Bernanke's market crash... N.Y. Fed number games... Avoid an audit... Bernanke the murderer... A balanced portfolio: 11.35% a year... Portugal yields... European Central Bank 1, Fed 0... PIMR's new 'Fed Trade' fund...
In today's Growth Stock Wire, our own Jeff Clark discusses Federal Reserve Chairman Ben Bernanke's incentive to crash the stock market. Jeff says removing quantitative easing from the market will be like taking drugs away from a junkie. The user will find out just how much he needs his connection. A good market crash followed by a QE3-induced rally will show everyone the true power of the great and wonderful Oz.
(Some say the title character in The Wizard of Oz was a metaphor for the gold standard. I don't know. I thought it was the story of a well-meaning crank who got found out.)
But don't worry… The New York Fed says we've got nothing to worry about. It says the chance of a double-dip recession through March 2012 is slightly less than 1 in 232, or roughly 0.43%.
How does the New York Fed come by this insight? By comparing Treasury spreads, of course! It compares the 10-year bond yield with the three-month Treasury bill yield and turns it into a probability of a recession.
Well, isn't this rich. The Fed supports the market by quantitative easing, a strategy whose two-pronged focus is increasing bank reserves and supporting Treasury security prices. So then the New York Fed looks at its artificially created spreads and pronounces the odds of a double-dip recession as less than 1 in 232. Most counterfeiters don't create marketing campaigns... Then again, most of them work in secret under threat of criminal prosecution, not out in the open.
The IRS is really ramping up the tax audits this year. I heard about one guy who got audited because he claimed $10,000 out-of-pocket medical expenses on $30,000 of income. Turned out he had no health insurance and didn't qualify for any type of assistance. So the IRS let him go. He was lucky. But his example tells you claiming huge, weird expenses is a sure way to get audited.
A trusted source told me yesterday that filing your taxes on time can reduce your chances of getting audited. Filing an extension gives the IRS more time to flag you. Also, he said I'm an unlikely candidate for an audit because my expense deductions are well within ordinary limits. In other words, I pay lots of taxes because I don't push the expense envelope, so the auditors will probably leave me alone. And because I have few expenses, they know they can't make a killing on me by disallowing them.
That's how the mob works, doesn't it? Pay Vinny on time and pay him plenty, and maybe you finish the year in good health. Don't pay Vinny on time or don't pay him enough and maybe you learn to live without knees.
Living without a body part or two at least falls short of murder… According to the editor of the Gloom Boom & Doom Report Marc Faber, if you're a member of the U.S. middle class, Fed-induced inflation is killing you financially...
Faber has warned us for years about the dangers of printing money. But we can't remember him using language this strong. In a recent interview, Faber referred to Fed Chairman Bernanke as a "murderer." He said Bernanke's quantitative easing will cause all asset prices to rise, destroying the middle class...
It's true. Bernanke thought he'd restore the economy to health and get people back to work. His original QE2 press release mentioned his twin mandates: price stability and maximum employment.
But what Bernanke has really done is send the prices of oil and other commodities soaring. Meanwhile, unemployment has barely budged. He's achieved the opposite of what he promised. Who would have guessed you couldn't just print a bunch of dollars and everything would be fine?
If you print enough money, eventually the price of just about everything goes up. But financial markets don't move in straight lines. Right now, newly printed dollars aren't going into housing because it's drastically oversupplied. But plenty of money goes into stocks and, unfortunately for Mr. Bernanke, commodities. This raises the cost of living of the typical U.S. household. Helicopter Ben is killing the middle and working classes. But I bet most of the thundering herd will remain too clueless to figure it out. Sooner or later, they'll blame those all-weather villains – the rich.
Faber advises holding a portfolio divided equally among real estate, equities, precious metals, and short-term corporate bonds. At the end of each year, you should rebalance the portfolio by taking your profits out of the best-performing asset and putting them into the worst performer.
This idea has been around for a long time. The late Harry Browne and two partners came up with the Permanent Portfolio mutual fund, which was based on equal weightings in a few asset classes and rebalanced at the end of the year, as Faber suggests. For the last 10 years, the fund has made about 11.35% a year, after fees. Michael Cuggino took over managing the fund in 2003 from co-founder Terry Coxon.
Meanwhile, the European Central Bank (ECB) is showing our Ben how it's done. The ECB is raising its main interest rate from 1% to 1.25%, the first such raise in three years. A Deutsche Bank economist thinks the rate will go still higher, commenting this morning, "By reacting to present inflation risks, the ECB is sending the message that they will stick to their mandate and refuse to let the governments off the hook by softening the euro. Further moderate rate increases during the remainder of this year will be required to drive this message home."
Refuse to soften the currency. A novel idea. We should try it. I bet lower prices would feel a lot better to most of us than higher ones. That's the rub, though. In the U.S., our great leaders would rather assuage the speculative classes than allow the working and middle classes to catch a break. I guess the herd is easier to manage than the bankers...
In Friday's Digest, Porter described how bankers are doing much better than the rest of the economy, due to their substantial government-granted advantages. He described how mortgage REIT Annaly borrows cheap money and has its profits virtually guaranteed by the government.
Now PIMCO, the biggest bond fund manager in the world, wants to get in on the action. PIMCO is raising $600 million to start a mortgage REIT that will buy – you guessed it – residential mortgages guaranteed by Fannie and Freddie. The new REIT's ticker symbol will be PIMR.
This is a great game. You should play it for all it's worth. In our monthly income letter, The 12% Letter, we call it "The Fed Trade" because it exploits the Fed's low interest rates. Right now, you can get a 14% yield by doing what PIMCO is doing. Click here to find out more about The 12% Letter and gain access to The Fed Trade and other high-yield income strategies.
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New 52-week highs (as of 4/6/11): First Trust DJ Select Fund (FDM), Cambria Global Tactical (GTAA), Powershares Dynamic Biotech & Genome (PBE), Westport Innovations (WPRT), Automatic Data Processing (ADP), WD 40 (WDFC), Alico (ALCO), Calpine (CPN), Hershey (HSY), iShares Silver Trust ETF (SLV), SVB Financial Group (SIVB), Altria Group (MO), Philip Morris International (PM), U.S. Ecology (ECOL)
Do you have a plan for when the excrement hits the proverbial fan? Such a plan might involve storage of food, water, guns, ammo, and other items necessary for survival should society break down. Or maybe you're just leaving the country now because you're scared of what will happen to it in the future. We'd love to hear about your plans at feedback@stansberryresearch.com.
"I am your faithful paid-up subscriber. Thank you for all info from all of you. I am soon will buy the Survival Kit but I have a question is when I need to sell those silver coins that will send with the Kit, where can I sell them, I never bought silver coin in the past." – Paid Jennifer A
Ferris comment: I don't plan on ever selling my gold or silver. It gives me a peace of mind I can't get from any other asset. But if you want to sell silver bullion coins, any coin shop that sells silver bullion should also buy it.
"I am one of those real estate people that now rent, 4/6/11 article. My profession was just that as a broker, developer. I hate it now!! Too capital-intensive, no time at my age of 65!! Where do I begin with your complexity of info; i.e. newsletters. It seems I am not the only one who failed to plan properly; i.e. gov't, fed., state, local, unions on and on. You have the answers when all I see is, just as the gent from Norway stated, inequality, despair, lack of confidence in anything, perhaps what you are telling us? If my gut is correct you are on target! Your newsletter has given me new optimism about the future.
"Now I need help hone just a poor realtor can get involved. Need help!" – Paid-up subscriber RAF
Ferris comment: It's good you're infused with a new optimism. Starting over financially at 65 sounds difficult, but it doesn't have to be. We're not allowed to give individual advice. But here's one piece of general advice I'll give to everyone: Before getting involved in the stock market or other financial assets, prove you can handle a large sum of money by accumulating one.
Most people can't do it. They get a big check, say from a tax refund or an inheritance or a bonus. And it gives them this itchy, awful feeling... they simply MUST spend it. A real investor has no trouble holding cash for as long as it takes to find a suitable opportunity for deploying that cash.
As a generally guideline, I would recommend anyone under 40 make his first investment goal the accumulation of $50,000 in cash. Anyone over 40 should shoot for $100,000. But those numbers are arbitrary. Whatever amount you choose, stick to it and don't do anything else as an investor until you reach it.
People who don't have the discipline to save up a big chunk of money without touching it make lousy investors.
"I have recently joined in reading the works of you and your coworkers. I am very new at doing my own investments. Your thoughts regarding natural gas and precious metals are in line with my thinking. By the time, I got my e-trade account setup and funded, many of the recommendations have already been exceeded the price set for stock.
"Here is my comment/question. If Matt and Frank believe that, for example, WPRT is going to continue to climb, why not revise their buy recommendations, especially for latecomers already behind in the initial buy recommendation? Example. Westport Innovations (WPRT) was a buy at $16.50 per share. Buy the time I got enough money to invest, it was already $21.76. Yesterday, it shot up to $25.60. So for the new investor, I still want to buy this stock but I do not have the insight and expertise that I rely on from your firm. HELP." – Paid-up subscriber Rick Crose
Ferris comment: Our editors typically set maximum buy prices based on the inherent value they perceive in the stock or the price at which the stock's risk-reward profile is in the buyer's favor. These things don't change just because the share price is higher. In almost all cases, when a writer sets a buy-up-to price, he also advises the subscriber to "not chase the price higher."
In any case, the best way to know what stocks an editor feels are good buys right now is to check the back of his latest issue. In nearly every issue, editors review their portfolios and identify the best current "buys."
"Steve I just had the chance to browse thru the True Wealth Systems website. You have nailed it. Unbelievable. I've researched a lot of trend systems, and from what I can see, yours is very very good. Maybe still a bit too much whipsawing but the backtesting shows it's worth it.
"You could charge a whole heck of a lot of money for this system. This alone is worth the price of my alliance membership. You rock, baby. Yes you do." – Paid-up subscriber Raj
Goldsmith comment: Thanks, Raj. Right now, you and the rest of the Alliance members are the only ones who have access to True Wealth Systems. But we're getting ready to do a limited release later this month. Anyone interested should keep an eye on his inbox. And we'll keep everyone up to date on our progress in the Digest.
"So we know that the growth in the stock market currently is primarily in the financial services sector. The S&P 500 is soaring, while unemployment is high and stagnant. We are not exporting any new goods and services, and still importing as much as ever. What are financial services companies and banks making so much money doing, when there appears to be no actual economic growth? Are there any tricky 'new instruments' that we should be wary of? or is this real growth outside of the US being funded by US based banks? or what?" – Paid-up subscriber John Sexton
Ferris comment: It's easy to make a lot of money when the Fed lets you borrow at zero percent interest and lend at much higher rates. It's also not too hard to make money when the Federal Reserve is trying to get you to rip its face off in the Treasury market.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
April 7, 2011