Making Money from the Greed Others

By John Del Vecchio  |  January 30, 2020

Greed. Greed is good.

That’s Gordon Gekko’s take on life in the movie Wall Street anyway. As I pointed out a couple of weeks ago, we are seeing extreme levels of greed in the markets.

Here, greed is both good and bad. It’s bad in the sense that stock returns will almost surely be lower going forward after greed reaches such extreme levels. After all, collectively, investors are horrible at gauging the market. They’re overly bullish right before epic declines – like the popping of the Internet Bubble two decades ago – and scared to death right before huge bull markets are about to take off, as they were in March, 2009.

In fact, March of 2009 saw investors’ lowest allocation to stocks. Ever.

In that sense, greed – or lack thereof – is good. It’s very telling. When we see the latter, the market sentiment is telling you to get super bullish and buy stocks aggressively.

We are far from that level.

The market presses on even as there are huge divergences in the economy. Stocks are hitting all-time highs while the economy may be topping out.

Take a look at these charts below. Durable goods and capital goods orders are sliding. Fast. What’s more is that recent results have come in well below expectations. Looking at the chart though, this certainly happens from time to time. The market has rallied despite declines in these indicators.

Nevertheless, it is a warning sign.

Durable goods are expensive, long-lasting items. Capital goods produce other products. Both paint a picture of future expectations. More recently, starting in late 2019, the trends are concerning.

One month doesn’t make a trend just like one tree doesn’t make a row. But it could be the start of something problematic and worth keeping an eye on.

Of course, it’s one thing to point out economic softness and another to make hay investing off of it. As I pointed out recently, the stock market is very stretched. Valuations are at nosebleed levels. Stocks are overbought. Returns in U.S. stocks as a whole are sure to fall short of what they’ve been in the last few years.

That’s why my focus has shifted to emerging markets to the extent that I am investing fresh money into stocks. My simple “30 Second Millionaire” strategy is emerging market focused. That and other strategies I outline in my new book Unbounded Wealth are shying away from U.S. stocks.

Beyond the overbought, overvalued nature of the markets, there’s another reason why. Income and risk.

Take a look at this chart.

U.S. dividends lag the rest of the world, in some cases by a wide margin. Some of my dry powder I have in CDs while I wait find good spots to invest. I’m earning more than the yield on U.S. stocks. I’m earning about the same in my short-term cash that I can free up within a day.

Why would I take risk in U.S. stocks? Makes no sense to me.

Emerging markets offer better yields and also upside potential. Europe is clearly out of favor. In fact, before seeing this chart I hadn’t considered the U.K.

Now I am.

I love to invest in a crisis. There’s a new government there, not to mention BREXIT. It has all the makings of the potential for better than average returns over the next cycle. Anything can happen tomorrow. I’m looking 5-10 years down the road.

In this country we have too much exposure to U.S. stocks. Returns are likely to disappoint due to overvaluation. You’re making very little in dividends. The economy is showing signs of softness.

The next spanking, when it comes, will be a doozie. One way to prevent your 401K from becoming a 201K is to look beyond your backyard and find attractive investments elsewhere.

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John Del Vecchio

John Del Vecchio is the author of the bestselling book, Rule of 72: Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio.

As the in-house stock market guru and forensic accountant for Dent Research, John stood on the shoulders of the great David Tice, James O’Shaughnessy and Dr. Howard Schilit, and built a framework of algorithms and a multi-factor grading system that has made him one of the more successful short-sellers around.

John is also the executive editor of our Hidden Fortunes newsletter and our trading service Small Cap All-Stars.

He graduated Summa Cum Laude from Bryant College with a B.S. in Finance and was awarded Beta Gamma Sigma honors. He earned the right to use the Chartered Financial Analyst designation in September 2001.MORE FROM AUTHOR