I normally take a bit of liberty on Friday's Digests... either to talk about investing strategies you should try (but probably won't) or about macro themes worth your attention. Today, however... I'd like to take a minute to comment on something I'm almost 100% sure won't interest you in the slightest: Me. I know the quickest way to ruin a party or lose a reader is start to talking about yourself... so I'll be brief. And there's something in it for you too, as you'll see...
This week brought two of the biggest endorsements of my entire career – recognition from both Richard Maybury and Dennis Gartman. In his eponymous letter, Gartman re-printed my entire "Why There Are No New Jobs" piece and followed it with this:
We don't like to lift whole cloth articles because we feel lazy when we do, but this time we had no choice but to do so for this is so truly spot on that it could only be lifted whole cloth. Though very tongue-in-cheek, there is real wisdom here. Would that the Left understood the lunacy of their philosophies... Mr. Stansberry is rather well known on the investment speaking circuit. He's a wise man; a good man and in this instance an imminently insightful man. Job growth? It is non existent and so long as this Administration remains in power intact it will remain so... – Dennis Gartman.
I'd venture to guess that most of my readers – maybe even 90% of them – have never heard of either Gartman or Maybury. But these guys are the wise old men of the investment newsletter game. They are giants. As David Galland, managing director of Casey Research, said when he wrote to congratulate me: "Glad to hear about Maybury... if you can get past his filter, you have indeed arrived."
These men – along with Richard Russell, my friend Doug Casey, and my partner Bill Bonner – were the pioneers of our business model. They proved if you were smart enough (and had enough integrity), you could make a living purely as an analyst. You didn't have to bend over to bankers... or pander to advertisers... or become a peasant in the book publisher's feudal system. They staked out the territory where I make my living today – a place where ideas matter and what you write shapes the markets and the world around us. That's why you should know their names, read their letters, and take them seriously. That's why I'm grateful they've recognized my work. Lots of people in the publishing business have commented on our ability to market... but I care a lot more about getting recognition from people like Maybury and Gartman, guys who really only care about ideas.
Now... what's in all of this for you? Well, we've started an important new project at Stansberry Research. We began our business by competing against investment banks. We knew improving on their research wouldn't be difficult: Their real clients are the folks selling shares to the public, as the Wall Street research scandals of the early 2000s proved in spades. Over the last 11 years, we proved our independent research is vastly better, by any measure, than the stuff your broker might send you. The reason is simple: We're not paid to lie to you. We really can only do well financially if we get a renewal check.
Over the years, we've noticed another glaring defect in the market for ideas: the way advertising dollars impact editorial coverage. Every major newspaper in America swears there's a "Chinese Wall" between their ad sales department and their editorial department. But every thinking person knows that's total nonsense. My dad worked for many years as a newspaper reporter. He knew very well who was paying his salary – as does every reporter in the world.
Why was Stansberry Research the first publishing group to predict the inevitable bankruptcy of General Motors? It wasn't because we're the only financial journalists who can read a balance sheet. GM and GM dealers were typically the single largest advertisers at most newspapers and magazines in the United States. That might have had something to do with it, don't you think?
Likewise, on Wall Street, GM's bond issues were one of the largest income streams for investment banks in the 20 years leading up to their bankruptcy. You see no evil and you hear no evil when your income depends on it. In contrast, we only get paid if we bring you the best, most valuable ideas – we're looking for "evil" all of the time.
And that brings us to this bit of institutionalized stupidity: the S&P 500 Index and the Dow Jones Industrial Average. "S&P" is Standard and Poor's. It's a bond-rating agency. To popularize its name and make sure its clients' stocks were well known too, it began selling information on market prices to newspapers, magazines, and investment banks. Likewise, to popularize its newspaper (the Wall Street Journal) and ingratiate itself to the biggest buyers of advertising in America, Dow Jones began compiling the prices of the 30 largest industrial stocks and distributing the information to the media.
When you hear people say, "the market went up 3% yesterday," they're almost always talking about either the S&P 500 or the Dow Jones Industrial Average. But here's something important to understand: These indexes weren't designed to help you become wealthier. They were made and published to generate bond-ratings business and sell advertising.
What's wrong with the existing major indexes? Well, for starters the S&P 500 is market-cap weighted. That means the more expensive a stock becomes, the more weight it carries in the index. So if you're buying an S&P index fund, your money will end up in the most expensive stocks first.
That doesn't make any sense, does it? Just because a stocks is enormous and expensive doesn't mean it is a good business. (Think AIG, Citigroup, Enron, etc.) In fact, buying the most expensive stocks simply because they're expensive is the opposite of sensible investing.
The Dow Jones index makes even less sense, if that's possible. It is "price weighted." That is, stocks with a high nominal price carry the most weight in the index. That's just bizarre. As even amateur investors know, the nominal price of a single share is completely meaningless as a factor in determining the attractiveness of the investment.
We've said for years that anyone who buys an index fund based on either the S&P 500 or the Dow Jones Industrial Average is either stupid or insane. Those indexes weren't made for investors – they were made to benefit the companies who created and popularized them. (By the way, the SEC knows this very well too... but did nothing to stop the headlong rush into funds based on these indexes, funds that were marketed most notably by the Vanguard mutual-fund company.)
The sad thing is... buying a diversified portfolio of stocks is a good idea for novice equity investors. And you could have done very well over the last decade owning a broad basket of stocks – if you'd simply applied a logical approach in selecting real blue-chip companies and buying them when they were trading for sensible prices.
So... what if a group of experienced and knowledgeable analysts started from scratch to build a real blue-chip index of stocks? It would be a list of companies that have achieved a superior return on assets. It would be a group of companies that consistently put shareholders first by keeping expenses low and returning capital to investors in the form of cash dividends and share buybacks. We've taken on this task. And we're close to publishing the S&A 40. Here's the best part. We can prove to you our index is far, far superior to either the S&P 500 or the Dow Jones Industrial. And we can show you a simple system for knowing exactly when to buy the stocks in our index – and when to sell them. This is safe investing made simple. Look for our new Blue Chip Monitor soon.
I'm with my family this week down in Florida. We're spending this weekend at the beach in Miami... then it is off to Disney World with my three-year-old son, Traveler. Seeing his face when he walks into the Magic Kingdom will almost be worth the 90-degree weather... I'm signing off here and turning you over to Goldsmith... who is somewhere in the jungles of Nicaragua...
Goldsmith comment: All is well in Nicaragua. I just have a nasty flu... The sickness peaked yesterday. My trip to the hospital was a precaution, as diseases like malaria still occur down here. The hospital, Hospital Metropolitano Vivian Pellas, was excellent. It's the passion project of Vivian Pellas, the matriarch of the wealthiest family in Nicaragua.
As for the actual treatment... I checked in, waited for 20 minutes, then saw a doctor. She performed some basic tests, prescribed two types of medicine, and sent me to the "farmacia." In total, the visit probably took 45 minutes. It cost $50, which I charged on my debit card. You can't do that in the states. The only drawback... You need to know basic Spanish to get around the hospital.
In particular, the [Federal Open Market Committee] is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. – Federal Reserve Chairman Ben Bernanke at today's Jackson Hole, Wyoming Fed meeting.
"Helicopter Ben" is staying true to his word. At today's meeting in Jackson Hole, Bernanke said he'd do whatever is necessary to stabilize the economy. The federal-funds rate is already near zero, so he can't lower that any further. The Fed already announced it would buy more agency debt, thereby pushing down long-term interest rates. The problem with that move... long-term interest rates are already low. And the market's reaction to the bond buying was mediocre.
That leaves one other option – an option Bernanke downplayed at the meeting – printing more money. With GDP growth slowing, unemployment near record highs, foundering real estate, and tightening credit, we would bet the Fed will quickly turn to the third option... more stimulus.
A quick update on the Dell/Hewlett-Packard/3PAR takeover situation Dan discussed yesterday... Today, HP upped its bid to $30 a share, or $2 billion. That's an 11% premium to Dell's previous bid. HP's latest offer values 3PAR at 10 times revenue. Remember, these shares were trading for less than $10 before Dell's opening $18 bid. They're near $32 today. (They're trading above HP's bid because the market expects Dell to counter). It looks like this takeover is turning into a pissing match (I can't think of a more polite term). And I'm sure it has to do with HP wanting to show it can close a deal without former CEO Mark Hurd at the helm.
Things are worsening in the Miami real estate market. Last week, lenders passed the 100,000-foreclosure mark. This year, lenders have repossessed more than 33,600 properties in Miami-Dade, Broward, and Palm Beach counties – already more than the 30,400 repossessions for all of 2009.
Peter Zalewski, a principal at Florida real estate consulting firm Condo Vultures, puts it in perspective, "To get a grasp of South Florida's real estate crash, consider that lenders have repossessed an average of 75 properties per day since January 2007, which is a span of more than 1,300 days." Lenders have repossessed 40% of the foreclosures in the area.
New highs: Eldorado Gold (EGO), Keyera Facilities Income Trust (KEY-UN.TO), Silver Wheaton (SLW), Seagate Technologies (STX), Western Digital (WDC).
In the mailbag... Some readers offer up their macro analyses... Plus another True Income subscriber weighs in. Send your thoughts to feedback@stansberryresearch.com.
"Your article for World Net Daily is excellent and very clearly expresses the type of oppression we face in this country. I've one other thought to add. You finish the article with: 'That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs.'
"Some of the criminals in Washington may wonder. Too many of them probably are aware that they f**k*d us by giving us 'FREE TRADE AGREEMENTS' and enacting various incentives for and sanctions against business, thereby destroying huge numbers of productive jobs in this country.
"The bastards are guilty, not only of coercive theft, they are traitors to this country and it's people." – Paid-up subscriber Bob Kaeding
"Nice article. A little biased though. Don't you think that we need a military to open up new markets and reduce the costs of raw materials for your business? Wouldn't you like to have roads, so that you and your employees can get to work safely and you can transport your goods across America? How about police to stop thieves from breaking into your warehouse and liquidating your finished goods? Maybe a fire department to put out a fire just in case?
"How about a strong centralized government which helps breed stability and encourage foreign investment? Maybe a strong currency too? OK so our currency is poor. But what about when your company gets really big, becomes international, and even though you as a CEO made some of the stupidest mistakes ever (maybe even on purpose) we will be there to bail you out because let's face it your company is too big to fail! And who knows, if you become a major conglomerate someday, we will let you buy off our legislators to pass favorable lesgislation for you to profit from even if it goes against the best interests of the people and our Constitution.
"Don't you want us to help you get to the billionaires club? Because once you get there you get to practically write your own rules. So stop whining already. The average working person has it way worse than the up and coming small business owner. They never get any of the profits, most of them live pay check to pay check and they have no real assets because they had to finance their education through banks which charge usury just for the chance that maybe one day they could land a job and try and live the American Dream.
"Zetta my HR lady told me that 'life is not fair'... 'You have to pick yourself up by your bootstraps.' Isn't that what all of the rich people do? They don't get any advantages right?!!!
"It was a very nice article, just thought I'd play the other side. Besides, if there was no regulation, we would have 1% of the population filthy rich, while the other 99% were poor... wait... um never mind." – Paid-up subscriber Todd Phillips
"True Income does something I tried to do right after I got out of the Army, only much better.
"I would spend my lunch hour going over the fine print of the Washington Post and New York Times financial sections, looking for Bonds at a discount. This was pre-internet, pre-anything in fact. The bonds I was looking for also had to have a maturity date of less than 5 years. I was hoping to cash in on the capital gain, just like True Income.
"Unfortunately after spending about a week that it took to look at all the listings, I gave up after not finding a single bond that met the even first 2 criteria, which is NOT the case with True Income. Now, I just let Mike do the searching. Now, after all these years, I can finally apply the first strategy I ever wanted to try." – Anonymous
Regards,
Porter Stansberry and Sean Goldsmith
Miami Beach, Florida and Managua, Nicaragua
August 27, 2010