In early April, I had lunch with an old friend, a very successful guy who retired about 10 years ago. After reading Sjuggerud's economic recovery "script" in True Wealth, he became convinced the stock market would bounce back strongly and so put all, or nearly all, of his assets into the market. While I was fairly bullish on stocks too, I told my friend he should look at corporate bonds. "I bet you'll make just as much money in bonds over the next few months as in stocks – but you'll take a lot less risk. And given your age and the fact that you're retired, you might want to focus at least as much on avoiding risk as earning high returns..."
Happily, we were both right. Stocks have done very well. But it's a little-appreciated fact that corporate bonds have done just as well. In fact, the returns on high-yield corporate bonds are nearly identical to the stock market's return since I sat down for that lunch on April 3. The chart below shows the index returns for the S&P 500 and corporate high-yield bonds (HYG) over the last six months. As you can see, the results are nearly identical.
Given the chance to make 30% in stocks or 25% in bonds (from the March lows), you ought to pick the bonds. Why? Two reasons. First, as a bondholder, you have a legal claim to the par ($100) value of the bond. You have no such claim when you buy a stock. Second, you should remember performing bonds will continue to pay their full coupon, regardless of the price you paid. So if you buy a bond for $50 that yields 7% at par, you're going to earn an annual yield of 14%. When you start adding up both the yields you can earn simply holding a bond and the capital gain you can make when it's redeemed, you can see right away that buying bonds at a steep discount is usually a much better investment than buying stocks.
As you probably know, we have a corporate bond specialist here at Stansberry Research. His name is Mike Williams and, at 62, he has been analyzing corporate bonds for investors literally since I was born. He is the only analyst at S&A Research who has earned his Chartered Financial Analyst (CFA) designation. If you'll read just one issue of his newsletter, True Income, you might never buy a stock again. I'm certain that for most investors, buying corporate bonds instead of stocks would greatly improve the annual gains from their portfolio. And if you buy Mike's recommendations, you could increase your returns enormously.
So... what would have happened if the friend I had lunch with had been reading True Income instead of True Wealth? Let's ask a True Income subscriber.
Says True Income reader Erik Frieg: "In March, I couldn't help but notice the extreme value of some of the True Income bonds. As it turns out, I could have gone into stocks, but the bonds just felt like a better deal. So I bought Freescale at $15, Rite Aid at $20, Aleris at $1.25, and Tribune at $3.5. My bonds portfolio is showing an unrealized profit of 225% in just four months, not counting the interest payments. That is simply amazing... I recently sold a portion of my bonds, so I have my initial investment back in cash and I'm waiting for more money to show up in the corner. Keep up the great work."
If there's one thing I would teach every single subscriber, it's to always evaluate a company's bonds before you buy its stock. If you can earn 15%-25% in the bonds – and you frequently can on yield alone – why bother owning the stock? You're going to make just as much money in the bonds as you will in the stock – with much, much less risk. To learn more about buying corporate bonds at a discount from par, I urge you to check into True Income. Click here to learn more.
Rents have fallen so much in the Miami market (by about 50% in the last year) that I'm considering renting a house there this year while I continue to shop for a condo out of foreclosure. I'm finding big (3,500-5,000 square foot), luxury homes asking $5,000-$7,500 a month. Taxes alone on these places are probably half that amount. With rents this cheap, why buy? Miami isn't the only major market with plummeting rents either. Rents on luxury apartments in New York have fallen 17% so far this year, according to real estate brokerage Prudential Douglas Elliman's second-quarter report. And if asking prices have fallen this much, real rents are probably down 25%-30%.
We've long said sovereign wealth funds – the foreign, government-controlled pools of money – are among the worst investors in the world. These massive funds, managing hundreds of billions of dollars each, invested in nearly every failed bank near the top – Bear Stearns, Merrill Lynch, UBS, Bank of America... And one country, Singapore, seemed to be behind every bad investment. We reported in May that Singapore's sovereign wealth fund had lost $40 billion through 2009.
But things are picking up... Singapore's Temasek is now down only $28 billion as its failed bank investments are rebounding. When these sovereign wealth funds start redeploying money into financial companies, we'll know it's time to sell.
No one is going to call the coming limits on commodity position sizes capital controls, but they are rules on what you're allowed (and not allowed) to buy with the U.S. dollar. The government wants to blame "speculators" for blowing up oil prices in 2007 and 2008. Not taking any blame is the Greenspan Fed, which reduced interest rates to 1% and fueled huge asset inflation in houses and commodities of all kinds. "Speculators" did the only thing they could to preserve their purchasing power – they bought oil and gold – two of the world's great inflation hedges. If you outlaw "speculation" in inflation hedges, folks will simply buy something else with their dollars, because the dollar is a doomed currency. If the government really wanted to curtail "speculation," the only real way to do it is to make the dollar worth keeping. (And that's never going to happen.)
The last part of Sjuggerud's "script" is a rebound in real estate. And in his last issue, Sjug wrote: "It's finally time in residential real estate." He said the bottom in residential real estate was nearing because the government would do everything in its power to stop the carnage: "I'm absolutely certain President Obama and Ben Bernanke will do everything they can to prop up the U.S. housing market. You see, if housing prices keep falling, the U.S. economy will enter a death spiral..."
Now, less than two weeks later, news comes out showing the Case-Shiller House Price Index rose for the first time since July 2006. Kudos, again, to Sjuggerud.
By the way... In his most recent True Wealth, Sjuggerud showed readers how to make a once-in-a-lifetime, $500,000 TAX-FREE capital gain in two years by investing in real estate. This is likely the largest tax windfall you'll ever see. To learn more, click here...
Just how plentiful and easy to access is the oil in Iraq? Well, BP, the only winner in Iraq's first round of oil-licensing, says it can make a profit at the Rumaila deposit that's equal to its other fields, even after reducing its fee by half... "We should be able to do this in a very low-cost and efficient way," CEO Tony Hayward told Bloomberg yesterday. "We're looking at returns in Iraq that are compatible with returns we earn across the rest of our portfolio." BP will only get paid $2 a barrel at Rumaila – half its normal fee – but the company can still make a 15% to 20% rate of return on its investment, according to one energy analyst.
As you know, we've already made huge profits in one small Iraqi oil stock. And now we're recommending a few more... Click here for more information.
New highs: none.
In the mailbag... A new economic indicator: The Chick-fil-A index. Send us your signs of Honest to a fault. That's Steve Sjuggerud. What's your funniest I-couldn't-tell-a-lie moment? Let us know: feedback@stansberryresearch.com.
"Here in Oklahoma City 'They did what?' Went to Chick-Fil-A today to get my regular No. 5... their business is so busy, they have employees standing outside manning the drive thru to take orders during the brisk lunch & dinner stampede. My No. 5 is the 12 chicken bits, waffle fries, and a lemonade for $7.25. Today, when I question the guy transmitting the outside order with his headset on the price, he said all prices went up yesterday... now my No. 5 is $7.40 after paying $7.25 for as long as I can remember, which at my age is probably not that long.
"This occurred after the Turnpike Authority went to the state officials to increase fares on the turnpikes by 16%. If you have not driven in Oklahoma, you have to pay to drive on many of the major highways and Interstates, except I35 and I40, for the privilege to drive from point A to B, like Tulsa to Oklahoma City. The Turnpike Authority said the reason for their negative cash flow was the decrease in long haul truckers hit by hard economic times on the interstates. Another entitlement program kicking in ignoring the obvious rather than cutting their costs, we get the 16% increase!
"I took my Chevy truck to the shop today for new brakes... will be interesting to see this invoice compares to the past... Tick Tock Tick Tock Inflation Clock is running faster and believe we're going to have higher inflation sooner than most believe." – Paid-up subscriber Bill
"Have you ever thought about setting up an investment service in which people give YOU their money to invest? There are so many investment letters/types that just reading them and following them takes too much time. Each one of your services shows how much money one can make. I would prefer to give someone like YOU my money and let you invest it, paying you a percentage." – Paid-up subscriber David Loebenberg
Porter comment: Several of us have experience with money management. And I think Dan Ferris still has a capital management firm of some kind. But believe it or not, managing money is a whole different kind of business than selling research. In research, the main thing is generating good, profitable ideas. In money management, the main thing is getting money to manage – lots of it. We prefer to focus on the ideas. We're happy to let other folks do the money managing.
Regards,
Porter Stansberry
Baltimore, Maryland
July 29, 2009