The S&A Digest: Unemployment on the Rise

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/24/2013

Ferris on the Digest... So much for Countrywide... Chris Weber on currencies... Eat your vitamin C... Bad France... Our economy is overheating...

Editor's Note: For at least the next few months, Extreme Value editor Dan Ferris will write The Digest on Tuesdays and Thursdays. So if you have complaints about The Digest on Tuesdays or Thursdays, aim your insults at Dan, not Porter.

 "There is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company."

That's what Countrywide Financial said today. The comment has an all too familiar ring to it. It reminds me of the way governments tell everyone they're not going to devalue their currencies – right before they devalue them.

I keep hearing that we face a 70% chance of a recession, or a 50% chance, or whatever. Personally, I think there's a 100% chance we've been in one for months.

 Bear Stearns had a great reputation, and now the rumor is that it's so miserable, it'll have to get acquired to survive. CEO James Cayne is expected to step down today. What a mess, all because they leveraged up a bunch of financial instruments that probably shouldn't have been allowed to exist in the first place.

 So maybe Bear didn't deserve its sterling reputation, but I think 12% Letter pick Realty Income (O), which I also recommended in the former Real Estate Shareholder, does deserve its good rep, even though most of its tenants are junk credits. Realty Income's biggest tenant, Buffets Inc., which owns Old Country Buffet, says it'll miss an interest payment due on its debt. If Buffets goes bankrupt, Realty Income shareholders will feel some pain.

What I'm most curious about here is whether Realty Income is as good at assessing investment risk in property as S&A colleague Tom Dyson and I have made it out to be. The kinds of businesses Realty Income likes ought to weather a recession. A Buffets bankruptcy shouldn't permanently impair Realty Income's business, since Realty Income won't buy a property where the tenant isn't making enough money to pay the rent. I'll leave it to Tom to ferret out the details and advise his readers, but I think Realty Income will be okay over the long haul.

 French president Nicolas Sarkozy says he wants the country's state pension manager to protect French businesses from "extremely aggressive sovereign funds which only follow economic logic." This translates as, "We hate foreigners, and we're going to use our state pension manager as a white knight to keep foreigners from acquiring controlling stakes in our businesses." Bad, bad, bad... Bad for business. Bad for the French economy. Bad for the euro.

So maybe you're more interested in what currency you should buy. I haven't the foggiest, but I know someone who has the answer...

 Our friend Chris Weber developed his Max Yield currency-trading technique in 1970, putting $10,000 into the highest-yielding currency at the time. Every year since then, Chris has taken the interest from the previous investment and bought the new, highest-yielding currency. This simple method achieved an astounding 6,118% return through 2007. If you invested $10,000 in 1970, you're sitting on $621,854.23 today. Chris released his updated Max Yield report last week. Click here to read more about Chris.

 New highs: Annaly (NLY), Becton Dickinson (BDX), Covance (CVD).

 A London research team found that "people who drink moderately, exercise, quit smoking and eat five servings of fruit and vegetables each day live on average 14 years longer than people who adopt none of these behaviors." The study tracked vitamin C as a measure of how much fruit and vegetables people were eating.

Nobel laureate Linus Pauling's How to Live Longer and Feel Better, which advocates the use of vitamin C, is on my 2008 reading list. Pauling took massive doses of vitamin C and lived to age 93. My grandmother lived to 92, and my 82-year-old father can still beat me at tennis. I exercise, eat fruit, drink moderately, and don't smoke.

So like it or not, it looks like you, faithful Digest reader, are stuck with me on Tuesdays and Thursdays... for a long, long time. Tell me what you think of it here: feedback@stansberryresearch.com.

 "You have S&A top 10 Open recommendation in your email but I never see worst 10 Open recommendation, can you provide the list to be fair?" – Paid-up subscriber Denny Hardian

Ferris comment: I'm not sure what's fair about your suggestion or unfair about our top 10 list. Everybody knows we're not magicians. We don't need to publish a list of losers to belabor the point. Also, the top 10 doesn't seem to matter to our best subscribers. I bet a bottom 10 list wouldn't matter much to them, either. We work hard and do our best, and they read our research carefully, with a critical eye, and find a lot of value in it.

 "Porter you show your hall of fame list of profits made but neglect to show a hall of shame for all the poor selections you have made. try it. this percentage nonsense you show is very misleading. try showing the nominal gain instead. a $1 stock going to $2 is a gain of only $1. you represent it as a 100% gain which it is but you don't spend percentages, you spend dollars." – Paid-up subscriber Bert

Ferris comment: Bert, I hope you don't own guns or power tools. If you do, they should be taken away from you immediately.

 "With the hype surrounding the Twelve Days of Christmas publications, I was rather looking forward to it. But when they started to come in, only to discover that it was simply Twelve Days of Regurgitated Newsletters and Advertising from 2007, you can probably guess your readers were not impressed. Myself included. Next year, just shut up shop and give us Twelve Days of Nothing." – Paid-up subscriber Andre Glauser

Ferris comment: I was disappointed, too. But if you haven't learned by now that hype rarely lives up to its promise, maybe you're a little slow on the uptake.

 "Something I feel is important in dividends is how often they are paid. I use Fidelity's dividend reinvestment. I think two stocks both paying an 8% apr dividend, but one that pays monthly while the other pays quarterly. The monthly pay to me should compound greater. What say you? I think it would be helpful in your research to list the dividend period as well as yield." – Paid-up subscriber John Walker

Ferris comment: Mathematically, yes, the more often you get paid, the better you'll do... if you reinvest all dividends... and if the funds are run by good managers... and if the fund's fees aren't too high.

Goldsmith comment: We also think the dividend period is important. That's why we combed through the entire universe of monthly dividend payers – close to 500 – to find the 10 best companies. We scoured through the documents of Colombian banks, Canadian income trusts, and municipal bond funds to come up with our recommendations. We're putting the final touches on it now. We'll update you in The Digest as the release date nears.

 "Your investment ideas and education are outstanding. Now tell me where I can get a mailman like Tommy." – Paid-up subscriber Mike Polo

Ferris comment: Thanks. Is Tommy real? I thought Porter made him up.

Regards,

Dan Ferris

Medford, Oregon

January 8, 2008

Unemployment on the Rise: Watch Out Below

By Ian Davis

Rising U.S. unemployment is dominating the headlines...

If you missed the story, here's the short version: On Friday, the U.S. Department of Labor came out with its latest unemployment figures, and they weren't pretty. The report showed a 0.3% rise in the unemployment rate, from 4.7% to 5%.

This is the highest level of unemployment in the U.S. since 2005. However, the absolute level of unemployment doesn't concern me as much as the direction and magnitude of the change.

You see, when unemployment is very high, it's a sign of a weak economy... However, if the unemployment number is no longer rising – like in the early 1980s – the damage to the stock market has already taken place and good buying opportunities arise.

Conversely, when unemployment is very low, like it is today, it is the sign of a strong economy. The problem with strong economies is that they tend to overheat. Eventually, they return to normal rates of production. This is usually accompanied by a correction in the stock market.

Even though 2005 was the last time unemployment was above 5%, back then, it was on the way down and the market posted nice returns.

September 2001 – halfway through the dot-com correction – was the last time unemployment was above 5% and rising, like today.

The following chart shows the U.S. unemployment rate since 1964 versus the S&P. As you can see, lows in the unemployment rate always correspond with market tops.

Low, Rising Unemployment Signals Market Peaks

The S&P returned 10.2% annualized during periods of falling unemployment and a measly 2.9% annualized during periods of rising unemployment.

Conclusion

Rising unemployment – such as we're seeing today – usually signals rough times ahead for the stock market, especially when it's rising from very low levels. However, even during rough times in the market, plenty of opportunities exist for savvy investors.

In Quant Trader, I'll continue to update you on my outlook for the market and how best to profit in both good times and bad.

Until next time...

Good investing,

Ian Davis

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