If you've opened a newspaper or logged on to your computer today, you've seen headlines about the European Union bailing out the country of Cyprus...
Government leaders – including the European Central Bank (ECB), the Cypriot government, and the International Monetary Fund (IMF) – decided they would steal from the nation's savers in order to bail out its financial system.
Under the plan, all accounts in Cyprus banks of less than 100,000 euros would be hit with a 6.75% tax. Accounts over that threshold would see a 9.9% levy. In other words, the European government is commandeering its citizens' private property to pay off its debts.
This deal isn't set... Today is a banking holiday in Cyprus. And the talk is the government will close the banks tomorrow as well (to avoid a run).
Talks led by Nicos Anastasiades, president of Cyprus, are currently underway to amend the proposals... Potential amendments include lowering the levy on accounts of less than 100,000 euros to 3% and increasing the burden on larger account holders.
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An interesting thing to consider... Cyprus' banking system has around 70 billion euros. Meanwhile, the country's entire economy is only 18 billion euros. And Cyprus is a banking hub for Russian oligarchs (who are mostly criminals parking cash abroad). It's ironic that these billionaire rulers took advantage of a socialist system to garner massive fortunes... only to see socialism reclaim its fee.
The bank levy will raise 5.8 billion euros. Cyprus is receiving another 10 billion euros in bailout funds from the ECB and IMF. That's still short of Cyprus' estimated 18 billion-euro shortfall. And barring capital controls, it ensures a run on Cyprus' banks.
The world's global banking system runs on trust... Depositors trust a bank with their savings in the belief they can access those savings on request. That trust was broken today. And it will have severe consequences for the euro and European banks.
I spoke with Porter this morning... He said the bank levies in Cyprus are simply the latest move toward global socialism... And he ties the entire debacle into the abuse of paper money. Digest Premium subscribers will hear more about this later in the week.
Gold and the dollar both rose on news of Cyprus' bailout. The euro hit a three-month low of less than $1.29. And the Volatility Index (the "VIX"), the market's fear gauge, jumped 14%... But it's still under 13, an extremely low level. (The VIX hit 80 after Lehman's collapse in 2008.)
Despite the shock to the euro, U.S. markets hardly budged. The stock market is still near all-time highs.
Retirement Millionaire recommendations CVS and Walgreens hit 52-week highs last week.
Dr. David "Doc" Eifrig recommended these companies to take advantage of the aging Baby Boomer population. As Doc wrote in his December 2011 issue, when he originally recommended Walgreens…
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The generation born between 1945 and 1964 is hitting retirement age... Today, they are 47 to 66 years old – an age when people tend to increase their consumption of health care.
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For example, if you're older than 50, it's recommended you regularly get things like a colonoscopy, cancer screenings, and blood-pressure checks. For many people in this age group... their bodies need fixing. If they have the money, they're usually willing to spend it on a cure.
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Retirement Millionaire readers are up 34.3% on Walgreens and 41.8% on CVS. But if Doc's right, these returns will get even bigger...
Doc agrees with Steve that stocks could boom this year... "This year could be the biggest year for stocks ever," he wrote in his latest Retirement Millionaire. For the record, the best year to date was 1933... The market returned nearly 54% including capital gains and dividends.
In that issue, Doc went over his favorite economic indicators to explain why he thinks we'll see a good year for stocks. One point I found interesting is that investors are starting to put money into equity funds at the same rate as bond funds. In 2012, bond-fund inflows crushed those of equities.
Investors are waking up to the danger in bonds today... And they realize the relative value stocks offer. Not to mention... some of the best companies in the world, like Intel, Johnson & Johnson, and Microsoft all yield between 3.1% and 4.1% – compared to 2% for 10-year Treasurys.
Steve Sjuggerud has been following this phenomenon closely, too... He calls it "the great migration." He believes investors will shift en masse from bonds to stocks. And he thinks the market could double from today's levels as this shift occurs.
In today's DailyWealth, Steve explained why you should still be bullish at today's levels:
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Stocks are NOT near a peak now – far from it. Based on 100 years of history, instead of selling, you actually want to buy stocks now.
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That's because, after stocks have a good quarter, they normally have a fantastic NEXT 12 months.
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The first quarter of this year has been fantastic. Stocks are up by double digits, percentage-wise – up 11% year-to-date. It is the best first quarter since the 11% gain in the first quarter of 1998 and the 11% gain in the first quarter of 1991.
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Based on history, the next 12 months should be pretty darn good for stocks...
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I used our True Wealth Systems database to look back at 100 years of data. Here's what I found:
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If you'd bought the stock market (the Dow) any time the index rose 10% or more in any quarter, stocks rose 9.4% over the NEXT 12 months. That crushes a buy-and-hold strategy, which only returned 5.5%. (These numbers don't include dividends.)
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And if you bought the Dow after a bad quarter, you would underperform over the next 12 months.
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Steve used his True Wealth Systems proprietary model for this research. If you're not familiar, Steve employed a team of mathematicians and computer programmers to build a comprehensive program to process incredible amounts of historical financial data... And he spent nearly $1 million putting this together.
As we explained in the February 20 Digest:
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For years, Steve has been working with a Ph.D. in mathematics, Dr. Richard Smith, to develop a computer program to wrangle an almost unimaginable amount of market data into useful and profitable trading systems. The goal was to provide you, our reader, with the kind of technical, proprietary data analysis large hedge funds use to consistently beat the market.
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These hedge funds spend millions, even tens of millions, of dollars on the brainpower and data behind their trading systems. And they go to great lengths to ensure nobody outside the firm (in some cases, even employees at the firm) know the strategies they're using.
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At S&A... we strive to make this kind of high-quality research and analysis available to everyone. We've spent nearly $1 million to build a sophisticated set of proprietary programs that quantify the strategies Steve developed over his career. (We spend $200,000 a year just on data.) These systems can now scan a vast array of market data and yield buy/sell signals.
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The result is a service called True Wealth Systems – a high-end trading service based on decades of Steve's financial knowledge and Dr. Smith's mathematical prowess. And our system tells you EXACTLY when to get in and out of a trade.
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The program looks for tradable systems that would have made money reliably over decades. So far, Steve's found three dozen of these setups.
Last month, we put Steve and his team at True Wealth Systems to the test in the Digest... We asked them to run certain scenarios and investment beliefs through the program to see if they actually held up. They covered topics like whether it is better to invest in a good economy or bad economy… or how you can beat the market by trend following. We'd encourage you to go back and read that series.
Today, Steve has submitted another essay for the Digest… In it, he scrutinizes a popular tool you’ll hear analysts use to measure how expensive stocks are. He explains why that gauge is worthless today… and for the next six years. Don't miss his analysis at the end of today's edition.
In case you missed it, make sure to check out last week's episode of our weekly podcast Stansberry Radio. Porter's guest was Gene Epstein, economics editor of Barron's.
Barron's is one of our favorite investment journals not published by us. And Gene is one of the few widely published columnists who openly use terms like "Ponzi scheme" when analyzing the U.S. government's vast social welfare programs.
Gene also uses terms like "the next Greece" when writing about America's vulnerable financial situation. In other words, he's one of the few mainstream writers with the guts to use the terms we've been using for many years. We've confidently stated dozens of times that Social Security is the biggest and most harmful Ponzi scheme in history.
Listen to Porter and Gene's discussion... and then let us know what you think (at feedback@stansberryresearch.com). At the very least, we guarantee you'll come away with something to think about. You can access this Stansberry Radio episode for free, right here. (When the page opens, just click the "listen" button.)
New 52-week highs (as of 3/15/13): Altius Minerals (ALS.TO), WisdomTree Japan SmallCap Dividend Fund (DFJ), iShares Australia fund (EWA), Fission Energy (FIS.V), W.R. Berkley (WRB), Constellation Brands (STZ), Johnson & Johnson (JNJ), Monsanto (MON), Cisco (CSCO), 3M (MMM), Chicago Bridge & Iron (CBI), Consolidated Tomoka (CTO), Dominion Resources (D), American Financial Group (AFG), Blackstone Group (BX), Union Pacific (UNP), Two Harbors (TWO), Wells Fargo (WFC), McDonald's (MCD), CVS Caremark (CVS), and Sysco (SYY).
Are you still buying stocks at all-time highs? Are you nervous of a market correction? Let us know here... feedback@stansberryresearch.com.
"I have to take some issue with the well drilling figures that were submitted by another reader. I get well cost statements all the time with the minerals I own and even the largest horizontal wells, which drill in multiple directions, under multiple sections (640 acres) cost only a little over 2 million to drill. Their cost sheets are very specific down to fuel, equipment, lease, and even office supplies. Traditional wells in my part of the country are in the 550,000-dollar range. If you like I can send you guys a recent cost statement as it is quite interesting. I would doubt the cost of production would be %500 higher in other parts of the country. Some 'reliable sources' are more reliable than others." – Paid-up subscriber JG
"I would like to make one simple observation regarding the recent discussions in the Digest related to politicians and the creation of a dependent class in this country. While the politicians claim that the creation of welfare programs with ever-expanding benefits and reach serve as an example of their 'compassion' by providing people with what they 'need,' these very same people pass laws against humans giving food to wild animals in public parks because they know it will create dependence in the wild animal population and they will lose the ability to fend for themselves by having their basic needs handed to them.
"It has long been my contention that the ultimate goal of welfare as we know it was never to be a show of 'compassion,' but rather the creation of a dependent class that needed to retain the existing political class because it provided their only means of survival.
"Mission accomplished!
"Unfortunately, as with wild animals that have become dependent upon handouts for survival, when the politicians are no longer able to provide what the dependents demand, the situation will get very ugly, very quickly." – Paid-up subscriber Ken McGaha
Regards,
Sean Goldsmith
Delray Beach, Florida
March 18, 2013
One Figure You Must Ignore (Until 2019)... and What to Use Instead
By Steve Sjuggerud
Many stock-market analysts say the stock market is expensive...
They rest their case on something called "Shiller's P/E" – a variation on the time-honored price-to-earnings (P/E) ratio valuation metric developed by economist Robert Shiller.
While Shiller's P/E has a good HISTORICAL track record… it is actually USELESS today. And it will be until we get through 2019...
I will show you why... And more important, I will share with you what we use in True Wealth Systems instead of the popular Shiller measure.
The chart here applies these two metrics to the S&P 500 and compares the results... It's the Shiller P/E (black) versus our True Wealth Systems P/E (blue). As you can see, these measures tracked each other through the '70s and '80s. But the Shiller P/E has been too high in recent years.
Why is there such a discrepancy?
I can explain why the Shiller P/E is too high today – and why it will be too high until 2019. You just need to understand how it's calculated, and why that blows up right now.
But first… let's step back to see what we're dealing with here...
The most common way to value a company is to look at its price relative to the money it makes – the P/E ratio. In short, you don't want to pay too high a price relative to earnings.
But the standard P/E has a problem. Sometimes, it bizarrely goes up when it should go down...
This happened most notably in 2008-2009. Back then, the E (earnings) in the P/E ratio fell to nearly zero, causing the P/E to spike to more than 100. Stocks were actually their best value in decades, but the P/E ratio (wrongly) said stocks were crazy expensive.
To solve this problem, many investors latched onto Shiller's idea of the "cyclically adjusted P/E ratio" – often just called "Shiller's P/E."
Shiller's P/E takes the last 10 years of earnings and adjusts them for inflation. It then uses that number to create a P/E ratio right now. So in Shiller's P/E, earnings from nine years ago (for example) count just as much as earnings from the most recent quarter.
Today, the Shiller P/E shows that stocks are trading for an expensive ratio of around 24x. You might look at that and think stocks are expensive. But you'd be wrong...
Shiller's strategy of smoothing earnings does work most of the time... it flattens out the booms and busts. But unfortunately, it doesn't work right now...
You see, the Shiller P/E is set to be artificially high until 2019. Like I said, in 2009, earnings collapsed, so the "E" in P/E – the denominator – is artificially low. Those ultra-low earnings readings will force the Shiller P/E to stay high until after 2019, when those earnings readings finally drop out of the calculation. Then, the Shiller P/E will fall dramatically to its more proper value.
To fix this problem, we put our True Wealth Systems computers to work. Our solution was simple… We use the regular P/E almost all the time... except when an earnings collapse makes the number useless. (We looked for big divergences between P/E and price-to-book ratios.) Then, we made an adjustment for that. (90% of the time, we use the traditional P/E number.)
We are convinced that our number is "right" and that Shiller's number will be wrong until 2019 (when the ultralow 2009 earnings numbers finally drop out of Shiller's calculation).
Right now, based on our True Wealth Systems P/E number, stocks are selling for just a bit below their long-term average. So even after the recent rally, stocks are a decent value.
Most analysts love Shiller's P/E ratio. But I wonder if they know what's "under the hood"? When you look under the hood, you see a flawed number until 2019...
Based on our number, stocks are still a decent value at a 17.5x P/E (though not as cheap as they have been in the past).
Still, with such low interest rates, I think stocks are a great value today...
Good investing,
Steve Sjuggerud
Everywhere you turn today, you see another talking head discussing "currency wars" – when countries around the world race to devalue their currency. And you see countless headlines asking if gold's run is over.
I (Porter) wouldn't pay any attention to what the politicians or the pundits say. I would watch what central banks are doing. And right now, central banks are buying gold – particularly Russia and China. To a lesser extent, almost every central bank in the world is buying gold.
When central banks are buying gold, the price of gold will rise. Only when central banks stop buying, for whatever reason, will the price of gold go back down.
Interestingly, the best time to buy gold is when central banks are selling. And I mean the ideal time to buy gold is when central banks are selling.
But today, central banks are buying… And they have been buying for the last five or six years. So gold is going up. If you have the luxury of owning plenty of real property and having plenty of gold, you just wait and enjoy the ride. Because you know that whatever happens, central banks will do the wrong thing.
In the long run, all paper-currency regimes fail. And at some point in the future, gold will become the basis of international trade. We can't know when that will be. But when it happens, the price of gold will go much higher than it is today.
But you want to buy gold as cheaply as possible… And that's difficult to do when central banks, with their trillions of dollars in reserves, are buying gold.
My advice has been the same for many years… If you don't own any gold, please buy some. It's expensive, but it's necessary insurance against today's fiscal policies. If you're trying to speculate in gold, you want to do it in a contrarian way… And you want to be contrarian to central banks.
– Porter Stansberry with Sean Goldsmith