Socialism reigns in Brazil... Bad news for this Big Oil stock... An update on Europe... And a pairs trade we like... Quality is holding up... Porter's prediction: This company will be a top performer in the S&P 500 over the next 20 years...
Brazil is getting crushed today... And so is one of our favorite short candidates...
For many years, Brazil has been one of the world's most popular emerging markets. It's the largest economy in South America. It has vast resource wealth and tremendous potential growth ahead of it.
That's why Brazil is included in the popular "BRICS" club... which is an acronym that describes the major emerging-market economies of Brazil, Russia, India, China, and South Africa. When investors talk about countries with massive potential in the 21st century, Brazil is always mentioned.
Brazil is heavily dependent on commodities like iron ore, oil, and agriculture. As we noted in last Thursday's Digest, commodities have been crushed due to a rising dollar and decreasing demand. The selloff is also putting downward pressure on Brazil's economy.
Plus, right now, the market isn't happy with Brazil's choice for president. President Dilma Rousseff was just reelected for a second term. During Rousseff's first term, Brazil fell into a recession. It's currently suffering from high inflation, rising debt, and low productivity.
According to Brazil's official statistics agency (IBGE), the current inflation rate in Brazil is 6.75%. The inflation rate in Brazil from 1980 until 2014 was 392%.
Government debt as a percent of GDP ranged from 53%-60% from 2006 to 2014, according to the Central Bank of Brazil. Today, it's around 57%.
According to consultant group McKinsey, labor productivity represented 40% of Brazil's GDP growth between 1990 and 2012, compared with 91% in China and 67% in India.
Rousseff also promised to make the necessary reforms to boost Brazil's economy... But instead of making necessary structural reforms to the tax system and bureaucratic structures, she tried to remedy the problem with more socialism via subsidies to consumers and businesses.
In March, ratings agency Standard & Poor's downgraded the nation's sovereign debt to one level above "junk."
General fear of emerging markets has also punished Brazilian stocks. In October, investors pulled $9 billion from emerging-market stock funds – the most in more than a year. Brazil's benchmark Bovespa Index is down 4% today.
But one stock is selling off much harder: state-run oil company Petrobras. The $71 billion company operates more like a socialist enterprise than a business.
Regular Digest readers shouldn't be surprised of our skepticism in investing in companies run by government officials. Our most recent warning came from Editor in Chief Brian Hunt in an essay titled "A Timeless Lesson on Investing With the Government"...
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Petrobras is sitting on huge oil discoveries... But the oil is far offshore and super-deep. In fact, some of the technologies necessary to extract oil from those levels haven't even been invented yet.
An abundance of deepwater oil means it's expensive (if not impossible) for Petrobras to extract it. The company announced a nearly $240 billion, five-year capital expenditure plan in 2012. Petrobras plans to produce 5.7 million barrels per day by 2020.
Of course, oil below $80 a barrel today crimps those plans.
Perhaps this is why Petrobras oil production has flattened out. In 2013, it averaged 2.7 million barrels per day... the same levels as it produced three years ago.
We're not the only ones skeptical of Petrobras. Renowned short-selling hedge-fund manager Jim Chanos has been short since 2012. He's skeptical of the company's ability to produce its deepwater oil... And he doubted investors would benefit even when oil went for more than $100 a barrel. (Today, it's around $79 a barrel.)
Meanwhile, Petrobras is generating about $26 billion in cash flow a year... But it's spending $45 billion. So it has to borrow money to cover its $19 billion shortfall.
Porter brought up a similar point at the recent New Orleans Investment Conference. He presented the following chart, showing Petrobras' mounting debt and falling cash flow.
In addition to cash flow problems, Brazil refuses to let Petrobras raise domestic fuel prices in line with world prices. Thanks to the government, gasoline in Brazil sells for close to 25% less than the cost of importing it. That boosts domestic demand, but crushes Petrobras' earnings potential.
Shares of Petrobras were down as much as 16% today. They've fallen nearly 50% since the beginning of September.
In the October 20 Digest, we updated you on the European Union's dismal economy... The economy is slowing, inflation is falling, and European Central Bank (ECB) head Mario Draghi is starting to buy bonds.
In its latest attempt to produce inflation, the ECB has bought $2.2 billion of bonds. This is the third time in the past six years that the ECB purchased bonds directly in the market.
The bond buying comes on top of "stress test" results released this weekend (which Stansberry International editor Brett Aitken discusses in today's Digest Premium).
The test revealed that 117 of the 130 banks tested passed and will supposedly be able to survive a financial crisis. Of the 13 banks that failed – which were a combined $31 million short – nine were Italian and three were Greek. The ones that failed have nine more months to generate enough capital to pass the test. No major European banks failed.
European officials hope the stress-test results will improve confidence in the banking industry and the overall European economy.
But much of Europe – specifically Italy, France, and Spain – have plenty of pain left. So we're not long all of Europe today. But there are some interesting opportunities...
For example, you can buy a basket of Europe's highest-quality dividend-paying stocks for 14 times earnings (versus 19 times for the S&P 500)... And they pay a nearly 5% dividend. Doc Eifrig's Income Intelligence subscribers got all of the details in the July issue.
If you'd like more information on this fund, consider a subscription to Stansberry Research's flagship income publication. Click here to learn more about Income Intelligence.
Last October, on episode 99 of Stansberry Radio, Porter recalled a conversation he had with his friend, hedge-fund manager Erez Kalir. Kalir had traveled through Greece for about three months visiting companies in mid-2013. The stock market had been crushed and the country was in the middle of a recession... But Erez was bullish. As Porter recalled...
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The trade is currently in the red. Greek stocks have gotten crushed since September for political reasons, such as the rise of a radical, anti-austerity party called Syriza and the country's prime minister saying he wanted to end his country's bailout early (leaving $8 billion on the table)...
But the long Greece/short France trade caught the attention of another investor – billionaire hedge-fund manager David Einhorn.
Speaking at the Robin Hood Investors Conference in New York two weeks ago, Einhorn recommended going long Greek banks – specifically Alpha Bank and Piraeus Bank. And he recommended shorting French debt as a hedge.
His reasons are similar to ours: Greece is improving. France is still an economic mess.
As you can see below in our new highs list... While volatility is spiking, money is still flowing into the best and safest companies... like Altria (tobacco), Apple (Big Tech), Union Pacific (railroads), CVS Health (health care), and W.R. Berkley (insurance).
So if you've followed our advice to buy only the highest-quality companies paying large and growing dividends, you're still doing well today.
Porter was in the office today. He's practically salivating at the idea of buying shares of one of the world's best businesses today. He told me this about the company...
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The company has been a longtime Stansberry's Investment Advisory holding... Porter's subscribers can learn more about this company in the December 2012 issue.
If you're not already a subscriber, but you want to know the name of the stock Porter is referring to, you can sign up for a risk-free trial to Stansberry's Investment Advisory. Click here to learn more.
Keep in mind that the last time Porter was this bullish on an individual company, he predicted chocolate maker Hershey would be one of the best-performing recommendations of his career. His subscribers are up 157% on Hershey since 2007... It's the second-best-performing holding in the model portfolio.
New 52-week highs (as of 10/24/14): Apple (AAPL), ProShares Ultra Nasdaq Biotechnology Fund (BIB), Brookfield Property (BPY), CVS Health (CVS), Leggett & Platt (LEG), Medtronic (MDT), 3M (MMM), Altria (MO), Travelers (TRV), Union Pacific (UNP), ProShares Ultra Utilities Fund (UPW), W.R. Berkley (WRB), and SPDR Utilities Select Sector Fund (XLU).
In today's mailbag, a subscriber shares his experience with leverage and another shares her appreciation of Stansberry Research. Send your thoughts and comments to feedback@stansberryresearch.com.
"Porter – When I was in my early 30s my squash buddies convinced me to buy into a river barges program which was pretty heavily leveraged. Soon there was an oversupply of barges and the values began to sink. This resulted in, effectively, a margin call by the bank, asking us to put up 2 for 1, or $80,000 for each $40,000 investment. Having a wife and four sons under 5 years old, this was a tad beyond my reach. We finally negotiated a settlement in the $30,000 range. All my pals in our garage band and other connections gave me a tremendous hard time. 'The banker gets fleeced, etc.'
"A few years later I was able to tell them all it was the best investment I ever made. It taught me about leverage and has probably saved me 100 or 200 times the amount in losses I might have had in leveraged deals. Leverage may be good for people with the means and smarts to skate on thin ice, but not good for people working 50 hours a week and supporting a family. I love the world dominating dividend growers, especially when they can be bought at a bargain price, and the beaten down commodities such as oil, uranium and maybe even coal, where they are absolutely essential if we are to keep the lights on, yet the prices are less than half the production cost. Enjoying your newsletters, and profiting by using the advice." – Paid-up subscriber Bob Evans
"Thank you so much for the wealth of knowledge you have already imparted to me – in just my first week. I have been working with Doc Eifrig's Retirement Trader and Income Intelligence for about a year, and just joined the Flex Alliance when I added Jeff Clark's programs – then added yours as #5. I've already learned so much. Now I'm looking forward to dipping a toe into some trades. I really appreciate the work of the entire team at Stansberry! They're the greatest!" – Paid-up subscriber Barbara Atherton
Regards,
Sean Goldsmith
October 27, 2014
Why European stocks are headed higher...
While Europe is far from booming today, it's a long way from the dark days in mid-2012. But unless a new financial Armageddon sets in, Stansberry International editor Brett Aitken believes the euro should hold up better than many think.
In today's Digest Premium, Brett says he's bullish on European stocks moving forward... and discusses the catalysts that could make Europe a little less bad...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Why European stocks are headed higher...
Editor's note: While Europe is far from booming today, it's a long way from the dark days in mid-2012. But unless a new financial Armageddon sets in, Stansberry International editor Brett Aitken believes the euro should hold up better than many think. In today's Digest Premium, Brett says he's bullish on European stocks moving forward... and discusses the catalysts that could make Europe a little less bad...
On my travels and at an economic conference in Budapest earlier this month, the most extreme one-sided trade I (Brett Aitken) heard about was the euro.
The currency was so despised that every single person I spoke with or heard from was bearish. These types of trades don't often work out well for latecomers. Things have a habit of working different from the way everyone thinks...
In May, the U.S. dollar traded for $1.39 versus the euro. Since then, the dollar has strengthened about 8% to around $1.27 today. It hit $1.25 during the first week this month.
Some analysts are calling for the dollar to keep strengthening against the euro. Some have even said it could trade at par with the dollar. At first glance, given the activities underway by the European Central Bank (ECB), a weaker euro seems the most logical path. And in time, we may see further weakening.
But remember this... When ECB head Mario Draghi opened up the first long-term refinancing operation (LTRO) spigots back in late 2011 and early 2012, he added around €1 trillion ($1.27 trillion) to the ECB balance sheet. These LTROs were cheap loans designed to boost liquidity and prevent a collapse of the banking system.
That expanded the balance sheet total to around €3 trillion by early 2012. Coincidentally, the euro traded right around today's levels of $1.27. The ECB's LTRO facilities were also around similar levels as they are today...
By the end of 2011, the European sovereign crisis had already pushed down the euro. The currency had dropped from $1.47 in April that same year – a 13% drop.
After Draghi pulled the trigger on the first LTRO batch, we saw a small bounce back above $1.30 for a brief period before the decline continued until July 2012. The euro then dropped to $1.21 – a level not seen since mid-2010. That was when Draghi told the world: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."
Remember, in 2012, almost every expert on the planet was calling for an end to the euro. It was over. According to the experts, the euro-area common currency experiment had failed.
While Europe is far from booming today, it's a long way from the dark days in mid-2012.
At the worst time period over the last five years, the euro changed hands for around $1.20... 5% lower from here. Could it get there again? Absolutely.
But unless a new financial Armageddon sets in, the euro should hold up better than many think. We'll likely see more volatility. But for now, we think it might be a stretch to go lower than those $1.20 levels when everyone considered a euro area breakup inevitable.
This doesn't mean the euro will follow the same path it took in 2012. In addition to LTROs, the ECB is now proposing significant additional stimulus. The first round of targeted LTROs auctioned last month was more than 50% lower than the market expected.
It's still important to understand what happened last time to estimate what might transpire during the next few months.
We also believe stock prices are going higher.
We're clearly in the minority here. Many say Europe's economy is faltering. Deflation is rearing its head. Unemployment is high. The euro is crashing. And banks have massive non-performing loans on the books.
There's no doubt Europe needs structural reforms. Spain and Greece have made tough decisions over the last couple years. It's a painful exercise. So far, France and Italy have refused to do the same.
In Stansberry International, we look around the world for the best bargains. We're looking at investing over the long term. Our subscribers know a crisis isn't hard to find... It's harder to judge one that's getting better.
We don't need to see massive GDP growth for bombed-out stocks to do well. A positive number will do.
The market got spooked by Europe's quarterly GDP numbers, which declined in June. Plus, deflation remains a threat. But Spain's GDP is growing 1.2%. Greece's GDP is still shrinking, but it's on target for GDP growth by early 2015. The trend is returning to growth.
Barring a depression or another deep recession, we only need small improvement for stocks to do well from here. The recent selloff is creating great buying opportunities. We recommend taking advantage of it.
– Brett Aitken
Editor's note: In the October issue of Stansberry International, Porter and Brett recommended a European consumer-staples company with a distinguished brand... trading at a good price... and paying a 2% dividend. If Europe's situation gets a little less bad, investors who buy today could be rewarded handsomely. You can learn more about Stansberry International and how to get started with a four-month, risk-free trial subscription by clicking here.
Why European stocks are headed higher...
While Europe is far from booming today, it's a long way from the dark days in mid-2012. But unless a new financial Armageddon sets in, Stansberry International editor Brett Aitken believes the euro should hold up better than many think.
In today's Digest Premium, Brett says he's bullish on European stocks moving forward... and discusses the catalysts that could make Europe a little less bad...
To continue reading, scroll down or click here.
Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)
As of 07/21/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 411.6% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 316.2% | The 12% Letter | Dyson |
| Constellation Brands | STZ | 06/02/11 | 310.5% | Extreme Value | Ferris |
| Ultra Health Care | RXL | 03/17/11 | 268.2% | True Wealth | Sjuggerud |
| Ultra Health Care | RXL | 01/04/12 | 222.2% | True Wealth Sys | Sjuggerud |
| Altria | MO | 11/19/08 | 210.2% | The 12% Letter | Dyson |
| Targa Resources | TRGP | 12/13/12 | 187.6% | SIA | Stansberry |
| Blackstone Group | BX | 11/15/12 | 179.1% | True Wealth | Sjuggerud |
| McDonald's | MCD | 11/28/06 | 178.1% | The 12% Letter | Dyson |
| Automatic Data Proc | ADP | 10/09/08 | 158.2% | Extreme Value | Ferris |
Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals |
| 3 | Extreme Value | Ferris |
| 3 | The 12% Letter | Dyson |
| 2 | True Wealth | Sjuggerud |
| 1 | True Wealth Sys | Sjuggerud |
| 1 | SIA | Stansberry |