In the March 18 Digest Premium, I (Porter) told you central bank buying is the most important indicator to watch when buying gold...
Another factor that leads me to believe the price of gold will continue to fall is that the precious metal has been in a 12-year bull market... And for the last year or so, we've been warning that gold was likely to suffer a significant correction.
What idiot would ever lend anyone hundreds of thousands of dollars for 30 years at less than 4%?
Yesterday, I (Dan Ferris) was looking at mortgage rates. I noticed the 30-year fixed-rate mortgage hit 4% Tuesday, a large jump from 3.81% last Friday. (The markets were closed on Monday for Memorial Day.)
Why did mortgage rates spike higher on Tuesday?
Rising mortgage rates is likely a sign of the economy picking up. Higher demand for borrowed money will generally push rates higher. Plus, the 30-year mortgage rate could go to 5% and still be cheap. (Of course, that doesn't mean you should rush out and buy a house if you can't afford it just because rates are at historic lows.)
Ten-year Treasurys also jumped from 2.01% on Friday to 2.13% on Tuesday. Remember... the government (in the guise of entities like Fannie Mae and Freddie Mac) guarantees the loans that underlie mortgage-backed securities (MBS). So the rising rates (which coincide with a selloff in MBS and Treasurys) could indicate investors would rather own riskier stocks than safe MBS or Treasurys.
Most folks think higher rates are bad for stocks and the economy. If the 10-year Treasury goes to 15%, we'll talk about that. For now, higher rates aren't necessarily bad at all.
Mortgage rates aren't the only financial item moving higher. Shares of World Dominator Berkshire Hathaway hit a new all-time high today.
I have been recommending Berkshire Hathaway since July 2005, when shares traded for $84,500. Today, they cracked $172,000. Extreme Value readers who took my advice have compounded their money safely at about 9.1% per year. (The S&P 500 has risen about 4% per year over the same period.)
At the annual Berkshire Hathaway shareholder meeting earlier this month, MidAmerican Energy chief executive Greg Abel said renewable power sources are a great deal because they come with big government incentives. Berkshire clearly sees an opportunity for growth there.
The flippers are returning to the housing market...
In California, the number of homes "flipped" in recent months – those bought and resold within six months – has reached the highest point since late 2005, according to real estate data firm PropertyRadar.
House flipping is popular all over the country... But according to brokers, it's most popular in California. In the past year, six of the 10 cities with the biggest gains in home prices were in California. Home prices are up 25% year over year in Sacramento, San Jose, and San Francisco. They're up 18% in Los Angeles.
But there is a major difference between the flippers leading up to the real-estate crash and today: leverage. In 2005, people who had never purchased a home before were putting zero money down to buy homes with the hopes of making a quick buck.
Today, buyers are focusing on foreclosed homes and short sales... And they're paying cash.
The Wall Street Journal tells the story of a man named Robert Ganem, who beat four other offers to purchase a $600,000 short sale in Orange County, California. Ganem made some cosmetic improvements and sold the house a few weeks later for $755,000.
Larry Fink, chairman and CEO of BlackRock – the world's largest money manager – is bullish on stocks. On CNBC Wednesday, Fink said he believes the bull market in stocks could continue another five to six years. He believes we could see 8%-10% annual growth. Extrapolating those numbers, Fink says the Dow could hit 28,000. (It's around 15,350 today.)
Charles Dow, the founder of the Dow Jones Industrial Average, once said, "My customers don't pay me to be bearish." So take Fink's comments with a grain of salt... His firm manages $4 trillion in stocks and bonds.
But Fink is right to point out how relatively cheap stocks are today... "The S&P [500] is around 15.5, 16 times earnings... There's no question in my mind that equities remain... fairly cheap."
Fink's views are in line with what Steve Sjuggerud calls the "Bernanke Asset Bubble" – whereby Fed Chairman Ben Bernanke will inflate asset prices to incredible heights through quantitative easing – and "The Great Migration" – Mom and Pop moving their savings from cash and bonds into stocks.
Still, as we outlined in yesterday's Digest… even though we have said the bull market could last for a year or two… we advise you to be cautious in today's euphoric market... Stick with high-quality stocks. And mind your trailing stops.
Right now, Fink is looking for large, multinational companies with exposure to emerging markets... Emerging markets are as cheap as they've been in two years. They haven't participated as much in the global rally. Meanwhile, most investors are looking for low-volatility stocks with higher than average dividends. They're ignoring the value in emerging markets, Fink said.
We've long explained how banks and other financial firms would flourish during the government's loose monetary policy...
Today, banks can borrow money for next to nothing (thanks to near-zero-percent interest rates) and lend that money out at higher rates. Meanwhile, the Fed has given banks an implied guarantee that they cannot fail. The Fed will simply print more money.
And while the "spread" that banks collect from their loans has narrowed as long-term rates have collapsed, the volume of loans is increasing... And banks are reversing billions of dollars of write-offs they made after the financial crisis. Plus, new loans are experiencing lower levels of default.
U.S. banks earned more money between January and March than during any previous quarter on record. The Federal Deposit Insurance Corp. (FDIC) – which is the government body responsible for insuring deposits – said banks earned $40.3 billion in the first quarter – up 15.8% from a year ago.
And while banks are minting cash, they're placing less money in reserves (the cash they set aside to cover losses)... According to the FDIC, reserves are at a six-year low. As FDIC Chairman Martin Gruenberg said in a statement...
We saw improvement in asset quality indicators over the quarter, a continued increase in the number of profitable institutions, and further declines in the number of problem banks and bank failures. However, tighter net interest margins and slow loan growth create an incentive for institutions to reach for yield, which is a matter of ongoing supervisory attention.
So banks are earning less on their loans today... Lending is growing slowly... And they have the lowest amount of reserves in six years. This should end well.
New 52-week highs (as of 5/29/13): Berkshire Hathaway (BRK), KBR (KBR), Ligand Pharmaceuticals (LGND), Constellation Brands (STZ), Targacept (TRGT), and Wells Fargo (WFC).
In today's mailbag, one subscriber responds to yesterday's feedback and another shows how he's benefited from S&A's advice. Send your e-mails to feedback@stansberryresearch.com.
"In the May 29th mailbag subscriber John Yarbrough wrote:
I'm not to the point where I'm ready to leave the country but instead choose to try and fight for change. We have to let our leaders hear our voices. It's like pushing a large stone uphill but political change is possible like in 2010. It will take a while but the mess can be reversed. We have a great country, just incompetent and dishonest leaders. They must be changed.
"Dear Mr Yarbrough,
"The name of the gentleman originally pushing the stone uphill was Sisyphus and was known for his futile and useless efforts. If you're trying to convince folks to fight for change, pick a better metaphor; and let me know how the IRS audit goes." – Paid-up subscriber David Bern
"As a subscriber now for a few years I thought that I would write in with a recap of our recent achievements implementing your advice/help/writings. So here goes:
"1) Our IRA had lost nearly 70% of its value in the 2008/2009 crash. We are now up + 10% from where we were at before the crash.
"2) We now strictly adhere to stops/trailing stops which if we had done before, we would not have suffered the losses of No. 1.
"3) Our IRA is now built around several core WDDG holdings, and I can say we sleep much better at night.
"4) We confidently write covered calls even within the IRA and also use selective selling of naked puts on businesses we would own anyway.
"5) We have acquired physical gold and silver and will continue to do so (I actually bought some more today).
"6) We have a bank account outside the U.S.
"7) We have paid off nearly $20,000 in credit card debt and are now debt free except our home.
"8) We are about to make our first real estate investment other than our residence. It might possibly be outside the U.S.
"9) We have 6 or more months of emergency cash on hand for the first time in our lives.
"10) I can see our way to more than $1M net worth within 2-3 years and accelerating.
"11) We managed to do this while paying for 2 college educations – both science based, I might add, where there is actual value received for the $$ paid.
"And the most important to me – No. 12 – We share all of the Stansberry publication ideas, investment rationales, concepts etc with our children. I only wish my own father had done the same with me when I was younger. BTW, none of this is meant as bragging – it all comes as a direct result of seriously using what your team writes. Perhaps our only credit is for actually taking action on what we were reading.
"Maybe in the not too distant future I can consider joining the Atlas 400 – that may be one of our next goals we set for ourselves! Your collective advice has been irreplaceable and will be what allows us to retire in reasonable comfort." – Paid-up subscriber Mike Ziehl
Regards,
Sean Goldsmith and Dan Ferris
Miami Beach, Florida and Medford, Oregon
May 30, 2013