The Fed's stupidity... No fear in the markets... Investors want risk... Record CLO issuance... Return of the PIKs... Bonds we like... The gigafactory indicator...
Cause-and-effect is a simple concept...
Actions cause reactions. If you eat too much, you get fat. If you throw gasoline on a fire, it explodes...
You get the idea... We learn it from an early age.
So we wonder why the Federal Reserve is having such a difficult time getting it.
The Fed should clearly grasp the fact that if you orchestrate the largest bailout in history... flood the markets with $4 trillion of capital... manipulate bond yields to zero... and signal that the accommodative policies will last for years... people are going to take more risk.
We couldn't help but chuckle when Federal Reserve President William Dudley made the following comment after a speech last week...
"Volatility in the markets is unusually low... I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they'll take more risk than really what's appropriate."
What other option do people have?
Savings accounts yield nothing... Bond prices are near record highs (subsequently, yields are near record lows)... The stock market is at an all-time high.
Retiring Baby Boomers need income to live. Pension funds need income to pay pensioners. That's trillions of dollars looking for a home... anywhere that offers a decent yield.
We wrote about some of the madness in the bond market in the May 29, 2014 Digest titled "Signs of the top."
Junk bonds (debt issued by the least creditworthy companies) are up nearly 5% this year... And they're yielding 4.99% – the all-time low was 4.96% in May 2013. Companies can't issue enough of this garbage paper.
The average junk bond is now trading for more than $1.05 on the dollar. (The high was $1.07 in May 2013.) Bonds are repaid at par, or 100 cents on the dollar. So today, investors are agreeing to pay five cents more than what they will be repaid in the future to buy the riskiest debt at record-low yields... This won't end well.
And people are plowing cash into stocks and risky debt with little fear of repercussion...
As you can see from the above chart of the Volatility Index (the "VIX"), the market's fear gauge, investors are as complacent as they've been since 2006-2007. The Wall Street Journal pointed out the VIX has gone 74 consecutive weeks below its long-term average.
But can you blame them? Time and again, the Fed has assured investors it has their backs... It will continue to pump liquidity into the market and keep bond yields low...
Jason Goepfert of the research website SentimenTrader showed his readers another sign of investors' appetite for risk in his June 3 issue. Jason agreed to let us share the following chart from that issue. It shows investors have put four times as much money in equity-focused mutual funds and exchange-traded funds as they have in much safer money-market funds...
In other words, investors have put $4.05 in stocks for every $1 invested in money markets. As Jason points out, that's 31% above the peak in 2000 and 19% above the peak in 2007.
To date this year, Wall Street has sold $46 billion of collateralized loan obligations (CLOs), which bundle high-yield bonds. It sold $82 billion in all of 2013, according to the Royal Bank of Scotland.
JPMorgan Chase thinks issuance of junky CLOs will hit $100 billion this year, making it the biggest year on record.
Here's yet another sign of the madness in bond markets today...
In the April 4, 2014 Digest, we told you about so-called "payment in kind" (PIK) bonds... PIK bonds give the issuer the right to pay back debt by issuing more debt. Why would a company pay back debt with more debt? Because they can't afford the minimum bond payments...
As of that Digest, companies had issued $1.9 billion of PIK bonds... up from $1.2 billion in the first quarter of 2013. And it's only accelerating...
To date this year, companies have issued $4.2 billion in PIK bonds, according to research firm Dealogic. That's the most since the same period in 2007, when companies sold $5.6 billion. And there's more coming down the pipeline today...
"We call it the yield-hunger games," Matt Toms, head of U.S. public fixed income for Voya Investment Management, told the Financial Times. "In this environment of very low yields and very low volatility, any extra yield that products such as these may offer already helps."
And what do investors get paid for this paper, which is junkier than junk? A mere 50 basis points (0.5%) more than comparable high-yield debt.
And to put the lunacy in perspective, we present Toms' comments in the following excerpt from the Financial Times article:
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However, there's one area of the bond market that still offers a healthy yield and some safety... And Dr. David "Doc" Eifrig has been urging subscribers to invest in these conservative securities for years. I'm talking about municipal bonds – loans to local governments.
As Doc wrote in the October 2013 Income Intelligence:
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If you're looking for income in today's market (and thanks to the Fed, we're all scrambling for income), there's no better resource than Doc's Income Intelligence.
In Income Intelligence, Doc covers all the different income-producing sectors – real estate investment trusts (REITs), corporate bonds, municipal bonds, dividend stocks, master limited partnerships (MLPs), etc...
Because he has such a large universe of income-producing securities to choose from, Doc is able to recommend the best, safest, and cheapest sectors at any given time.
In addition to municipal bonds, Doc recently recommended a blue-chip stock that pays one of the largest dividends in the market. It's a super-safe way to get some extra yield on your dollars today.
To learn more about Income Intelligence, click here...
Occasionally, you'll hear people reference the contrarian "magazine cover" indicator. That's the idea that by the time an economic trend or idea graces the cover of mainstream magazines like Time and Businessweek, it has become too popular and will soon reverse.
There's also the "stadium" indicator... That's the idea that you should short the stock of any company that pays a fortune to emblazon its name on a professional sports stadium.
Today, we present the "gigafactory indicator"...
Whenever a company announces it is spending $5 billion to construct a "gigafactory" that will revolutionize our nation's power grid, short it.
Of course, that's what electric car manufacturer Tesla did this February. The company plans to build a factory to build lithium batteries (which power Tesla's autos) at 30% below their current cost.
We scoffed in these pages at the outrageous claim.
No, we don't scoff at innovation or forward thinking... quite the opposite. However, we know toppy language when we see it.
Tesla CEO Elon Musk said the company would likely break ground on its gigafactory by June (this month). But surprise, plans are delayed...
Now, Musk says the company will choose the site for its gigafactory by year's end. And it may break ground at several locations before choosing the final plot.
Here's a prediction... Tesla won't be near ready to break ground on its gigafactory by the end of the year. And the project will cost way more than $5 billion.
New 52-week highs (as of 6/3/14): Apple (AAPL), Becton-Dickinson (BDX), Calpine (CPN), Carrizo Oil & Gas (CRZO), ProShares Ultra Oil & Gas Fund (DIG), Devon Energy (DVN), Freehold Royalties (FRU.TO), 1st United Bancorp (FUBC), Intel (INTC), Johnson & Johnson (JNJ), 3M (MMM), Superior Energy Services (SPN), Skyworks Solutions (SWKS), and Targa Resources (TRGP).
Still more positive feedback from our Dallas event... And we still have a few more "early bird" spots for our event in Los Angeles in August. (These events are getting more and more popular.) If you're interested in attending Los Angeles at the early bird rate, please e-mail us at thesociety@stansberryresearch.com.
And as always, send your feedback to feedback@stansberryresearch.com.
"What a great event! Getting the chance to listen to T Boone Pickens live and in person was a real treat! The events Friday night and Saturday night were a LOT of fun!
"Loved Apollo Robbins... who gave us another private magic/sleight of hand show with commentary at Happy Hour... also thought the 'other magician' Sat night was very entertaining.
"Listening to the panel with Leslie Haines was interesting and very informative, as was Rick Rule... James Altucher was a highlight as always... enjoy getting the chance to see and meet Stansberry & Assoc.
"Meeting up with other Stansberry Society members and getting to know them better each time is so much fun... what a great group of interesting successful people! I am lucky enough to be "gold partners" with three other Society members... we won the ounce of gold Friday night! Also, thanks for the iPad mini!
Loved listening to T Boone Pickens, he is so impressive... ... could have listened to him all day!" – Paid-up subscriber Kim Crain
"I was very favorably impressed by the quality of people, presentations and the friendly atmosphere in general at the conference. However, I should not be greatly surprised after considering the quality of your products.
"I hope you, your staff and friends had a similar experience in Dallas and Texas, if you had time for any special invitations outside of business." – Paid-up subscriber Raymond
Goldsmith comment: Thanks to you both for the kind words. Once again, if you'd like to join us at the Wilshire Ebell Theatre in Los Angeles on August, 23, 2014 at the discounted early bird rate, send us an e-mail letting us know... thesociety@stansberryresearch.com.
Sean Goldsmith
Baltimore, Maryland
June 4, 2014
How to 'time' the market for high income...
In today's Digest Premium, DailyWealth Trader editor Amber Lee Mason describes the best way to maximize your gains when investing in the municipal-bond sector...
To subscribe to Digest Premium and access today's analysis, click here.
How to 'Time' the Market for High Income...
Editor's note: In today's Digest, we mentioned the opportunity Income Intelligence editor Dr. David Eifrig sees in municipal bonds.
DailyWealth Trader editor Amber Lee Mason made munis the focus of her May 30 issue to subscribers. And she described the best time to invest in the sector. She agreed to let us share it with you today...
There's more than one way to "trade for income"...
If you've been a reader for at least a week or two, you've seen that phrase before. I use it to describe our strategy of selling puts and covered calls on high-quality businesses. These trades regularly produce payouts of 1%, 2%, or 3%. They start small, but over a year, they add up.
The great thing about this strategy is that it's always available. Whenever you like, you can step into the market and collect a few hundred (even a few thousand) dollars.
But that's not the only way to "trade for income." Occasionally, you get the chance to buy income-paying assets at "blowout" prices. If you're willing to step in and trade after the market has panicked, you can set yourself up to collect big income payouts AND big capital gains.
Let me show you what I mean...
Back in October (and again in November and December), I recommended buying municipal bonds... Specifically, I told you to buy shares in the Nuveen Municipal Opportunities Fund (NIO).
If you bought shares of NIO in October, you're up about 17%... Just under 5% of that came from the monthly income payments. The rest came from capital gains. And you got those gains because you nailed the timing...
As regular DailyWealth Trader readers know by now, municipal bonds are loans made to state and city governments. To encourage folks to invest in government projects, interest received from "munis" is exempt from federal income tax and, in many cases, state and local income taxes.
Not only are these payments tax-free, they're safe. According to Forbes magazine, about one in 5,900 investment-grade muni bonds have defaulted each year over the last four decades.
But every now and then, folks stampede out of these bonds. Late last year, the trigger was the rise in interest rates and bad news about finances in Detroit and Puerto Rico. NIO's share price dropped 23% in seven months. It was selling at a double-digit discount to the underlying value of its bonds. It was yielding more than 7% tax-free.
At that point – once shares were "blown out" – we stepped in to buy.
As you can see, the panic has eased... and NIO's share price has risen. Because we bought when no one else wanted to, we locked in large income payments and set ourselves up for capital gains.
This kind of panic doesn't just happen in the municipal-bond market... Every couple of years, a high-income sector will suffer a big selloff... Just take a look at what happened to real estate investment trusts (REITs) when the U.S. real estate market melted down... Or pipeline stocks when energy prices collapsed... Or corporate bonds during the credit crisis.
Often, the underlying payments are safer than folks realize. Some REITs went bust. But most continued to collect rent and pay it back out to shareholders. Pipelines continued to move oil and gas around the country. High-quality companies continued to make their debt payments.
You want to buy when the yields reach "no brainer" levels. No matter what happens to the share price, you'll keep collecting income. And as the payments keep coming in, they'll lure other folks into the market. You'll profit as they push prices higher.
That's exactly what's happening with NIO.
You don't have the opportunity to "trade for income" like this every day. But I'm always watching for these opportunities. You should, too.
– Amber Lee Mason
How to 'time' the market for high income...
In today's Digest Premium, DailyWealth Trader editor Amber Lee Mason describes the best way to maximize your gains when investing in the municipal-bond sector...
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 06/03/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 449.0% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 306.7% | The 12% Letter | Dyson |
| Constellation Brands | STZ | 06/02/11 | 295.4% | Extreme Value | Ferris |
| Ultra Health Care | RXL | 03/17/11 | 251.3% | True Wealth | Sjuggerud |
| Ultra Health Care | RXL | 01/04/12 | 207.3% | True Wealth Sys | Sjuggerud |
| Altria | MO | 11/19/08 | 202.7% | The 12% Letter | Dyson |
| McDonald's | MCD | 11/28/06 | 187.5% | The 12% Letter | Dyson |
| Hershey | HSY | 12/06/07 | 160.6% | SIA | Stansberry |
| Automatic Data Proc | ADP | 10/09/08 | 150.3% | Extreme Value | Ferris |
| Targa Resources Corp | TRGP | 12/13/12 | 148.7% | SIA | Stansberry |
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 |
| 1 | True Wealth | Sjuggerud |
| 1 | True Wealth Sys | Sjuggerud |
| 2 | SIA | Stansberry |
Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)
| Investment | Sym | Holding Period | Gain | Publication | Editor |
| Seabridge Gold | SA | 4 years, 73 days | 995% | Sjug Conf. | Sjuggerud |
| Rite Aid 8.5% bond | 4 years, 356 days | 773% | True Income | Williams | |
| ATAC Resources | ATC | 313 days | 597% | Phase 1 | Badiali |
| JDS Uniphase | JDSU | 1 year, 266 days | 592% | SIA | Stansberry |
| Silver Wheaton | SLW | 1 year, 185 days | 345% | Resource Rpt | Badiali |
| Jinshan Gold Mines | JIN | 290 days | 339% | Resource Rpt | Badiali |
| Medis Tech | MDTL | 4 years, 110 days | 333% | Diligence | Ferris |
| ID Biomedical | IDBE | 5 years, 38 days | 331% | Diligence | Lashmet |
| Northern Dynasty | NAK | 1 year, 343 days | 322% | Resource Rpt | Badiali |
| Texas Instr. | TXN | 270 days | 301% | SIA | Stansberry |