A wicked market headache
Mr. Market isn't partying anymore. Today, he looked like he was waking up with a hangover.
The S&P 500 was down more than 8% around 3 o'clock this afternoon. I doubt the net worth of corporate America changed 8% today. But since corporate America has been overvalued in the stock market for months now, today's action strikes me as rational and reasonable.
Perhaps Mr. Market will do as he always does and get more and more fearful as the days go by... eventually delivering bargains like he did last year. That's the thing about bear markets. All you can do is hope...
Investors can't be too scared about what's going on in Europe. There was plenty of demand for a recent Spanish Treasury bond issue. But I still have to wonder how healthy Europe as a whole really is. Most of the governments are bureaucracy-laden socialist nightmares that weigh heavily on their economies. And according to a chart in the New York Times, Portugal, Spain, Ireland, Italy, and Greece all seem to owe each other money. And all of them owe France, Germany, and Britain.
It's just like the United States, where, as the saying goes, "we owe it to ourselves." In the Eurozone, they owe it to each other. It's hard to believe Europe isn't getting ready to fall off some type of sovereign-debt cliff.
For example, isn't it bad for Ireland that Greece owes it $8.5 billion? Greece also owes Italy $6.9 billion and Portugal $9.7 billion. Isn't it really bad for France that the PIIGS collectively owe it $911 billion? And nearly one-third of Portugal's $268 billion in debt is held by one country, Spain. Both countries have suffered credit downgrades. That can't be good.
No wonder the Irish, Greek, and now Spanish bank stocks have been getting hammered. Spain's Banco Santander is down from $16 in January to $10 today.
And no wonder one of the most dyed-in-the-wool value investors, Lloyd Khaner of Khaner Capital, recommended buying gold at the Value Investing Congress. It's unusual to see a detailed presentation on gold at a value conference. Khaner hit all the usual buttons, too: Hedge against paper currencies, 5,000-year history as a store of value, gold is nobody's liability...
Khaner's been buying gold since 2004, so he's done well. He's obviously not done with it yet. He owns ETFs and mentioned a small gold stock he didn't want to name.
Still, if you took a random survey, nine times out of 10, I bet most folks would tell you they don't own gold. They'll probably put their life savings into it when gold hits $5,000 an ounce and Treasury bonds are yielding 15%.
But don't hold your breath for rising Treasury yields. On Tuesday, my mortgage broker locked me in at 4.875% on a 30-year fixed mortgage. Incredibly, it looks like I locked too soon, as Treasury yields dropped even more. Folks are scared about what's happening in Greece and the rest of Europe, and they're buying Treasuries as a safe haven.
Gold, too, has risen the last two days. A week ago, a number of S&A editors sat by the Chesapeake Bay at our recent conference in St. Michaels, Maryland, chatting with Gold Stock Analyst editor John Doody. He insisted that when gold and the dollar move up together, it's bullish for gold, not the dollar. I don't know if that's true, but I know I'll continue making my monthly sojourns to my coin dealer to buy more Krugerrands. I have no intention of selling my gold anytime soon.
If you want a reason for interest rates to go up, especially mortgage rates, here's a big one: The Fed owns $1.1 trillion of mortgage-backed securities (MBS) and wants to sell. The selling is likely a year or so in the future, and the debate isn't settled within the Fed. But selling $1.1 trillion of MBS could easily drive down mortgage bond prices... and raise up mortgage rates.
I noticed MBS yields falling with Treasuries, possibly indicating MBS were viewed as a safe haven, too. That helps explain how I got my low fixed rate. The Fed's massive MBS position and its desire to get rid of it suggest I locked in my rate at a good time. I expect future homebuyers may face a headwind.
After the Value Investing Congress in Pasadena, California, yesterday, they bussed attendees to the nearby convention center to attend the Wesco annual meeting. Wesco is 80%-owned by Berkshire Hathaway. Wesco's chairman is Berkshire Vice Chairman Charlie Munger. He spoke for an hour or so, then took questions for a couple hours.
Among other topics, Munger said Goldman Sachs "has the best morality and the best wisdom of all the investment banks." He said the government made a big mistake going after Goldman. But he also said, "It's a mistake to invent products that have the purpose of rooking your customers."
It's hard to believe Goldman didn't create products that "rooked" its customers, just like every other big financial firm does every day.
The government giveth, and it taketh away...
Having given mega-banks an oligopoly, the government is now telling them to pay more for deposit insurance. The Senate unanimously passed an amendment to change the way banks are charged for deposit insurance. Instead of basing the insurance premium on domestic deposits, the new formula is to base the fee on a bank's total assets minus its tangible equity, according to the Wall Street Journal. The bigger and more leveraged a bank, the more it'll pay.
The Independent Community Bankers Association said the new law will reduce deposit insurance fees at 98% of banks with less than $10 billion of assets.
Of course, the government isn't really taking away anything from mega banks. It actually cements their competitive position. The more banking regulations that pass, the more entrenched the mega-banks become. Massive incumbents easily adapt to regulation, but it makes it harder for smaller competitors to enter the space. That's why the more things appear to change in the financial and political spheres, the more they stay the same.
I've been complaining that the stock market is expensive and good ideas are hard to find. Well... at the Value Investing Congress this week, I found two stocks that seem like bargains right now and another I hope gets cheaper. In the May issue of Extreme Value, which comes out next week, I'll have two new picks.
One of them is a brand new World Dominator stock. World Dominators are the No. 1 companies in their industry. They beat competition year after year, and they have pricing power that allows investors to beat inflation.
My new World Dominator pick is the No. 1 brand in seven of the top 10 markets in the world. It's No. 1 or No. 2 in 25 of the top 31 markets. It sells a product virtually immune to inflation, recession, depression... you name it. Management is stellar, and the price is incredibly cheap for such a high-quality business.
Most investors think you can't make a lot of money in a short time with World Dominating blue-chip stocks. But my readers made 53% in a few months on TJX Companies, the No. 1 and No. 2 discount department-store chain. Subscribers made 50% on UPS, the world's No. 1 package delivery company. And they're up 49% in a little more than a year on the world's No. 1 microprocessor company. I think this new World Dominator stock can double within the next three years.
World Dominator stocks are also the world's greatest income investments. When you hold them for years and years, World Dominator stocks are like bonds with coupons that grow. Wal-Mart has raised its dividend every year since it went public. ExxonMobil has raised its dividend every year for 27 years. Automatic Data Processing has raised its dividend every year for 34 years. Procter & Gamble has raised its dividend every year for 56 years.
If you aren't building your portfolio around these stocks, you're probably making a mistake. I'm willing to bet the World Dominators will outperform the S&P 500, the Russell 2000, and the Nasdaq 100 over the next three years. They're the most compelling values in the stock market today. They're also the safest stocks you can own. If you think the market is going to be difficult for the next few years, you should have more money in World Dominators than any other type of stock today. To get access to Extreme Value and our next World Dominator stock pick, click here.
New highs: PowerShares UltraShort Euro (EUO), St. Mary Land (SM), Eldorado Gold (EGO).
In the mailbag... subscribers write in with questions about inflation and rallies. Send your messages to feedback@stansberryresearch.com.
"I confess that it could be stupid question, but I need to understand the difference between Government Bond and the Inflation adjusted treasury. Would you kindly put some light to it? It will educate me. I appreciate it." – Paid-up subscriber Ashok Vachhani
Ferris comment: With regular government bonds, you pay the principal and collect interest payments for as long as you hold the bond. The interest coupon doesn't change. If you buy a bond at $100 that pays a $5 coupon, you get a 5% yield. If you buy the same bond for $90, you get a higher yield, $5/$90 = 5.55%.
Inflation-indexed bonds are different. The principal and coupon are adjusted for inflation using a benchmark like the Consumer Price Index (CPI). For example, suppose the principal on 5% Treasury Inflation Protected Securities (TIPS) is $100. At that principal, the coupon is $5. If inflation rises 10%, the principal is adjusted upward by $10. The new principal is $110, and the new coupon is 5% of principal, or $5.50.
The CPI is maintained by the Bureau of Labor Statistics. You have to wonder if the government purposely uses an inflation index over which it exercises full control, so it can understate inflation and undercompensate TIPS holders when the Fed starts printing money.
"The recent increase over the past few months of the stock market (over 30%) just goes to show that people in this country are either out to screw there fellow man or are dumber than dirt. Every one that has gotten suckered back in is being set up for another huge fall. Get out now while you still have your skin left." – Paid-up subscriber Mark Heilbron
Ferris comment: A big rally to premium valuations certainly shows investors are still human. Whether it also means they're out to screw their fellow man or are dumber than dirt, I leave for you to decide. Both are true to some extent... and always will be.
"In reality, Randy is listening to you in doing the opposite of what you suggest. I, however, have seen a 30% gain in the year I have been following Tom Dyson's 12% Letter recommendations. Eventually, I would like to expand to some options trading, like maybe your Put Strategy Report, but I haven't got brave enough yet. Thanks also for the insightful commentary on economics and our government." – Paid-up subscriber, Dale Nussdorfer
Ferris comment: It's easy to see Randy will get killed if he does what he says he's doing (which I doubt). Most S&A picks are longs. So most of Randy's positions would have to be shorts. Shorting is a horrible idea most of the time. You can't stay on the short side all the time and expect to do anything but lose money over the long term. Nor can you simply be a knee-jerk investor and ever expect to do anything but lose.
There's only one way to succeed: Do all the work necessary to find and exploit great opportunities. That's what we try to do every day.
I have my money in five stocks. The three best-performers I learned about through S&A editors' research reports. People like Randy will have a hard time telling me my colleagues don't know what they're doing and don't make their readers any money. I read their stuff, take their advice, and make money doing it.
Regards,
Dan Ferris
Pasadena, California
May 6, 2010A wicked market headache... PIIGS owe it to each other... Khaner's gold... Update on the new house... Why Treasury yields are down... And why they could rise soon... Munger on Goldman... Mega-banks pay more... A new Extreme Value World Dominator!...