Tue, Mar 19, 2013|Sean Goldsmith

Apple's growing cash hoard...

What the Cyprus situation really means for the global economy...

The latest news out of Cyprus – the government levying taxes on bank account holders, which we discussed in detail yesterday – is very, very interesting...

If you understand it on a deep level, Cyprus' actions cut to the core of whether we are going to live in a socialist world or a capitalist world. Banking is at the center of the economy... And the policies you set in banking determine who gets capital and under what conditions. That's the definition of capitalism: how to allocate capital and under what terms.

And right now, the world is completely socialist, because every deposit and every bank is government-guaranteed. Do you remember the first thing that happened during the fiscal crisis of 2008 and 2009? The Feds said, "You have to have higher deposit guarantees." With higher guarantees, there was no reason to have a run on banks... In the case of a bank failure, every depositor would get every penny back.

The Fed had to increase its deposit guarantees because when the first couple banks failed, the Federal Deposit Insurance Corporation (FDIC) limits were $100,000. Some people lost money. Because of that, people were moving money around to different banks.

After the crisis, the FDIC raised the limit to $250,000.

The 2008 crisis happened because banks made bad lending decisions and lost money. But who should be responsible for those bad lending decisions? Is it the bank and its depositors or is it the taxpayers? In capitalism, you have to be responsible for your own economic choices. That's how the economy is guided...

And if you allow people to make economic decisions without consequences, you'll end up with a lot of malinvestment. You'll have a dysfunctional economy. And that's what we're seeing in the world today because nobody is responsible for their bad decisions. Problems get papered over (thanks to government bailouts) and society as a whole pays for them in the form of inflation.

In Cyprus, the European Union is telling every depositor he must pay a tax of 10% to cover the losses in Cyprus' banks. And depositors are saying, "Hell no! We'll take our money out of the bank so you can't tax us." It's interesting that bank runs are caused by regulators today... because at the end of the day, they control everything. That's socialism, not capitalism.

What happened in Cyprus doesn't have any direct implications for the U.S. banking system... Our banking system is already so thoroughly socialist, we won't have any runs on the bank... We have the printing press, we have the reserve currency, and we have Fed Chairman Ben Bernanke, who will print as much money as he feels is required at any time.

But realize something... If we were truly living in a capitalist world, who you choose to bank with (where you choose to place your cash) would become an important decision. You would want to bank with people who make wise lending decisions. Today, you don't have to think about your bank because your money is always guaranteed... There's no consumer preference for well-run banks. And if there's no preference for well-run banks, you'll get a bunch of crappy banks, which is what we have... And crappy banks make crappy loans.

For example, today, automaker General Motors can lease cars to subprime borrowers. There's no way in hell these subprime borrowers should be allowed to get a new car. It's absurd. And yet because there is no consequence to making a bad loan (or lease, in this case), that's how the economy operates. This is a big mistake... We'd be much better off if people had to be responsible for their own economic decisions... and that starts with where you put your money in the bank.

But we don't have that... We haven't had that kind of freedom in the U.S. since before the Great Depression. And it's a shame. In places where you have free banking – like Hong Kong and Switzerland – you have much better economies. You have much better per-capita GDP growth, more wealth, and more freedom.

The lesson of the Cyprus bank levy is that you can't have a system where depositors face no risk. If there is no risk, there is no incentive in the economy for making wise capital-allocation decisions... Therefore, the economy will become stagnant and there will be no growth or wealth created.

Think about it this way... What if the government were to guarantee the dividend payments from every Fortune 500 company? So no matter how bad the product development was, no matter how bad the marketing was, no matter how many people were employed who shouldn't be... the government would always guarantee the dividend payments.

There would be no reason for management to do a good job or make wise decisions.

– Porter Stansberry with Sean Goldsmith

What the Cyprus situation really means for the global economy...

Regardless how the European Union and Cyprus decide to handle the government's bailout, the damage has been done. And in today's Digest Premium, Porter shows readers what it means for U.S. depositors...

To continue reading, scroll down or click here.

What the Cyprus situation really means for the global economy...

To subscribe to Digest Premium and access today's analysis, click here.

Apple's growing cash hoard... Why companies stash cash overseas... How to double Apple's share price quickly... Stansberry Radio: Barron's Gene Epstein... The Great Migration is at hand...

Credit-ratings firm Moody's says Apple's cash hoard could reach $170 billion this year. Apple's latest SEC filings indicate the tech giant is holding just over $137.1 billion in cash.

Last year, Apple started paying out about $2.5 billion per quarter in cash dividends. It also said it would use $10 billion to buy back stock – but only to mop up shares issued to employees as compensation. That type of share repurchase prevents dilution for shareholders, but nothing more.

Today, Apple shares are roughly 36% below their 52-week high. They're trading around 10 times earnings. So it's cheap enough for the company to buy back shares as a way to increase shareholder value. In other words, Apple has no excuse not to pay out more in dividends and spend much more on share repurchases, both of which would help push shares higher.

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Apple isn't the only huge cash hoarder out there... Moody's says non-financial U.S. corporations are sitting on $1.5 trillion. Nearly one-fourth of that is in the hands of just five companies: Apple, software giant Microsoft, pharmaceutical giant Pfizer, search-engine giant Google, and Internet "plumbing" giant Cisco.

This is one of the biggest ongoing boondoggles perpetrated by public companies on their (usually unwitting) shareholders. These companies keep their foreign-earned cash in foreign banks, rather than bringing the money back into the U.S. For example, nearly 70% of Apple's cash and 90% of Microsoft's cash is held outside the U.S. They do this to avoid the U.S. corporate tax rate. At 35%, it's one of the highest in the world.

I (Dan Ferris) called Apple and Microsoft a couple months ago to talk about their cash hoards. Microsoft said it can use foreign cash to create shareholder value, pointing to the $8.5 billion acquisition of Internet communication service Skype. Unless that business is earning at least a few hundred million dollars of pretax cash flow – which is doubtful, since most of its users pay nothing to use it – Skype destroyed shareholder value rather than create it.

Apple reminded me that CFO Peter Oppenheimer believes there'll be another corporate tax holiday, similar to the one in 2004. Back then, the tax on foreign earnings was temporarily reduced when Congress passed a law that allowed corporations to deduct 85% of dividends received from their foreign subsidiaries. That reduced the effective tax on those earnings to 5.3%.

As we reported previously, at least one of the top five cash hoarders has given up any hope of a tax holiday. Cisco CEO John Chambers said he's given up a four-year lobbying effort and has decided to invest outside the U.S. He named Canada and the U.K. as potential destinations for Cisco's foreign cash.

The idea of keeping cash outside the U.S. to avoid taxes is pure baloney. There are publicly traded companies out there – including one in the Extreme Value portfolio – that do plenty of foreign business, bring home their cash, and have no trouble creating massive amounts of shareholder value.

Apple, Microsoft, and Cisco shares are all cheap today, despite all three achieving record sales within the past two years. Their businesses are bigger than ever, but their market valuations are among their cheapest ever.

I can't tell you exactly why shares of these three companies are cheap. I can tell you that these companies should bring all their cash home, pay their U.S. taxes, and distribute the remaining money to shareholders.

Imagine what would happen to Apple if it brought home $94 billion, paid 35% in taxes, and spent the remaining $61 billion on share repurchases.

First, Apple might be able to buy back close to 20% of its outstanding shares. If it did that, every shareholder's piece of the pie would get bigger.

Second, the market would quickly figure out that Apple is shareholder-friendly. That would very likely lead the stock to trade at a premium valuation... much higher than today's 10 times earnings.

Together, these two forces could easily double Apple's share price.

The same goes for Microsoft and the other big cash hoarders I mentioned earlier. Of course, as long as shareholders behave like sheep, this won't happen. It would take a lot of loud, angry shareholders to persuade these companies to take action.

As we mentioned in yesterday's Digest, be sure to listen to last week's Stansberry Radio episode if you haven't done so already. Porter spoke with Gene Epstein, economics editor at Barron's. Gene is one of the few widely published columnists gutsy enough to call the U.S. government's social welfare programs a "Ponzi scheme."

Unlike almost every other journalist out there, Gene is one of the few mainstream writers who agrees with what we've been saying for many years. We've stated dozens of times that Social Security is the biggest and most harmful Ponzi scheme in history.

Agree with us? Disagree with us? Listen to Porter and Gene's discussion... and then let us know what you think. At the very least, we guarantee you'll come away with something to think about. You can access this episode of Stansberry Radio for free by clicking here.

We're seeing further strength in the housing market...

Housing starts jumped 0.8% month-over-month in February to an annual rate of 917,000. Building permits increased 4.6% month-over-month to an annual rate of 946,000, the strongest since July 2008.

And the number of "underwater" homeowners – those who owe more on their mortgage than the house is worth – is decreasing... That number fell 1.7 million from a year earlier. As of the end of 2012, 21.5% of total households have an underwater mortgage, down from 25.2% at the end of 2011.

The improving housing market is a sign that the Bernanke Asset Bubble is working...

Housing prices are rising on a wave of Fed-created liquidity. In this environment, Steve also expects a "Great Migration" into stocks... He believes "Mom and Pop" investors will shift into equities en masse. They literally won't be able to afford to stay in cash or bonds earning record-low yields.

He believes the inflow of cash could nearly double the stock market over the next three years.

In today's DailyWealth, Steve outlines the steps we'll see in the Great Migration.

Steve's bullish stance on stocks and housing are only two of his high-conviction ideas today... Every day, he and his True Wealth Systems research team scan massive amounts of historical market data for his next profitable trading idea.

For instance, this month, Steve spotted a discrepancy in the insurance sector... one where his subscribers' likely return is nearly 300%... and they could make more than 500% "if things simply go back to normal."

In February, Steve found a trade with 900%-plus upside potential in the next six years... using conservative assumptions.

As we've discussed recently, Steve has spent nearly $1 million – and hired a mathematics PhD and a team of computer programmers – to develop a computer program that processes enormous amounts of data and finds profitable trading setups.

The result is True Wealth Systems. Steve uses many of the same strategies available to only the best and largest hedge funds in the world... But we're making these strategies available to the individual investor.

Since launching True Wealth Systems, Steve has discovered nearly four dozen tradable strategies. And the best part of Steve's system is that it tells you exactly when to buy and sell.

We've discussed some of Steve's trades before. His subscribers have successfully booked 56% gains in biotech... and they're currently up 104% on homebuilders and 71% on health care stocks.

Today, Steve submitted one more essay for Digest readers. In it, he explains the power dividends can have on your portfolio... and an easy way to "juice" your returns even more over the long term. Don't miss this essay at the end of today's Digest.

New 52-week highs (as of 3/18/13): Altius Minerals (ALS.TO), WisdomTree Japan SmallCap Fund (DFJ), Fission Energy (FIS.V), Constellation Brands (STZ), Travelers (TRV), Texas Pacific Land Trust (TPL), Range Resources (RRC), Two Harbors (TWO), and CVS Caremark (CVS).

In today's mailbag, two questions we often receive... Where and how do you buy physical gold? Do you own physical gold? Send your notes to feedback@stansberryresearch.com.

"What channels do you suggest that I could purchase gold? I hear that I need to actually own physical gold. But how do I purchase a brick? Or are you suggesting holding certificates or stock in gold? I only see this country and that smelly rat Obama soon getting us into a Cyprus issue with all of our printed watered down money with nothing to back but our land and the people who reside on this land. Us!" – Paid-up subscriber Mike Regan

Goldsmith comment: We always recommend keeping some of your assets in physical gold. If you'd like to buy bullion, we recommend you call or e-mail Van Simmons at David Hall Rare Coins (1-800-759-7575 or van@davidhall.com). We also recommend Rich Checkan at Asset Strategies International (1-800-831-0007 or rcheckan@assetstrategies.com). As always, we receive no compensation for mentioning either dealer.

Regards,

Sean Goldsmith and Dan Ferris
Miami Beach, Florida and Medford, Oregon
March 19, 2013

How Dividends Can Maximize Your Stock Returns
By Steve Sjuggerud and Brett Eversole

Dividends make a huge difference in your portfolio over the long run... It probably doesn't take our $900,000 True Wealth Systems computers for you to believe it.

But what's the most valuable way to put dividends to work? And when is the best time to buy the stock market, based on dividends?

We put our True Wealth Systems computers to work... And our results might surprise you...

As most investors know, dividends make a huge difference on your long-term returns in the stock market. Since 1900, the average annual gain on the S&P 500 has been 5%. But by simply reinvesting your dividends, that number nearly doubles to 9.4%.

Over time, you can see why the difference really adds up. Without dividends, $10,000 invested in 1900 would have turned into more than $2.5 million today. But by simply reinvesting your dividends, the same $10,000 turns into more than $263 million. That's a 10,420% increase, simply by reinvesting dividends!

Now, you might think that buying when the dividend yield on stocks is high would be a winning strategy. And while this beats the long-term average return on stocks, our True Wealth Systems computers found a simple idea that does even better...

To test the idea, we looked at "relative" dividend yields, meaning the current dividend yield versus the dividend yield of the last three years. If today's yield is the highest of the last three years, yields are at a "relative" extreme, and we should buy.

This idea works. Since 1900, the average five-year return on stocks is 56.3%. But buying and holding for five years when dividends are at a "relative" extreme increases our returns to 64.1%.

That's a big improvement. But our computers found an even better way to use dividends...

You see, we also need to understand how dividend yields compare with other investments – specifically, basic government bonds.

For example, a 5% dividend yield would be amazing today, with our ultra-low interest rates. But in 1982, when 10-year Treasurys were 14%, a 5% dividend yield wasn't a great deal.

So to determine relative value, we looked at the "spread" between S&P 500 dividend yields and 10-year Treasurys, using the three-year "relative" extreme to tell us when to buy. The results are below...

System	Five-Year Return	Annualized Return
Buy & Hold	56.3%	9.3%
Dividend	64.1%	10.4%
Dividend Spread	73.7%	11.7%

As you can see, buying based on the dividend spread not only increases our returns over buy and hold... but it beats buying simply based on dividends, too.

Our takeaway is simple... dividends matter. But the spread between dividends and U.S. Treasurys matters even more. Buying when the spread is high is an easy way to increase your stock returns over the long term.

Today, our system says it's time to buy. Last month's spread reading was at a "relative" extreme. Based on history, buying today should lead to above-average returns over the next five years...

Good investing,

Steve Sjuggerud and Brett Eversole