It's hard to be a contrarian sometimes. There's so much bad news out there right now, I'd love to buy... something... anything... but stocks have already surged nearly 40% since early March. I see little that is obviously cheap. I subscribe to a few different services that provide value-oriented stock screens. A few months ago, the screens went on for pages and pages. Now, their output has slowed to a trickle.
Microsoft is still cheap, selling for about 11 times trailing free cash flow. eBay is nearly 100% off its bottom and still sells for less than nine times trailing free cash flow. Wal-Mart is cheap at less than $51 and outperforming almost every retailer on the planet.
A few good deals among the big-cap stocks... but that's about it.
What the heck is this, 1999?!
MetLife's chief investment officer, Steven Kandarian, says "the worst is to come" in commercial real estate. Kandarian told a Bloomberg interviewer, "Like all firms that hold these kind of mortgages, we'll have some issues."
Kandarian says MetLife underwrote its loans "very carefully" to minimize the risk of losing principal, and he expects MetLife to make more loans as others bow out of the market. I bet it's really, really hard to underwrite anything "very carefully" when you're spreading $36 billion around, when every market in the country has been clobbered, and when your largest exposures are in the worst markets (California, Nevada, Florida, Georgia) and the worst-performing property types (office and retail). I suppose MetLife could have underwritten its commercial real estate loans with surgical precision, but I doubt it.
I'll have a lot more to say about MetLife in the next issue of Extreme Value, due out tomorrow.
Friend, author, and portfolio manager Vitaliy Katsenelson sent out an e-mail this morning reminding us all not to imagine we're smart just because the market went up, any more than we should feel stupid when it goes down. Don't try to buy bottoms and sell tops. Buy good stocks when they're cheap and sell them when they're fairly valued.
Don't waste time asking yourself if this is a market top. Right now, you should ask yourself, "What do I own that's fairly valued or maybe even overvalued... and why do I still own it?"
Yesterday on CNBC, contrarian, author, and newsletter publisher James Grant pointed out the importance of valuation to investors. Grant said there are no toxic assets, only toxic prices. For example, he noted, Treasury bonds yielding 2% some months ago were a toxic asset.
A recent Merrill Lynch report confirmed the pain Treasuries have caused investors who panicked and bought them at any price. Investors have lost 28% on 30-year Treasury bonds this year, 11% on 10-year notes, and 0.4% on two-year securities, according to Merrill Lynch. Merrill also says Treasuries of all maturities are down 6.2% this year. Treasuries haven't fallen this much since 1998.
Relentless rate cutting by the Federal Reserve briefly pushed mortgage rates below 5% this spring, causing a flurry of home buying and refinancing. Everyone was cheering when we hit bottom.
They're not cheering now... Yesterday, the rate of 30-year fixed-rate mortgages hit 5.79%, up from 5% two weeks ago, and lending activity has already fallen off a cliff. Advisory firm FTN Financial says the jump in rates will cut the number of borrowers with an incentive to refinance (generally rates 1.5% to 2% below your current rate constitutes "incentive") in half. JPMorgan, the third-largest mortgage originator this year, said refinance activity is already "really down" since rates started rising, and noted 4.75% "seemed to be the switch" that spurred activity.
The Mortgage Bankers Association (MBA) says refinancing activity is at its lowest level since last November.
Accounting for the two-week increase in mortgage rates, the average homebuyer will pay $100 more per month, about $36,000 over the 30-year life of the mortgage, on a $200,000 loan. Mortgage loan application volume is already down 7.2% from a week earlier.
And if you think an extra 79 basis points on a mortgage is a big deal, consider the coming pain in the adjustable-rate mortgage (ARM) market.
In 2007, Shirley Breitmaier took out a $315,000 option-ARM to refinance an existing loan on her house. Her payments started at 3/8 of 1%, or around $98 a month. Her payments may jump to $3,500 a month in two years (a 34,714% increase). She'll be required to start paying principal and interest once the loan reaches 145% of the original amount borrowed.
More than $750 billion of option ARMs were originated in the U.S. between 2004 and 2008. And around 1 million of those will reset higher in the next four years. About three quarters of the ARMs will adjust next year and in 2011, with the peak coming in August 2011, when 54,000 mortgages reset. What happens when these loans reset?
Foreclosures will skyrocket. It's going to be a slow and difficult recovery in the real estate market... though I have no doubt a few smart players will scoop up unbelievable deals. The Extreme Value Model Portfolio features the stock of a company run by one of the greatest distressed investors of all time (it's not Buffett), who has already started buying bank debt (generally speaking, the most senior type of debt).
The Federal Reserve's Beige Book report came out yesterday, and it was just chock full o' swell news:
"Demand for nonfinancial services contracted...
"Retail spending remained soft...
"New car purchases remained depressed...
"Travel and tourism activity also declined...
"Vacancy rates for commercial properties were rising in many parts of the country..."
The Cleveland Fed publishes the so-called Beige Book – officially the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It comes out eight times a year and compiles data and anecdotal reports from each of the 12 Federal Reserve districts. It's intended as a summary of comments and reports from sources outside the Fed and isn't meant to reflect the Fed's opinion.
A true contrarian ought to be lapping all this bad news up. But with stocks up almost 40% off their March lows, I'm finding little I recognize as obviously cheap.
Hunt and Dyson just marked their first 200% gain in our new Penny Trends service.
As you'll recall, Penny Trends trades the market's fastest-moving growth stocks. It's performing spectacularly well.
We believe we have a one- to two-year window open right now to make large gains in the market's smallest companies.
One of the service's first recommendations, Venoco (which we told you about more than a month ago), is up 208% in just a few months. It's a microcap oil play we're using to ride the uptrend in crude. You want to play the uptrend in copper? The guys are up 124% on Taseko Mines. They're also making nice gains in emerging-market stocks and gaming stocks.
And they just revealed the market's next "moonshots" with recent picks in the gold-mining sector. You can learn more about Hunt and Dyson's unique strategy here.
New highs: Penny Trend picks Caribou Coffee (CBOU) and Allied Nevada (ANV).
We pick stocks for a living, but even we can barely scratch the surface of more than 20,000 global equities. Please write in and tell us about the most overvalued stock you know of... or perhaps about the cheapest stock you know about. Reach us at feedback@stansberryresearch.com.
"Please show me the guns and ammo stocks that are soaring. I looked at all the US public held gun manufactures and didn't see any soaring stocks... I imagine the gun availability depends on what you are looking for, but I just bought my wife a Remington 870 pump and didn't have any problem finding one or purchasing the ammo (7.5 bird shot) except for the price." – Paid-up subscriber Tony
Ferris comment: Two gunmakers are publicly traded: Sturm, Ruger (RGR) and Smith & Wesson (SWHC). Both bottomed around November 2008 – when Obama took office – and have torn upwards since.
Regards,
Dan Ferris
Medford, Oregon
June 11, 2009