One of our favorite short candidates just rocketed higher...
The head of one of the largest private-equity and asset-management firms believes stocks are headed higher from here...
Scott Minerd, CEO and CIO of Guggenheim Partners – a New York City-based financial firm with $170 billion in assets – appeared on CNBC yesterday to share his views on the economy. Like many of our analysts, he's bullish in the intermediate term.
Minerd said today's market conditions resemble those of 2004. Credit spreads – the difference between 10-year Treasurys and other debt instruments – are similar... And we know the Fed's quantitative easing policy can't go on forever. Still, he believes "we're nowhere near" an actual reversal today.
Instead, according to Minerd, the markets will rally as much as another 35% as more investors are forced out of cash and into riskier assets like stocks. He notes the huge cash balances sitting on corporate and personal balance sheets... He believes once confidence returns, that money will go to work.
Steve Sjuggerud has a similar view to Minerd's. He calls it "The Great Migration." Steve believes small-scale investors will propel the market to a dot-com-style boom as investors grow tired of the minuscule returns from their savings accounts. As Steve wrote in a recent DailyWealth...
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One by one, Mom and Pop will soon realize that near-zero-percent interest on money in the bank and in bond funds isn't good enough. You can't live on that in retirement... and you need to do something else.
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They'll look around to see what they can do with their money... and they will rediscover stocks. They will eventually figure out they've been left with no other options.
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But all these folks who are currently sitting on the sidelines with their cash will eventually put that money to use and create a bubble. And the biggest bubble will be in the bond market. We've been writing about a bond-market bubble for years. (You can read Porter's recent thoughts here.) We were early, but the fundamentals are still there: we're drowning in debt... yields are zero bound (meaning they can't go much lower and prices can't rise much more). And eventually, the Fed will have to stop printing money.
Minerd says the amount of bonds the Fed is buying this year is "equivalent to all the debt that will be issued in the bond market this year." That, in turn, has pushed 10-year Treasury yields to 1.8%... According to Guggenheim, the true yield on Treasurys should be between 3.5% and 4% today. The question remains, how will the Fed reverse these massive purchases without a major market disruption?
The Fed's balance sheet sits at $4 trillion today. It was $850 billion before quantitative easing began... We may never return to $850 billion. If we pull $3 trillion out of the economy, everything – stocks and bonds included – will crash.
Still, the push for liquidity continues. And it will drive up asset prices across the board, especially real estate and equities. Consider the latest from President Obama...
In his January State of the Union address, Obama said he wanted more Americans to own homes (Does that sound familiar?):
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Even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected. Too many families who have never missed a payment and want to refinance are being told no. That's holding our entire economy back, and we need to fix it.
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According to the Washington Post, the Obama administration is currently working with banks to lend to more borrowers by taking advantage of taxpayer-backed programs. It would focus on young people buying their first homes and people whose credit was hurt in the crisis.
The socialization of our economy continues... Obama urges banks to make more loans to less-qualified people. The banks reap huge profits, thanks to their zero borrowing cost and the increasing volume of loans. And when things turn south – which they inevitably will – taxpayers will once again be on the hook. We've seen how this ends before, four years ago with the financial crisis... only this time, it will be worse, because we're playing with trillions more dollars.
One good way to take advantage of what's happening in the economy today is by buying bank stocks... They borrow money for close to nothing and lend it at higher rates, collecting what's called the "spread." And as loan volumes increase, banks make more money.
Retirement Millionaire editor Dr. David "Doc" Eifrig's favorite bank is Wells Fargo (WFC). It's the largest mortgage lender in the U.S. As mortgage demand picks up, Wells makes more money. And right now, the company is minting cash.
Last year, Wells Fargo issued 29% of all home loans in the U.S. last year. That's up from 11% in 2007 (thanks to its purchase of Wachovia). Wells Fargo made $524 billion in home loans last year – the biggest annual total for any lender in history... and more than the next five largest lenders combined, according to the trade publication Inside Mortgage Finance.
The mortgage-banking operations of the entire U.S. bank sector earned $31.9 billion last year. That's almost six times as much in 2011 and the most in at least a decade. Wells Fargo earned $11.6 billion from mortgages last year, up nearly 50% from 2011. Its total earnings were $18.9 billion, more than double its 2007 figures.
Leading up to the crisis, when banks were devising riskier and more exotic ways to make money by the hour, Wells Fargo stuck to its core business of making conservative loans and maintaining a fair amount of leverage.
And when the crisis hit, Wells executives realized the game had changed. The secondary market "wasn't coming back anytime soon," Franklin Codel, head of loan production for Wells Fargo Home Mortgage, told The Wall Street Journal. "And so we needed to get more focused and stronger on portfolio lending." In other words, banks couldn't count on the government to buy all their mortgages, so they had to make solid loans and keep them on their books.
As of yesterday's close, Retirement Millionaire readers are up 12% on Wells Fargo since Doc recommended it a year ago. The company currently pays a 2.7% dividend. And Doc believes shares are heading higher...
Bill Gross, billionaire executive of asset management firm PIMCO, is questioning his own achievements in today's markets. Here's an excerpt from Gross' latest outlook, which you can read in its entirety here (the emphasis is Gross')...
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But let me admit something. There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.
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Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of "greatness." Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch.
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My point is this: PIMCO's epoch, Berkshire Hathaway's epoch, Peter Lynch's epoch, all occurred or have occurred within an epoch of credit expansion – a period where those that reached for carry, that sold volatility, that tilted towards yield and more credit risk, or that were sheltered either structurally or reputationally from withdrawals and delevering (Buffett) that clipped competitors at just the wrong time – succeeded. Yet all of these epochs were perhaps just that – epochs. What if an epoch changes? What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered?
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As we've pointed out many times, the financial gurus we respect – like Gross and Warren Buffett – had the benefit of riding a 40-year wave of expanding credit and declining capital costs.
No doubt these guys are skilled. But when you can borrow money, buy almost any asset, refinance at lower rates, and buy more... it's easy to make a fortune. That is, until the borrowing dries up.
That's what we saw in 2008 and 2009 (falling asset prices and a halt in liquidity). And that's why the Fed stepped in with trillions of dollars of fresh capital.
Many of the greatest investors in the world have said things are different today (including Stanley Druckenmiller and Louis Bacon). It's much harder to make returns. And many of them are hanging it up.
New 52-week highs (as of 4/2/13): ProShares Ultra Nasdaq Biotechnology Fund (BIB), Berkshire Hathaway (BRK), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Nasdaq Biotechnology Fund (IBB), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), Targa Resources (TRGP), W.R. Berkley (WRB), Utilities Select Sector SPDR Fund (XLU), Anheuser-Busch InBev (BUD), Constellation Brands (STZ), Coca-Cola (KO), PepsiCo (PEP), Abbott Laboratories (ABT), Johnson & Johnson (JNJ), Prestige Brands Holdings (PBH), Automatic Data Processing (ADP), 3M (MMM), Calpine (CPN), Dominion Resources (D), Chubb (CB), Travelers (TRV), Becton-Dickinson (BDX), Medtronic (MDT), Texas Pacific Land Trust (TPL), DCP Midstream Partners (DPM), Enterprise Products Partners (EPD), Procter & Gamble (PG), McDonald's (MCD), GenMark Diagnostics (GNMK), and Philip Morris (PM).
Are you worried about investing in today's market? Tell us your thoughts here... feedback@stansberryresearch.com.
"I have been a subscriber for approximately six months now. In looking back at your recommendations (Buy, Don't buy, Sell, Hold) I see how right your recommendations have been. But, I still have not purchased anything yet (and have lost a lot of money because of it). Every time I step up to the plate to buy I read one of your articles on the end of America, or something on how close we (America) are to collapse.
"I have lost a large portion of my net worth twice before in the market greatly due to not knowing about and following stop losses and getting caught up in the media news hype and buying at the tops of the market. Now being armed with your knowledge and input I want to move forward but remain paralyzed by the thought of losing copious amounts of our hard earned savings with the ever looming unknown collapse of the United States. I am in my mid-50s and so desperately do not want to lose any of the six digit savings we have accumulated. On the other hand I know our current savings will get us no ware in retirement with today's interest rates." – Anonymous
Goldsmith comment: Hopefully today's Digest answered some of your questions. We expect the market to rally from this point. But we also know this rally will end – as all market rallies do. That's why it's important to be conservative and mind your stop losses.
"Rather than just reading your newsletters, I figured I should contribute. We took your advice to purchase real estate in 2011. We bought several properties, each time forming a company that owns the property. One of the properties is a small horse ranch that has two duplexes, a farm house, barns, pastures, and a riding arena. Another property is a 3 bedroom/2 bath home. We paid cash for the properties, manage the rental units, and in return receive a bit under one percent per month ($5,300/month; net $3,500/month).
"By moving some money into the rental properties it earns more interest than it would have earned in the bank and, importantly, this money is not in the bank. We view our rental properties as an important part of our diverse portfolio (i.e., we've learned from the Stansberry team that there is much more to investing than stocks and bonds!). We are also in the process of building a home outside of the US." – Anonymous
Regards,
Sean Goldsmith
Miami Beach, Florida
April 3, 2013
Shares of one of our favorite whipping boys – electric-car manufacturer Tesla Motors – jumped 16% on Monday after the company announced it sold a couple hundred more cars than it thought... And for the first time since going public in 2010, it was going to be profitable.
In the December 14 Digest Premium, we discussed the qualities that make Tesla a short candidate. Since November, Tesla shares are up nearly 40%. But that makes it even more attractive from the short side.
I (Porter) don't believe Tesla will be successful in the production or marketing of electric vehicles because the technology for those vehicles is not nearly ready for commercial application. The cars will be too heavy. They will have far too short a lifespan and too little resale value to interest the mass market.
Tesla was funded by venture capital. The idea for the company originated when the concept of peak oil was becoming popular. There are a lot of very smart people who unfortunately have a very bad understanding of oil and gas resources in the U.S. And they honestly believed we would run out of hydrocarbons. That's why we saw oil hit $150 a barrel, its peak in 2008.
People believed the lack of hydrocarbons would alter our way of life and that electric cars would be the only way people could get around. And Tesla – the pioneer in electric cars – would make for a great investment. But I don't believe we'll run out of hydrocarbons. I don't believe electric cars are sensible and I don't believe they have any substantial utility... so I don't believe Tesla will succeed.
In tomorrow's Digest Premium, I'll explain why I don't trust that Tesla actually is profitable, despite its recent claims...
– Porter Stansberry with Sean Goldsmith
One of our favorite short candidates just rocketed higher...