Here's a different way to look at the stock market... A view that I happen to believe is a lot more accurate than the way you're probably used to seeing it:
The chart above is the price of stocks (as measured by the Dow Jones Industrial Average) expressed as a ratio to the price of gold. One of the biggest problems with our government's money is that its value is constantly manipulated. The feds control both the price of money (short-term interest rates) and the supply. This distorts one of the most important roles of money: to deliver accurate information about supply and demand. It's hard to know what to do with your savings when you don't really know what anything else is worth, thanks to the vagaries of paper money. And that's why looking at asset prices through the lens of gold is sometimes very helpful.
If you'd been looking at this chart in late 1999/early 2000, it might have been more apparent to you how expensive stocks had become. When you look at this chart today, it's more apparent how close we may be to a long-term bottom in stock prices.
It's interesting that at the peak of the gold mania in 1980, one ounce of gold was the same price as one unit of the Dow. The Dow-to-gold ratio was 1 to 1. At the peak of the stock market (the real peak) in March 2000, the ratio was 42 ounces of gold to one unit of the Dow, or 42 to 1. Today, the ratio is about 7 to 1. If you were going to lean one way or the other right now, you'd have to say stocks are the better value. Meanwhile, everyone we know is selling stocks and buying gold, including many people who are buying gold for the first time in their lives.
When asked whether or not he was a socialist last week by the New York Times, OBAMA! said "no" and defended his administration's aggressive intervention in the economy. Said OBAMA! "The fact that we've had to take these extraordinary measures and intervene is not an indication of my ideological preference, but an indication of the degree to which lax regulation and extravagant risk-taking has precipitated a crisis."
There's no doubt in my mind that incredibly foolish risk-taking is what caused this crisis. In that sense, OBAMA! is quite correct. But he ignores the central role tight regulations played in encouraging that risk taking. If you look for the source of the credit bubble, you'll find it in the books of Fannie, Freddie, AIG, and the big investment banks. These firms are not only among the most highly regulated in our country, at the time of the credit bubble they were more stringently regulated than at any time in history. Citigroup, for example, was under intense scrutiny by the comptroller of the currency for most of the years leading up to the crisis. Freddie and Fannie were under even more intense scrutiny by a regulator whose sole job was to monitor these two companies. How could the regulations have been any tighter?
So... how did we "regulate" excessive risk taking? By rule making and insurance schemes where the government stood behind every commitment and counterparties had no need to evaluate the quality of any financial institution's promise. And did that work? Washington's rules and guarantee strategy created a perfect moral hazard that encouraged Fannie and Freddie to have capital reserves of less than 2% of assets! Regulation and guarantees are what allowed AIG to sell insurance (credit default swaps) with only a credit rating standing behind their contracts! The government's policy of "too big to fail" and its confidence in intense regulation is what caused the risk-taking that led to this crisis. None of these absurdities would have been possible without the Treasury's guarantee, because no rational counterparty would have accepted the risks. My bet is OBAMA! and company will never understand why a highly regulated financial sector is actually the riskiest.
Today, Merck (MRK) agreed to buy Schering-Plough (SGP) for $41.1 billion in cash and stock, a 35% premium. The deal gives Merck full rights to SGP's cholesterol drugs Zetia and Vytorin, making it the second-largest U.S. drugmaker. And the deal comes less than two months after Pfizer agreed to buy Wyeth for $62 billion, creating the world's largest drugmaker.
We've been following this biopharma merger and acquisition "mega-trend" all year... Big Pharma companies are sitting on mountains of cash. And they currently have the once-in-a-lifetime opportunity to buy their competitors at enormous discounts and take over their pipelines. It's much cheaper than developing new drugs on their own. Our biotech analysts, Rob Fannon and George Huang, have already recommended two companies that were taken over at huge premiums. And they're currently researching other probable takeovers. Even if they only identify one or two acquisition targets, those stocks could return hundreds of percent...
Rob also recently recommended a trade surrounding one of the most anticipated biotech events of the year. On March 30, this company will announce clinical data for what could be the best-selling drug of all time. Rob and all the inside experts he's consulted think the drug is one of the most valuable assets in health care.
To sign up for Phase 1, and receive Rob's most recent recommendation, click here. We're currently offering the service at a large discount, but only until midnight tonight.
Steve's True Wealth readers take note... Steve sent us this update on his high-yield bond recommendation today:
I never thought we'd see the day... but high-yield bonds (as measured by shares of iShares iBoxx High Yield Corporate Bond (HYG) fund) just fell below their November lows. True Wealth readers should close out their position in HYG now.True Wealth in high-yield bonds... In a falling high-yield bond market, we netted over 40%. Now that we've hit our stop, we'll step aside.
We entered our high-yield bond trade in the January issue. We rode shares of PHK up to about a 60% gain. We took the gain. We then swapped the money into HYG. We lost about 12% in HYG before it recently hit its stop.
We got lucky in
PSIA short sale Capital One (COF) cut its dividend 87% to $0.05 per share. The reduction will save the credit-card company $500 million a year... and leaves BB&T as the only top 10 U.S. bank ranked by deposits that hasn't reduced its dividend in the past year.
Some of you
had problems signing up for The Daily Crux's recent interview with multi-millionaire currency expert Chris Weber. In this interview, Chris names the only two places you should be putting your money today... and the only realistic way to make 1,300% gains, or more, in the next few years. To receive the interview, click here... Again, it's completely free.
Warren Buffett did a three-hour interview on CNBC this morning. Some of the highlights include Buffett calling American Express (AXP) a "hell of a buy" at $10 a share – he is restricted from buying any more. He also admitted he wishes he had written the New York Times "Buy American" piece a few months later. But he still believes stocks will outperform Treasuries over the next 10 years. Buffett doesn't think the public should "demonize" corporate executives for using private jets. He loves Berkshire's jet, The Indefensible, and says it has helped Berkshire make many deals in the past.
Finally, and most importantly, Buffett says he still expects to make money on the long-term put options he wrote against the S&P 500, the FTSE 100, the Eurostoxx 50, and the Nikkei 225. The options are worth $37.1 billion, and he's already written them down by $5.1 billion. But the options aren't as risky as they appear. Berkshire doesn't have to make any payments until the options expire... The first expires in 2019 and the last in 2028. And Buffett further explained in his annual letter, "For us to lose the full $37.1 billion we have at risk, all stocks in all four indices would have to go to zero on their various termination dates." Get the full transcript here.
The market is so fearful about Berkshire's derivative exposure that it's pricing a 60% probability Berkshire will default in the next five years. Credit default swaps, bond insurance for Berkshire, are trading at 535 basis points... That's enormous. A Berkshire default is incredibly unlikely... The firm has almost as much cash as it does debt. This is just another example of a panicked market unjustly punishing a stock.
New highs: none.
In the mailbag... We're famous in Israel? Apparently so. Send your press clippings of our work here: feedback@stansberryresearch.com.
"I don't know how many other subscribers live in Israel, but you should know that the Friday edition of The Jerusalem Post (the "weekend version" of the largest English newspaper in Israel) mentioned both Sjuggerud and Dyson, and DailyWealth. Not that the reporter recommended the newsletter, but he mentioned how DW not only discusses investment ideas, but has of late, also discussed the failure of the U.S., U.K. and Japanese govts. The only question posed was which would collapse first! I was completely caught off guard when I read the article and saw your reporters and newsletter mentioned. I think this is good news for your great company. As we say in Israel Kol Ha'Kavod (that means with great honor). Keep up the great work." – Paid-up subscriber Steve L.
"I just recently subscribed to your Investment Advisory newsletter, and discover that this month's (my first month) newsletter is more of a political rant than a financial newsletter. I do not object to anyone having political opinions, but this is not what I thought I was purchasing when I signed up. Furthermore, the use of profanity is not only offensive, but indicates to me that the author has not got his emotions under control, and I am loathe to invest in the advice of a person who can't control his emotional reaction to external events. This is particularly relevant when investing." – Paid-up subscriber Anna
Porter comment: When the government gets out of the economy, we promise to leave the government out of our work. In the meantime, figuring out how the government is likely to screw up next is critical to making good financial choices. As for profanity... we very rarely publish it. But sometimes those are the only words that fit.
"Could you review the ins and outs of shorting a stock? What are the risks? What to tell the broker? Etc." – Paid-up subscriber AF
Porter comment: I've been recommending shorting stocks each month in my newsletter, PSIA. There are so many companies with overleveraged balance sheets. These stocks can't afford the interest on their debts, and they can't refinance or raise new equity in this market. There's no way they can escape bankruptcy, which wipes out the value of their stock. In these situations, shorting stocks is actually the safest investment you can make.
In my most recent issue, for example, I covered a stock that's losing $400 million per quarter in cash. It is down to its last $2.6 billion in cash. And when the company's cash balance falls below $2 billion, it will trigger various debt covenants and cause the firm to file for bankruptcy. The company also has a $400 million loss outstanding on a derivative contract. (It's perfectly hedged, as I like to say: It will go bankrupt no matter what happens in the future.) To learn more about shorting, see my newsletter, PSIA.
Regards,
Porter Stansberry
Baltimore, Maryland
March 9, 2009