Remember, the concept couldn’t be any more straightforward.

Since a picture can be worth 1,000 words, I try to zip my lips (well, mostly) and let some carefully selected graphics convey a few critical investing and economic insights.

This week’s gallery includes…

• The No. 1 reason to steer clear of hedge fund investments…
• The key metric that will influence whether or not the Federal Reserve ever stops printing money…
• And the most misleading news of the week. (The truth shall set you free!)

So without further ado…

Hedge Funds Don’t Do a Portfolio Good

Hedge fund managers (still) can’t catch a break.

In early March, I noted how their performance was lagging behind the S&P 500 and (gasp) lowly mutual fund managers by about six full percentage points.

Well, fast forward two months, and now they’re behind by 10 full percentage points, according to the latest analysis from Goldman Sachs (GS)

For decades, we’ve been told to covet the high returns enjoyed by the few investors rich enough to invest in hedge funds.

But here’s the truth: We don’t need no stinking “exclusive” investments to earn top returns.

Boring, low-cost index funds like the iShares Core S&P 500 ETF (IVV) can get the job done just fine this bull market.

Why Ben Will Keep Buying

On Wednesday, fears surfaced that the Federal Reserve might take its foot off the quantitative easing gas pedal before the end of the year.

The news sent investors running for the hills.

Don’t join them.

Ever since Ben Bernanke took office, the U.S. economy has sucked wind.

As Bespoke Investment Group notes, “The US economy is in the midst of its eighth straight year where annual growth has been (or will be) below 3%.”

That’s the longest low-growth streak in the last 84 years.

With Bernanke’s legacy on the line, there’s no chance he’ll start “slowing the pace of [asset] purchases” until economic growth climbs out of its current rut. And I’m willing to bet that it won’t happen over the next six months.

Speaking of bets…

The Truth About Tragedies

This week, my prayers go out to all the Americans impacted by the deadly tornado in Moore, Oklahoma.

As for our elected (mis)representatives and so-called “experts” trying to capitalize on the tragedy by pushing their climate change agenda, shame on you.

Democrat Senator Barbara Boxer didn’t leave any room from confusion during her Monday floor speech when she said, “This is climate change.”

Well, here’s a nice tall glass of truth serum, Mrs. Boxer…

“There’s just one small, inconvenient problem with making a connection between climate change and an increasing frequency of violent tornadoes,” says Dr. Mark J. Perry of the American Enterprise Institute, “The link doesn’t actually exist.”

Over the last 50 years or so, the frequency of violent tornadoes in the United States keeps trending lower by about four violent storms per decade.

Yet, Michael Mann, a climatologist at Pennsylvania State University says, “If you’re a betting person – or the insurance or reinsurance industry, for that matter – you’d probably go with a prediction of greater frequency and intensity of tornadoes as a result of human-caused climate change.”

I’ll take that bet any day Mr. Mann! Just tell me how much you’re willing to wager.

That’s it for this week. Before you go, though, let us know what you think of this weekly column – or any of our recent work at Wall Street Daily – by sending an email to feedback@wallstreetdaily.com, or leaving a comment on our website.

Ahead of the tape,

Louis Basenese

Talk about an ominous statement for investors.

But if his “everywhere” includes the residential real estate market, Mr. Gross is sorely mistaken.

As I shared yesterday, the real estate recovery is legitimate. And it’s gaining traction, too.

However, the way we capitalize on this trend is evolving…

Forget the Usual Suspects

No longer can we expect to book the biggest profits on the most obvious beneficiaries of a housing recovery – homebuilders.

Nor can we bank on “first derivative” opportunities – companies with obvious ties to an uptick in home sales.

I’m talking about home improvement stores like Home Depot (HD) and Lowe’s Companies (LOW), and building materials suppliers like Lumber Liquidators Holdings (LL) and Masco Corporation (MAS).

As I told you in late February, these plays are too obvious and overcrowded.

Instead, it’s time to move our attention to “second derivative” opportunities – companies that investors don’t even remotely think about when it comes to the real estate market… but are nonetheless highly leveraged to the recovery.

I can think of no better example than mortgage insurance companies…

Back From the Dead

Mortgage insurance companies cover losses when homeowners, who typically make a down payment of less than 20%, default on their loans.

But you know the story: During the go-go days, just about everybody put less than 20% down and then defaulted. As a result, it drove the biggest mortgage insurance providers to the brink. Meanwhile, others – like PMI Group – completely crashed and burned on the courthouse steps.

Fast forward to today, though, and we’re working through the excesses of the last boom.

Case in point: The total share of distressed home sales keeps falling.

Take Las Vegas, for example. In September 2011, distressed sales accounted for over 70% of all activity. Now, it’s almost half that – and still falling. We’re seeing big declines in many other major markets, too…

The Comeback is Officially on for Mortgage Insurers

As the real estate market charts a path back to normal conditions, it’s a similar story for mortgage insurers.

Sure, the bonds of the largest insurers like MGIC Investment (MTG) and Radian Group (RDN) still carry junk ratings. So we’re not in the clear, yet. But there are definitive signs that their businesses are coming back to life. Consider:

• In the most recent quarter, Radian reported a 69% jump in new mortgage insurance business. And CEO S.A. Ibrahim sees a “return to operating profitability” on the horizon, too.
• MGIC reported a 54.7% increase in new insurance business in the first quarter. And its delinquency rates continued to improve, dropping more than two full percentage points in the last year.

Industry-wide data confirms that a recovery is underway, too.

Moody’s Investors Service says operating income before taxes for the entire mortgage insurance industry more than doubled compared to last year.

And Inside Mortgage Finance found that sales of private mortgage insurance rose by almost 80% in the first quarter.

And this comeback isn’t going unnoticed, either…

Follow the Leader

You’ll recall that hedge fund manager, John Paulson, made a name for himself – and his firm, Paulson & Co. – when he famously sold short subprime mortgages in 2007.

Basically, he predicted the top in the real estate market and positioned himself to profit from it.

A $3.7-billion profit, to be exact.

Today, Paulson is signaling the bottom of the market – and setting himself up to profit again.

As Bloomberg reports, Paulson & Co. and other noteworthy hedge funds are “piling into mortgage insurers.”

Paulson’s hedge fund alone owns 17 million shares of MGIC. He also owns 8 million Radian shares, which he thinks could top $20. That would be 45% higher than the current price.

That’s enough profit potential to get my attention. How about you?

Bottom line: In a normal environment, mortgage insurers enjoy strong profitability. And we’re moving to a more normal market.

Or, as Paulson said in a letter to his clients, “Mortgage insurers are all experiencing improving fundamentals… and should offer considerable upside if recent positive housing trends continue.”

As I’ve demonstrated here many times, all signs point to the positive housing trends continuing. So do your portfolio a favor and follow the leaders into mortgage insurance stocks.

Ahead of the tape,

Louis Basenese

At least, that’s what the mainstream financial press wants to scare us into believing.

A recent Bloomberg article, entitled “Brooklyn to California Bubble Threat Grows in Rebound,” recounts an all-too familiar tale from the go-go days:

“An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000, drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house.”

Bidding wars! The ultimate sign of a bubble, right?

Not so much…

The Same, But Different

Let’s ignore, for a moment, that Bloomberg cherry-picked these examples, and that they’re completely out of touch with reality. (The median price for a house in the United States remains below $200,000. Yet Bloomberg uses million-dollar listings to characterize the broader market.)

The real reason we’re “hearing stories of frenzy – lots of traffic and multiple offers,” as Paul Willen at the Federal Reserve Bank of Boston puts it, isn’t because we’re in another bubble.

It’s because inventory remains at mind-numbingly low levels.

You see, for a normal (and healthy) market, we need about six months’ worth of supply. Yet home inventories rest at just above 1.9 million units, which equals about 4.7 months of supply, based on the current sales rates.

And inventories keep dwindling on a year-over-year basis.

According to the National Association of Realtors (NAR), listed homes for sale are down 16.8% from last March.

The declines aren’t regional, either, considering that 135 out of 146 markets tracked by NAR experienced year-over-year inventory declines. And about one-quarter of the markets witnessed declines of 20% or more.

So there’s no way we’re getting to six months’ worth of supply any time soon. Not unless home construction activity picks up in a major way. (FYI: New home construction remains 66% below the peak, which also flies in the face of any bubble talk.)

Now, when you couple this scarcity of listings – particularly high-quality ones – with historically low interest rates, what do you get?

Competition for properties, of course. It’s the basic economic principles of supply and demand at work.

Or, as real estate agent Barbara Brown-Allen told Bloomberg, “Once the inventory is this short, you have a lot of people vying for the same properties.”

But we don’t have to fret about this situation leading to another bubble. For two reasons…

Two Factors Keeping a Lid on Prices

First, increasing mortgage rates promise to slowly erode record affordability.

Borrowing costs for a 30-year fixed mortgage just hit 3.51%, the highest level in six weeks. As rates creep higher, it should help contain demand.

Second, as I shared in late February, most mortgage applicants now boast FICO scores above 740. So lending standards remain tight.

The NAR’s Chief Economist, Lawrence Yun, says that’s a bad thing. In his latest report, he said, “The bad news is that underwriting standards remain excessively tight.”

That’s not bad news, Mr. Yun. It’s great news!

Insisting on higher credit scores ensures that the real estate market doesn’t get (way) ahead of itself… again.

Or, as Jonathan Miller – President of the real estate appraiser, Miller Samuel Inc. – says, it’s “keeping the process close to honest for the time being.”

I think Mr. Yun would agree that a little honesty is certainly not a bad thing!

Bottom line: Despite all the fearmongering, we’re not in another real estate bubble. Not yet, at least. So we should continue to look for ways to profit from the recovery.

With that in mind, I’ll soon share an opportunity to pocket a short-term gain of as much as 50% on an under-the-radar real estate investment. Be on the lookout for it!

Ahead of the tape,

Louis Basenese

In his 1993 hip hop anthem, O’Shea Jackson, better known as Ice Cube, raps…

“You better check yo’ self before you wreck yo’ self. Cus’ I’m bad for your health, I come real stealth.”

And that’s exactly the warning speculators in the new(ish) and wildly popular digital currency, Bitcoin, need to hear.

Otherwise, they might find their dreams dashed – or worse, their portfolios “stealthily” ruined.

Let me explain…

Desperate for An Alternative to the U.S. Dollar

Ever since the Federal Reserve embarked on its easy money campaign, everyone and their mother has been on a crusade for an alternative reserve currency.

The battle cry? Stop devaluing our money!

I hear you. But what are we going to do about it?

Several years ago, the euro was the top answer to the currency woes. Then the eurozone imploded. Game over.

China’s yuan entered as the next great contender. But let’s be real. We have a better chance of seeing Jesus tomorrow than we do of seeing the world embrace the currency of a communist government as the new reserve.

Even if the Chinese government finally decides to allow its currency to freely float – rather than controlling its value within predetermined ranges – it’s still not going to happen.

Of course, during the world’s desperate search, the Federal Reserve has just continued printing more money. And that has only intensified the desire for an alternative.

Enter, Bitcoin.

Bitcoin was envisioned in a 2008 paper by the pseudonymous developer, Satoshi Nakamoto, and launched in 2010.

It’s essentially a peer-to-peer electronic cash system that can be transferred through a computer or smartphone without an intermediate financial institution.

That sounds incredibly interesting. Or, as Jeb Terry of Aberdeen Investment Management says, “Bitcoin is a curiosity.”

Let me assure you, though – it’s nothing beyond that.

So any talk about Bitcoin being a potential alternative currency is a function of desperation, not rational thinking.

Even if it keeps garnering more and more notable support.

You Don’t Impress Me Much

Last week, BitPay – an Atlanta-based startup involved in processing payments that merchants receive in Bitcoins – secured $2 million. Founders Fund, a venture capital firm backed by the co-founders of PayPal, led the round of funding.

A few weeks before that, Coinbase, an 11-month-old startup that also facilitates Bitcoin transactions, secured $5 million in capital from another Silicon Valley heavy-hitter, Union Square Ventures.

Despite such strong votes of confidence, though, Bitcoin stands zero chance of being a legitimate, widely adopted currency. And here are three key reasons why…

~Bitcoin Pitfall #1: In God Nobody We Trust

No doubt, the atheists who cringe over the fact that U.S. paper money says “In God We Trust” love the fact that Bitcoins pledge no such allegiance.

In fact, many supporters of the digital currency tout the lack of any centralization or regulation over Bitcoin as a key selling point. Combine that with a finite supply of Bitcoins (21 million), and it seems like no government can inflate the currency.

I’ll concede that a world without inflation would be wonderful. And Bitcoin is set up to make that a possibility.

But without regulation, and the guidelines and legal protections that come with it, consumers have no reason to trust the currency.

And if we can’t put our trust in a currency, we won’t use it. Simple as that.

Besides, if you think governments around the world are going to sit on the sidelines and allow an unregulated, digital currency to gain momentum, you’re crazy.

The Department of Homeland Security has already dropped the hammer on Mt. Gox, the world’s largest Bitcoin exchange, for operating a money-transmitting business without a license. And that’s only a preview of what’s to come.

So this whole notion of an unregulated currency is really just a pipe dream. While citizens might want it, world governments won’t allow it.

Whether or not that’s fair doesn’t matter. It’s reality.

~Bitcoin Pitfall #2: No Guarantees

In addition to lacking trust, we have no guarantee that Bitcoin won’t be replaced. I mean, what’s going to stop a better Bitcoin from coming onto the scene?

And if the limited supply drives up prices to untenable levels, there’s nothing to stop the creators from simply creating more Bitcoins.

They say they won’t. But do you actually trust them?

Put another way, would you be willing to accept your next paycheck in Bitcoins?

Yeah, I didn’t think so.

~Bitcoin Pitfall #3: No Inherent Value

Haters continually deride the U.S. dollar because it’s not backed by anything of value.

What’s the difference with Bitcoin?

Just like there’s no inherent value in paper, there’s no inherent value in a bunch of ones and zeros in cyberspace.

That means there’s no way to figure out what a fair price is for a Bitcoin. And that’s ultimately the digital currency’s undoing. It’s nothing more than a (wild) speculation.

When Bitcoin first hit the market, it had little to no value. But the price of each coin quickly soared above $25. Then it collapsed back to $5 again.

After a slow and steady recovery, prices zoomed above $250 in the wake of the asset seizure in Cyprus. And sure enough, they cratered back down to Earth again.

Notice a pattern?

I’m sorry. But people want a currency with a stable value. And that’s something Bitcoin simply can’t offer.

Bottom line: The only reason people won’t stop talking about Bitcoin is because of the chart above. Forget its “sound theoretical underpinnings,” as Henry Blodget of Business Insider notes. Greed is what’s driving interest right now.

Investors see an opportunity to make a quick buck on a far-fetched “asset,” just like they’ve been doing for centuries. Tulip bulbs, anyone?

And the fringe set of retailers that accept Bitcoins are no different. They like the currency because it allows them to avoid interchange fees. And it also immunizes them to the risk of chargebacks. (Like cash transactions, Bitcoin payments can’t be reversed.)

In other words, it lines retailers’ pockets with more money.

Ultimately, it’s greed – not a genuine interest in a fundamentally stronger alternative to the status quo – that’s driving Bitcoin prices.

So forget Bitcoin being a contender as an alternative currency. At best, it’s a speculative investment. And a very speculative one at that.

Ahead of the tape,

Louis Basenese

You’re not alone, either.

By our best estimates, there are roughly 1.2 million such freaks trading the market each day.

What would happen if all these paranoid maniacs decided to sell?

Well, it’d look a lot like the Hindenburg crash of 1937, which I just happened to watch a documentary about last night.

Look, we’re all human, which means it’s perfectly natural to be a bit paranoid, given that the market keeps hitting new, all-time highs (on what seems like a daily basis).

However, asking about it with no way of arriving at an answer makes no sense at all.

Didn’t you know that only purpose-driven paranoia is productive and acceptable?

To that end, on Wednesday, I introduced you to my trusty “Bear Market Checklist,” which provides a systematic way to assess whether or not anxiety over a stock market collapse is, indeed, warranted.

Full disclosure: I can’t take credit for the checklist. It actually represents a compilation of reliable bear market indicators monitored by myself, along with other noteworthy Wall Street veterans.

Like Richard Bernstein and Morgan Stanley’s (MS) Chief Investment Strategist (and author of the must-read investment book, The Art of Asset Allocation), David Darst.

However, the fact that others find the indicators worthwhile should only boost your confidence in using it.

Now, earlier in the week, I just had time to cover the first four indicators out of nine. Today, I’m finishing the job, so you’ll be fully equipped to answer the most nagging question about the stock market.

Let’s get to it…

~Bear Market Warning Sign #5: A Peak in New 52-Week Highs

Bull markets can’t keep rising on the backs of a few stocks. To the contrary, the rally must be broad-based.

It must have “breadth,” as Wall Street pros like to say. And we can easily measure the rally’s breadth by monitoring the number of new 52-week highs.

An early warning sign that a run-up might be losing steam is a declining number of stocks hitting new 52-week highs. As I’ve shared before, Ned Davis Research found that the average bull market ends 30 weeks after the number of new 52-week highs tops out.

So when was the last time this occurred during this bull market? Two weeks ago? Two months ago?

Try two days ago!

As Bespoke Investment Group reports, “An astounding 37.2% of stocks in the S&P 500… hit new 52-week highs [on Wednesday].”

Based on the averages, even if that reading ends up being the tippy top, this bull market could endure until December 11, 2013.

~Bear Market Warning Sign #6: Cash Crunch

For stocks to keep hitting new highs, investors need to keep buying more shares. And that takes cash.

But unlike the government, which can simply print more money as needed, individuals can’t. So by monitoring cash balances on the sidelines, we can determine if there’s any fuel left to propel share prices higher – once investors find themselves in the buying mood.

Again, there’s nothing to worry about right now. Although I shared on Monday that investors are rotating out of money market funds into stocks, there’s still plenty more cash to go around.

To be exact, there’s another $2.583 trillion in money market mutual funds, according to the latest tally by the Investment Company Institute.

That’s down about $1.2 trillion since the bull market began. But it’s about $1 trillion more than right before the dot-com collapse. And it’s about $2 trillion more than the lows hit during the early 1990s.

Any way you look at it, there’s more than enough cash to keep fueling this rally.

~Bear Market Warning Sign #7: Get Shorty!

The “smart money” has a pretty good track record of increasing their short bets ahead of stock market declines. Therefore, if we’re so overdue for a correction, we should see short interest creeping higher.

Yeah, that’s not happening. Short sellers appear to be borrowing a page from Taylor Swift’s book. They remain completely noncommittal.

The short interest as a percentage of float for the S&P 1500 Index stands at a measly 5.7%. That’s almost exactly where it stood one month ago when I last brought this indicator to your attention. Yet the S&P 500 Index has rallied another 5% since that time.

~Bear Market Warning Sign #8: Runaway Valuations

Bull markets give way to bear markets when valuations get overstretched.

Consider: Prior to the dot-com collapse and the Great Recession, the price-to-earnings (P/E) ratio for the S&P 500 Index reached almost 30.

Today, though, it stands a tad over 16. We’re nowhere close to the danger zone.

Not to mention, we’re looking good on a forward P/E ratio basis, too.

As of May 10, the forward P/E ratio stood at 14.2, which is only slightly above the 10-year average of 14.1, according to FactSet.

~Bear Market Warning Sign #9: Stocks Can Only Go Up

The time to be wary of a stock market collapse comes when everyone (and their mom) gets bullish and starts buying stocks.

That’s not now.

As Darst says, “Nobody is buying stocks.”

Exaggeration? Maybe a little bit.

But the point remains: We’re nowhere close to a Great Rotation into stocks. There’s no one running around saying that “stocks can only go up” – like they did about real estate not too long ago.

The data backs me up, too…

Take the most recent sentiment readings from the American Association of Individual Investors (AAII), for instance. They’re not even close to being out of whack. The latest bullish sentiment reading checked in at 38.5%, compared to an average reading of 38.8% since 1987.

And the latest bearish sentiment reading clocked in at 29.3%, which is right in line with its long-term average of 30.6%.

Then there’s the STALSTOX Index, which measures the average recommended allocation for stocks by U.S. chief strategists. It’s not overwhelmingly bullish, either. Currently, it rests at 49.2%, down from 61% at the start of 2012.

Bottom line: If you’re prone to worry, I suggest you keep this checklist handy. It’s a much more reliable way of pinpointing exactly when this bull market is losing steam.

Ahead of the tape,

Louis Basenese

If any professional baseball player (particularly one in New York) puts up stats like that, he’s immediately booed and ridiculed.

But when it comes to a particular stock market indicator, it’s actually a reason to celebrate.

And guess what? It’s time to break out the bubbly!

No Batter! No Batter! Big Whiffer!

I can’t tell you how many readers routinely accuse me of being too optimistic. And I’ll readily admit that I’m a “glass half full” kind of guy.

Despite my predisposition, though, I always base my bullishness on cold, hard facts. So my optimism is always justified.

What’s more, when the data warrants a pessimistic stance, I have no problem embracing it. And we simply start sleuthing out attractive short-selling opportunities together.

Right now, however, there’s nothing to be bearish about. And I say that with conviction, because my “Bear Market Checklist” is a perfect 0-for-9.

Heck, not a single indicator on the list is even close to flashing a warning sign. We’ve got nothing but big whiffers!

Take a look…

~Bear Market Warning Sign #1: A Tightening Fed

When Fed Chairmen – and their merry band of bankers – start tightening monetary policy, it’s time to keep an eye on the exits.

Why?

Because they have a tendency to overdo it, thereby creating a much more challenging environment for businesses.

Or, as Richard Bernstein notes, “Historically, bull markets didn’t end when the Fed started to tighten. Rather, they ended after the Fed tightened too much.”

We’re in the clear now, though, since Ben Bernanke isn’t even contemplating an end to the quantitative easing efforts.

If you want something specific to track, look at the yield curve. That is, the difference in short-term and long-term government bond yields. When it inverts (i.e. – short-term yields rise above long-term yields), it’s a surefire indicator that the Fed has tightened too much.

As you can see, the current yield curve is nowhere near inverted.

~Bear Market Warning Sign #2: The Incredible, Disappearing Profit

By now, I’m sure you’re tired of hearing me say that stock prices ultimately follow earnings. But it’s true. So when corporate profitability starts taking a hit, it’s only a matter of time before stock prices head south, too.

Again, we’ve got nothing to worry about.

In the first quarter, S&P 500 companies reported a 3.2% increase in earnings. And analysts expect them to keep growing over the next three quarters, by 1.6%, 7.9% and 14.2%, respectively.

~Bear Market Warning Sign #3: A Recession is Coming! A Recession is Coming!

Economic activity tends to slow down long before corporate profits take a hit. So we need to be on the lookout for reliable signs of a looming recession.

Note the word “reliable.”

I say that because, at any given time, there are always a handful of analysts warning that a recession is coming.

Ignore the Chicken Littles – and their opinions. Instead, focus on the hard data, including the two most reliable recession indicators I shared with you in late March – Piger’s “Recession Probability Index” and the 2/10 Spread. (For the record, they aren’t flashing any warning signs.)

Besides, although the economy isn’t firing on all cylinders, it’s growing nonetheless. The latest estimates call for GDP growth of about 2% this year.

~Bear Market Warning Sign #4: A Spike in CDS Prices

With all the funny money being pumped into the market by the Federal Reserve, another banking crisis is the biggest threat to the stock market.

As I’ve shared before, there’s a simple and quick way to determine if we need to be fearful. All we need to do is consult the latest prices for credit default swaps (CDS) for banks and brokers.

CDS prices reflect the cost to insure against a default. So if banks are truly about to pull the stock market into the abyss, CDS prices should be rising rapidly.

Guess what? Right now, we have nothing to fear but fear itself.

Or, as Bespoke Investment Group says, “Our Bank and Broker CDS Index is now at its lowest level since April 15, 2010. Over the last week alone, financial-sector default risk is down 8.5%, and it’s down 50% over the last year.”

Stay tuned for tomorrow’s column, where I plan to share the remaining five indicators on our “Bear Market Checklist.”

In the meantime, pop a pill and relax. There’s no immediate danger threatening stocks.

Ahead of the tape,

Louis Basenese

For months, we’ve heard that a “Great Rotation” is underway. That is, investors are dumping bonds and promptly putting the money back to work in equities. And this uptick in buying activity is precisely why the stock market keeps hitting new all-time highs.

Sounds perfectly logical. And Wall Street appears to be corroborating the theory.

“You have this huge migration moving from grossly overweight fixed income back into equities,” says John Stoltzfus, Chief Market Strategist at Oppenheimer.

The only problem? The data tells an entirely different story.

Here’s the proof in a single chart – and, more importantly, why Wall Street’s latest deception ironically bodes well for us…

Stocks Back En Vogue

I’ll be the first to admit that a transition is afoot.

In January, investors (finally) rediscovered stocks. U.S. stock funds reversed 20 consecutive months of outflows by attracting a record $18.4 billion.

And over the course of the first quarter, the enthusiasm for stocks intensified. According to the fund tracker, EPFR Global, investors plowed a total of $53.9 billion into stock funds in the first three months of the year.

Yet none of these purchases were fueled by the sale of bonds.

As you can see, U.S. bond funds actually attracted another $43 billion in fresh capital in the first quarter.

Granted, that’s down about $30 billion from the same period last year. But it’s still a net inflow, which indicates that investors aren’t rotating out of bonds one bit.

So where’s the money coming from to buy stocks? Money market funds.

Based on EPFR data, investors yanked a total of $103.9 billion out of these funds in the first quarter.

The latest numbers from the Federal Reserve support the EPFR data, too. According to the Fed, the $644-billion influx into savings accounts and CDs we witnessed in 2012 slowed to a trickle this year.

As I’m sure someone will point out, I’m basing my conclusion on data for the first quarter of 2013, which ended about six weeks ago. And a lot can happen in that amount of time.

Fair enough. But even if we look at the most recent data, it’s clear that a rotation out of bonds still isn’t underway.

Survey Says? Bonds Over Stocks

The latest weekly report from EPFR reveals that investors still prefer bonds to stocks.

Case in point: For the week ending May 10, global bond inflows totaled $13.07 billion, versus $10.49 billion for stocks.

And if we focus only on U.S. flows, bond funds and stock funds finished the week almost dead even at about $7 billion. So investors certainly aren’t ditching bonds en masse in the United States, either.

Of course, those headline figures don’t tell the whole story.

As Cameron Brandt, EPFR Global’s Director of Research, said, “A single ETF accounted for over $5 billion of the total net [equity] inflows and retail redemptions were the second highest year-to-date.”

Bottom line: Forget all the chatter about the so-called “Great Rotation.” Investors still love bonds more than stocks, which means this bull market has plenty more room to run.

If you’re reluctant to embrace such an optimistic view of reality, tune in tomorrow. Boy, do I have a statistic that’ll zap any bearishness out of you!

Ahead of the tape,

Louis Basenese

• In the summer of 2008, when oil topped $140 barrel – and Wall Street banks predicated a “super spike” to $200 – I told readers to sell it short. Within five months, oil tanked more than 70%.
• In August 2009, everyone hated the U.S. dollar. Heck, foreign governments even publicly jawboned about the need for a stronger reserve currency. And the euro was everyone’s choice as a replacement, which seems laughable now. Yet I told readers to bet on the almighty dollar and bet against the euro. Those who listened profited handsomely.
• I insisted that readers buy the auction house, Sotheby’s (BID), when everyone else thought it was heading for the chopping block.
• Then I urged a bullish stance on JDS Uniphase (JDSU) when everyone else left it for dead.
• And there’s no doubt that longtime readers recall my multiple recommendations to short Facebook (FB) – before it even went public.

Now, I’m not bringing any of this up to brag. Instead, I want to prove a point…

In isolation, each bold call above seems wonderfully lucky – and can be quickly ignored. Collectively, however, these predictions can’t be so easily dismissed.

So how’d I do it?

Simply put, I cheated. That is, I relied on the help of the world’s greatest investors. And today, I want to show you how you can do it, too.

You’re Either a Contrarian or a Victim

It may shock you, but unlike everyday Wall Street types, the world’s greatest investors don’t believe in keeping secrets. They freely share their profit strategies.

Mind you, this benevolence doesn’t just come from their exploding net worth. They just have zero confidence in the average investor’s ability to master their strategies.

We’re certainly not average investors, though. And I have all the confidence in the world that we can put their invaluable insights to work for our ultimate profit.

So listen up!

• From Sir John Templeton we get this nugget of wisdom: “It is impossible to produce superior performance unless you do something that is different from the majority.”
• Warren Buffett advises, “Be fearful when others are greedy and greedy when others are fearful.”
• And Silicon Valley venture-capitalist extraordinaire, Bill Gurley, says, “You can only make money by being right about something that most people think is wrong.”

Or, to sum them all up, the key to minting riches in the stock market boils down to this: Be a contrarian!

That’s easier said than done, of course. But it’s imperative if we want to maximize our profits.

Now, I’ve spent the better part of a decade fine-tuning my contrarian investing skills. I’ve taken some lumps along the way. After all, nobody’s perfect.

In the process, though, I’ve been able to boil down contrarian investing to three simple, yet powerful, keys.

Follow them, and I’m absolutely convinced you’ll become a more disciplined and profitable investor.

Just check out the latest issue of WSD Insider to see exactly what these keys are!

Ahead of the tape,

Louis Basenese

Each Friday, we abandon long-winded analysis to let some carefully selected graphics do the talking for us.

But don’t let our brevity fool you.

Most subscribers tell us this is the most insightful and useful column we write each week.

Yes, picture books can be educational for adults, too! And here’s the latest proof…

Record High? Think Again!

MarketWatch’s Mark Hulbert says, “Stock market bulls face an inconvenient truth as they celebrate the stock market’s new all-time highs.”

What’s he talking about?

Apparently, we’re supposed to be miffed that the S&P 500 Index didn’t actually hit a new all-time high. At least, not on an inflation-adjusted basis…

We need stocks to rally about another 25% before we can make such a boast.

Oh, how “inconvenient!” We’ve already shown that history points to this bull market lasting longer.

So shoot me now and spare me the misery.

Talk About Stimulation

Want to know how the economy is doing? Forget about tracking consumer spending, manufacturing activity, or unemployment claims.

Just be on the lookout for pregnant women.

You might think that’s inappropriate, but according to Hedgeye Risk Management, when more women aged 20 to 34 find jobs – in other words, when the economy is strengthening – more babies are born in the United States.

Conversely, when the economy hits the skids, the baby making stops.

Naturally, there’s a nine-month lag between more jobs and more babies. (If I have to explain why, we’re in trouble.)

So what does the latest data reveal? That Marvin Gaye’s “Let’s Get It On” is getting a lot of playtime.

After the Great Recession caused the largest drop-off in births in 40 years, Americans are certainly getting busy again.

Of course, more babies mean more Americans need bigger houses. And that plays right into our thesis of a prolonged real estate recovery. (In case you missed it, you can get up to speed to here, here and here.)

The Scariest Jobs Chart Ever, Revisited

Baby-making levels might be back to normal. But that doesn’t mean all is well on the employment front.

Even after adding 165,000 jobs in April, we’re still not back to normal, based on the latest version of “The Scariest Jobs Chart Ever.”

Caution: This is one of the scariest images we’ve seen since the War ended.

At this point, any progress is welcome progress, though, right?

Dump China, Buy Mexico?

Two weeks ago, I shared that China lost its crown for being the lowest-cost producer of goods in the world. Now, it’s Vietnam and Indonesia’s turn to reign, which makes these ETFs compelling investments.

It turns out that we might want to invest a few pesos in Mexico, too.

As hourly manufacturing costs keep rising in China, it’s making Mexico competitive again.

And given the manufacturing renaissance that’s underway in America (thanks to a glut of cheap natural gas), Mexico is certain to benefit because of its close proximity.

Or, as Morgan Stanley’s (MS) Nikolaj Lippman and Luis Arcentales put it, “A sustained manufacturing revival in the United States… will create a new competitor for the [emerging markets] world, but a partner for Mexico. And the benefits could be felt across the Mexican economy for years, perhaps even decades.”

Sounds like an opportunity to me. And the easiest (and cheapest) way to play it would be the iShares MSCI Mexico Capped ETF (EWW).

That’s it for this week. Before you go, though, let us know what you think of this weekly column – or any of our recent work at Wall Street Daily – by sending an email to feedback@wallstreetdaily.com or leaving a comment on our website.

Ahead of the tape,

Louis Basenese

For the second consecutive quarter, S&P 500 companies are on pace to grow earnings by about two percentage points more than analysts originally expected.

While their ineptitude may not be all that surprising, here are five more earnings season trends that might be…

Again, take note and invest accordingly…

~Surprise #6: Europe’s Woes Aren’t Sabotaging Revenue “Beat Rates”

Yesterday, I focused on the mildly bullish earnings “beat rate.” Today, it’s time to turn our attention to the revenue beat rate (i.e. – the percentage of companies topping analysts’ expectations for sales).

To put it bluntly, it started off in the tank at a mere 43%. Truth be told, we haven’t witnessed such a terrible reading since the height of the financial crisis.

Thankfully, though, we’ve made (significant) progress. The current revenue beat rate stands at 52%, according to Bespoke Investment Group.

While that’s still below the bull market average of 60%, it’s not terrible. Especially when you consider that companies aren’t suffering massive sales declines. Instead, S&P 500 sales are off a mere 0.1%, on average.

So much for “European exposure” sabotaging sales, as one Wall Street analyst boldly warned…

~Surprise #7: Underpromise Now… Overdeliver in the Second Half

Out of the 80 S&P 500 companies that provided guidance, 63 lowered expectations. That works out to 79%, which is well above the average of 61% over the last five years, according to FactSet.

Wall Street is wise to management’s ruse of underpromising and overdelivering, though. That’s why nobody’s rushing to lower earnings estimates for the next quarter.

In fact, second-quarter earnings revisions for the S&P 500 remain in line with historical averages. They dropped 2.5% compared to the five-year average quarterly revision of -2.8%.

So don’t sweat the seemingly negative guidance. Earnings growth for S&P 500 companies remains on track to accelerate in the second half of the year.

And since stock prices ultimately follow earnings, that bodes well for the longevity of this bull market.

~Surprise #8: No Fatigue Yet

At this stage of the bull market, you’d expect stock prices to exhibit a muted response to earnings – given that they’ve risen so much already. Think again!

Based on Bespoke’s calculations, the average one-day gain for stocks after reporting earnings checks in at 0.77%. That’s sky-high compared to the 10-year average of 0.12%.

~Surprise #9: Time to Hang Up on Telecom?

In terms of valuation, the S&P 500 is trading in line with historical averages. The current forward P/E ratio for the Index rests at 14, compared to the 10-year average of 14.1.

So, on average, we’re paying a fair price for stocks.

If we break down the valuations by sector, though, be wary of telecom stocks, including Windstream Corporation (WIN). The sector boasts the highest forward P/E ratio of 18.

Depending on whether or not you own any telecom stocks, it’s either time to hang up on them – or put them on your “Do Not Call” list.

~Surprise #10: Energy is (Still) Getting Cheaper

If you’re on the hunt for bargains, look no further than the energy sector. It’s the only one that experienced a decline in valuations over the last quarter.

The current forward P/E ratio checks in at a mere 11.9.

Now, I’ll be the first to concede that a cheap valuation doesn’t guarantee future profits. But it certainly reduces our risk.

There’s actually one corner of the energy market that I’m convinced is poised for a resurgence. So much so, that I’m getting ready to recommend that WSD Insider subscribers push some chips in on it.

Fair warning: It’s perhaps the most contrarian recommendation I’ve made all year. But that’s why the profit potential is so high.

Ahead of the tape,

Louis Basenese