sjuggerud
Monday, October 7, 2013

Most people don't get the idea I'm about to share with you... or they're not willing to accept it.
However, it's 100% true...
The idea is that value is RELATIVE when it comes to investments. And this concept is hugely important today.
Once you understand this, you'll see how the stock market could soar 50% or more from here.
Nobody is saying that now. But I think you'll be hearing more talk like this soon...
Let me explain... starting with a question…
Does 10% interest on an FDIC-insured bank CD sound good to you?
Today, you would say, "Heck yeah!"
It sounds good because relative to all the other investments, a safe 10% in the bank is fantastic.
But what if it were 1981?
Back then, it would have been a bad deal...
In 1981, you could find plenty of other investments paying more than 10% interest. Bonds, bank CDs, and bank savings accounts were all paying 12%-plus interest.
Why would you accept 10% interest when you could get 12%-plus?
My point is, value is relative to what else is out there... And today, it's no contest... The value is in the stock market.
Look... You earn zero-percent interest in the bank. You earn less than 3% interest if you're willing to lend money to the government for 10 years (which I am not willing to do!). Yet stocks today have a forward "earnings yield" of 7%-plus.
"Earnings yield" is simply the price-to-earnings (P/E) ratio reversed... It's the E/P ratio. The current forward P/E ratio is 13.7. The inverse of that is 7%.
We can use earnings yield to compare stocks apples-to-apples with other assets.
So what sounds best to you?
•  0% in the bank
•   3% in 10-year government bonds
•   7%-plus in stocks
Based on those three choices, the answer is obvious – you want your money in stocks. The relative value is just too good to pass up.
Comparing yields this way isn't perfect, of course. But it is a simple way to compare investments when you're looking for mispriced assets. And something is severely mispriced today...
Stocks shouldn't be offering a yield that's so much higher than bonds. Something has to happen to bring their yields closer together.
Either stocks need to soar (which would bring the earnings yield down) or government bonds need to crash (which would bring their yield up).
Let's say government bonds crash, causing interest rates to go from 2.6% to 5%. For stocks to have an earnings yield of 5%, they'd have to rise 50%.
Looking at it another way, if interest rates stay the same, stocks would have to more than double in value to push their earnings yield closer to what bonds are paying.
Remember, when it comes to investing, value is relative. And right now, when you size up financial assets, stocks win by a mile.
Good investing,

Further Reading:

One of Steve's favorite opportunities in stocks today is emerging markets. He says they're "cheap, hated, and seem to just be starting an uptrend." Learn all the reasons Steve believes you should consider adding emerging markets to your portfolio here.
"Regardless of whether it's stocks, bonds, real estate, or something more exotic, I look at all investments through the same lens," Steve writes. "And right now, it shows a clear winner in the global investing landscape." Get all the details on Steve's method to gauge investments... and what it says about the market right here.

Market Notes

Yahoo (YHOO)… search engine
Facebook (FB)… social networking
American Financial Group (AFG)… insurance
Blackstone Group (BX)… private equity
Interactive Brokers (IBKR)… brokerage firm
Market Vectors Gaming Fund (BJK)... casino stocks
Time Warner (TWX)… media and entertainment
Washington Post (WPO)… newspapers
Netflix (NFLX)… movie rentals
Sotheby's (BID)… art dealer
Sturm, Ruger (RGR)… guns
Constellation Brands (STZ)... booze
Harley-Davidson (HOG)… motorcycles
Goodyear Tire (GT)… tires
Delta Air Lines (DAL)… airlines
Continental Resources (CLR)… oil and gas
Pioneer Natural Resources (PXD)… oil and gas
Schlumberger (SLB)… oil services
Chart Industries (GTLS)… natural gas storage
Chicago Bridge & Iron (CBI)… natural gas infrastructure
Cheniere Energy (LNG)… natural gas exports
Under Armour (UA)… "sporting" products
Amazon (AMZN)… online retailer
Walgreens (WAG)… drugstores
Rite Aid (RAD)… drugstores
Huntsman (HUN)… chemicals
iShares Nasdaq Biotechnology Fund (IBB)… biotech stocks
iShares Spain Fund (EWP)… Spanish stocks
iShares Italy Fund (EWI)… Italian stocks

PowerShares Dollar Fund (UUP)… Big U.S. dollar fund
Pan American Silver (PAAS)… silver stock
Gold Resource (GORO)… gold stock
Harmony Gold (HMY)… gold stock
American Eagle (AEO)… clothing retailer
J.C. Penney (JCP)… struggling retailer

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