A trip to Nicaragua... What's going on with Annaly?... Trailing stops work… A Windows 8 convert… A grammar lesson…
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I (Sean Goldsmith) am pleased to announce – from my New York City apartment, which still doesn't have hot water or heat – that I'm going to the beach. And I'm taking a small group of subscribers with me...
Once or twice a year, Porter and I take a few folks to visit Bill Bonner's luxury beachfront community – called Rancho Santana – on Nicaragua's Pacific coast. It's one of my favorite places in the world to unwind. And it's one of Porter's favorite places in the world to surf. (That's why he recently acquired a beachfront lot on the property.) More and more of our friends who visit Rancho Santana are buying property, or at least going back to enjoy the sunshine...
In fact, a member of our Atlas 400 – a private social club consisting of some of S&A's most interesting subscribers – recently visited "Rancho" for the first time this year. (This gentleman's job takes him all over the world.) He said it was one of the best spots he'd seen.
I last visited Rancho in August. It was my first time seeing the new clubhouse and restaurant – called La Finca y El Mar ("The Farm and The Sea"). I was blown away…
You can sit outside, under giant arches, watching the waves crash on the rocks... And the food is the best in the country... They recruited a chef from a leading restaurant in San Francisco to run the kitchen.
The service was even more impressive than the food... The servers are all locals with no prior exposure to the kind of service provided at world-class, five-star hotels and restaurants… (The Ritz-Carlton has yet to open a location in rural Nicaragua.) But you wouldn't know it. The service is top-notch... I've known many of the Rancho employees for more than five years. It's wonderful to see how much they really care about providing guests with the best possible experience.
Rancho's owners are still investing millions of dollars into the property... They're building a seaside inn, a new spa, another restaurant (this one with a more casual, beach-club feel), and expanding the activities offered. They've even started their own development company to ensure quality control.
But for many of the folks investing in Rancho Santana, it's about more than just having an idyllic, tropical playground… It's also a good way to diversify their assets outside of the U.S. Considering the outcome of Tuesday's election, everyone should consider moving some assets offshore. We have no idea what capital controls Obama will put into place over these next four years. So it's best to get your money out while you can.
And we think offshore real estate is one of the best options for protecting your capital overseas. Especially Nicaraguan real estate... The carrying costs at Rancho Santana are so low, it's laughable. For example, property taxes are $200 a year. Housekeepers and gardeners are inexpensive and enthusiastic.
Less than 20 minutes from Rancho Santana, Central America's richest man – Carlos Pellas – is building a world-class development called Guacalito de la Isla. I visited Guacalito in August. It's beautiful. But the opening price point is triple that of Rancho Santana.
And Rancho residents will likely have access to Guacalito's crowning asset – an 18-hole golf course designed by David Kidd (who also designed Bandon Dunes in Oregon). Pellas is also working to put an airstrip between his property and Rancho and build Nicaragua's first boat marina – both of which would increase the value of property at Rancho Santana. He's also paving the 12 miles of dirt road leading into the ranch...
When Guacalito opens next year, prices for Nicaraguan real estate will skyrocket. And the best way to play the boom is buying a lot across the cove at Rancho... You can still buy a lot there with sweeping ocean views for just $150,000. And you can build a home with premium finishings for around $100 a square foot. (Similar construction would cost five to 10 times as much in the U.S.) I wouldn't be surprised to see prices in Rancho Santana double in the next five years.
In addition to Pellas' investment, many of the biggest companies in the world are ramping up investment in Nicaragua... Wal-Mart, Levi Strauss, and BMW (to name a few) have all recently increased their business presence in the country.
And the mainstream media is taking notice... We have it on good authority that the New York Times Travel Section will be running a major front page feature on Nicaragua this month.
If you'd like to escape the cold – and the U.S. political situation – come visit Rancho Santana with us. We will host a small group of subscribers at the ranch December 12-16. If you are thinking about investing in real estate in Rancho Santana, we urge you to act quickly... As we bring more and more groups down, the best lots are getting snatched up.
I spoke with someone from Rancho Santana yesterday... He said following the presidential election, more people are already reaching out to visit the ranch and buy lots. Don't worry, there are still plenty of beautiful lots available. But you shouldn't hesitate.
We just ask one thing... Please come only if you're truly interested in investing in the community. We think Nicaraguan real estate is a great investment today... And we want to make sure serious investors are given priority on this opportunity. Please contact Rancho's head of sales, Marc Brown, to reserve your spot. You can reach him at marcb@ranchosantana.com. And to see more on the spot, visit Rancho Santana's website here.
Annaly Capital Management (NLY) is one of the most popular stocks we've ever recommended at Stansberry & Associates…
Recently, the company released news that has caused investors to sell off the stock. Perhaps you're a shareholder (lots of subscribers are) and have been tempted to do the same…
You'd be making a big mistake…
Annaly is what's known as a mortgage real estate investment trust (REIT). We refer to these businesses as "virtual banks" because they make money the same way most banks do. Annaly's business model is simple... It borrows money at low interest rates (thanks to the Federal Reserve) and invests it at a higher interest rate in 100%-guaranteed mortgages from Fannie and Freddie. It then uses leverage (currently 6x) to amplify those returns.
The difference between the rates Annaly pays to borrow and the ones it receives from its investments is called the "interest rate spread." The interest rate spread is the most important number in Annaly's business. It tells you exactly how profitable its investments are…
Let's say the interest rate spread is 2%, and Annaly is using six times leverage... The company is making 12% on its money.
When the interest rate spread increases, Annaly makes more money. When it decreases, the company is making less money – and it has less money to pay large dividends. Right now, the spread is decreasing...
In the third quarter, Annaly reported an annualized interest rate spread of 1.02%. That's down from 2.08% a year ago and 1.54% in the second quarter of 2012.
The spread is narrowing because the Federal Reserve has pushed mortgage rates to record lows... And short-term rates are starting to creep up.
You may think you'd want to avoid buying Annaly when the interest rate spread is falling, but that's not the best indicator. There's another metric (which we'll discuss in a moment) that signals Annaly's stock price performance more accurately.
Take a look at this chart of the interest rate spread...
The blue line represents Annaly's interest spread… the black line represents its share price. When the blue line is falling, the spread is narrowing (Annaly is earning less). When the blue line is rising, the spread is widening (Annaly is earning more).
Most investors figure a narrowing spread is a good sign to get out of Annaly…
Adding to the bad news… Annaly declared a $0.50 dividend in the third quarter, down from $0.55 in the second quarter. This is bad news for investors who buy mortgage REITs for income. A falling dividend pushes money out of the stock.
The combination of a decreasing interest rate spread and falling dividend has sent Annaly's shares plunging…
But take another look at the chart. Notice how the spread was still falling in December 2005, while the share price rose. In fact, the two lines moved in opposite directions for more than a year… from late 2005 until the spread bottomed in early 2007. Investors who waited for the spread to start rising missed a lot of the move – and the dividends.
If not the interest rate spread, what is the best indicator for when to buy Annaly? Well, it's extremely simple. You only have to follow one number – book value.
Let me explain…
Book value is essentially the value of the assets on a company's balance sheet. Here's the thing about Annaly's book value... It's not just an accounting number. It's the actual liquidation value of the business. Annaly could sell its book of mortgages on the market today for around $16.70 a share.
At its current price of $15 a share, Annaly is trading at 90% of book value. Our research and experience has shown that whenever Annaly is trading below book value, you should buy...
Whenever the book value (blue line) falls below "1," shares rally (black line).
Look what happened when the book value plunged in 2009... Shares rallied from $12.50 in March to nearly $20 in September. You would have made more than 60% in those seven months, including dividends. I (Porter Stansberry) recommended my readers buy shares in November 2008, when shares were trading closer to $12. We closed that position in June 2011 for an 81% gain.
Currently, Annaly's regular income can only support a $0.30 quarterly dividend ($1.20 a year). Based on a $15 stock, that's 8% a year. But the company is actually paying a higher dividend today ($0.50) because it is selling bonds to generate capital gains. But this can't go on forever...
Let's say Annaly pays an 8%-10% dividend in the next year... It's lower than today's payout. But it's still excellent, considering the alternatives.
And here's the really interesting part... Annaly announced it will begin buying back stock. That's fascinating... I've never seen a mortgage REIT do this before. Its logic is simple: With spreads low right now, why put capital to work there? Why not buy our own portfolio instead, at a price that's less than book?
For investors, this provides a better future return by lowering the share count.
We're certain Annaly will pay a lower dividend in the future. But it will still be multiples higher than most other alternatives. And Annaly is one of the safest and best-run financial companies we know. Its mortgages are 100% guaranteed by the government. And the market has already priced in the downside.
We're happy holding Annaly here and collecting near double-digit income.
New 52-week highs (as of 11/9/12): Vanguard Inflation Protected Securities (VIPSX) and Yamana Gold (AUY).
In today's mailbag… one subscriber thinks we need to grow up and wishes us "good riddins." Same to you, sir. Send more vitriol our way here: feedback@stansberryresearch.com.
"Great show this week, and I do believe that Porter nailed the issue - that people have a fear of selling. Anyone who can't get the concept of a trailing stop is either:
"1) In willful denial
"2) A product of the US educational system with poor math skills
"3) Can't understand much more important things about stocks in general
"4) Some combination of the above
"I have been a subscriber for about 2 years, and will say that I have made my share of mistakes, but I am cleaning them up today and taking today as an early 'new year's resolution.' This includes stopping out of Intel - a world dominator - but my guess is I can sell puts next month and get a better entry price.
"In more positive news, I put my Mom and Dad's portfolio in TradeStops and they follow my advice when I tell them to sell. Their performance is killing mine. Funny how I have less emotion advising them than taking care of my own affairs." – Paid-up subscriber Kevin
"Like Dan Ferris, I have no idea why folks thought people would abandon Windows because Windows 8 looks different. I pre-ordered a Dell Duo with Windows 8 which was delivered this week and I love it. That is from a dinosaur who did command line programming for decades. Just click on "desktop" and you have most of the old interface back when you want it. I'm sure I'll be annoyed by something they changed but why would I leave Microsoft? Leave it for what?! If anything this will make the generation which is used to touch screen phones love their Windows based systems even more. Microsoft is a 'World Dominator' which I'll be keeping." – Paid-up subscriber Joyce Reynolds
"You Assholes, will you quit the Komrade Obama sh*t and grow up! The other guy lost, so Obama remains everyone's president. In fact, I'm so disgusted with all your negativity, that I want to quit my subscription to your 12% Letter as well as your newsletter and all the rip-off promos you send out.
So long and good riddins…" – Paid-up subscriber J.P. Peszko
Goldsmith comment: It's "riddance."
Regards,