Asking Ben Bernanke to take his hand off the money spigot is like asking a 16-year-old girl not to worry about the color of the car you'd like to buy her.
"Huh?" they both say, as if you're speaking in Swahili.
I've never met Mr. Bernanke, but the 16-year-old is my stepdaughter. Unlike her brothers, she understands that she'll be paying for the bulk of the car with only modest help from her mother and me. This got my attention and my enthusiastic commitment to help her.
My wife and I shopped around recently and thought we'd found a great little car at a good price. We texted her a picture of the car we thought was cute. We thought she'd love it. Her reply startled us... "Do we have to have white?"
OK, no white cars.
Over at the Fed, they ask, "Do we have to have deflation?"
No white cars, no deflation. And no taking your hand off the money spigot until everybody's happy.
As we wrote in yesterday's Digest, we know the stimulus spigot must bring forth inflation. Politicians can't allow a prolonged deflation. It's too painful... especially with trillions of fresh capital only a button-press away.
But who knew it would happen so quickly? The front page of the Wall Street Journal this morning says the Fed is now considering using the proceeds from its maturing mortgage bond holdings (acquired in the midst of the financial crisis) to buy new mortgages and Treasury bonds... The Fed stopped buying bonds only four months ago.
In a recent speech in South Carolina, Bernanke fairly acknowledged the lack of a "V-shaped" recovery, or any recovery shaped like any other letter of the alphabet for that matter... Helicopter Ben said, "We have a considerable way to go to achieve a full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure, and lost savings." He said we need to be "careful" about tightening too quickly (meaning the fed-funds rate will remain near zero for some time). Care in the width and duration of spigot opening was not on the agenda. Oh well. Fish gotta swim, Fed's gotta print.
Corporate America is borrowing at record low rates. U.S. nonfinancial companies have a record $837 billion of cash on their balance sheets. Both are the ingredients for a surge in corporate takeovers. Mix in a healthy helping of Fed's newly affirmed fear the money supply might not grow fast enough, and the long case for stocks looks compelling.
To my knowledge, "Do we have to have banks?" is not a question my stepdaughter has ever asked, though investors who want to make money should ask it and answer yes. When the mass printing of currency is in the offing, those in the currency moving and storage business can expect something extra in their paychecks. Banks that want to make hay while the sun shines will continue to exploit low interest rates. Uncle Sam, of course, will remain ready to backstop their debt purchases. When it's hard to lose, it's easy to win.
One way to exploit this situation is to own one of the best-managed mutual funds in the world with heavy financial exposure. Steve Sjuggerud recommended this stock to readers of his True Wealth newsletter. This fund is probably the safest and best way to profit from the financial rally. To learn its name, sign up for Steve Sjuggerud's True Wealth here.
If you're looking for a good time to load up on gold stocks, we're almost there... Jeff Clark has been watching the gold sector, waiting for the perfect buying opportunity. In his latest S&A Short Report update, he wrote:
The sector is oversold. Many of the gold stocks are trading at the lows of the year. And the charts are starting to develop bullish patterns.
Jeff says we'll soon see the best buying opportunity in months. And with his recent track record (including several triple-digit gains), we wouldn't bet against him. Jeff is currently monitoring several potential gold trades and will likely make a recommendation later this week. To sign up for Short Report and make huge gains in this volatile market, click here.
New highs: AmeriGas Partners (APU), EV Energy Partners (EVEP), Vanguard Natural Resources (VNR), Applied Micro Circuits (AMCC), Altria (MO), MFA Financial (MFA-PA).
Nothing in today's mailbag... Where are the venom and accusations? Send yours to feedback@stansberryresearch.com.
Must-Reads That Will Radically Change
Your View of the Stock Market
By Dan Ferris
Most people view the stock market like a lottery game. They make short-term bets on businesses they know little or nothing about... and generally lose money.
But there's another way to practically guarantee you'll make money in stocks. It requires you to stop obsessing about the market's day-to-day fluctuations and learn something about the businesses you're buying and selling.
You can learn about this method in a number of ways. But I think a great introduction is to read three short books, and one important chapter of another book. By the time you've read all four, a light bulb ought to switch on in your head. You should be convinced there's a better way to buy stocks than making random guesses about short-term share price movements.
Last fall at the annual Stansberry Alliance meeting, I was asked for a single book recommendation. I enthusiastically recommended Joe Ponzio's F Wall Street, which I had just finished a few hours earlier.
F Wall Street teaches you to think about the value of a business first and forget about the price of it until you understand the value well enough. That's what all the best investors say. Look past the noise. Look past the short term. Forget about market risk... F– Wall Street! Focus on value. Be a business analyst, not a market follower.
I probably shouldn't tell you any of this. If you gained expertise in valuing businesses, you'd almost never buy stocks. Most public companies are simply too hard to value. Those that aren't too hard to value spend most of their lives overvalued by Mr. Market. When I tell my readers I'm having trouble finding "cheap stocks," it goes without saying I mean "cheap stocks I understand well enough to value them."
Ponzio also provides a reasonable valuation shortcut method "for 'armchair' investors who see the value in stocks, want to stick with large, stable companies, and don't want to invest hundreds of hours of research each year."
The book treats a hard subject in a straightforward, easy to understand manner.
Ponzio's final chapter is on patience, another hugely important concept. As I'll show my Extreme Value readers in the August issue (which comes out this week), mastering time is the most important factor in any investment plan. If you can't learn to be patient, you simply cannot make money in stocks. If you can be patient enough, success is virtually guaranteed. If you want to sign up for Extreme Value in time to get the August issue delivered to your inbox this week, click here.
Overall, F Wall Street is well-written and highly readable. It's also worth re-reading. I keep it at arm's length at all times when I'm at home. Most financial books stink. This one is great. Read it and learn from it.
Another valuable investing book is Joel Greenblatt's classic, The Little Book That Beats The Market. Using a simple story that's a joy to read, Greenblatt teaches the reader the ideas behind his Magic Formula investing concept. Magic Formula investing is a simple idea that says you should buy the best businesses when they're trading at suitably cheap prices. Greenblatt offers simple metrics and guidelines so you can learn to identify a good business and know when it's cheap enough. Greenblatt's book, too, is worth re-reading. It's next to Ponzio's book on my shelf.
Another book I often recommend is Frank Singer's little 27-page masterpiece, How To Value A Business. Singer's booklet provides a simple formula for valuing a business, which requires that you estimate the probability of a company's earnings occurring. Think about that. Most people take the earnings for granted. They don't bother wondering about the likelihood of earnings occurring. There are many highly cyclical businesses out there. Once you get real about the likelihood of a given level of earnings happening again, you start realizing a lot of stocks are just too risky to fool with.
Singer's book also prompts you to think about three different types of value, Liquidation Value, Stock Value (which is really IPO value), and Ongoing Business Value. Liquidation value is not the subject of the book. Nor is Stock Value. Singer admits there seems to be no sense or logic to IPO valuations.
Singer provides you with basic tools to understand the value of an ongoing business. He also shows you how ongoing business value can be much higher for a strategic acquirer than for an investor like you or me. A strategic acquirer is another company in the same business. Businesses are worth more to strategic buyers because the key inputs, the earnings, and the probability of the earnings occurring are higher for the strategic buyer. He buys the business because he thinks he can wring more profit out of it. And he thinks higher profits are highly certain. So he pays more. Like Ponzio and Greenblatt, Singer's book contains good examples and anecdotes.
The other must-read I recommend most consistently is Chapter 20 of Benjamin Graham's The Intelligent Investor. The chapter is called "Margin of Safety as the Central Concept of investment." I recommend you re-read it once a month. It's that important.
Once you learn about value, you have to keep in mind business values are inherently imprecise. You can't pinpoint them. You can only estimate them within a given range. Margin of safety is simply the margin for error investors need because it's impossible to pinpoint business value.
For example, if you think a company's stock is worth $100 a share and you buy it for $95 a share, you don't have a real margin of safety. If that $100 company is a World Dominator and you buy it for $75 a share, you're getting a margin of safety. Say the company is a riskier business, not a World Dominator. In that case, you'll want a bigger margin of safety. You might want to wait until it sells for $60 or even $50 a share.
Warren Buffett once said something like this: You want to build a bridge to withstand 30,000 pound trucks, then you want to drive 10,000 pound trucks on it. You don't want to drive too many 29,000 pounders across it.
If most investors learned to value a business, they might exit the stock market altogether. My guess is most stock investors who learn to value a business become very picky about the stocks they'll own. They buy less often, sell less often, and hold longer.
And they make more money.
Dan Ferris and Sean Goldsmith
Medford, Oregon and Nashville, Tennessee
August 3, 2010