The Supremes debate Obamacare...
The Supremes debate Obamacare... Inflation at 2.2%? It still kills bond returns... 50 Best Buys shutting down... SHLD and BBY: Investment or speculation?... A Niche Dominator...
If you've been listening to some of the audio clips coming out of the Supreme Court's examination of the Obamacare law, perhaps your eyes have been opened – as have mine – to the blatantly political nature of the justices' views.
For example, Justice Ruth Bader Ginsburg was heard yesterday favoring a "salvage" operation rather than a "wrecking operation," meaning she felt like it was her job to save the law, not merely determine its constitutionality. I'm no lawyer, but that sort of commentary isn't what I'd expect from the highest representatives of blind justice.
One of the other justices seemed to get it (though I realize a single sound bite can't possibly sum up his whole position). Justice John Roberts asked if we should all be forced to buy cell phones so we can have them in case of a medical emergency. It's a good question. If you can force me to buy health insurance "for my own good," where does it stop? Shouldn't I stop eating fatty foods? And what about the amount of time I spend watching TV? That harms my health, too, doesn't it?
Roberts' point is that Obamacare is a slippery slope. It opens the door for an unprecedented level of control over our lives. Isn't the government already too deeply involved in our daily lives? Obamacare only makes it much worse. I hope the court does the right thing and strikes the law down. If I'm forced to give up cheeseburgers, I'm not sure I'll survive.
If you read Tuesday's Digest... or last Thursday's Digest... or you subscribe to my newsletters, The 12% Letter and Extreme Value... you know I've been warning everyone that buying bonds at today's prices is a losing proposition in the overwhelming majority of cases. I've been using a 3% inflation rate for illustration purposes...
I based that inflation figure on the Consumer Price Index (CPI), which ostensibly measures the prices individuals pay for everyday goods, and the Producer Price Index (PPI), a measure of what businesses pay for the materials they need to make goods. The CPI shows inflation growing at 2.9% today… and the PPI inflation around 3.3%. So I thought 3% was a conservative round number to use.
Well, the Massachusetts Institute of Technology begs to differ. That institution's Billion Prices Project puts inflation lower, at about 2.2% these days. Researchers at MIT collect prices from online retailers around the world and make an inflation index out of it. The result is what some view as a more accurate accounting of the effects of monetary inflation.
So am I all wet? Is my "inflation is going to kill bond holders" thesis dead?
No. It's not even injured. The 30-year Treasury yield is a little less than 3.3%. After taxes, it's still a negative return when you subtract the BPP's 2.2% rate of inflation.
In fact, 2.2% is just about the least inflation you can expect from here on out. "Helicopter" Ben Bernanke says he'll keep the chopper's rotors spinning and he'll keep throwing bags of cash overboard at a rate adequate to create at least 2% inflation.
So let's say you're making 4.24% from your bonds. That's the current yield on the iShares iBoxx Investment Grade Corporate Bond Fund (LQD). You'll still wind up with just shy of 0.6% per year after taxes and 2.2% inflation. (You can earn twice that much interest in some fully insured certificates of deposit today.) If the BPP is off by just 0.56%, your return isn't a return at all.
So even if Mr. Bernanke is successful at targeting "just" 2% inflation... 3%... or even 4%... bond yields aren't going to get you far after the tax man takes his cut.
Just as it's getting nearly impossible to make real returns in fixed income, it's getting harder and harder to sell things from a traditional storefront. We've said more than once in the Digest that we don't expect Sears to do anything but continue to shrink for that reason.
So too, we expect Best Buy to have an increasingly difficult time paying salaries to armies of salespeople and rents on gigantic big box stores. Today, Best Buy said it's giving up on 50 of its stores and closing them in an effort to save $800 million. That's just a little more than 4.5% of its 1,100 big box locations. The move will also eliminate 400 jobs in the corporate information technology part of the business.
You can tell me it was a mistake not to own Sears this year, as it rallied more than 130% off its January lows. You might even say the same thing about Best Buy, which is up 11% since its October 2011 lows. But you'll have to work harder to convince me either business will look the same in 10 years as it does today... that they won't be much smaller or possibly even nonexistent. To my mind, buying their stock is more of a speculation than an investment.
You can find plenty of short-term, speculative opportunities – like Sears and Best Buy – in the market… But what you really want is an opportunity to put your money somewhere, leave it there for decades, and have it compound at a high rate. With volatile stocks, you must sell at the right moment to make big money. Selling is hard. Holding is much easier.
I want a business I can hold on to... one that's going to be here 10 years from now... one like Wal-Mart, ExxonMobil, Coca-Cola, Procter & Gamble, and all the other World Dominators I've been writing about in The 12% Letter and Extreme Value for the past few years.
I've written a lot about World Dominators... But there's something I haven't mentioned as much: There are smaller dominant companies, too. Let's call them "Niche Dominators." For example, Prestige Brands owns more than a dozen well-known brands, including Compound W wart remover, Comet and Spic N Span cleaners, Clear Eyes eye drops, and Chloraseptic throat remedies. Many of its brands are either No. 1 or No. 2 in their markets. Prestige just owns the brands. It outsources the manufacturing and focuses on sales and marketing. So it's a cash-gushing machine.
When I found it in May 2009, it was generating around $60 million a year and selling for a little more than $6 a share. Now, after a failed buyout bid by a Mexican drug company, the stock has soared to around $17.50 a share, up more than 180% in less than three years.
Another Niche Dominator we identified in early 2009 was a small Canadian company that's run by the finest, most experienced group of small-cap exploration mining investors in the world. These guys see more potential deals than anyone else in the small-cap mining exploration industry. The stock is up more than 50% since then... but it's still more than 20% below my maximum buy price. These guys are incredible at making money in the mining industry. A few years ago, they put $55 million into a small energy company and pulled $240 million out of it less than a year later.
Right now, this small team of mining investment geniuses is holding several excellent investments in energy, metals, and agriculture... all with the potential to make many times its original investment. It's also got plenty of cash and gold bullion on hand, too, which takes a lot of the risk out of your investment. If you want to know who these guys are, you can find out by reading the February 2009 issue of Extreme Value. To access Extreme Value – and discover this great mining opportunity – click here.
New 52-week highs (as of 3/28/12): Coca-Cola (KO), Exact Sciences (EXAS), Prestige Brands (PBH), Cisco (CSCO), and Tetra Tech (TTEK).
If you know of a small company, public or private, that dominates its market niche, we'd love to hear about it. That's our kind of business. Tell us about it at feedback@stansberryresearch.com.
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Regards,
Dan Ferris
Medford, Oregon
March 29, 2012