Let me (Porter) take those questions in order... We don't use trailing stops on gold bullion because you shouldn't trade gold.
When people ask the second question, I want to shake them. Gold has been in a bull market for 12 years. I've never seen an asset go straight up for 12 years, and I'll probably never see it again. All bull markets experience corrections. So the current one shouldn't stun anyone.
Trying to trade gold or time the gold market is just plain foolish. Gold is something you should stockpile. I buy some almost every year, and I've never sold a single ounce.
Not only that, I would never "back up the truck" in terms of buying gold. I load up on an asset when I can determine there's a huge gap between its intrinsic value and price. If I can buy a stand of timber for $500,000 and sell it for $1 million… it's time to back up the truck. I know it's worth $1 million and the $500,000 price is wrong. I'm happy to buy.
"We think it's a fabulous environment to be selling."
Leon Black, the billionaire founder of private-equity firm Apollo Group, spoke at the economic think tank Milken Institute conference in Los Angeles. He told the audience, "We're selling everything that's not nailed down. And if we're not selling, we're refinancing."
Black said Apollo has sold around $13 billion in assets in the last 15 months.
We discussed why private-equity firms are in a "sweet spot" right now... They have nearly unlimited access to cheap capital, thanks to falling interest rates and the increasing money supply. This allows them to finance bigger and bigger deals – or in Black's case, unload assets at rich multiples to their original prices.
And as the world's central banks continue to create trillions of dollars of paper money, private-equity firms gather more and more assets. With a lack of suitable investments (e.g., bond yields are at record lows), that money is looking for a good home. Much of it will end up being invested with private-equity firms. More money under management means more fees for these businesses.
True Wealth editor Steve Sjuggerud and Small Stock Specialist editor Frank Curzio both predicted a boom in private-equity companies...
They recommended Blackstone Group (BX) and Kohlberg Kravis Roberts (KKR), respectively. Both cited the reasons we discussed above. Also, Steve liked Blackstone because the firm is buying tons of real estate, including single-family homes in the United States... You can read more about Blackstone's investments here.
We asked Steve what he thought about Blackstone today:
There's plenty of room for the stock to move much higher... Even with the run up, it's trading at a forward price-to-earnings ratio of 7.7x and a forward dividend yield of 6.8% (both based on 2014 estimates). It's dirt-cheap.
Frank also shared his views on KKR:
KKR blew away its first-quarter earnings expectations last week. The private-equity firm reported earnings of $0.88 per share, much higher than the $0.82 Wall Street was expecting. The bigger news: KKR increased its assets under management to $78 billion, up 18% from six months ago. And management adopted a new distribution policy where it will return more of its income to shareholders.
The huge increase in assets under management is no surprise. The company has seen strong results from its existing portfolio over the past year. Plus, KKR is raising more cash from pension funds and endowments since its returns are easily outperforming mutual funds and hedge funds.
As for the company's distribution policy, KKR said it will return 40% of its realized investment income from its balance sheet. That's a big deal – and it caught most of Wall Street by surprise. This will return even more cash to shareholders. Based on the new policy, KKR will pay at least a 6% yield for 2013 and 2014. And the stock remains a steal, trading at just eight times forward earnings.
I expect KKR to increase its assets under management to more than $100 billion over the next six to 12 months. This is an easy goal given the tens of trillions of retirement assets stuck in hedge funds and mutual funds that have been underperforming the market over the past five years.
If I'm right, KKR has at least another 50% upside. If I'm wrong, you can sit back and collect the 6% yield, which is three times higher than what the average S&P 500 company pays.
True Wealth subscribers who bought Blackstone in November on Steve's recommendation are up 56% since then. Small Stock Specialist subscribers have enjoyed the same return on KKR shares since Frank's July recommendation.
Back to the Milken conference... Black isn't the only private-equity executive getting cautious with stocks at record highs.
"It has become more difficult to find transactions priced at levels we'd like," said Scott Sperling, co-president of the firm Thomas H. Lee Partners.
Jonathan Sokoloff, managing partner at Leonard Green & Partners, also said today's environment is challenging. "We're having trouble deploying capital at these price levels," he said. "[It's] time to take a pause."
Howard Marks, the billionaire founder of Oaktree Capital Management and a legendary distressed debt investor, also took the podium at the Milken conference. Marks is a contrarian... and he's obsessed with avoiding risk.
So it's no surprise he began his speech on that subject... "Risk aversion is the key element that will keep the markets honest," Marks said. When investors have a healthy respect for the possibility of losing money… prices in the market tend to stabilize. Risk aversion keeps them from paying too much. Bubbles form when caution goes out the window.
Marks pointed to late 2007 – just before the financial crisis – when people stopped factoring risk into their investments. We know the result...
"People came to believe that risk had been banished," Marks said. "Prices get too high relative to reality, and that's when you get a bust."
Right now, the market is not worried about risk. Just take a look at this chart of the Volatility Index ("VIX"). The VIX measures the prices people are willing to pay for options that protect the value of their stock holdings. That's why we call the index the market's fear gauge: The higher the VIX, the more people will pay to insure their stocks... hence, the more scared they feel.
"This is the kind of herd error that you can take advantage of," Marks said of the market's current apathetic view of risk. Like the other private-equity investors at the conference, Marks believes this is a good time to take profits. He noted that fortunes can be made even when you're "right once in a row."
When investors panicked in 2008 (and the VIX hit 80 – six times its current level), Marks put $500 million to work in one week.
Don't take these comments to mean the bull market is over. While these heavyweight investors may be preparing for a near-term correction… we think in the longer term this rally has legs, as we outlined in the April 29 Digest. The government is still buying $85 billion in bonds every month. At its Federal Open Market Committee meeting on Wednesday, the Federal Reserve said for the first time it was open to increasing its bond purchasing.
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.
The government appears to be ready to ward off any deflationary pressures (falling commodity prices, lower employment numbers, etc.) with a limitless amount of cash. Stock prices could increase for another two or three years as a result. However, when some of the smartest people in the business say they're taking money off the table, take note...
New 52-week highs (as of 5/1/13): AllianzGI Equity & Convertible Income Fund (NIE) and CVS Caremark (CVS).
In today's mailbag, another e-mail from an angry subscriber... Send your notes to feedback@stansberryresearch.com.
"I'm really p**sed about all your recos and browbeating to buy Microsoft. For several tears it's been floundering around in the $20s and I've been making a killing selling naked puts. Now you've gone and pushed the price up and out of range.
"And what puzzles me too, is why you're trying to do the exact same thing with CSCO. It's been perfectly happy bouncing around in the teens but you just insist that it go higher. Why can't you leave well enough alone. What's wrong with a guy making 20%-plus a year without actually buying anything?" – Paid-up subscriber Jeff Eason
"That video [on how to value a stock] was the best. I actually feel like I am getting it. No book could have made it more clear, and I have read a few. Porter and Aaron great job! Your pilot subscriber will never get it. Union members are accustomed to being fed. Poor fellow needs to take personal responsibility, but he can't because he gave to the union thugs." – Anonymous
Goldsmith comment: We're glad you enjoyed the video... As you know, Porter believes a fundamental understanding of how to value a security is one of the most important aspects of being a successful investor... And in my opinion, he's one of the best.
Porter recently put together a video for his Stansberry Radio Premium listeners that walks them through the process of valuing an equity. You can learn about his weekly podcast and how to view the video by clicking here...
"Keep [the beard] going through duck season! It's just starting to fill in. And stop cutting your hair too." Paid-up subscriber Hill Rogers
Goldsmith comment: Hill is talking about Dr. David "Doc" Eifrig's interview with Fox Business News yesterday. Yes, the beard is getting unruly. But I'm sure his Retirement Trader readers don't want to see it get any shorter... Doc told his readers he wouldn't cut his beard until he closed a position at a loss. To date, he's closed 118 consecutive winning positions.
Regards,
Sean Goldsmith
Miami Beach, Florida
May 2, 2013