A major melt-up in Treasurys... Making 30% in the long bond... A 100% gain in corn... Warning of a crisis at the market peak... Your chance to ask Jeff Clark live questions... Reader feedback: Recommending 'immoral' stocks...
Treasury yields continue their descent...
The 10-year Treasury yield fell to a new two-year low, hitting as low as 1.87% today. Stocks got whacked across the board. And the Volatility Index – the market's "fear gauge" – jumped 20% higher.
The market is shunning risk (note the recent selloff in high-yield bonds as one example)... and buying only the safest assets. In addition to Treasurys, municipal bonds – our favorite fixed-income sector – are up.
DailyWealth Trader editor Amber Lee Mason warned subscribers of a potential selloff in high-yield bonds and a rally in Treasury securities back in April. We just saw Martin Fridson, the "dean of high yield," speak at the Grant's Interest Rate Observer conference in New York City.
Fridson warned that high-yield bonds were about to implode. As Amber recalled...
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And with today's rally in Treasurys (and subsequent decline in yield), DailyWealth Trader subscribers who took Amber's advice and bought the ProShares Ultra 20+ Year Treasury Fund (UBT) are sitting on big gains.
UBT is a "double long" fund that tracks long-dated Treasury prices. For every 1% gain in Treasury prices, UBT should rise 2%.
UBT rose as much as 10% today before closing the day up around 6%. If you bought shares in April, you're now up more than 30%... a massive gain in Treasury bonds.
As you can see from the chart below, the break in high-yield bonds and the corresponding surge in Treasurys is playing out just as Fridson predicted...
Last month, we told you about the bear market in corn (one of the many commodities getting crushed lately)...
Bad weather in late 2012 produced lower corn supplies. That – combined with increased use of ethanol in gasoline – caused prices to spike. Since then, favorable weather has produced huge corn crops around the world... And prices plunged to the lowest level in four years...
In the September 24 Growth Stock Wire, S&A Resource Report research analyst Brian Weepie said it now costs farmers more money to grow corn than corn is actually worth – a setup that will eventually lead to farmers abandoning corn for other crops (like soybeans)...
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Commodities are inherently cyclical. When producers are losing money selling a commodity, that's typically a good sign that a bottom is near.
Noting the extreme in the corn market, S&A Short Report editor Jeff Clark went long on September 30, telling subscribers, "there is a price at which even the most despised, hated asset on the planet has to bounce. And that is the situation we have with corn right now."
Jeff nailed the call – and the timing. That was the same day that the Teucrium Corn Fund (CORN) bottomed.
As you can see from the three-month chart below, corn has since rallied...
Jeff closed half of his option trade in CORN two weeks later for a 100% gain.
Last month, Jeff hosted one of the most popular live training events in Stansberry Research history. He told listeners how to prepare and profit from what he believed was an upcoming correction in the stock market.
Once again, Jeff's timing was perfect... The S&P 500 peaked the day Jeff went on air.
Of course, at market peaks, people don't want to hear about a crash... They're enjoying their profits. But anyone who missed out on Jeff's event now has big losses in their portfolio... The S&P has fallen more than 5% since then.
We received complaints from people who missed the webinar... And even more sent us questions about what's going on in the market.
That's why Jeff is hosting a follow-up webinar tomorrow at 2 p.m. Eastern time. He will recap what he thinks about the current market situation, and whether we're in a crisis today. Then, he's going to take live questions from the audience... He'll answer as many as possible.
To make sure you don't miss this event – and to have a chance at asking Jeff your market queries – visit www.stansberrytraining.com tomorrow at 2 p.m. Eastern time. There's no password to attend... and it's completely free.
New 52-week highs (as of 10/14/14): National Beverage (FIZZ) and ProShares Ultra 20+ Year Treasury Fund (UBT).
A few subscribers wrote in responding to subscriber Joseph Aldridge's comments that our recommendations border on immoral. Is our research offending you, or are you sitting on large gains in "controversial" stocks? Let us know at feedback@stansberryresearch.com.
"Dear Mr. Aldridge: Whoa Joe! You need to lighten up a little bit. You sound incredibly stressed out. You really need to read Doc Eifrig's October issue of Retirement Millionaire. Especially the section on Telomeres, what they are, how they work, and how critical they are for your overall health. Very briefly, if you don't take care of your telomeres, you may be susceptible to age related diseases and even early mortality!
"And one of the three biggest threats to your telomeres is STRESS. Geez Joe, you can't let a little thing like an investment opportunity in marijuana get your knickers in a twist, or even worse, incensed. If you want to get incensed about something how about the way your government is invading your privacy? Or what about the TSA, IRS and NSA? How about the militarization of your local police force? Or how tens of thousands of illegal immigrants are flooding into your country? Or (and this is the best one) the over $100,000,000.00 (that's correct) that your president has spent playing golf the past six years?
"I fully appreciate and respect your beliefs. Obviously you are concerned by the decline of morality in your country. But do you really think it is in your best interest to get so worked up over such a minor thing. The folks at Stansberry are the best in this business. They only have your best interest at heart. If you don't like what they send you, bin it. It's that simple. But don't get incensed at them." – Paid-up subscriber Steve Previs
"Hi! I just had to write in and say thank you for including the feedback from paid up subscriber Joseph Aldridge who is upset at S&A for sending him a mailing encouraging him to cash in on the marijuana industry. I literally can't stop laughing. I find it hilarious that a paid up subscriber would demand that your firm stop sending him what he considers to be immoral garbage – as if S&A is his very own personal financial advisor. Mr. Aldridge must have forgotten that when he joined S&A he wasn't asked to submit a bio so your firm could tailor the recommendations you send him to include only the industries he might be willing to invest in. This paid up subscriber clearly doesn't understand what he paid your firm for. In my amoral opinion, I think Mr. Aldridge would benefit from taking a nice big hit off of a big fat joint as it might help him to CHILL OUT. 'Nuff Said.' Sincerely, A happy S&A subscriber from Northern California (of course!)." – Paid-up subscriber Valerie Bishop
Regards,
Sean Goldsmith
October 15, 2014
What happens to banks when the Fed raises interest rates...
Yesterday, Kroll Bond Ratings managing director Christopher Whalen explained why demand for consumer credit has slowed in recent months.
In today's Digest Premium, Whalen discusses what will happen to U.S. banks when the Fed raises interest rates... what that means for investors... and one of his favorite names in the sector...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
What happens to banks when the Fed raises interest rates...
Editor's note: Yesterday, Kroll Bond Ratings managing director Christopher Whalen explained why demand for consumer credit has slowed in recent months.
In today's Digest Premium, Whalen discusses what will happen to U.S. banks when the Fed raises interest rates... what that means for investors... and one of his favorite names in the sector...
If you look at capital, U.S. banks are healthy. The U.S. banking system is well-capitalized compared with European and Asian banks. This is largely a result of the Federal Deposit Insurance Corporation (FDIC) and former head Sheila Bair and their refusal to go down the road to Basel III and this fantasy of fair-value accounting and risk-weighted assets.
Because of its role as a receiver for dead banks, the FDIC likes to know the cash value of a bank's capital. It has fought tooth and nail to keep the basic leverage ratio test – which was capital assets – as part of the regulatory framework... therefore, U.S. banks have a lot of capital.
There is also interest-rate risk in the system because the Fed has kept rates so low that most of the bond portfolios that the banks hold as part of their liquidity have super-low coupons. When you have a low-coupon bond, the duration risk is profound because it's hard to hedge.
Most of the people who work at banks today really don't understand what happens in markets when you get a move in interest rates.
Let's say you have a bond that pays a 1% coupon versus an older bond that has a 6% coupon. Obviously the 1% bond is going to move a lot more in price because it has less cash flow. As the Fed tries to normalize rates, we're going to see that banks (and other institutions) will have to deal with duration risk and other risks they haven't had to think about in years. I worry about that.
The issue for the banks – in part due to the low-interest-rate environment – is that they aren't making much money on their investment assets. They are taking risk in other lending areas, like commercial lending, to try and make up for it.
Even if the Fed normalizes rates by next March – which everybody expects – it's going to take years to get securities to re-price so that banks start to earn more money on their investments. In the meantime, I think we're going to see net interest margins and profitability in the banking sector under a lot of downward pressure.
The statistic I often cite is that when the Fed dropped rates at the end of 2007 and beginning of 2008, it took the cost of funds for the entire banking system from about $120 billion a quarter to about $12 billion today. Think about that. The entire $14 trillion U.S. banking system has $12 billion in costs of funds. The Fed did this to maintain the spread for banks... But that spread is now compressing because banks didn't earn much on their assets.
Even though the cost of money is low, the amount of money banks are making on their assets is also falling. For years, as banks try to re-price these assets, they aren't going to be making much money.
For investors, these are going to be boring, low-return investments. There's no alpha here. Banks are basically going to be low-yielding utilities for the foreseeable future. In fact, the only sector in the entire banking system creating value right now are smaller banks, because they're focused on lending and don't have all the regulatory burdens.
For example, U.S. Bancorp (USB) is much smaller than JPMorgan (JPM) or Wells Fargo (WFC). But dollar for dollar of assets, it delivers much more value to investors. That shows in terms of valuation. JPMorgan trades for a little more than book value. Wells Fargo trades for about 1.6 times book value. U.S. Bancorp is around two times book value. It's an expensive stock, but the reason is because it delivers. It has a relatively stable business model. It doesn't have a lot of volatility in earnings, and it has a loyal shareholder base. It pays a steady dividend. You don't buy these kinds of stocks for volatility. You buy them for the cash flow they generate.
– Christopher Whalen
What happens to banks when the Fed raises interest rates...
Yesterday, Kroll Bond Ratings managing director Christopher Whalen explained why demand for consumer credit has slowed in recent months.
In today's Digest Premium, Whalen discusses what will happen to U.S. banks when the Fed raises interest rates... what that means for investors... and one of his favorite names in the sector...
To continue reading, scroll down or click here.
Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)
As of 07/21/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 411.6% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 316.2% | The 12% Letter | Dyson |
| Constellation Brands | STZ | 06/02/11 | 310.5% | Extreme Value | Ferris |
| Ultra Health Care | RXL | 03/17/11 | 268.2% | True Wealth | Sjuggerud |
| Ultra Health Care | RXL | 01/04/12 | 222.2% | True Wealth Sys | Sjuggerud |
| Altria | MO | 11/19/08 | 210.2% | The 12% Letter | Dyson |
| Targa Resources | TRGP | 12/13/12 | 187.6% | SIA | Stansberry |
| Blackstone Group | BX | 11/15/12 | 179.1% | True Wealth | Sjuggerud |
| McDonald's | MCD | 11/28/06 | 178.1% | The 12% Letter | Dyson |
| Automatic Data Proc | ADP | 10/09/08 | 158.2% | Extreme Value | Ferris |
Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals |
| 3 | Extreme Value | Ferris |
| 3 | The 12% Letter | Dyson |
| 2 | True Wealth | Sjuggerud |
| 1 | True Wealth Sys | Sjuggerud |
| 1 | SIA | Stansberry |