JPMorgan Chase CEO Jamie Dimon recently announced he thinks all banks have too much capital. And as that capital continues accumulating over the next few years… those banks won't know what to do with it.
This excess cash is a function of the Federal Reserve's easy-money policies. For the last four years, the Fed has made it impossible for banks not to make money. To get an idea of what I (Porter) mean, take a look at the recent experience of mortgage real estate investment trust Annaly.
In 2009 and 2010, Annaly was making more than $10 billion in annual cash flows. That was on an equity base of around $10 billion... So in 2009 and 2010, Annaly was doubling its equity annually by investing in risk-free, government-backed securities.
Those kinds of returns aren't typical in the free market. Annaly was only able to achieve these returns because the market has been engineered and manipulated in order to benefit the banking sector.
The government backs all the deposits in the banking sector through the Federal Deposit Insurance Corp. (FDIC). But the FDIC doesn't have enough reserves to cover the potential risks in the banking sector. In other words, the government can't afford the collapse of the fractional reserve banking system.
To protect itself from a banking collapse, the Federal Reserve manipulates interest rates and bails out banks. That way, there isn't a run on the banks and the credit cycle never collapses. Instead, credit is constantly expanded.
What Jamie Dimon is saying is that the manipulation has worked so well that banks will be incredibly flush with capital... And there's not enough high-quality lending available to put the money to work.
Jamie is a very smart guy... And I don't want to go on the record disputing what he says. But I'm pretty sure bankers will make terrible decisions and that money will be put in really bad places.
Maybe this won't happen at JPMorgan. But I know that money won't just sit there. I expect (and Steve Sjuggerud has also written about this) the Bernanke boom is going to accelerate, and we'll start seeing "signs of the top."
If you go back and look through the Digests from 2006 through mid-2008, you'll find probably 100 different instances where we wrote "signs of the top." We were noting crazy things people were doing with borrowed money or crazy things going on with asset prices.
In periods where there's tons of capital available, credit flows into places that aren't safe or reasonable... People make lots of bad decisions.
I wrote a funny essay in the July 2009 issue of Stansberry's Investment Advisory saying the one thing central bankers can't plan for is the terrible capital-allocation decisions people will inevitably make... The essay was mostly about what happened with former Major League Baseball player and financial "guru," Lenny Dykstra. "Doc" Eifrig said it was my best essay ever.
We'll republish the essay in its entirety in tomorrow's Digest Premium.
– Porter Stansberry with Sean Goldsmith
In today's edition of our free e-letter DailyWealth, Steve Sjuggerud laid out his "Great Migration" thesis (which he originally outlined in the March issue of True Wealth).
He believes the stock market could nearly double from current levels within three years as record-low interest rates force more and more investors into the stock market. We also discussed Steve's thoughts in the February 19 Digest.
As Steve explained in today's DailyWealth…
The principle is simple. It is the idea that Mom and Pop America are about to buy stocks... big time. They are about to migrate from ultra-low-interest investments (like cash and bonds) and into stocks.
Mom and Pop don't want to do this, yet. (Heck, they don't want to do it at all.) But over the course of the next three years, they will make the migration. They have no choice.
One by one, Mom and Pop will soon realize that near-zero-percent interest on money in the bank and in bond funds isn't good enough. You can't live on that in retirement... and you need to do something else.
They'll look around to see what they can do with their money... and they will rediscover stocks. They will eventually figure out they've been left with no other options.
At first, this migration will be slow... But it will gain some real momentum once Mom and Pop understand the effect the first two incredible forces I described (low interest rates and low inflation) are having on stocks.
By the end of next year, the Great Migration could get silly. Ultimately, we could see a dot-com-style boom in stocks all over again through 2015.
The Great Migration is fueled by the "Bernanke Asset Bubble" – Federal Reserve Chairman Ben Bernanke's loose monetary policy that is boosting equity prices in markets across the globe.
And after hitting an all-time high yesterday, the Dow Jones Industrials Average continues its march upward. And our portfolio companies continue to benefit...
Health care stocks across the board are hitting new highs today... Steve's recommended exchange-traded fund, the ProShares Ultra Health Care Fund (RXL), hit a 52-week high. Pharmaceutical giant Johnson & Johnson (JNJ) – a mainstay in several of our model portfolios – also hit a 52-week high… as did fellow Big Pharma firm Eli Lilly (LLY), which Dr. David Eifrig recommended to his Retirement Millionaire subscribers.
The thesis for health care stocks today is simple... As the largest segment of the U.S. population, the "Baby Boomers," ages, they will need more health care. And companies that provide excellent health care at reasonable prices will thrive.
Booze giants Anheuser-Busch InBev and Constellation Brands also hit 52-week highs.
Insurance stocks are also hitting new highs. Porter calls insurance "the best business in the world." Insurance companies collect money today in premiums and pay claims later. Then they invest that free money, called "float," for profit.
If an insurance company also underwrites at a profit – meaning it pays less in claims than it collects in premiums – it is actually being paid to invest that money.
Warren Buffett's insurance-driven conglomerate, Berkshire Hathaway, hit a new high today, as did five of the six "blue-chip insurance" companies Porter has recommended in his Investment Advisory.
While most of the market rallied, one stock continues its plunge to 52-week lows...
In the February 28 Digest, following yet another horrid earnings announcement, we explained why department-store chain JC Penney was failing…
Yesterday, the stock sank 11% as a major shareholder, the real estate investment trust Vornado Realty Trust, announced it sold 10 million shares of JC Penney. Vornado still owns 13.4 million shares and said it won't sell additional shares before March 11. It's lost more than $300 million on its JC Penney position to date.
Today, JC Penney is down another 3.5% after the board announced it would consider selling the company... and will oust CEO Ron Johnson if he fails to reverse sales declines this year.
As we've said previously, this stock is in a freefall... We doubt it will survive. Yes, JC Penney could be bought out at a higher price than its shares trade for today... But we're not willing to take that gamble.
In July 2007, months before the market turned over, former Citigroup CEO Chuck Prince told the Financial Times, "As long as the music is playing, you've got to get up and dance... We're still dancing." He meant his bank would continue making loans despite an increasingly shaky economy.
We would advise you to "keep dancing" today... In 2007, the Fed wasn't spending $85 billion a month to buy bonds and keep interest rates artificially low. We weren't experiencing negative real interest rates – when inflation is running higher than the risk-free rate (Treasurys). And there weren't trillions of dollars in fresh capital looking for a home...
Eventually, we believe the massive quantitative easing (money printing) will result in an epic bubble – far worse than what we saw in 2008. But prices will skyrocket before then.
Today, equities present the best relative value in the market today. Billionaire hedge-fund manager Leon Cooperman of Omega Advisors agrees… calling equities "the best house in the financial-asset neighborhood."
This morning on CNBC, Cooperman said…
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Think about the alternatives in financial assets ... You can put your money in cash... that's zero and Bernanke says it's going to stay zero for another year or two. You can put it in U.S. government bonds ... [but] buying U.S. government bonds today is basically like walking in front of a steamroller and picking up a dime.
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Cooperman said the S&P 500 is fairly valued at 1,500. Today, the S&P 500 is trading at 1,540. But he says the market will still rally. "Every bull market ends in overvaluation and every bear market ends in undervaluation," Cooperman said. "So the market is still probably OK."
Cooperman says there's "no shortage of excellent ideas" in equities... Almost half of the companies in the S&P 500 yield more than Treasurys today, and those dividends are growing.
If you're looking for income, Cooperman said KKR Financial (asset management), Chimera (mortgage REIT), Atlas Pipeline (pipelines), and Transocean (drill rigs) are solid dividend-payers.
For growth, Cooperman mentioned wireless technology firm Qualcomm and Internet/tech behemoth Google.
If you want exposure to equity markets and want to collect large and growing dividends, we'd recommend you try Dan Ferris' income-focused 12% Letter.
In his newsletter, Dan maintains a portfolio of companies he calls World Dominating Dividend Growers. These companies lead their sectors and pay healthy, growing dividends.
In his latest issue, Dan recommended the "highest-yielding World Dominating Dividend Grower yet." This company pays a dividend of more than 4% a year. And it's one of the most dominant companies in the world, with an 80% market share in its sector. Dan believes this company will raise its dividend by 13% every year (far outpacing any inflation we see in the near future). Please note, this stock is approaching its "by up to" price, so act quickly.
In deference to The 12% Letter subscribers, we can't reveal the company name here. But to gain access to Dan's latest recommendation and learn more about how to build a portfolio of super-safe, dividend-growing businesses, click here...
And if you decide within the first four months of your subscription that The 12% Letter isn't right for you, we'll refund 100% of your money, no questions asked. It's zero risk to you.
New 52-week highs (as of 3/5/13): ProShares Ultra Biotech Fund (BIB), Berkshire Hathaway (BRK), WisdomTree Japan Small Cap Dividend Fund (DFJ), WisdomTree Japan Hedged Equity Fund (DXJ), Fidelity Medical Equipment & Systems Fund (FSMEX), iShares Insurance Fund (IAK), iShares Biotech Fund (IBB), SPDR International Health Care Fund (IRY), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Anheuser-Busch InBev (BUD), Pepsico (PEP), Johnson & Johnson (JNJ), Eli Lilly (LLY), Automatic Data Processing (ADP), Ericsson (ERIC), 3M (MMM), Chicago Bridge & Iron (CBI), Dominion Resources (D), Hershey (HSY), American Financial Group (AFG), Chubb (CB), Travelers (TRV), Alleghany (Y), Kohlberg Kravis Roberts (KKR), Becton-Dickinson (BDX), Chart Industries (GTLS), Enterprise Products Partners (EPD), Range Resources (RRC), Union Pacific (UNP), Government Properties Income Trust (GOV), Two Harbors (TWO), Sysco (SYY), Target (TGT), and Fluidigm (FLDM).
Wine and chocolate go great together, especially in the mailbag. Send your notes to feedback@stansberryresearch.com.
"Yea the Pavots [you mentioned in the March 1 Digest Premium] is a treat... but in my opinion too $$$ for what it is... Dominus in a great vintage would kick its a**...
"My recommendation to you if you don't already know of him, is to tell you about Philip Togni... a great Bordeaux Blend made by a true Frenchy up on top of Spring Mt. in Napa. Good juice. Even young... Check it out if you haven't had! $100." – Paid-up subscriber R. Peteson
"I'm still kicking myself for not taking your advice years ago and bought Hershey's. At that time is was in the 30's, today over 80. With the DRIPS... would have added plenty to my retirement account today. Good on ya Porter!" – Paid-up subscriber Steve Smeltzer
Regards,
Sean Goldsmith
Miami Beach, Florida
March 6, 2013