I got the strangest e-mail from my natural gas provider, Avista Utilities. The company said it will raise gas prices next year, but it's lowering them this fall… and the net result will be a 4% price increase. Kind of makes me wonder about the meaning of the term "lowering." The message ricocheted back and forth line by line… "We're lowering prices… We're raising them… We're lowering them." I'm glad I don't own the stock.
Maybe inflation isn't a huge problem right now. But it sure doesn't feel like that double-dip recession I keep hearing about is a problem, either…
First, look at temporary and contract employment. The American Staffing Association (ASA) Weekly Staffing Index of temps and contractors is back to where it was in early 2008. The ASA says this is a leading economic indicator (we'll see!). It makes a bit of sense that businesses would take a cautious approach and hire temp workers before committing resources to bring on permanent full- or part-time help. The index is 45% higher than a year ago.
Then, there's the shipping boom. The Cass Freight Index measures industrial shipments moving through U.S. distribution networks. It's at its highest level since August 2008, just before the crisis really crushed everything.
So I ask you, if businesses are hiring and shippers are shipping, which direction are we headed at the moment, based purely on those two factors? It doesn't look like recession, depression, or deflation.
So what happens to investor returns when the Fed ignores inflation and fights a depression that fails to show up? For one thing, tiny yields make bonds unattractive…
Hedge-fund billionaire Leon Cooperman went on CNBC this morning and proclaimed himself in the short bonds/long equities camp. Cooperman says the best time to buy bonds is when the yield curve is inverted (when long-term debt instruments have a lower yield than short-term debt instruments). The best time to sell bonds is when investors are reaching for higher yield and extending maturities to get return – the situation we have today.
Cooperman's been cutting his fixed-income positions, particularly in government bonds. He believes the fair yield on 10-year Treasurys is currently 5.5%... But he still thinks stocks would be a better value at that yield.
Why bother with 5.5% when you can get 10%? In the October issue of Extreme Value, due out today, I'm recommending a World Dominating business that's selling at a free-cash-flow yield over enterprise value of just a hair less than 10%. It gets 70% of its revenues from products that are either No. 1 or 2 in their markets. It has the No. 1 product in 21 distinct global product categories. It gushes free cash flow, almost $16 billion of it last year. It can borrow money at 2.95% because it's one of a handful of triple-A rated companies left. It's got $18 billion in cash and $13 billion in debt, a rock solid financial condition.
Profit margins are consistently thick, with gross profit margins of 70% and net profit margins of 20%. It's one of the greatest income investments of all-time, having raised its dividend 48 years in a row and at a rate of 13.48% per year over the last 10 years. Investors worry about big companies growing, but 25% of this company's sales are from products less than five years old. And 50% of its sales are outside the U.S., so it has excellent exposure to more rapidly growing economies of other countries.
I could gush on and on about this World Dominating business, but you get the point. All the details are in the October issue of Extreme Value. To get access to it, click here.
Will Mack, chairman of the $10 billion commercial real estate firm Area Partners, also appeared on CNBC this morning. He said we're forming a bottom in real estate. Prices are stabilizing and there's more liquidity. Plus, banks are no longer "extending and pretending" – rolling over bad loans to avoid writedowns. Personally, he's seeing "a wave of deals" at his shop. Mack thinks it will be three to five years before we see CRE prices recover to 2007 and 2008 levels.
While most commercial real estate may take years to recover, True Wealth recommendation Washington REIT is booming. Washington REIT is the landlord to the only growth industry left in the country – government. The stock is approaching its 52-week high today.
Steve recommended the Washington REIT last June, calling it "Obama's Landlord." Washington REIT is likely the largest nongovernment landowner in D.C. At the time of recommendation, it had fantastic occupancy rates and traded at its cheapest price in history. And as Steve pointed out, "there are no recessions in government." True Wealth readers are up 56% on the recommendation.
Maybe it's not clear whether inflation or deflation is the bigger concern right now. But it's pretty darn clear what the market thinks… Gold and silver jumped to fresh highs today after Japan and Bernanke gave the precious metals a shot in the arm. Japan's central bank cut its key interest rate to near zero to weaken the yen.
And Bernanke once again told the world he's ready to press "print." In a speech to college students yesterday, Helicopter Ben said the Fed's $1.7 trillion purchase of Treasurys and mortgage-backed securities was an "effective program." And he'd do it again if the economy doesn't improve… "Additional purchases have the ability to ease financial conditions," he said.
Ben Bernanke is telling you how to make money. He's telling you as explicitly as he can, more explicitly than I ever thought I'd hear, that he's going to fix the gold trade so you win.
GDP recovered faster after the 2007-2009 recession than after both the 1990-1991 and 2001 recessions. Employment and shipping are showing major signs of life. Real estate is recovering in some places.
So why hit the print button? I'll tell you why. Mr. Bernanke is worried about his friends in the banking industry. They're his potential future employers, after all. He needs to take care of them. He wants to get the economy smoking hot again, so his banker buddies can borrow short, lend long, trade with enormous leverage ahead of you and me, and make bigger bonuses. Bernanke must go to the Hamptons, look around and eavesdrop to determine what to do. If latte and lobster sales are down and he overhears too many complaints about bonuses less than $500,000, he threatens to hit the "print" button.
It's as if Mr. Bernanke were unaware that we don't need Wall Street ripping our faces off every day. We don't need the Federal Reserve at all… and we don't need to do anything about the economy but get the hell out of its way.
New highs: MFA Financial Preferred (MFA-PA), WR Berkley Capital Trust II (WRB-PA), HMS Holdings Corp (HMSY), Enterprise Product Partners (EPD).
In today's mailbag… What to do when our advice seems to conflict? Should we all be reading from the same script? Send your questions to feedback@stansberryresearch.com.
"I am a whole lot older than you. Why does that matter? For some reason, even though we study history, we give a lot more weight to the things we have experienced, than the things we read about. I remember the Carter years and the inflation and high interest rates. I was making about $12,000 a year back then and I borrowed $2,000 each year to make an investment in my IRA. The interest on the loan was deductible, and the contribution was deductible. At a tender age, I figured out that the after tax cost of a $2,000 investment that would compound, tax-free, was about $1,200. That IRA is now worth about $4.4mm.
"Back then, a neophyte banker, I engaged in many conversations about money supply, interest rates, inflation, etc. I remember telling my CFO in 1987 (I, like you, was entrepreneurial) that I didn't see the absolute correlation between inflation and interest rates. He enjoyed making fun of me at banking conventions, telling my fellow CEOs that I didn't think inflation resulted in high interest rates. They laughed. I still don't think inflation results in high interest rates. High interest rates are the result of demand for money, which does not exist now, nor will exist in the near future.
"You've lost your bet with Dyson regarding interest rates (although I don't hear you talking about that much). In the end, you will be right, but it will be a long time coming. I too, have always been early. So ends the inflation/deflation debate. P.S. Your service does the best advisory job I have ever encountered. Kudos!" – Paid-up subscriber MM
"I couldn't agree more with your assessment of Dr. Sjuggerud's personality and demeanor. I had the pleasure of meeting him and his lovely wife in Playa del Carmen three years ago, and he is one of the most gracious and unassuming people you could ever meet. The best description I can give is that, if you didn't know who he is, you would never guess who he is. It is important to note that who he is a pretty insightful analyst.
"Thanks for the great job you guys do and please give us a shout when you are in Nashville and we will fire up the smokers and fix some BBQ. I am told my baked beans are pretty special." – Paid-up subscriber Ken McGaha
Ferris comment: Doesn't sound like you and I met, but I'm game for that BBQ…
"Don't you think your organization should be giving consistent advice? True Income says Brunswick Corp is turning it around and safe for a purchase of its bonds.
"Whereas PSIA says we should be shorting it. Why would one take either piece of advice when a colleague is saying that it is ill-advised at the same time?" Paid-up subscriber Rob D.
Goldsmith comment: Porter addressed this issue in a past Digest. You can read his explanation here.
Ferris comment: One of Emerson's most famous quotes: "A foolish consistency is the hobgoblin of little minds." It's often misquoted without the first two words.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
October 5, 2010