Why I'm Sitting Out The Current Bull Market

by: Illuminati Investments

This is my first article, so I'm not arrogant enough to pretend I know exactly what the market is about to do or what stocks will continue to do well. No one can predict macroeconomic trends with much accuracy, much less control them (I'm looking at you, Bernanke and Geithner). However, as a cheapskate value investor, I can tell you that the current bull market can rage on without me for all I care. Let Jim Cramer be a bullrider that climbs on and rides the momentum until he's bucked off and the clowns are trampled, but I'm going to be watching from the sidelines.

You see, I'm basing my belief that the market is overvalued on the simple fact I haven't been finding many values lately, certainly none with enough of a margin of safety to buy. Apple (NASDAQ:AAPL) with it's P/E of 17.5 is about as close to a value stock as I can find, and I don't trust its ability to continue growing as rapidly as it has been due to market saturation and increased competition, not to mention its sheer size.

Even some of the current stocks I own, like Costco (NASDAQ:COST), EMC (EMC), and Silver Wheaton (NYSE:SLW) are looking pretty pricy at P/Es of 26.6, 27.1, and 21.8, respectively. The only enticing values that pop up seem to inevitably be small cap Chinese stocks that have been beaten down lately by fraud accusations, some with good reason, like recently halted North East Petroleum (NYSEMKT:NEP), and some that I still have cautious faith in, like Lihua International (NASDAQ:LIWA).

In contrast, I can certainly find plenty of stocks that appear overvalued, some comically so. Chipotle (NYSE:CMG) might be a fast food restaurant with slowing growth, but that doesn't stop it from trading at a P/E over 60. If its nearest competitor Qdoba traded at the same price per sales, it would imply a valuation greater than its entire parent company Jack in the Box (NASDAQ:JACK). And yet CMG still looks downright cheap compared to "new economy" stocks like LinkedIn (NYSE:LNKD) and Salesforce.com (NYSE:CRM), which both resort to cheap tricks to sustain their artificially high valuations, LNKD by only selling a sliver of itself to the public and CRM by using non-GAAP accounting to appear profitable only because they pay their salespeople with stock and don't count it as an expense.

For others, like Tesla (NASDAQ:TSLA), their stock price is not chained by pesky things like earnings. It can rise based simply on an arbitrary price target derived from an analyst's feeling that they are ahead of production schedule based on one factory tour. It trades based on analyst projections of precise sales figures of future models years in the future even though the company itself cannot even predict this year's output. When I see market leaders rising unfettered by reason I get nervous, so I'll be steering clear of what might simply be a bubble in a few momentum stocks or perhaps an indication that the overall market might be getting ahead of itself.

So, what exactly am I investing in these days? Well, I continue buying silver because of the Fed's inflationary monetary policy and I believe it is undervalued relative to gold in terms of limited bullion supply and underestimated investment and industrial demand. I'm also buying rental real estate, because banks are still giving it away, and if the market ever has a correction and starts doing the same with stocks, I'll be waiting.

Disclosure: I am long COST, EMC, SLW, LIWA, and short NEP via put options.