Back from Maui...
I just got back from a vacation in Maui. My wife chose the area in the hills just above Lahaina because it's always sunny and warm there. Other parts of Maui (and other islands) often see rain and clouds. But the weather was great the whole time we were there, a classic tropical vacation setting.
One day, we went on a "snuba" expedition. That's a combination of snorkeling and scuba diving, where two people are hooked up to a single air tank and quickly taught how to use the regulator (the mouthpiece you breathe through). For about two minutes, you feel like you're suffocating. Once you relax a little, you just feel like your ears are going to explode. Some people (like my wife) get the feel of equalizing the pressure, and the pain in their ears eases. I never learned to equalize very well, so I stayed pretty close to the surface.
I'm not sure how, but snuba was great fun, ear pain and all. I think it was fun because we were learning something new. Learning is like that. It's initially uncomfortable as you wade into the unknown. But as you make progress, it feels better emotionally, even if it still feels physically uncomfortable. Eventually, you have a new skill, and the mastery feels good.
Investing is like snuba in that regard. It often doesn't feel good, even if you're doing it right, especially when you're a beginner. Then, after you've been doing it a while, it feels better. My largest equity position is down quite a bit right now. The old me would have sold it and taken the loss. But the more experienced me is salivating as it falls lower. Pretty soon, I'm going to start pouring more cash into this stock. I'll be earning a huge double-digit dividend yield. And it's a preferred stock, so I'll have a position senior to the common equity.
It feels like 2008 all over again. The price of everything seems to be falling... stocks, gold, silver, oil, copper... That's how it is in a liquidity crisis. Everybody wants to sell everything – everything except dollars. Folks are bailing out of assets and seem happy to buy U.S. dollars.
So the dollar isn't going to zero this week. Yes, it's a worthless fiat currency. Yes, the Federal Reserve said it would continue buying Treasurys (with newly printed worthless dollars).
But these things don't happen overnight. Prices don't rise and fall in straight lines. When people get scared, they sell every asset they can. Selling assets is just another way of saying they're buying money. And everyone still thinks the U.S. dollar is money. So as the price of everything continues to fall, the price of dollars continues to rise. I started telling folks to hold lots of cash back in April. And so far, that's been the best bet.
Some day, we'll get tired of the Fed's mismanagement of the U.S. dollar. Until then, remember Gresham's Law – "bad money drives good money out of circulation." That means people hoard the good stuff (like gold and silver) and circulate the bad stuff (like U.S. fiat dollars) for as long as they can get away with it. So for as long as we continue to print new dollars like they're in danger of going out of style, folks will buy things with U.S. dollars and continue to hoard gold and silver. (It's funny… They're only in danger of going out of style because we continue to print too many of them.)
When will the U.S. dollar completely fall apart? Nobody can tell you that. They can only tell you how to prepare for it. Holding physical gold and silver is the best way to prepare.
It's a painful thing to figure out that government is impotent in the face of economic reality. It's like learning to equalize the pressure in your ears during a snuba expedition. It hurts at first, but it's necessary.
Thomas Jefferson once said something to the effect of the only enterprises that need government support are weak ones. We want strong enterprises in the global economy, not government-supported ones. Let the market's disbelief in government and the bear market in stocks continue. I love them both. The former creates more solid ground upon which to build the future. And the latter creates the stock market bargains we need to make money as investors.
Microsoft raised its dividend by 25% today. In a recent update, I told my subscribers, "I expect Microsoft will once again raise its dividend payout, likely before the end of September."
Microsoft is now yielding about 3.1%. That's a hefty number for a company with 25% dividend growth, which gushes free cash flow at a higher rate than any other company I know and has a balance sheet that actually deserves its triple-A rating.
Since late 2009, I've been telling investors that if they don't buy dividend growth stocks, they're not going to do very well over the next several years.
That's because we're in a sideways market. That's when the market ratchets up and down, pretty much going nowhere for more than a decade. The stock market has been going sideways since 2000, and it'll continue to do the same for years to come. Since you can't count on higher stock prices bailing you out, you either have to learn to time the market (which nobody can do consistently), or you have to earn a growing stream of dividends.
In The 12% Letter, I've compiled a whole list of stocks like Microsoft – big dividend growth stocks that are much safer than most stocks. If you want a growing income, they're the best place to be right now. To learn more about The 12% Letter and read about these exceptional income opportunities, click here.
Porter was right on the money (literally) in shorting First Solar. You can't ever expect a solar company to do too well for too long. It's a lousy technology for large applications. A solar stock with a big market cap is a disaster waiting to happen.
I've been watching the solar power debate play out in the Digest. It's amusing. We have so much oil and gas, solar was always (and still is) totally irrelevant, except on the smallest scale. It's not even a real debate. Solar is a dead-end for anything but small-scale applications in sunny locations. If you don't get that, you're just not paying attention.
The funniest, dumbest thing I ever heard about solar power came from Charlie Munger, vice chairman of investing legend Warren Buffett's company Berkshire Hathaway. Munger loves to tell the world how smart he is – a sure sign of someone about to say something really stupid.
A few years ago, at the now-extinct Wesco annual meeting in Pasadena, California, Munger said we should carpet the country with solar panels. If Munger knew anything about solar panels, he'd have known they're made of toxic waste. So he was basically saying we should carpet the country with a layer of poison. And if Munger knew anything about solar panels at all, he'd have known they're the most expensive way to make electricity. So using them everywhere would mean paying the most you could ever pay for electricity.
Speaking of people who think they're much smarter than they really are, the Harvard MBA indicator is flashing a sell signal again…
Ray Soifer, a former bank analyst with Brown Brothers Harriman, has been compiling the Harvard MBA Indicator for more than 20 years. The idea is simple. The greater the number of Harvard MBAs heading to Wall Street, the more likely stocks are to fall. The indicator has a decent track record...
Soifer's indicator correctly predicted falling stock markets in 1987 and 2000. It flashed a long-term sell from 2005-2008.
Right now, it looks like 37% or so of the class of 2011 has accepted so-called "market-sensitive" jobs, up from around 31% last year. The record was 41% in 2008, a great year to sell short stocks.
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New 52-week highs: short position of Gannett (GCI).
In today's mailbag… a subscriber throws himself into one of our positions. Send your comments to feedback@stansberryresearch.com.
"Gentlemen, I joined your newsletter about a month ago. I am retired living on a fixed income. I only had about $9,000 in savings and no investments.
"Today when Silver Wheaton (SLW) stock you recommend dropped, I was able to get 110 shares at $37.89. I will try to add more if we get any more large drops like today, as funds permit." – Paid-up subscriber R.B.
Ferris comment: Putting half of a retirement nest egg in a single volatile silver stock sounds risky to me. Putting half of one's retirement savings in any stock is risky. As a general rule, we at S&A suggest subscribers put no more than 5% of their portfolio in any single position.
Also, if someone needs tap their savings within 10 years, they should not be in the stock market at all. An investor nearing retirement is better off in bonds, like the ones Mike Williams covers in his True Income service. Click here to learn more about Mike's service.
Regards,
Dan Ferris
Medford, Oregon
September 22, 2011
Back from Maui... 'Snuba investing'... It's 2008 all over again... Where to get rising income now... The silly solar debate... Charlie Munger: Stupid genius... El-Erian: 'Eve of crisis'... Harvard MBA sell signal flashing...