Homebuilders hit new highs... Bold bond calls make huge returns... 'The best opportunity for conservative buyers'... The stock market points to recovery... The Bernanke Asset Bubble in effect... A children's newsletter?...
Editor's note: Porter is on vacation this week. He'll return to the Digest next Friday.
Yesterday, we discussed Steve Sjuggerud's bullish housing thesis... and the flurry of good news surrounding the sector. The bullish news was enough to send the industry's bellwether fund, the iShares Dow Jones U.S. Home Construction Fund (ITB), to a 52-week high yesterday.
Steve originally recommended ITB in the February 2011 issue of True Wealth. It was trading at $13.20 per share. Readers are up 32% on the position.
The fund consists of the country's largest homebuilders and other companies tied to housing (like hardware retailers Home Depot and Lowe's). It's a real-time sentiment tracker for the U.S. housing market.
Since bottoming in October around $8 per share, ITB has more than doubled...
Retirement Millionaire editor Dr. David "Doc" Eifrig is also bullish on housing (we'll discuss this later). In fact, he's been bullish on the economy at large for years – which was (and still is) a contrarian opinion. Doc follows several economic indicators to take the economy's temperature. In his June issue, he updated readers on the status of these indicators...
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The U.S. economy kept up its slow, steady growth over the past six months. If things continue at this slow pace, we could enjoy a stable "middle of the economic-cycle" recovery for years. |
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The key factor to watch is inflation. Increasing prices often leads to higher interest rates. This makes stocks and bonds less attractive, and they tend to do poorly when inflation heats up. (To hedge that risk, we're invested in stocks that have pricing power in those times.) |
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Plus, if the economy starts moving too fast, the Federal Reserve could raise short-term interest rates. In the past, that sort of Fed activity has led to lower stock and bond prices. But there's no sign of the economy running away from us. So far, so good. |
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The good news is I still don't see many signs of overheating inflation. |
All of Doc's indicators – including energy prices, inventory levels, the "M1 money multiplier" (which shows the actual flow of money through the economy), construction spending, and employment – pointed to a low-inflation environment. And that's good news for stocks and bonds.
Paying attention to concrete numbers (and avoiding media hype) helped Doc's readers in the past.
Back in August 2009, when Wall Street and the media were warning investors to avoid corporate bonds, Doc noted the fundamentals in the bond market were strong. And he recommended buying high-yield corporate bonds. It was a bold, contrarian call. He wrote...
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Downgrades occur when bond-rating agencies decide a company is getting riskier. A lot of downgrades make us worry about the economy and whether our borrowers will pay us back. The good news is downgrades are falling. The recent quarter had 256 downgrades, down from 303 last quarter. And we saw a record 106 upgrades at the same time (up from only 45 last quarter). |
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I'm seeing a similar trend with defaults, which occur when a company fails to pay its debt. In the Great Depression, default rates rose to an all-time high of 15.4%. An expert and academic I admire, Ed Altman, has spent his life studying these markets. He just published an estimate of 13.6%. So it looks like we're safe. |
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Companies borrowing money in 2009 have less leverage and more cash flow to cover their payments than in the past two years. |
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As companies have access to increasingly larger pools of money, they'll face lower refinancing costs when their debt comes due. That means they can pay back debts more easily. |
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Finally, companies have issued $70 billion in new high-yield bonds so far this year. That far surpasses all of the money they borrowed in 2008. |
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All these factors make me optimistic about bond investing. Remember how when yields go up, bond prices go down? It also works in reverse: When rates go lower, bond prices go up. So here's how we're going to make money buying bonds today: First, we'll get high yields on our initial investments. Second, we'll get capital gains on the bonds as interest rates go lower. |
One of the funds Doc recommended, the BlackRock Corporate High Yield Fund (HYV), hit a 52-week high today. Readers are up nearly 90% in this bond fund in a little more than two years – an incredible return for a fixed-income investment.
As I stated above, Doc is currently bullish on housing. In his latest issue, he noted the Housing Affordability Index – which measures what percentage of income a median-income family would need to spend to buy a house – is at an all-time high.
A reading below 100 means a family would need more than 50% of its gross income to buy a home. Above 100, that percentage decreases. The higher the index, the more affordable housing is.
Today, the index reads 200. At today's levels, the median-priced home would take only 13.5% of the income of a median-income family. That's the index's highest reading since the National Association of Realtors began compiling it in 1970.
Doc says housing is "the best opportunity" he's seen for small, conservative buyers.
And Doc pointed out how the equity markets are confirming the economy's slow, steady progress...
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On August 3, Wells Fargo (WFC) shares closed near their highest level in more than three years. Wells Fargo is the largest home lender in America, outside of the U.S. government. When folks take on and pay off mortgages, Wells Fargo prospers. (So far, we're up about 3% in just four months.) |
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On August 6, Boston Properties shares hit their highest level in more than a year. Boston Properties is America's largest office landlord. When businesses pay their bills and open new offices, Boston prospers. |
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On August 8, Disney shares hit their highest level in history. Disney is one of America's largest media and entertainment companies. When folks have enough money to spend on cable TV, movies, and vacations, Disney prospers. |
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Wells Fargo, Boston Properties, and Disney aren't the only major American businesses enjoying new price highs. Dozens of other stocks that are sensitive to the American economy are also surging. |
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For several years now, I've been telling you that things are slowly recovering in America. These days, this is a radical stance. Most newsletter readers are constantly exposed to news and commentary about how bad things are. But as I've repeatedly shown you, most all of the economic indicators I follow show things are getting better. This optimistic view is paying off. |
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The driving force behind the resurgent stock market is the same force behind our two investment ideas this month – the incredibly low cost of money... As we discussed last month, 10-year Treasury interest rates are at historic lows of around 1.6%. To use that to our advantage, we need to seek out assets or investments that use low interest rates to amplify their long-term results. |
The low cost of money is driving the stock markets. And Ben Bernanke, the chairman of the Federal Reserve, is intent on keeping the cost of money low. With record-low interest rates on savings, folks are putting money into other assets to generate returns.
True Wealth editor Steve Sjuggerud calls this the "Bernanke Asset Bubble." As Steve wrote in the May issue of True Wealth...
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In the end, [the Bernanke Asset Bubble] could turn out to be the greatest bubble in American history. Nearly all assets could soar to prices currently unimaginable today... [Ben Bernanke] will keep interest rates artificially low – near zero – for (I believe) longer than anyone can imagine. And that, in turn will create unimaginable asset bubbles... in just about everything. |
The Bernanke Asset Bubble is working... Bellwether U.S. stocks across all industries are trading near – or at – their highs. Banks, commercial real estate, housing, media, transportation, and retail... almost every sector is surging. This is the sign of a recovery.
New 52-week highs (as of 8/9/12): Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), BlackRock Corporate High Yield Fund (HYV), iShares Dow Jones U.S. Home Construction Fund (ITB), Monsanto (MON), and Chevron (CVX).
We'd love to hear about any gains you've made reading our work... Send your e-mails to feedback@stansberryresearch.com.
"I've been investing on my own for several years, and recently decided to start teaching my 11-year-old son about investing. I have set up a custodial account for him with my broker and gave him an initial stake to invest. Since I use newsletters to find my stock picks I had to decide which letters he would read. I have lots to choose from since I am a Casey Research Club member and also an Agora Financial Reserve member. It means I get all their newsletters. I have also subscribed to various Stansberry letters in the past, and currently subscribe to Retirement Millionaire.
"Instead of any of those, however, I chose the 12% Letter for two reasons. First, I wanted him to have the greatest chance of NOT losing money. I figure your WDDG stocks give him that chance, while still providing a decent return. Second, I wanted him to start out with a proper education in investing, which will help him develop good habits. Your letter is the best of all the ones I subscribe to in providing an understanding of the basics of value investing, which is the type of investing I think he has the greatest chance of succeeding at.
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Goldsmith comment: Thanks for the compliment, Larry. The only problem with a newsletter for children is that children don't have any money to invest.
Regards,
Sean Goldsmith
New York, New York
August 10, 2012