'The biggest bubble that has ever existed in the modern world'... The junk-bond market is turning... Almost doubling our money in muni bonds... A sojourn in Bordeaux... Enjoying an $80,000 bottle of cognac... Reader feedback: Our recommended coin dealers...
Who would have thought buying high-yield ("junk") bonds at record-low yields was a bad idea?
Us, for one... But we were in the minority. We discouraged readers from buying junk bonds – the riskiest corporate credits – numerous times in the Digest. And we weren't subtle.
In the June 18 Digest Premium, Porter wrote...
I think that the biggest bubble that has ever existed in the modern world is going on right now in the bond market. People refer to the "bond market," but it's actually a whole series of different markets. Almost all of them are wildly inflated. But there are different reasons for what's going on. Let me start with the high-yield bond market.
The high-yield market is sometimes called the "junk" bond market. This is where obligations of noninvestment-grade companies trade. The average yield on junk bonds is now right around 5%. What's really interesting about that is the average default rate on these bonds over time is usually around 30%. So the lower the yield, the higher the risk. When these bonds default, investors are going to lose a lot of money.
You would normally expect to see the junk-bond market yield 8%-12%. A good rule of thumb is to never buy a junk bond if it's trading at a yield of less than 10%. Another good rule of thumb is to never buy a junk bond unless it's trading at a discount to par. That's because these bonds come with such a high risk of default.
As Porter explained, all bond yields were low, thanks to the Federal Reserve's policies, which lowered interest rates to historic levels...
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Porter cited the most famous quote from investing legend Warren Buffett: "Be greedy when others are fearful, and fearful when others are greedy." Investors had never been as greedy for junk bonds as they were earlier this year...
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Despite the fact that junk bonds were offering "return-free risk" (especially when trading hands above par), investors continued to pile in... Even knowing we'll likely see a hike in interest rates by the first half of 2015.
The most egregious junk-bond call we saw came from investment bank Citi, which recommended leveraging into high yield to achieve higher returns. The report stated that "high yield is less risky than Treasuries."
Buffett appeared on CNBC this morning, saying he owned junk bonds in the past... but doesn't own any today. And with Treasury securities yielding 2.4%, he's "not salivating."
We'll further discuss Buffett's comments (including his purchase of an Arizona car-dealership chain) in next week's Digest.
Today, the high-yield market is breaking down...
We've seen some volatility in the market recently (including yesterday's big selloff)... And the divergence between high-yield bonds and the S&P 500 has grown larger, leading some to believe that even more volatility may be in store...
According to Bank of America Merrill Lynch index data, the average yield for high-yield debt hit a one-year high of 6.29%.
While high-yield speculators are getting smoked (as we expected), readers who bought municipal bonds on Dr. David "Doc" Eifrig's recommendation are enjoying huge gains.
We wrote about Doc's muni-bond call in the September 10 Digest as muni-bond funds were hitting new highs.
To recap, municipal bonds are issued by state and local governments to pay for things like roads, stadiums, and other government projects. To encourage folks to invest their money with the government, the interest on muni bonds is tax-free.
Between 1970 and 2011, junk bonds had a cumulative default rate of more than 25%. High-rated muni bonds had a default rate of just 0.02% over the same time frame.
Today, you can earn near-double-digit tax-equivalent yields buying high-rated municipal bonds (versus around 6% in high-yield bonds)...
In addition to a higher and safer yield, muni-bond holders have also been rewarded with larger capital gains over the past year...
Doc's Retirement Millionaire subscribers who purchased the Nuveen AMT-Free Municipal Fund (NEA) on his original recommendation in October 2008 are up more than 90% – an incredible gain for one of the safest asset classes in the world.
We'll end today's Digest with a long note from our colleague Gray Zurbruegg about a recent trip he took to Bordeaux, France... We hope you enjoy the highlights.
Petrus... Smith Haut Lafitte... Pontet-Canet...
Does it sound like I (Gray) am speaking a foreign language? That's because I am. Fortunately, I just had the opportunity to practice my French while visiting the Bordeaux region with some of my best friends. (And I'm getting pretty good!)
I met these friends through a special club I joined a few years ago – one that Porter founded – called the Atlas 400.
But before I tell you about this group, let me tell you more about our trip to Bordeaux...
We couldn't have picked a better week to visit. The weather was incredible – blue skies and sunshine every day. The cities were buzzing. Everyone was excited about the upcoming harvest.
Our home for the week was the Grand Hotel de Bordeaux, situated in a massive 18th-century structure. It's located on the corner of the "Golden Triangle," directly across from the Bordeaux National Opera House, in the town's cultural epicenter.
Our week started with tastings at Chateau Cos d'Estournel and Chateau Pontet-Canet.
One of our club's members arranged the visit to Pontet-Canet. He's a Bordeaux enthusiast and has become friends with the owners.
The owner's daughter hosted us on our visit. We had a delightful lunch on the property and sampled the extremely rare Tesseron Extreme cognac. If you ever have an opportunity to try this, DO NOT pass it up... It can fetch up to $80,000 a bottle.
Our week carried on in similar fashion, visiting beautiful chateaus that served even better wines. The owners at Smith Haut Lafitte were great... They shared stories of visits from celebrities and world leaders while we enjoyed some of their favorite vintages.
Smith Haut Lafitte
We also arranged a boat tour of the Arcachon Bay – enjoying fresh oysters and champagne as we took in the scenery at sunset.
But the highlight of the week was our visit to Petrus.
Petrus rarely opens its doors to the outside. But thanks to the influence of our members, there's rarely a door we cannot open.
The property is beautiful. There's no chateau, as many would think... just a picturesque old estate house that looks as if it has been frozen in time.
However, there's nothing antiquated about Petrus' production. The estate was among the first in Bordeaux to implement green-harvesting (or "éclaircissage") as a way to lower crop yields and raise the quality of the remaining grapes. Petrus' production integrity is even more impressive. There are some vintages it has deemed not good enough. The last one was 1991. Scarcity only adds to the mystique surrounding its brand.
But beyond the delectable wines, delicious meals, and fantastic scenery lies the more subtle – and certainly more important – objective of our trips. We organize trips for our members not just because it's invigorating and exciting to travel to beautiful places, but also so that the members can enjoy the luxury of time together.
It's always a pleasure to watch these goals come to fruition on our trips with the Atlas 400. And it was a treat when one member treated the group to a magnum of Chateau d'Yquem... He had closed a big business deal while we were away and wanted to celebrate with everyone.
Atlas 400 isn't for most of you. But for some, membership could literally change your life. Simply put, most of you won't fit the criteria we're looking for. But we know some of you will... We've fielded more than 500 applications and have accepted fewer than 100 for membership.
Don't let that keep you from applying (although, frankly, we know most of you won't)... We've spoken with people who have had tremendous success who were nervous about applying, for fear they wouldn't have value to add to the group.
The value is in your attitude. We're looking for people who come into this group with the right approach... And that is, "how do I add value to the group?"
In short, we want members who are positive... who see the potential in our club... and who are willing to help us make it one of the world's best, most exclusive groups.
If you would like to submit an application to the Atlas 400, please click here. I look forward to speaking with you... and hopefully the adventures we'll share in the future.
New 52-week highs (as of 10/1/14): Coca-Cola (KO).
In today's mailbag, an oft-recurring question: where to buy gold coins. How has your experience been with our recommended dealers? Let us know at feedback@stansberryresearch.com.
"What is the name of the dealer Steve Sjuggerud recommended for trading the numismatic gold coins? I had it written down someplace and couldn't find it nor could I find it on the website when I searched (although I am sure it's there)." – Paid-up subscriber Herve Kopciak
Goldsmith comment: We always recommend Van Simmons at David Hall Rare Coins (1-800-759-7575 or info@davidhall.com) and Asset Strategies International (301-881-8600).
Regards,
Sean Goldsmith
October 2, 2014
Every active investor should read these books...
While finance books are important, they aren't the best way to improve your performance in the stock market.
In today's Digest Premium, Porter shares some specific titles he thinks every investor should read.
To subscribe to Digest Premium and access today's analysis, click here.
Every active investor should read these books...
Most people interested in finance and the stock market spend their time reading finance books. But I (Porter) think that's a mistake.
Don't get me wrong... You need a fundamental understanding of the markets to get started. And there are plenty of great books – like The Intelligent Investor – for that.
But if you want to be active in the markets, I think you'll benefit much more from history books.
A History of Money and Banking in the United States by Murray Rothbard is a good place to start. As the title implies, it's a great resource to learn about America's background in money and banking.
I also really like A History of Interest Rates by Sidney Homer and Richard Sylla, which will teach you about interest rates and lending.
These two books are classics.
I'd also refer you to A History of the American People and Modern Times by Paul Johnson. They have several valuable chapters on economic and financial issues. Most notably, his histories of the Great Depression and the U.S. steel industry are excellent. These aren't commonly classified as history, but I would tell you that Warren Buffett's annual letters to Berkshire Hathaway shareholders are the best thing any businessman or investor could ever read... in part because they are a living history.
Buffett documents every important financial and economic situation over the last 40 years in his letters. And best of all, they're available for free on Berkshire Hathaway's website.
I'd also recommend buying Lawrence Cunningham's collection of Buffett's essays, which is called The Letters of Warren Buffett. He has a new edition out.
I believe that if you understand the history of money and banking... you understand a bit of U.S. history, politics, and industry... and you understand the history of investing through Buffett, you'll be positioned for success in the markets today.
– Porter Stansberry with Sean Goldsmith
Every active investor should read these books...
While finance books are important, they aren't the best way to improve your performance in the stock market.
In today's Digest Premium, Porter shares some specific titles he thinks every investor should read.
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 |