Why (Most) Stocks are Grossly Overpriced

Whatever metric the pumpers and fund managers have been using to evaluate stocks is wrong. Repeatedly over the last few days, weeks, months...since the last crash (the third in the last 12 years and perhaps we're in the midst of a 4th), we've been told that stocks are at all-time cheap multiples. So you must buy stocks. With the 10-year treasury plummeting below 2% and the 5-year yielding nothing more than pennies, this is what our country would like you to do. But be smart about it. Protect yourself with "high quality" blue chips, dividend paying stocks, and companies with international exposure.

Here's how some of those stellar, safe havens have performed over the last few weeks:

Industrials:
Deere (DE) -18%
Caterpillar (CAT) -28%

Dinosaur Tech:
Dell (DELL) -18%
Hewlett Packard (HPQ) -40%, 6-year low
IBM (IBM) -14%

Banks:
BofA (BAC) -30%, -50% YTD
JPM (JPM) -19%, -21% YTD "Best of Breed"

Energy:
Exxon (XOM) -18%
Chevron (CVX) -14%

And the broken record continues to play. Doug Kass, the most bullish bear I've ever read about, piled his clients into banks on Wednesday with the XLF trading at 13 and called a market bottom. Two days later, his clients are down 7%. Never afraid of catching a falling knife, Cramer recommended both Foot Locker and Decker to his viewers that same day ahead of earnings, down 9% and 19% respectively. Those who dare to say cash is king such as Mr. Harrison of Minyanville and Mr. Mccullough of Hedgeye are scorned for recommending a zero equity strategy at the moment. Three weeks into August they are beating the market by 15%.

If you had made no other investment since October of 2007 other than buying gold in the last month, you would be beating the market by almost 50%. Does anyone else ever get tired of the wrongomists and smart money throwing out tangible book value, future multiples, and growth rates that never seem to be right? As Mcculough has mentioned ad nauseum over the last 3 months, earnings will have to be slashed aggressively in calculating S&P earnings going forward, just as Citi, GS, and JPM have slashed GDP projections for the remainder of this year and next by 66%.

And this is why most stocks are grossly overvalued. Last week you thought Dell was growing at 9%, this week they told you they might not grow at all. Last month investors were willing to pay over 100x earnings for Salesforce.com, this week we're not so impressed with earnings of $1/share. For every story you've read about BAC's value all the way down from $18 to $6 in the past few months, there's a hedge fund (including the biggest) imploding somewhere. Last week people were willing to pay$75 for a small company that carbonates tap water at home, this week $36.

So what now? Well, I've given you gold since 2007. Recently I've given you RIMM, SHLD, and AIG puts, all of which paid off on time. I have no problems with a zero risk strategy at the moment. Yes, there will be small spurts like we saw from last Friday for 3 days, manic reversals like we saw after the FOMC, but to be sure we've seen the bottom takes some real optimism. Don't be long anything. If you must, use leveraged ETFs with tight stops but know what they are; day-trading vehicles only. This has worked well when the futures are clearly pointing 200 points in a singular direction, as we've often fallen or risen 400-500 points on those days. I shorted the yen at it's all-time high against the dollar. When we saw this in March, the G7 stepped in immediately and devalued the yen, something I suspect will happen again between now and Jackson Hole's conclusion.