Mon, Dec 9, 2013|Sean Goldsmith

Another new high for corporate bond issuance...

 

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Most stocks actually lose money...

In today's Digest Premium, Chris Mayer – editor of one of our favorite non-S&A newsletters, Capital & Crisis – explains why he's worried about today's market...

And Chris shares why most people's beliefs that stocks usually go up in the long run is actually false.

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Another new high for corporate-bond issuance... Super-risky bonds gaining in popularity... 30% default rates... Hong Kong and Singapore back the yuan... A WDDG takeover...

 Last week, corporate bond issuance reached an all-time high...

On December 5, pharmaceutical company Forest Laboratories sold $1.2 billion of debt yielding 5%... That brought total sales of dollar-denominated corporate bonds to $1.482 trillion, beating last year's record high of $1.479 trillion.

Corporate bonds, overall, are yielding about 200 basis points (2%) more than comparable U.S. Treasurys. That difference, or "spread," is essentially the premium investors require to hold corporate bonds over comparable Treasurys. And the current difference is the smallest since October 2007.

 This isn't surprising...

There's more money in the world today than ever before. And with interest rates still near their lows, investors are desperate for yield.

With companies issuing more bonds than ever... the volume of new high-yield bonds flooding into the market is also at a record high.

High-yield (or "junk") bonds – those rated below Baa3 by Moody's and triple B by Standard & Poor's – are issued by riskier companies. These companies pay more interest to compensate investors for the higher default risk.

Sales of high-yield bonds hit $361 billion this year, eclipsing the record $356.9 billion from 2012.

 In October, Porter said the high-yield market was one of the best indicators that U.S. credit markets were "warped beyond recognition." In May, the average junk-bond yield fell to less than 5%. Today, they're at more than 6%. From the October 14 Digest Premium:

First, credit markets in the United States have been warped beyond recognition by the Federal Reserve. In May, the average junk-bond yield hit a low of 4.96%. (Yields were more than 20% during the subprime crisis.) Yields on higher-risk junk bonds are falling because yield-starved investors are buying anything that will give them extra returns.

But you cannot make 5% junk bonds work mathematically. Remember, companies that issue junk bonds pay a higher yield to compensate for the higher default risk. So if you add in the inevitable default rate with inflation, you cannot possibly make a real return buying junk bonds with a yield of less than 5%. Yet we're still seeing it happen. It just makes no sense.

 But the most egregious sign of the credit markets overheating is no doubt the record sales of so called "high-yield payment-in-kind" bonds...

PIK bonds give borrowers the option to repay interest with more debt... And the issuance of these notes more than doubled from $6.5 billion in 2012 to $16.5 billion this year, according to Bloomberg.

Sales of PIK bonds last peaked in 2007 with $11.1 billion issued... Issuance fell to $5.4 billion in 2008 and $2.7 billion in 2010.

 The surge in interest for these bonds spurred the Bank for International Settlements (BIS), a financial regulatory body, to issue this warning:

Low interest rates on benchmark bonds have driven investors to search for yield by extending credit on progressively looser terms to firms in the riskier part of the spectrum. This can facilitate refinancing and keep troubled borrowers afloat. Its sustainability will no doubt be tested by the eventual normalisation of the monetary policy stance.

Ironically, the BIS is made up of 60 central banks from around the world. And its stated purpose, from its website, is "to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks."

 Also, according to data from the BIS, nearly 30% of payment-in-kind issuers before 2008 have since defaulted.

 In the December 3 Digest, we discussed the decline of the U.S. dollar in international trade... We noted that the European Central Bank (ECB) and the People's Bank of China (PBOC) agreed to a direct swap – bypassing the dollar – as trade increases between the two areas.

The same day, the yuan (China's currency) surpassed the euro as the second-most-used currency in trade.

And last Wednesday, two dominant Asian financial centers agreed to promote the internationalization of the yuan...

 The Singapore and Hong Kong exchanges signed a memorandum of understanding to work together in creating more financial products denominated in the yuan.

Why would they do this?

Today, the yuan has less than 9% of the global market for trade settlement... But that's up from less than 2% in 2012. And Singapore and Hong Kong expect that trend to continue... By rolling out more yuan-denominated products, they'll make more money as the Chinese currency gains in popularity around the world.

 Porter originally predicted the dollar would lose its place as the world's reserve currency when he first described the phenomenon as the "End of America" in the December 2008 issue of his Investment Advisory.

At the time, people thought we were crazy... Then, more and more people started saying the same thing, including renowned investors like Jim Rogers and Warren Buffett.

Now, entire nations see the writing on the wall... And they're rushing to diversify out of the dollar. Again, this is a trend we see accelerating.

 Dan Ferris originally recommended Sysco in the May 2012 issue of The 12% Letter. Sysco is the No. 1 food distributor in North America... For that reason – along with several other characteristics common in wonderful businesses – Dan added the company to his portfolio of "World Dominating Dividend Growers" (WDDG).

WDDGs have consistently thick profit margins and strong balance sheets. They gush free cash flow, and they have a long history of paying and increasing dividends...

Sysco's dividend history is stellar...

 Sysco has paid a dividend every year since it went public in 1970. And it has raised its dividend a total of 43 times... every year for the last 36 years. The dividend has tripled over the last 10 years, resulting an average 10-year growth rate of a little less than 12% per year...

Here's what Dan wrote about Sysco in his May 2012 issue:

Nobody sells a greater variety of food and food-related products than Sysco Corporation (NYSE: SYY).

It's the World Dominator of the North American food service-distribution industry. As a wholesaler, it sells more than 400,000 different items – including fresh produce, dairy, canned goods... paper, kitchen utensils, and other equipment – to restaurants, hospitals, hotels, schools, and colleges throughout the U.S. and Canada.

No other company can match Sysco's physical presence in North America. It sells products from 176 distribution centers in North America. That's nearly three times as many North American locations as its largest competitor.

As with our other World Dominating Dividend Grower stocks, this business is too big for the competition. Sysco offers a greater variety of products and sells more of them to more customers than any of its competitors.

Sysco has a 17% share – twice the size of its largest competitor – of the $225 billion North American food services market. Its nearest competitor, U.S. Foodservice, has an 8% market share. The No. 3 distributor, Performance Food Group, has a 6% share. The next 10 largest food distributors have a total share of only 11%.

To call the North American food distribution market "highly fragmented" is an understatement. In addition to the 13 largest companies in the industry, there are about 16,500 food services distributors in North America, with product sales ranging from $400 million for the national distributors... down to less than $10 million for the smallest specialty distributors.

A highly fragmented market is a great thing for Sysco. It means the company has a huge opportunity to grow market share. It can either steal it away from competitors – none of which offer its great variety of products – or it can acquire them.

 Today, we learned Sysco chose the latter option for growth...

The company announced it would buy rival U.S. Foods for about $3.5 billion, strengthening its No. 1 position.

Normally when a company announces a large acquisition, shares tumble. But the market loves Sysco's announcement... Shares spiked nearly 13% on the news (though they receded later on). The combined company will have annual revenue of $65 billion. (Sysco generated $44 billion in sales last year.)

And Sysco said it will see cost savings from the takeover almost immediately.

 Dan sent me an e-mail explaining his thoughts on the situation... He noted the same thing happened when global wine company Constellation Brands announced it would buy the beer firm Grupo Model from Anheuser-Busch. Constellation Brands is the largest premium wine producer in the world and a holding in Dan's Extreme Value model portfolio.

The market believed the acquisition would make Constellation more competitive. Shares jumped nearly 30% in one day.

Dan predicts the Sysco/U.S. Foods deal should have less regulatory trouble than the Constellation/Grupo Modelo merger. The food distributors have smaller market shares. It's a much more fragmented industry. After this deal, roughly 16,000 companies will remain in the industry. Several are large enough to acquire, but it will be more difficult with regulators after Sysco's deal.

Dan's 12% Letter subscribers were up 21% on the recommendation as of Friday's close. Dan will send a full update to his readers on Wednesday.

 New 52-week highs (as of 12/6/13): American Financial Group (AFG), BLADEX (BLX), Fluidigm (FLDM), Prestige Brands Holdings (PBH), ProShares Ultra Technology Fund (ROM), Third Point Reinsurance (TPRE), Union Pacific (UNP), and ExxonMobil (XOM).

 In today's mailbag... a couple readers catch up on recent topics – municipal obligations and Bitcoin. Send your e-mail to feedback@stansberryresearch.com.

 "Union pensions are contracts, too.

"The shame is on the politicians who misappropriated tax revenues and underfunded pension plans. Union members only took what was offered." – Paid-up subscriber Robert Cobb

Goldsmith comment: Indeed... Still, those claims are junior to other creditors in bankruptcy.

 "Could you advise the Alliance members about Bitcoin? I'm getting email pitches for it and I'd appreciate your comments. The only reference I saw on the S&A website was to an article written two years ago." – Paid-up subscriber Joe Latham

Goldsmith comment: We dedicated the November 27 Digest to Bitcoin. You can read it here...

Regards,

Sean Goldsmith
Miami Beach, Florida
December 9, 2013

Most stocks actually lose money...

 Last week, corporate bond issuance reached an all-time high...

On December 5, pharmaceutical company Forest Laboratories sold $1.2 billion of debt yielding 5%... That brought total sales of dollar-denominated corporate bonds to $1.482 trillion, beating last year's record high of $1.479 trillion.

Corporate bonds, overall, are yielding about 200 basis points (2%) more than comparable U.S. Treasurys. That difference, or "spread," is essentially the premium investors require to hold corporate bonds over comparable Treasurys. And the current difference is the smallest since October 2007.

 This isn't surprising...

There's more money in the world today than ever before. And with interest rates still near their lows, investors are desperate for yield.

With companies issuing more bonds than ever... the volume of new high-yield bonds flooding into the market is also at a record high.

High-yield (or "junk") bonds – those rated below Baa3 by Moody's and triple B by Standard & Poor's – are issued by riskier companies. These companies pay more interest to compensate investors for the higher default risk.

Sales of high-yield bonds hit $361 billion this year, eclipsing the record $356.9 billion from 2012.

 In October, Porter said the high-yield market was one of the best indicators that U.S. credit markets were "warped beyond recognition." In May, the average junk-bond yield fell to less than 5%. Today, they're at more than 6%. From the October 14 Digest Premium:

First, credit markets in the United States have been warped beyond recognition by the Federal Reserve. In May, the average junk-bond yield hit a low of 4.96%. (Yields were more than 20% during the subprime crisis.) Yields on higher-risk junk bonds are falling because yield-starved investors are buying anything that will give them extra returns.

But you cannot make 5% junk bonds work mathematically. Remember, companies that issue junk bonds pay a higher yield to compensate for the higher default risk. So if you add in the inevitable default rate with inflation, you cannot possibly make a real return buying junk bonds with a yield of less than 5%. Yet we're still seeing it happen. It just makes no sense.

 But the most egregious sign of the credit markets overheating is no doubt the record sales of so called "high-yield payment-in-kind" bonds...

PIK bonds give borrowers the option to repay interest with more debt... And the issuance of these notes more than doubled from $6.5 billion in 2012 to $16.5 billion this year, according to Bloomberg.

Sales of PIK bonds last peaked in 2007 with $11.1 billion issued... Issuance fell to $5.4 billion in 2008 and $2.7 billion in 2010.

 The surge in interest for these bonds spurred the Bank for International Settlements (BIS), a financial regulatory body, to issue this warning:

Low interest rates on benchmark bonds have driven investors to search for yield by extending credit on progressively looser terms to firms in the riskier part of the spectrum. This can facilitate refinancing and keep troubled borrowers afloat. Its sustainability will no doubt be tested by the eventual normalisation of the monetary policy stance.

Ironically, the BIS is made up of 60 central banks from around the world. And its stated purpose, from its website, is "to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks."

 Also, according to data from the BIS, nearly 30% of payment-in-kind issuers before 2008 have since defaulted.

 In the December 3 Digest, we discussed the decline of the U.S. dollar in international trade... We noted that the European Central Bank (ECB) and the People's Bank of China (PBOC) agreed to a direct swap – bypassing the dollar – as trade increases between the two areas.

The same day, the yuan (China's currency) surpassed the euro as the second-most-used currency in trade.

And last Wednesday, two dominant Asian financial centers agreed to promote the internationalization of the yuan...

 The Singapore and Hong Kong exchanges signed a memorandum of understanding to work together in creating more financial products denominated in the yuan.

Why would they do this?

Today, the yuan has less than 9% of the global market for trade settlement... But that's up from less than 2% in 2012. And Singapore and Hong Kong expect that trend to continue... By rolling out more yuan-denominated products, they'll make more money as the Chinese currency gains in popularity around the world.

 Porter originally predicted the dollar would lose its place as the world's reserve currency when he first described the phenomenon as the "End of America" in the December 2008 issue of his Investment Advisory.

At the time, people thought we were crazy... Then, more and more people started saying the same thing, including renowned investors like Jim Rogers and Warren Buffett.

Now, entire nations see the writing on the wall... And they're rushing to diversify out of the dollar. Again, this is a trend we see accelerating.

 Dan Ferris originally recommended Sysco in the May 2012 issue of The 12% Letter. Sysco is the No. 1 food distributor in North America... For that reason – along with several other characteristics common in wonderful businesses – Dan added the company to his portfolio of "World Dominating Dividend Growers" (WDDG).

WDDGs have consistently thick profit margins and strong balance sheets. They gush free cash flow, and they have a long history of paying and increasing dividends...

Sysco's dividend history is stellar...

 Sysco has paid a dividend every year since it went public in 1970. And it has raised its dividend a total of 43 times... every year for the last 36 years. The dividend has tripled over the last 10 years, resulting an average 10-year growth rate of a little less than 12% per year...

Here's what Dan wrote about Sysco in his May 2012 issue:

Nobody sells a greater variety of food and food-related products than Sysco Corporation (NYSE: SYY).

It's the World Dominator of the North American food service-distribution industry. As a wholesaler, it sells more than 400,000 different items – including fresh produce, dairy, canned goods... paper, kitchen utensils, and other equipment – to restaurants, hospitals, hotels, schools, and colleges throughout the U.S. and Canada.

No other company can match Sysco's physical presence in North America. It sells products from 176 distribution centers in North America. That's nearly three times as many North American locations as its largest competitor.

As with our other World Dominating Dividend Grower stocks, this business is too big for the competition. Sysco offers a greater variety of products and sells more of them to more customers than any of its competitors.

Sysco has a 17% share – twice the size of its largest competitor – of the $225 billion North American food services market. Its nearest competitor, U.S. Foodservice, has an 8% market share. The No. 3 distributor, Performance Food Group, has a 6% share. The next 10 largest food distributors have a total share of only 11%.

To call the North American food distribution market "highly fragmented" is an understatement. In addition to the 13 largest companies in the industry, there are about 16,500 food services distributors in North America, with product sales ranging from $400 million for the national distributors... down to less than $10 million for the smallest specialty distributors.

A highly fragmented market is a great thing for Sysco. It means the company has a huge opportunity to grow market share. It can either steal it away from competitors – none of which offer its great variety of products – or it can acquire them.

 Today, we learned Sysco chose the latter option for growth...

The company announced it would buy rival U.S. Foods for about $3.5 billion, strengthening its No. 1 position.

Normally when a company announces a large acquisition, shares tumble. But the market loves Sysco's announcement... Shares spiked nearly 13% on the news (though they receded later on). The combined company will have annual revenue of $65 billion. (Sysco generated $44 billion in sales last year.)

And Sysco said it will see cost savings from the takeover almost immediately.

 Dan sent me an e-mail explaining his thoughts on the situation... He noted the same thing happened when global wine company Constellation Brands announced it would buy the beer firm Grupo Model from Anheuser-Busch. Constellation Brands is the largest premium wine producer in the world and a holding in Dan's Extreme Value model portfolio.

The market believed the acquisition would make Constellation more competitive. Shares jumped nearly 30% in one day.

Dan predicts the Sysco/U.S. Foods deal should have less regulatory trouble than the Constellation/Grupo Modelo merger. The food distributors have smaller market shares. It's a much more fragmented industry. After this deal, roughly 16,000 companies will remain in the industry. Several are large enough to acquire, but it will be more difficult with regulators after Sysco's deal.

Dan's 12% Letter subscribers were up 21% on the recommendation as of Friday's close. Dan will send a full update to his readers on Wednesday.

 New 52-week highs (as of 12/6/13): American Financial Group (AFG), BLADEX (BLX), Fluidigm (FLDM), Prestige Brands Holdings (PBH), ProShares Ultra Technology Fund (ROM), Third Point Reinsurance (TPRE), Union Pacific (UNP), and ExxonMobil (XOM).

 In today's mailbag... a couple readers catch up on recent topics – municipal obligations and Bitcoin. Send your e-mail to feedback@stansberryresearch.com.

 "Union pensions are contracts, too.

"The shame is on the politicians who misappropriated tax revenues and underfunded pension plans. Union members only took what was offered." – Paid-up subscriber Robert Cobb

Goldsmith comment: Indeed... Still, those claims are junior to other creditors in bankruptcy.

 "Could you advise the Alliance members about Bitcoin? I'm getting email pitches for it and I'd appreciate your comments. The only reference I saw on the S&A website was to an article written two years ago." – Paid-up subscriber Joe Latham

Goldsmith comment: We dedicated the November 27 Digest to Bitcoin. You can read it here...

Regards,

Sean Goldsmith
Miami Beach, Florida
December 9, 2013

Editor's note: Today's Digest Premium is excerpted from episode 211 of Frank Curzio's S&A Investor Radio podcast. He interviewed Chris Mayer, editor of Capital & Crisis.

After Frank – editor of Small Stock Specialist and Phase 1 Investor – introduced Chris by calling him a "value" investor, he asked for Chris' view of the current market, which is near its all-time highs. The following is an edited transcript of Chris' response...

 I would say I'm worried. And I would say it's a very frustrating market. It's hard to find bargains. We haven't had a real pullback – a 10% correction – in around two years. And valuations are stretched all over.

But it's a frustrating market because it's one [where] I think you can get in trouble pretty easily. It's not like the late '90s market where everything was just extreme... You could even see Coca-Cola trading for 55 times earnings. We don't have that across the board.

We have certain parts of the market that are ridiculously overvalued or seem to be, like the social media stocks... Twitter with a $12 billion market cap. But there are still some parts of the market that look reasonable.

I think it's tough because investors can easily stretch their standards and all of a sudden because they're behind... because the market's going good and they feel good... they pick up something they regret later. So in that respect, I think this year has been really tough...

 It goes back to a comment that I remember hedge-fund manager Carlo Cannell, who's a very good at investing and selling stocks short, made. I've heard him say it more than once... The market doesn't have the upward bias that everyone thinks it does. Instead, the market is really a well-tended garden.

And what he meant by that is, if you look at the market (and when everyone says the market we're often referring to different indices, so we're looking at the S&P 500, the Dow, or the Russell 3000 or 2000)... the makers of these indexes drop out losing stocks and replace them. So the stock market indexes are really a tale of the survivors. You don't see the stocks that drop off and become zeros because they leave the index long before they become zeros.

A report from hedge-fund company Blackstar Funds went back and looked at every stock that was ever in the Russell 3000 index. It counted everything and didn't drop anybody out. If you did that, most of the stocks lost money. So I think that's a good thing to keep in mind. There is a tendency to think that stocks generally go up for the long run. But it's hard to say that's really true when you pick it apart and look at the actual experience of all the equities that have traded.

– Chris Mayer

P.S. In his monthly Capital & Crisis letter, Chris consistently provides contrarian investment ideas you won't find anywhere else. To check out Chris' impressive track record and learn more about subscribing, click here.

Most stocks actually lose money...

In today's Digest Premium, Chris Mayer – editor of one of our favorite non-S&A newsletters, Capital & Crisis – explains why he's worried about today's market...

And Chris shares why most people's beliefs that stocks usually go up in the long run is actually false.

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 12/06/2013

 

Stock Symbol Buy Date Return Publication Editor
Rite Aid 8.5% 767754BU7 02/06/09 683.6% True Income Williams
Prestige Brands PBH 05/13/09 471.1% Extreme Value Ferris
Enterprise EPD 10/15/08 239.6% The 12% Letter Dyson
Constellation Brands STZ 06/02/11 232.6% Extreme Value Ferris
Ultra Health Care RXL 03/17/11 200.3% True Wealth Sjuggerud
Altria MO 11/19/08 181.2% The 12% Letter Dyson
McDonald's MCD 11/28/06 172.4% The 12% Letter Dyson
Ultra Health Care RXL 01/04/12 162.2% True Wealth Sys Sjuggerud
Hershey HSY 12/06/07 160.4% SIA Stansberry
Automatic Data Proc ADP 10/09/08 150.3% 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
1 True Income Williams
3 Extreme Value Ferris
3 The 12% Letter Dyson
1 True Wealth Sjuggerud
1 True Wealth Sys Sjuggerud
1 SIA Stansberry
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