Published: September 14, 2009

I'm consistently amazed at the ability of smart, successful people to get things totally wrong. I find myself in slack-jawed awe of how just plain clueless investors can be.

The supply of intelligence is finite, someone once said, but the population is growing. That makes me smile.

I don't grin just because that's a funny saying. Instead, that adage makes me happy because it invariably creates a significant profit opportunity.

I mean, I like being right as much as the next guy, but it's even more satisfying to make money off the ignorance and narrow perspective of the people on Wall Street.

Here are three glaringly obvious facts about the market that no one seems to be paying any attention to:

1.) Valuations are too high

The S&P 500 is trading at 19.3 times earnings. That's a five-year high, a roughly 18% premium to its average in that period. That means one of things needs to happen: Earnings need to rise or prices need to come down.

It's just silly to think earnings are going to rise. Ten percent of the country's workforce is unemployed. The people who have jobs are spending carefully. Six of the 10 largest companies in the country are expected to report lower earnings for the quarter than in the year-ago period.

If you're seriously betting on a wholesale rise in earnings, you ought to have your head examined. Some companies are going to have great quarters, but the earnings picture looks bleak overall.

That means the market has gotten a little ahead of itself. The only thing left is for prices to fall. A stock price on an index level doesn't tell you anything on its own, but investors, like lemmings, assume that if the S&P is above 1,000 then everything must be all right. You simply can't afford to be this naive.

Action to Take: If you have broad market exposure, perhaps through an ETF like the SPDR S&P 500 (NYSE: SPY), then you should consider moving those assets into cash or into sectors that are more reasonably valued.

Insiders' Tip: Don't forget your 401(k). If you've made up some lost ground with your retirement account after the drubbing many took in 2008, it'd be a shame to give it back. Put that money someplace where it can grow. There's no upside left in the S&P.

2.) Inflation is coming

The federal government has spent, lent or committed $13 trillion since the financial bailout began. That's roughly equivalent to the United State's annual gross domestic product. The Obama administration's budgets going forward will add $9.3 trillion in deficits in the next 10 years, according to the nonpartisan Congressional Budget Office.

That very nearly doubles the $11.8 trillion national debt.

Where does all this money come from? Whether you answer China or the U.S. mint's printing press doesn't matter. It's impossible to drop that much cash into the U.S. economy without seeing the dollar lose value. This is a freight train barreling down on a railroad crossing, and for some reason no one is heeding the warning lights.

Action to Take: If you've never looked at foreign investments, now may be a good time. If you've ever considered exchanging greenbacks for a more stable currency, that's not a bad idea, either. And hard assets have always been a good hedge against an eroding dollar.

If you're uncomfortable using an international broker, there are plenty of foreign stocks that trade on U.S. exchanges as American Depositary Receipts. Investors now can use exchange-traded funds (ETFs) to gain easy entry into dozens of once-forbidden markets (like Vietnam) or countries such as Brazil and China that were once difficult and expensive to access.

ETFs also can be an easy way to convert your dollars into foreign currencies. The iPath Pound/Dollar fund (NYSE: GBB), for example, will turn your greenbacks into pounds sterling.

3.) Financials are ridiculously underpriced

Though some of the nation's large banks are commanding steep prices, many small and midsize banks are still insultingly cheap. This just doesn't make any sense. Even if the worst of Wall Street's fears comes true and loans continue to go bad, most of these midsized banks would be just fine. That's because they are still being guaranteed by the federal government, which isn't going to withdraw its support until the banks are healthy and in a position to thrive in a recovered economy.

But for now, the market is doing what it does best, focusing on fear. That's foolish. Bad loans have crested. TARP funds are available, and the FDIC has offered to cover some bad loans, too. What's more, dozens of these banks are also raising additional private capital, which strengthens their balance sheets.

When the economy turns, these banks will have dealt with bad loans and positioned themselves to be stronger and healthier than ever. In the meantime, they can be had for a song. They're a steal.

Some people look at the banks that have paid back their TARP and applaud. Not me. I don't want to own the bank that just paid its TARP funds back, I want to own the ones that are about to. I don't know why investors always want to buy what's hot and never focus on what's getting warmed up, but I do know that it's no way to make real money.

Action to Take: Familiarize yourself with the banks that have taken TARP funds and had their shares hammered. Forget about the banks that have paid their TARP money back already. That's admirable, but it's also a good indicator the upside is gone.


-- Andy Obermueller
Chief Investment Analyst
Government-Driven Investing