"The Federal Reserve remains prepared to respond..."
Ever since Bernanke announced the end of the second round of quantitative easing (QE2), we warned Digest readers QE3 was inevitable. On June 30 – the day QE2 ended – we wrote…
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The Fed won't keep its finger off the print button for long. As we've said all along, the Fed will only let the country experience a little pain (inevitable as the largest buyer of U.S. debt steps back) before launching a new round of quantitative easing. |
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Since QE2 began in November 2010, the Fed has bought around 85% of the net Treasurys issued, according to Morgan Stanley economists. And in each of the first six months of 2011, the Fed bought all but $17 billion of Treasurys sold. JPMorgan estimates private buyers will have to absorb $94 billion a month in the Fed's absence. And only one thing – outside of "friendly" nudging from the government – will attract those buyers... higher yields. |
The opening quote from Ben Bernanke's press conference today proves our thesis correct. Bernanke got to the crux of his statement when he said…
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The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate. |
While we were expecting these comments from Bernanke, they caught Russian Prime Minister Vladimir Putin off-guard... "Thank God, or unfortunately, we do not print a reserve currency, but what are they doing? They are behaving like hooligans, switching on the printing press and tossing them around the whole world, forgetting their main obligations."
When Putin criticizes how you're managing your country's finances, you've got a problem...
Bernanke's press conference today was basically an admission that his efforts to curb the economic crisis have been a failure... And as soon as the economy darkens again, we'll resume printing money. Bernanke doesn't say outright we'll print money, but considering the federal-funds rate is already at zero (and will remain there for "an extended period"), we have no other option. The market knows this. And it acted accordingly today.
The Dow Jones and the S&P 500 both jumped more than 1% today. But the big news today is gold – the central banker's scorecard. Gold hit a record $1,578.80 an ounce today.
Moody's downgrading Irish debt to junk status also helped the precious metal. But what we saw today is just the beginning. Since Bernanke announced QE2 in Jackson Hole on August 27, 2010, gold is up 27% (from $1,235 an ounce to $1,570). When the formal announcement of QE3 comes, gold will soar again.
During the testimony, Ron Paul asked Bernanke if he thought gold was money. Bernanke responded, as any central banker must, "no." Then, Paul asked why central banks hold so much gold if they don't recognize the metal as money. Bernanke responded "tradition." Take a look at the performance of the "barbarous relic" versus the euro and U.S. Treasurys (a dollar proxy) over the past two years. It seems the market is starting to recognize gold as the only true currency, while dismissing fiat money as the garbage it is.
While most S&A analysts are bullish on gold for the long-term, Jeff Clark deserves special recognition for nailing the short-term trend. As we noted in the June 30 Digest, he believed gold stocks were cheap relative to the market and the price of gold...
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Gold stocks are cheap. Many of them trade at 12 times earnings or less – a big discount to the S&P 500's earnings multiple – and many of the big name gold companies pay decent dividends. With global economic conditions around the world what they are, it's easy to make a strong fundamental argument for owning gold and gold stocks. |
Starting in mid-June, Jeff booked a 76% one-week gain buying calls on GDX, 75% on Kinross Gold, and most recently, an 80% one-day gain in Gold Fields International (the trade we mentioned yesterday).
Jeff's on a roll right now. And S&A Short Report readers are making a fortune. Jeff said he's waiting for a pullback in the sector, but he'll soon add more gold trades to the portfolio. To sign up, and receive Jeff's next trade recommendation, click here...
While precious metals and the larger market are soaring, we found one stock lagging behind. Despite beating analyst predictions and announcing a 50% gain in net income, shares of credit-card company Capital One (COF) fell 1.5% today. The company also announced its total charge-off ratio (the percentage of loans it doesn't expect to collect and wrote off) fell to 2.9% – the first time it fell below 3% since 2007.
Stansberry's Investment Advisory subscribers know Capital One is Porter's latest short victim. In the June issue, he wrote…
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Capital One's business is huge and has been performing well lately, thanks to fat margins made possible by low funding costs – aka the Fed's near-zero interest rate policy. The company holds $124 billion of credit-card debt, funded via $109 billion of low cost deposits. It makes more than 7% currently on the spread between what it earns from the credit card receivables and what it pays for the deposits. |
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My bet is that Capital One's funding costs will increase and the value of its credit-card receivables will decline because of increased financial stress related to a slowing economy. |
When a stock falls in the face of a booming market and great earnings, it's a bearish sign.
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New 52-week highs (as of 7/12/11): V.F. Corp (VFC), WD-40 Company (WDFC), Royal Gold (RGLD), SPDR Gold Trust (GLD), U.S. Ecology (ECOL).
High praise in today's mailbag... perhaps we should take breaks more often. Send your feedback to feedback@stansberryresearch.com.
"I hope that you both get home safely from Argentina soon. Regarding the Friday Digests, keep them coming – they are a very valuable source of things to think about and do research on!! I certainly appreciate the respect shown by Mr. Stansberry to his subscribers in dealing with tough topics out in the open, as well as subjects not normally covered in investment newsletter circles. It is not necessary to agree with everything written. In fact, when I disagree, that is when I learn the most. Humility and openness to other points of view helps me a great deal.
"I generally find the other days' Digests very useful – Dan Ferris in particular has a unique and very instructive way of looking at the world. This is reinforced by his dry and bizarre sense of humour, which I really enjoy. Must be the be old musician coming out in his writing. I have one suggestion. Please continue to suggest books that all of you have read or come across that you feel would be useful or enjoyable. That has always been one of my favourite part of reading the Digests at the end of the day." – Paid-up subscriber Leslie Kasza
Goldsmith comment: Thanks for the kind words, Leslie. I've been on a fiction kick recently, but we'll continue to update you on the important books we read.
Regards,
Sean Goldsmith
Baltimore, Maryland
July 13, 2011
QE3 is nigh... Putin on Bernanke... Record high for gold... Jeff's hot streak... Capital One falls... U.S. downgrade imminent...