Billionaire distressed-asset investor Wilbur Ross recently said he believes shipping will be the next major bull market.
However, I (Porter) think Wilbur is probably right. I think over the next 24 months, the shipping world will see a lot of bankruptcies. That means lots of boats that come up for sale at low prices. People who have capital at the bottom and are able to buy those ships will do very well.
We'll see two things happen to help the shipping industry recover... In both cases, the key is energy.
Today, we have something called the Jones Act, which demands that only U.S.-flagged vessels be allowed to carry U.S. crude oil. Originally, this was done as a protectionist measure to give business to U.S. fleets.
To give you a little bit of an overview of what's going on now… the U.S. used to import lots of crude oil from places like Nigeria. But as U.S. supplies of crude oil have grown from the shale oil and gas revolution, the imports have collapsed... And that has caused a huge glut in the oil tanker market. Sooner or later, that glut will reverse as the world begins to buy cheaper U.S. oil.
And to give you an idea of how much cheaper it is… Brent crude (the international benchmark for petroleum prices) has traded in the spot market for 15%-30% more than West Texas Intermediate (the benchmark for U.S. oil prices). It's a very unusual dichotomy to see that much of a spread between WTI and Brent.
That spread started to open up at about the same point that tanker rates began falling. So the wider the spread goes, the worse the tanker day rates are. Sooner or later, shipping oil and refined products from the U.S. to other parts of the world will increase demand for those tankers, and the price spread between WTI and Brent will narrow.
The latest S&P Case-Shiller home price index shows not only are housing prices still rising… but the increases are accelerating.
The 20-city index climbed 10.87% in March compared with March last year, beating expectations of a 10.2% year-over-year increase.
It's also the fastest increase since April 2006.
But as True Wealth editor Steve Sjuggerud has been saying for months now… housing is more affordable than ever. Interest rates are lower. And banks are more willing to lend if your credit is good.
Steve nailed the housing trade... He recommended the iShares Home Construction Fund in February 2011, a little more than two years ago. Nobody wanted anything to do with housing back then. Now, the fund is up more than 90%.
And Steve is not backing down. I heard him say just a few days ago that housing is one of the greatest investments in the world today.
Most people stink at making big macro calls on entire markets. But Steve is as good at that as anyone. His readers have made triple-digit gains on health care and big double-digit gains on foreign stocks, biotechnology, and other major market moves he's predicted over the last year or so.
Steve's big call in the March issue of True Wealth has already produced a double-digit gain, and he says the trend he based the recommendation on should last until 2015.
If you want to learn more about the trend behind Steve's latest call… check out his True Wealth letter. You can try it out for four months at no risk to you. If you decide it's not for you within that time, you can get a full refund. If you want to sign up for True Wealth (at just $39 a year) without sitting through a long sales presentation, click here.
In the May 17 Digest, Porter shared some lessons you can learn from a book he recently read – The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike.
The book profiles a group of CEOs, largely uncelebrated by the media, who generated 20%-30% returns during their decades-long tenures. These CEOs all focused on allocating capital to generate outstanding returns for investors.
When their stock was cheap, they bought back in large volumes. When other companies were cheap, they made acquisitions. These CEOs were also frugal when it came to corporate expenses. They shunned trophy headquarters in midtown Manhattan for much more meager accommodations in lower-cost cities.
One example of this frugality came from Tom Murphy and Dan Burke, who ran the media company Capital Cities Broadcasting.
Legendary investor Warren Buffett is quoted in the book calling Murphy and Burke "probably the greatest two-person combination in management that the world has ever seen or maybe ever will see."
The two managers regularly acquired new businesses, then applied their streamlining strategy to improve margins. This included laying off executives and cutting frivolous expenses... all with the aim of improving margins.
Eventually, Capital Cities bought the much larger television network ABC... And its cost-cutting strategy remained intact. Murphy and Burke cut ABC's executive elevators and private dining rooms. They consolidated offices and sold real estate, including ABC's premier Manhattan headquarters for $175 million.
Another executive outlined in the book was John Malone, who grew TCI into the largest cable company in the country. Thorndike described TCI's Denver headquarters as: "Spartan, with few executives at corporate, fewer secretaries, and peeling metal desks on Formica floors. The company had a single receptionist, and an automated service answered the phone."
So the executives in this book were able to generate some of the greatest shareholder returns in history without fancy offices. Still, we see corporate America in a race to build the biggest and best workplaces...
The same vanity drives the "stadium indicator" in professional sports. When you see a corporation slap its name on a professional sports stadium, watch out. These actions in and of themselves don't mean a company is destined to fail... But they do highlight a glaring mistake with most corporate managements – frivolous use of corporate funds and the habit of wasting cash when they have lots of it.
And today, four technology giants are building trophy headquarters to display their dominance...
Last week, Amazon – one of the most expensive stocks in the S&P 500 stock index, trading at more than 80 times earnings – announced plans to build a new headquarters in downtown Seattle that would feature three see-through bubbles, each 100 feet high. Behind those would be three skyscrapers.
Google, Facebook, and Apple are all also building premier corporate headquarters...
Google, the technology giant built on the ubiquitous search engine, is building a 1.1 million-square-foot "Googleplex" in Silicon Valley.
Internet-based social networking service Facebook hired famed architect Frank Gehry to design additional office space in Menlo Park, California. The addition will be the size of seven and a half football fields.
Apple has the most ambitious project of them all... a 2.8 million-square-foot glass ring on 176 acres. Former CEO Steve Jobs described his plans for the headquarters before he died in 2011. The project will cost Apple an estimated $5 billion.
A sign of the top... Hedge-fund leverage is approaching an all-time high...
NYSE margin debt across the hedge-fund sector hit $380 billion last week, according to Bank of America Merrill Lynch. That number falls just $1 billion short of the high point in 2007. In other words, hedge funds are borrowing a near-record amount of money to buy stocks today.
New 52-week highs (as of 5/24/13): Activision Blizzard (ATVI), Fission Uranium (FCU.V), Sequoia Fund (SEQUX), Constellation Brands (STZ), and Walgreens (WAG).
In today's mailbag… one subscriber comments on Porter's Digest Premium criticism of electric-car maker Tesla… and another weighs in on valuing great businesses. Send your comments to feedback@stansberryresearch.com.
"Somebody's going to make a lot of money when it crashes. It is more than obsolete, it is nonfunctional. A 30-minute charge at a Tesla Supercharging Station will provide a half charge, good for about 140 miles. That's about 2 hours driving. So rather than travelling at 70 mph, you're only going to manage 56 mph with stops for recharges.
"It gets worse. Consider my least favorite road, I-95. The typical vehicle volume between 10 a.m. and 2 p.m. is about 5,000 vehicles per hour. So on that 140-mile stretch of roadway you have about 10,000 vehicles, of which 30% are locals that recharge at home. That leaves 7,000 vehicles that need a charge plus about 2,000 sitting in the charging stations. That comes to about 60 charging stations per mile. It ain't gonna work.
"It is conceivable that an electric car could be powered on major roads without recharging by using high-frequency cables in the road bed that couple with an antenna in the car. Current would be generated in the antenna just like it is generated in those ID badges you hold up to a door to gain entry. With either a battery driven or antenna coupled electric car, the increase in electrical generating capacity would be immense.
"The greens want to see automotive travel go away so an electric car is just fine with them. They'll take the train – electrically powered of course – and they think windmills will do the job. Right!" – Paid-up subscriber Earl Hackett
"Porter's description of great businesses reprinted in today's Growth Stock Wire is brilliant, but likely unappreciated by the masses. We are income investors, but we've added to our income definition synthetic 'income' like share buybacks and high, continuing free cash generation per share. We think that our expanded definition serves income investors well, as it offers both cash income and a force for upward pressure on a stock price so that some shares may be profitably clipped from time to time.
"At this juncture in the market cycle, we think that our more holistic definition of income makes huge sense. Great dividend payers are no longer 2009 cheap. Nice work. I for one appreciate the refresher." – Paid-up subscriber JP
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Miami Beach, Florida
May 28, 2013