The price for a barrel of oil has spiked from the mid-$80s in April to more than $108 a barrel today. The ongoing strife in Syria is to blame for the most recent run-up.
I can tell you this. We are producing so much oil now that we've run out of pipeline capacity and have resorted to moving it by train, truck, and boat. We're moving more oil by these other vessels than at any time since 1981, when domestic production was much higher. So my feeling is the markets are so skewed.
The best time to finance storage tanks is during "contango," when spot oil is cheaper than the futures. So you buy the oil. You store it. And you sell it in the futures markets two or three years out.
Unfortunately, we have a bunch of inane laws holding back the oil market... In particular, two things are really screwing up oil supplies. If Americans wanted cheaper oil prices, we should fix these first.
No. 1: You're only allowed to transport oil destined for the U.S. market on U.S.-flagged vessels. We have a limited number of these ships. And they're taxed like crazy. It's called the Jones Act. That's trouble… Taxes impede our ability to move oil to where it's needed.
Nor can we easily move those excess supplies to somewhere where they're needed like the West or East coasts. It's a big conundrum.
So a little prediction here from me... Sooner or later, the domestic price of oil just gets crushed because we literally won't have anywhere to put the stuff.
The 10-year Treasury yield is on the rise...
The "risk-free rate" rose to more than 2.98% today – continuing its steady march higher. Yields on the 10-year last hit 2.98% in July 2011.
Porter has been predicting this rise in interest rates. And he believes higher rates will mean lower multiples for stock prices. As he wrote in the August 16 Digest Premium:
"Judging by indexes, like the S&P 500, I think stocks are far too expensive relative to where interest rates should be.
"That's a strange statement... but just imagine what interest rates would have to be to offer investors a safe place to save. For instance, take 2.5% GDP growth and 3% inflation. Add those two things together, and you get a 10-year Treasury rate of 5.5%. At 5.5%, people would have a good incentive to buy government bonds. And I believe that's where interest rates are heading. At that interest rate, what should the value of the S&P 500 be? Where should the Dow be?
"If you talk to the people who are bullish on stocks, like my colleague Steve Sjuggerud... many will say the No. 1 reason they're bullish is that current interest rates should correspond with stocks trading at price-to-earnings multiples of 25-30. But the current multiple is around 18.
"Many of the bulls are focused on the relative value of stocks compared with bonds. But I'm skeptical of those values because I think interest rates should be much higher than they are today."
We'll soon see how higher interest rates will affect stock prices... Next stop 3%.
The improving economy may be helping push interest rates higher by creating more demand for credit.
Yesterday, the big car manufacturers released great August sales figures – an important indicator of economic health.
General Motors, Ford, Toyota, and Chrysler announced an increase in light-vehicles sales in August to 16.1 million cars, according to research group Autodata. That's the strongest since October 2007.
Also, weekly jobless claims are at their lowest since 2007. The Institute for Supply Management trade group released monthly data showing economic activity in the nonmanufacturing sector is picking up. The group's index came in at 58.6 in August versus 56 in July. A reading above 50 indicates growth.
Economies improve when you inject trillions of dollars into them... That's no secret. But what remains unknown is how the economy will react to interest rates 200 to 300 basis points (2%-3%) higher than today.
Gold isn't reacting well to the bullish news... The precious metal is down from $1,399.50 on Tuesday to $1,369 today.
We're currently experiencing an event in the mortgage markets that has never happened before, at least according to industry executives...
Rates on jumbo mortgages – those too big for government entities like Fannie Mae and Freddie Mac to buy – are now lower than conforming loans (the ones Fannie and Freddie can purchase).
The average 30-year fixed-rate conforming loan was 4.73% last week... The average 30-year jumbo, fixed-rate loan was 4.71%.
"In my 30-year career, I've never seen nonconforming loans priced below conforming loans," Brad Blackwell, executive vice president of Wells Fargo Home Mortgage, the nation's largest mortgage company, told the Wall Street Journal.
Conforming loans are more expensive because Fannie and Freddie are charging lenders higher fees in an effort to reduce their huge role in the mortgage markets. Rates are also jumping because yields on bonds Fannie and Freddie are issuing are going up.
Meanwhile, jumbo mortgages are often kept on banks' balance sheets, so the individual institutions set the rates. And banks are itching to put money to work today... "Banks have more deposits than loans today, so the desire to put that money to work, as well as the fact that it's at a very low cost, allows us to make [jumbo] loans at a very good interest rate," said Blackwell.
Steve Sjuggerud has been urging readers for years to take advantage of low prices and mortgage rates by buying a home... And in today's DailyWealth, he reiterated that call, saying he believes home prices can go even higher today.
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Many financial "experts" will tell you that anomalies like the discrepancy between jumbo and conforming mortgage rates shouldn't exist… that a large efficient market will always digest available information and price assets correctly.
Of course, if that were true, it would be impossible to "beat the market" with your investments. Clearly… anomalies are a fact of nature… and they represent opportunity.
Porter and his research team recently discovered a different market anomaly that investors can use to make large returns while taking less risk than if you simply bought shares in a company. The strategy aims for triple-digit returns while trading the best and safest stocks in the market.
We've called the anomaly "Alpha." And Porter launched a trading service late last year to help subscribers take advantage of the opportunity.
We wrote about Alpha in depth in the August 2 Digest. The market anomaly exists in the stock options market… and it boils down to this:
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Porter and his research team have taken advantage of this phenomenon to produce outstanding returns over the past 10 months...
In total, they've recommended 11 trades. Across the entire portfolio (six closed positions and five remaining open), Alpha has produced a 60% return on margin with an average holding period of only 3.5 months.
Right now, you can still open positions in the two most recent Alpha trades.
In the most recent issue, Porter recommended a trade on one of the most important companies in the world. I can't give away many details, but this company owns what Porter calls a "trophy asset" – an irreplaceable, invaluable property.
And right now, you can buy this company for nearly a 50% discount to its tangible book value. And it's trading at only eight times cash flow... Both are extremely cheap valuations for a large, profitable company with assets as valuable as this one.
With the trade Porter recommends, subscribers will make triple-digit gains, even if this company continues to trade at a discount to its tangible assets.
The last time he recommended an Alpha trade on a "trophy asset" like this was with casino operator MGM Resorts. MGM owns a large slice of the Las Vegas Strip – exactly the kind of valuable one-of-a-kind asset we refer to as "trophies." When Porter recommended the trade, you could buy MGM at a 76% discount to the value of its properties. Six months later, he recommended subscribers close the position. Readers who followed his recommendation booked a gain of about 119%.
New 52-week highs (as of 9/4/13): Fluidigm (FLDM), iShares Nasdaq Biotechnology Fund (IBB), Constellation Brands (STZ), and Targa Resources (TRGP).
Great feedback about Porter's conference call on the state of the economy... We hope you listen to it yourself and find it useful. We'd love to hear your thoughts on this presentation... feedback@stansberryresearch.com.
"Just finished listening to the conference call on state of the economy. Terrific... Great presentation! Good macro view and actionable suggestions backed by facts without the hype.
"SA Alliance is by far the best investment I have ever made... a continuing education. You guys continue to exceed expectations." – Paid-up subscriber Judge
Goldsmith comment: Thanks for your feedback, Judge. Porter believes the consequences of the Federal Reserve's monetary policies will be devastating… and the crisis our central bank has created is imminent.
Needless to say, with stocks still near their record highs, Porter's view is not universal. In fact, True Wealth editor Steve Sjuggerud has written that the current bull market has plenty of room to run higher… We've discussed their differences before.
Porter held a conference call for subscribers to hear Steve and him debate the different signs they are seeing. And he invited a respected New York hedge-fund manager to contribute his views, as well. We think the insights and recommendations that resulted are invaluable, regardless of which way the market goes from here…
Regards,
Sean Goldsmith
Miami Beach, Florida
September 5, 2013