Biggest rally since 1998... Steve's health care winner... The market still likes bonds... Rick Rule's favorite sector today... Goldman: screwing people for money... Porter issues an apology...
The benchmark S&P 500 stock index rose 0.8% last week to 1,408.47… finishing a 12% rally for the quarter – the biggest first-quarter rally since 1998.
Global central bankers' loose monetary policy is the culprit. In a speech last month, Fed Chairman Bernanke said to further reduce unemployment, we must expand production and consumer demand, which "can be supported by continued accommodative policies." And over the weekend, European Union members voted to add 500 billion euros ($667 billion) to the existing 300 billion-euro rescue fund – bringing the total to over $1 trillion. With liquidity flowing so freely, stocks are rallying.
The best-performing sector within the S&P 500 last quarter was health care (drugmakers, diagnostic firms, insurance, medical devices, etc.). Steve Sjuggerud's True Wealth readers enjoyed the ride. Just under two years ago, in his June 2010 issue, Steve wrote:
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It seems like investors have given up on drug companies like [Johnson & Johnson]. Whether it's worries about patent expirations, dry drug "pipelines," lawsuits... or just simply boredom after a decade of no return, shareholders have thrown in the towel. |
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But J&J isn't going away. I don't know about at your house, but around my house, we are big J&J customers for life – without even realizing it... |
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Since I started writing investment newsletters in 1996, I haven't been interested in [health care stocks]. They've been expensive. Fortunately, we haven't missed a thing. Shares of Merck are actually trading at their 1996 price. Pfizer is at its 1997 price. After 13 years of no return on the stock price, investors are fed up with holding and hoping. Not me... I've never held them. Now, I'm interested. |
Back then, Steve recommended the ProShares Ultra Health Care Fund for a 16% gain. The "ultra" in the fund name designates its goal to return two times the daily return of an index. The fund's largest holdings are Johnson & Johnson, Pfizer, Merck, and Abbott Laboratories (more on Abbott later).
Steve re-recommended shares of the fund in his April 2011 issue for the same reasons: "Drug companies are record cheap. And investors have given up on them. At these record-cheap values, they're worth speculating on." Today, shares hit a 52-week high. True Wealth readers are up over 35%.
In his recommendation, Steve quoted legendary 19th-century speculator Daniel Drew as inspiration for his long trade:
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The way to make money in Wall Street is to calculate on what the common people are going to do, and then go and do just the opposite. |
In other words, be a contrarian. When markets are overwhelmingly bullish, be wary. And when markets are panicked, start buying. The billionaire founder of Oaktree Capital, Howard Marks, also has interesting thoughts on the topic, which you can read here.
With that in mind, consider this headline from Bloomberg today: "Biggest Bond Traders See Worst Over for Treasuries."
According to a survey of the 21 primary Treasury dealers that trade with the Federal Reserve, the 10-year note will finish 2012 yielding 2.48%... That's the same as the January poll, meaning the market expects the 30-year bull run in bonds to continue. We'll take the other side of that bet.
Most Digest readers know our friend and legendary resource investor Rick Rule.
Rick specializes in junior resource stocks – the small companies involved with the exploration for and extraction of resources like oil, natural gas, gold, silver, copper, and fertilizer.
Giant Wall Street institutions rarely cover the space, so it's often rife with bargains. This is one of the reasons a value hunter like Rick has made himself and his clients millions of dollars over the years. Now, Rick is finding value in a sector he normally avoids. (A sector that's much easier for you to invest in.) Our own Matt Badiali wrote about this idea a few days ago in the March 31 edition of DailyWealth:
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Over the past few years, commodities like gold and copper have soared in price. Gold was $1,000 an ounce in 2009. Now it's $1,660. Copper was $2 a pound in 2009. Now it's $3.80. But rather than climb along with the price of metals, big mining firms have declined... or traded sideways. Most people just don't believe the price of commodities can stay this high... So they are avoiding these stocks. |
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Meanwhile, big mining firms like Freeport-McMoRan [down 30% in the past year] and Kinross Gold [down 37% in the past year] are raking in huge amounts of cash. This "falling stock price, surging cash flow" situation is making big miners very cheap. |
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In sum, it's not often a guy like Rick Rule gets into "Big Mining." It takes extraordinary values to get him interested. Right now, those values exist. If the world simply doesn't end – and commodities simply stay at their current prices – buying now will look like a brilliant move a few years from now. |
More bad press for Goldman Sachs...
Press reports are indicating the hated investment bank was the largest shareholder in a website used to traffic women (some of whom are underage and "working" against their will). According to a New York Times op-ed, Goldman owned 16% of Backpage, the largest forum for prostitution in the U.S. The company has 70% of the market for prostitution ads, according to trade organization AIM Group.
Author Nicholas D. Kristof confronted the bank about its position. Goldman's response may surprise you:
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Goldman Sachs was mortified when I began inquiring last week about its stake in America's leading website for prostitution ads. It began working frantically to unload its shares, and on Friday afternoon, it called to say that it had just signed an agreement to sell its stake to management. |
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"We had no influence over operations," Andrea Raphael, a Goldman Sachs spokeswoman, told me. |
While it may sound outlandish that Goldman would back such a business, we're not surprised. Goldman is well-versed in the art of screwing people for money.
While Goldman dumped its Backpage position, it continued buying shares of another website involved in prostitution... Going through the bank's filings, financial news site Zero Hedge discovered that as of Q4 2011, Goldman is also a top-10 owner of Adult Friend Finder.
As the name implies, the website helps men and women "find" each other for sexual relationships. (The men pay a monthly fee to access the site.) Goldman was the only major shareholder to add to its stake in the most recent quarter.
New 52-week highs (as of 3/30/12): ProShares Ultra Health Care Fund (RXL), Coca-Cola (KO), Exact Sciences (EXAS), Cisco (CSCO), Altria Group (MO), Philip Morris International (PM), and Tetra Tech (TTEK).
In today's mailbag… an apology from Porter... and why your broker doesn't want you buying options and bonds... If you have expertise in any of these topics, please send us a note at feedback@stansberryresearch.com.
"Not all newspapers "sell" space outside ad space and allow PR or big advertisers to have a say in their editorial space. Yes, I'm very small potatoes, and maybe pollyanna-ish, but I don't know anyone in local community newspapers who would shill their editorial space for a few ads. The demands only grow, so we don't open the door in the first place.
"Readers see it, aren't stupid, and the paper withers.
"I started my newspaper in my living room 16 years ago. Now I've got 5, and I and my 30 employees have a great reputation. It CAN be done without the BS. And we DO walk away form demanding advertisers, but they always come back. Not as much extraordinary ethics as my dad's Irish streak, but it works." – Paid-up subscriber Thomas Ward
Porter comment: Thomas... I apologize for painting with a broad stroke. Obviously, my comments do not apply to every single newspaper...
But in my defense, have you ever wondered why a guy like me – who's hardly a genius, definitely not the most "plugged-in" guy in New York or Washington, and who doesn't a have a huge staff of analysts or clients sending him information – could accurately predict the bankruptcy of GM? In fact, I published at least a dozen articles – some of which were written tongue-in-cheek from the 'chairman' of General Motors – pointing out the serious (and obvious) problems the company couldn't possibly overcome...
Meanwhile, the Wall Street Journal and the New York Times didn't say one word. Instead, they printed article after article in defense of the companies – same with CNBC.
And guess who the largest advertiser of those papers and that network is… and who was the source of roughly 25% of Wall Street's banking fees in 2007.
Take a wild guess.
"Initially, glad to hear your back is improving and nerve pain in leg has dissipated. As one with herniated disc problem in past, I hope you will take it slow and easy my man. I've found that long walks on the beach and flats fishing on Laguna Madre, replaces the offshore beat back to the dock just fine.
"Regarding your 3/30 digest, your comments about brokers and Merrill discouraging options trading and junk bonds, is exactly what transpired with my former account. When I told my adviser I wanted to sell puts and buy discounted corporate bonds online anyway, they attempted to restrict my trading and complained about the time it took to place the bond orders. Since moving to an online brokerage account, I'm doing just fine." – Paid-up subscriber Dave Embry
Good investing,
Sean Goldsmith
New York, New York
April 2, 2012