Get ready for a 'violent' move... Dan Ferris' thoughts on the rate hike...The closest thing to 'free money' in the market...
Get ready for a "violent" move...
Eight times each year, the Federal Reserve's Federal Open Market Committee ("FOMC") holds a two-day meeting to discuss and decide on monetary policy. This includes making changes to the Fed's short-term interest rate, known as the "federal funds rate."
These meetings always end with an announcement at 2 p.m. Eastern time on Thursday, detailing any changes to Fed policy. These "Fed days" often see increased volatility following the announcements. And tomorrow could be one of the most volatile in years...
As we've discussed over the past several months, the market believes there is a chance the Fed could increase the fed funds rate from 0.25% – where it has been for several years – to 0.50% tomorrow.
The move is far from certain. But this uncertainty could create some serious short-term volatility in the markets. Our colleague Jeff Clark explained the situation to his Stansberry Short Report subscribers this morning...
The most potentially explosive Federal Open Market Committee (FOMC) meeting of the year starts today. And tomorrow, the FOMC will announce its decision on interest rates. All financial markets – stocks, bonds, currencies, and commodities – are set to react violently once the news is out.
Or the whole thing could be a dud.
We just don't know what the Fed will do. And we don't know how the markets will react. Sometimes, the markets whip around like Argentine tango dancers in reaction to an FOMC announcement. Sometimes, they just sit there quietly like adolescents at their first boy/girl dance.
As Jeff said, no one outside the Fed knows what it will announce tomorrow. And no one knows how the market will react in the short term.
Jeff suggests waiting until the "dust clears" after tomorrow's announcement before adding new positions to your portfolio. That's likely good advice for short-term traders and long-term investors alike.
But we believe tomorrow's interest rate decision is unlikely to have a significant long-term effect...
First, while a bump of 0.25% would double the fed funds rate, a 0.50% rate is still extremely low. And reports from the Fed suggest any additional increases will come slowly.
Second, research from our colleagues Steve Sjuggerud and Dr. David "Doc" Eifrig show interest rate hikes have historically been good for the market over the longer term.
Our colleague Dan Ferris agrees. Dan says tomorrow's decision should be considered little more than "noise" for investors. As he told Extreme Value subscribers in yesterday's weekly update...
The "noisy" worry of the day is whether or not the Federal Reserve will raise interest rates. I don't care what the Fed does because it doesn't matter much.
Lots of people think the Federal Reserve sets interest rates. That's not entirely accurate. The Federal Reserve only sets one interest rate: the one the banks pay. The market sets the others.
A Wall Street Journal article recently pointed out that central banks around the world were being pushed by the market to repeal interest-rate increases.
The Fed, like other central banks, must be in step with the market. It doesn't control the market the way most people seem to think.
Despite the Fed's "best efforts" to devalue the dollar and interfere in the economy, Dan showed investors have still done incredibly well over the long term...
Concern about the Fed is not totally unfounded. Since 1913, when the Fed came into existence and started regulating the U.S. dollar, the buck has lost more than 95% of its value (according to some measures).
U.S. stocks, on the other hand, have returned just shy of 6.6% per year in that time. That's adjusted for changes in the consumer price index with dividends reinvested. At that rate of compounding, every $1 invested becomes $651.30. That's a fantastic result, especially for a one-shot, set-it-and-forget-it investment... and especially compared to the drastically decreased value of the dollar.
The Fed has done a horrible job, but that didn't stop investors from doing well over the long term. I doubt the Fed will manage the U.S. dollar any better over the next 102 years. I also think stocks will still be great long-term investments during that time.
Dan says worrying about the Fed and other "macro" concerns is one of the most common mistakes investors make. Instead, you must keep one big idea in mind...
As I've said before, "shopping trumps politics." The awesome power of unfettered, or even semi-fettered, commerce trumps the machinations and stupidity of a handful of government-appointed economists who won't admit they don't know what they're doing.
If you think it's important to react to the Fed, it's unlikely you'll do well in stocks over the long term. Better to forget about the Fed, and focus on the businesses you own.
We agree. While we're cautious on the broad market today – and recommend avoiding major new investments in U.S. stocks for now – we believe there are still some great opportunities to put money "to work" today...
We've discussed the bullish case for "World Dominator" Apple and high-quality gold stocks. Today, we'll share another idea to consider...
Another great opportunity is hiding in an area of the markets many investors have never considered: closed-end funds (or "CEFs").
Longtime readers know CEFs are one of Doc's favorite investment vehicles. When purchased at the right time, he says they're "the closest thing to free money" you'll find in the market.
Doc reminded readers how CEFs work in the January issue of Retirement Millionaire...
First, a fund company and a portfolio manager decide to create an investment vehicle for a category of investments (like energy stocks or municipal bonds). For our example, we'll say this fund invests in municipal bonds.
To get the money to invest, the managers go to the stock market and hold an initial offering. They'll sell 10 million shares for $10 each. Investors now hold shares of the fund, and the managers have $100 million to invest. The managers take that money and buy $100 million worth of municipal bonds according to their strategy.
Now, here's where things get interesting... At this point, the value of the CEF's shares and the price of the shares can (and do) diverge. That's because the shares trade openly on an exchange, so they are priced independently from the underlying value of the securities the fund holds.
In other words, the value of the stocks or bonds the CEF holds – known as the fund's net asset value (or "NAV") – can sometimes be higher or lower than the "share price" of the fund itself.
Doc continued the example of a fund with 10 million shares to explain how this happens...
Remember, the value of the shares comes from the market value of each individual security (in this example, each municipal bond) it holds. If the bonds rise in value to $110 million, then the NAV of each share is now $11. But the CEF's share price in the market doesn't have to go to $11 right away.
The price is determined by whatever people are willing to pay for shares in the market. Shares could still trade for $10 or $10.50. Or they could even trade for more than the actual value, say $12... meaning that people are paying extra to invest in the bond portfolio.
It's this first kind of "divergence" that Doc is interested in... where the value of the fund is higher than where shares trade.
As Doc likes to say, it's one of the easiest ways to become a true "value investor." Here's more from Doc...
You don't have to project future earnings, sales, or price-to-earnings ratios on an individual stock or company. You can know unequivocally that you're buying $1 of value for only $0.90.
But always make sure you know what you're buying... some funds, called "open-end funds" and "exchange-traded funds," trade in a fundamentally different way from CEFs.
When people buy or sell shares of open-end and exchange-traded funds, the fund managers adjust the share count to keep value and price roughly in line. Thus, the NAV and the price are nearly always the same.
CEFs don't do that. When you spot a CEF selling for cheaper than its value, you get to buy it at that price... at a discount to its true value.
When most folks discover discounted CEFs for the first time, they're shocked that the opportunity even exists. And they often assume that these opportunities don't come around too often.
But incredibly, that's not the case...
Doc says you can find hundreds of CEFs trading at a discount most days. In fact, history shows that the average CEF trades at a small discount throughout the year... with the biggest discounts appearing toward the end of the year...
In December, professional money managers need to arrange their portfolios to determine their year-end numbers. It's thought that these managers sell CEFs to book gains and take losses (for tax purposes), and that drives CEF prices down in relation to their true values.
Regardless of the underlying cause, December is a good time to scoop up funds that you've been considering. Over time, the discount changes, but odds are that it will be the biggest in December.
But from time to time, discounts can soar much higher. And that's the case today...
The recent market volatility has pushed the average discount on CEFs to 9.8%. Several funds are trading at discounts well above 10%.
Doc explained the situation in a private e-mail this morning...
The reason CEFs get so "out of whack" from time to time is because they're too small for institutional investors. That means that most of their shares go to "retail" investors like you and me.
The thing is, non-professionals are even more susceptible to fear and bad-decision making. When they're scared, they sell... regardless of true value.
So when investors panic like we've seen recently, CEFs go on sale... And I love to buy things on sale.
Of course, the opposite is also true. Sometimes funds trade for a premium... meaning you get less for your money. For example, when President Obama announced improving relations with Cuba, one CEF – the Herzfeld Caribbean Basin Fund (CUBA) – leapt to a premium of 70%.
Today, it's still trading at a 15% premium, even though any investor can go out and buy its holdings like Royal Caribbean Cruises (RCL), MasTec (MTZ), or Cemex (CX) individually for much less.
These are the wild anomalies in the market that we love to take advantage of...
If you'd like to learn more about buying discounted CEFs – including the best ways to find discounted funds, and guidelines on when to buy and sell – be sure to check out our free interview in the Stansberry Research Education Center right here.
And if you're ready to graduate to the "master class" in CEFs, there's no better instructor than Doc Eifrig...
In this month's issue of Retirement Millionaire, Doc showed readers how to invest in one of the best CEF opportunities in the market today. This fund trades at an incredible 18.5% discount to its net asset value, and pays a 9.2% dividend. Buying this fund is like getting $1 worth of assets for just $0.80... while locking in nearly double-digit annual dividends.
Of course, this is just one of the many benefits Retirement Millionaire subscribers receive...
In addition to safe strategies for making more money from your investments, Doc shares all of his best ideas on how to live a great retirement, including simple ways to stay healthy as you age... how to earn extra income without working or investing... "loopholes" in the insurance and health care systems... ways to get free travel, free golf, and luxurious upgrades... how to get the world's best health care at huge discounts... and much more.
At just $39 for one full year, you won't find a better value in the investment world. Even better, if you take advantage of a four-month, 100% risk-free trial of Retirement Millionaire today, you'll also receive a brand new book explaining how to collect up to an extra $200,000 or more from your Social Security benefits. Click here to learn more.
New 52-week highs (as of 9/15/15): Activision Blizzard (ATVI), National Beverage (FIZZ), and Lancashire Holdings (LRE.L).
One reader praises Porter in today's mailbag. Send your questions and comments to feedback@stansberryresearch.com.
"Porter, I look forward to your Friday letters. I appreciate being spoken to like an adult, and hearing what you truly think about Mr. Market. Before subscribing to your letters several years ago, I was like the zebra, sitting on the sidelines, watching the carnage, and wondering if I was next.
"As an Alliance member, I've put into practice what I've learned about position size and trailing stops. I, too, believe we are looking at challenging conditions. I tightened my trailing stops to 15%, and have stopped out of a number of positions. I probably have too much in cash, but I still came out ahead on all but one stock. That paid my Alliance membership. Keep writing the Friday letter. Thanks." – Paid-up subscriber Andy Wallace
Regards,
Justin Brill
Baltimore, Maryland
September 16, 2015
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