When the government insists on giving money away, big players in debt take advantage of it. Wal-Mart is borrowing $3 billion in short-, medium,- and long-term debt. The longest-term debt, the stuff with the highest interest rate it'll pay, yields just 4.875%. Time-Warner is doing the same thing. It just announced tender offers to repurchase up to $4 billion of debt. It'll issue three tranches of new debt totaling $3 billion, all at lower interest rates than the old debt. The coupons on the existing notes are 5.5%, 6.875%, and 9.125%, while the coupons on the new notes are 3.15%, 4.7%, and 6.1%. Those are huge reductions in interest expense. It's not hard to see why corporate America vaults into bed with its old Uncle Sam at the slightest provocation.
As much as investors love bonds at historically low rates, they hate stocks right now. The American Association of Individual Investors Sentiment Survey for the week of June 30-July 7 shows about 57% of investors are bearish. Long-term average bearishness is about 30%. About 21% of investors are bullish, with the long-term average at 39%.
You want to buy stocks when they're hated. That's when the best investors buy. They wait until nobody wants the assets they like, and then they scoop them up for dirt-cheap prices. Very few stocks are cheap enough, though. In a special essay (below), I'll tell you about the safest, cheapest stocks in the world today.
An article in today's Wall Street Journal expands on one of the main reasons we have yet to see the long-awaited commercial real estate (CRE) explosion... "extend and pretend." When a borrower can't repay a loan, sometimes the bank will extend the duration of that loan or lower interest rates, in hopes the borrower can repay the loan at a later date. This practice is becoming particularly popular in commercial real estate lending...
Lenders restructured $23.9 billion of nonresidential loans at the end of the first quarter, over three times last year's level and seven times the level two years ago. In return for extending the loan, lenders can count the loan as "performing" and keep less cash in reserves. The only problem is if the economy doesn't pick up, the borrowers can't repay the loans. Eventually banks will have to write those loans down... But they won't have the cash on the books to cover the loss.
Banks currently hold around $176 billion of deteriorating commercial real estate loans, according to research firm Foresight Analytics. And two-thirds of the loans maturing between now and 2014 are underwater. In the first quarter, 9.1% of CRE loans were delinquent, compared with 7% a year ago and only 1.5% in the first quarter of 2007. Eventually, these bad loans will catch up with the banks and insurance companies. But it could take years. Major institutional investors are sitting on a lot of dry powder. And with real estate being one of the few asset classes still trading far below 2007 highs, we could see a lot of money flow that way.
U.S. private-equity firms had a record $280 billion of cash at the end of 2009. And buyout firms typically agree to invest new cash within five years or return it to investors. Less cash under management means fewer fees, so you can be sure we'll see a mass exodus of capital from the sector. U.S. buyout funds have $51 billion that must be invested before the end of 2011. Another $213 billion must be put to work by 2015. According to a recent Bloomberg article, hedge funds – which manage $1.67 trillion – are around 20% in cash.
Just today, private-equity firm Carlyle Group announced it bought six landmark London properties for $1.02 billion. The properties total more than 1.6 million square feet and include prestigious tenants like JPMorgan, UBS, and IBM. The buildings generate more than 62 million pounds annually (about $94 million) – a rental yield of 9.2%. Considering the current yield on REITs is 4.92%, it looks like Carlyle's getting a pretty good deal. Also, this purchase is in addition to the $355 million loan Carlyle Group arranged to refinance the mortgage on 650 Madison Avenue (from Tuesday's Digest).
Real estate billionaire Sam Zell gave his opinion of the CRE market in a recent video interview. He said it all comes down to supply and demand (much more than real estate being a play on inflation). Zell says we haven't built any new properties since July 2007, with the exception of some apartments, because funding dried up and demand disappeared. He believes that in the next 18 months, we'll start to see most of the high-quality institutional real estate fill up (those properties will fill at current rents... 30%-35% below the peak). When the properties are full, rents will increase. You can watch the short video here.
As we noted on Tuesday, the Baltic Dry Index – one of the best indicators of global growth – is in a freefall. Today, the index dropped below 2,000, hitting a 14-month low of 1,940. The BDI is heading toward the post-Lehman levels of late 2008. Despite the continuous decline of this major global indicator, markets are up today.
New highs: Carbo Ceramics (CRR), AmeriGas Partners (APU), Entergy Texas (EDT).
In today's mailbag, more questions (and some authoritative answers) about buying and traveling with gold. Send your questions to feedback@stansberryresearch.com.
"Just this afternoon, about an hour before reading today's Digest, I researched the issue of crossing Canadian border with coins. Seems you are totally correct about having no obligation to declare when crossing with gold wafers, but coins are considered currency and require declaration without tax when crossing with CAD$10,000 or more. Declaration is made on Canadian forms E677 if crosser owns the coins himself, or E667 if carrying the coins for others, i.e. a courier or friend crossing border with coins owned by another. See www.cbsa-asfc.gc.ca/publications for details. Penalties for failure to declare coins & other 'monetary instruments' can be CAD$250,000 fine AND forfeiture of 'monetary instruments' discovered but undeclared." – Paid-up subscriber Carl Johnston
Goldsmith comment: To put this debate to rest, I asked Simon Black, editor of Sovereign Man. Simon is a perma-traveler with expertise in international investments and regulation. His answer is below:
In the United States, the law requires that an individual is required to report if s/he is leaving the country with more than $10,000 or foreign equivalent in monetary instruments. This includes domestic and foreign currency, travelers checks in any form, money orders, negotiable instruments, stock certificates, or any investment securities in bearer form.
If you leave (or enter) the United States with more than $10,000 in monetary instruments, you must fill out form FinCen 105, which you can ask for upon arrival or departure. Gold bars and coins are not included on this list.
In Canada, the rules are essentially the same. Entering or leaving the country with more than C$10,000 or foreign equivalent in monetary instruments must be declared to Canada Border Services Agency (CBSA) on form E667. Gold bars and coins are not included on this list either.
Simon is a major advocate of Americans "planting flags" around the world – simply put, spreading assets around in foreign accounts, real estate, etc. He recently joined with colleagues to write a report telling individuals how to position their IRAs to take advantage of these opportunities. It's called "Unleash Your IRA." If you agree the U.S. government is going to pile more regulations, more taxes, and more capital controls onto the earners and savers of America, you need to consider this option immediately. You can learn more about it here...
"With all the talk in the various newsletters I receive about buying gold, I've a question. My jeweler, who also sells gold maple leafs made an offer to sell me a smaller piece, one or two tenths of an ounce of melt (basically a 24K gold wafer that is melted and mixed with alloys to make rings). Would you consider this as a viable option to gold coins/bullion when one does not have the $1200USD to buy an ounce?" – Paid-up subscriber Brad R.
Goldsmith comment: I asked Van Simmons, president of David Hall Rare Coins, your question. He said smaller denominations of gold coins sell for a slight premium over the one-ounce size (which runs 3.85% to 6% over spot gold). Van says the premiums for the smaller denominations can be around 10%. Just make sure you're not paying too large a premium.
"How can you say that rail shipping is local? Apparently you don't consider the long trains coming from the ports in Southern CA loaded with containers from overseas as international or global as you call it." – Paid-up subscriber Jim Pickles
Ferris comment: Shipping is global. Rails are domestic. Not sure what else to say about this. Railroads don't travel the world's oceans. If trains are full of cheap goods from Asia, it's about domestic demand, not, for example, Australian demand. But if you aggregate all the shipping activity, you get a picture of how much stuff is moving around the world. You don't get that picture from U.S. rail activity alone, no matter where the stuff comes from.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
July 8, 2010
The Safest, Cheapest Stocks in Existence
By Dan Ferris
It's hard not to notice I've been telling you over and over again to buy World Dominator stocks for the past several weeks.
World Dominators are the few businesses that dominate their industry globally, grow consistently, and earn thick and/or consistent profit margins. They're No. 1 because they're insanely difficult to compete with. How much competition does Wal-Mart really have? For the No. 1 spot, none. How much competition does Intel really have? None. Microsoft's Windows 7 and Office? Not much.
These businesses gush more free cash flow than any others. Microsoft will easily do $21 billion-$22 billion in 2010. It did just more than $20 billion the last four quarters. Another World Dominator does about $12 billion a year in free cash flow, and all its upper management are incentivized to make that number grow.
World Dominators pay and raise dividends more consistently than other stocks. My most recent World Dominator report featured a stock that has paid dividends every year for more than 100 years and raised its dividend every year for 26 years.
They out compete everyone in their industry. One of them has more than 50% and 60% market shares around the globe and dominates the market for a golden commodity that's been shining for investors for more than 5,000 years (but it's not gold!). Wal-Mart is still the No. 1 player in the highly competitive field of retail. Another World Dominator has an 80% global market share.
They're fantastic businesses... but you rarely get a chance to buy them cheaply. Lately, you've had the chance to pick up these stocks at dirt-cheap valuations. One of them is trading for less than nine times free cash flow. Another trades for just eight times estimated 2010 earnings. These are the kinds of valuations you get when markets bottom like they did in 1982. They're unheard of.
But as stock prices recover, the chance to buy the World Dominators can disappear quickly and not return for years. In recent weeks, as many as six of my eight World Dominator picks were in buy territory. Now, only four are still buys. In another two weeks, that could shrink to two or one or even zero.
Since I started covering the World Dominator companies in late 2006, not one of these stocks has failed to make money pretty quickly. A couple of them surged 50% or so in a matter of months. A few people in the newsletter business use my World Dominator list as their core holdings. Others use it as a source of trading ideas. Since I started picking these stocks four years ago, my fellow S&A editors have poached the list for their own newsletters (as well they should!). Everyone here who knows anything about stocks thinks this list is pure gold. And they all know there's only one place you can get the true World Dominator list: on page 8 of each monthly issue of Extreme Value.
Last year, in an interview in Stansberry & Associates' online investment news aggregator, the Daily Crux, I said buying cheap World Dominators was by far the best stock investing strategy, as well as the best income-investing strategy in existence. Let me add to that what Peter Lynch says, "The only way to make money in stocks is not to get scared out of them."
Most public companies aren't worth owning at any price. It's easy to get scared out of them. It's hard to find stocks you won't get scared out of. Now, when everyone is scared, is the best time to find those stocks.
The World Dominators are different than other stocks. They're a small, elite group of great businesses all investors should keep on their radar screens. You know they're going to be in business and probably still growing 10 years from now. They're the best, safest stocks you can buy. There's never any reason to get scared out of them. Buying them when they get cheap is the easiest stock market money you'll ever make.
Every Monday, I put out a new list of the latest Extreme Value buy recommendations, including a list of which World Dominators are in buy territory. To get Extreme Value every month and your copy of the weekly World Dominator buy list, click here.
Sincerely,
Dan Ferris
Editor, Extreme Value
P.S. A few weeks ago, a reader sent us an e-mail and criticized my pleas on behalf of my Extreme Value service. He said it was too much. He said I sounded too desperate. I almost agree with him, but I also don't think I sound desperate enough!
I am utterly desperate to teach everyone I know about World Dominator stocks – so they'll buy them for their own accounts. It's becoming my mission in life. I've been doing this for nearly 14 years, and I haven't found a surer thing in the stock market than buying cheap World Dominators.
So yes, I'm desperate, I admit it, and I'm going to stay that way as long as this opportunity lasts. And yes, I want you to click here and buy Extreme Value.