En route to Sea Island... Volatility returns... MSFT, INTC rise... Canadian banks hunting in the U.S...
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Editor's note: Today's Digest will be brief. Most of the Digest team is traveling to Sea Island, Georgia for our annual Alliance conference today. If you're an Alliance member... we hope to see you there.
In yesterday's Digest, we noted Retirement Trader editor Dr. David "Doc" Eifrig's prediction that the market is headed for a period of higher volatility.
As we've explained before, the Volatility Index (the "VIX") reflects the prices people pay on options... when the index rises, it reflects people paying more for options that protect them in a falling market. That's why the VIX is often referred to as the market's "fear gauge."
Today, the VIX spiked nearly 14% to almost 19. The Dow Jones fell more than 1.7%... The S&P 500 dropped 1.4%. As we said yesterday, the VIX moves inverse to the market.
Today's drop, the biggest since June, comes on the back of disappointing earnings from multinational blue chips DuPont (chemicals), United Technologies (elevators and air conditioning), and 3M (conglomerate). All companies were hit by the global economic slowdown.
Also, credit-ratings agency Moody's downgraded five Spanish regions last night, citing low cash reserves and upcoming bond payments.
Two bright spots in today's otherwise ugly market... Technology giants Intel and Microsoft were both up today. Both stocks have been crushed recently. Microsoft is down from a high of almost $33 in March to $28 today. Intel dropped from $29 in May to $21.60 today.
Their price performance – going up while the rest of the market is down – suggests these two stocks could have turned the corner.
While many of us are in (or en route to) Georgia for the Alliance conference... Dan Ferris is in New York attending the Grant's Interest Rate Observer Conference... He filed the following notes from there...
A headline on the Wall Street Journal website today said Canadian bank RBC is buying the Canadian assets of U.S.-based Ally Financial.
Just below that story, another headline said retail giant Target is selling its credit card portfolio to Canada-based Toronto-Dominion Bank. I (Dan Ferris) recommended Target to 12% Letter readers back in February. It's returned about 27% in dividends and capital gains since. With the market down almost 2% today, Target is flat.
(I've also recommended a couple of extremely well-capitalized small banks... But I can't tell you about them. They're screaming, dirt-cheap buys. The folks who pay good money for Extreme Value might not like me giving away two of my best current recommendations for free.)
If you're in the market for bank stocks that you believe will be acquired... adjust your expectations accordingly. An article in today's edition of the trade magazine American Banker pointed out that acquisition multiples aren't what they used to be. Good small banks were getting acquired for three times tangible book value before the financial crisis. But so far this year, five banks have gone out at prices that represented just two times tangible book value.
That trend is typical of post-euphoric markets. For example, stocks peaked at more than 40 times earnings back in 1999-2000. Today, the market is up by more than 100% from its 2009 bottom, yet it trades at around 15-16 times earnings.
If history is any guide, one day in the next five to 10 years, you'll see the S&P 500 trading for less than 10 times earnings... Hopefully, I'll still be around, begging subscribers to buy, buy, buy at that time. For now, I'm picking stocks more carefully and trying to be extra cautious about expectations surrounding their valuation.
I was sitting next to the co-director of research for a big hedge fund at the Grant's conference this morning. He says they're finding things to do, but not as many opportunities as a few years ago. He also said, "When markets are cheaper, you buy the best-looking stock. But when they're less cheap, you buy the least unattractive one. As long as the world doesn't come to an end, we should be fine over the next couple years."
I'd add to that. If it looks like the world is coming to an end, I'll probably spend the last few minutes of my existence recommending all the cheap, high-quality stocks...
New 52-week highs (as of 10/22/12): Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), Navigators Group (NAVG), and Travelers (TRV).
More folks weigh in on the anti-college side of the debate... Send your feedback to feedback@stansberryresearch.com.
"Your response was right on. As a college student, I worked hard to save extra money. When I got married, my wife had similar feelings as the young man in the story, and felt she was 'not living life' because she could not spend whatever she wanted whenever she wanted. I convinced her that saving was prudent. For a while, I worked three jobs, and she worked two jobs. I am a Pharmacist, and she is a nurse. With a lot of savings, by the time we were in our late 40s, it was time to open a medical-education business, which she had learned as she moved from job to job in the medical industry. Today, we are in our 60s and semi-retired in Florida. I can look out over my lanai and pool to the 12th green on our private golf course which is exactly 115 feet away. This is the American Dream and it was ONLY possible because we saved rather than spent. Hard work really is the road to wealth. Keep up the good work." – Paid-up subscriber Ed
"I'm a quiet subscriber, I've never felt compelled to respond to anyone's letter until today. I'm a 50-something aged woman, married to the same wonderful man for 33 years. We've raised and launched three daughters and have hit that point in life when lifestyle choices are beginning to really pay off. I'd like to tell all 20-somethings that indeed there is wisdom in your advice – my husband and I have lived it all our lives.
"We have always lived well below our means and forgone the 'keeping up with' style of living. We live in a small midwest state where the average income is well below the national average. In spite of that, we've managed to accumulate a comfortable savings account. We even began married life when mortgage rates were in the 16% range! We own a family business on which we made weekly payments for twenty years. So if we could put it together, I believe anyone can.
"I could list all sorts of ways we worked hard and pulled in our belts but suffice it to say that my husband likes to say we are now down to working half days – 7 AM to 7 PM is a half day, right? Working hard doesn't have to mean a miserable life. There is great satisfaction to living this way. Happiness in life is built on relationships not wealth and it costs nothing to be and to have a good friend.
"Our daughter's will one day be surprised to find out our net worth. It's never been a concern of theirs but they are at the age where they are suspecting we aren't hard-up. For now they are living the same way they were raised and I doubt they will ever need an inheritance to survive their own golden years. Keep up your good work. You may feel nobody is learning/listening but we are!" – Anonymous
"As a 30 year-old, I was a bit appalled at the attitude of the 29 year-old son of the subscriber who sent in his son's letter to you. Maybe it's because I've experienced a somewhat similar attitude in the past (albeit, years ago), but I realized that attaining one's goals has nothing to do with where you were educated – of which I was fortunate that I had no student debt coming out of school with a degree in engineering – and everything to do with such attributes as your attitude, becoming a valuable resource to others, who you choose to surround yourself with, and if your goal is to attain wealth, living like a miser while you persevere in whatever field you choose.
"A while back, I had decided that my passion was not in my family's construction business, but in the world of investment analysis. Needless to say, the decision made me re-think my priorities: I moved out of the house that I purchased with some of my savings, rented it out, and moved back home. In the meantime, I educated myself through hitting the local library – rather than fork over $80k a year for grad school – applying what I learned into practice and, at the same time, went out and hustled for whatever work I could find.
"Throughout, I had many instances of doubt – from myself and from others – as well as many naysayers who believed I was making a huge mistake and that I would invariably fail. It was a long journey, with many bumps in the road, but over that time that I struggled, not once did I think of quitting. Now I'm in the fortunate position to say all that hard work and sacrifice is finally paying off as I begin a new journey as an Analyst at a late-stage Venture Capital firm. In addition, as I had previously mentioned that who you surround yourself with is just as important as your attitude, I earned sweat equity in a business started by one of those individuals I've surrounded myself with. (By the way, it's an extremely difficult decision to distance yourself from friends you've known for years due to their attitude towards life and success being opposite to what you're trying to achieve.)
"To the 29 year-old who wrote that letter: it's not impossible to attain monetary success at a young age; you just have to be willing to sacrifice more than you think you have in order to do so. In addition, while there are some that can claim 'luck' for their success, most of the people I know who are very successful worked diligently and continued to better themselves on a daily basis, all while foregoing such things as video games, going out for drinks on weekends, etc. Can it be miserable at times? Absolutely, but it's all worthwhile in the end.
"To you Porter, I say thank you. We may have never met (although I hope to at an Alliance meeting when I'm able to attend), but the words you have written over the years – as well as your story of your own business endeavors and advice to younger readers – do inspire confidence in others. And to any other young readers out there, never give up on your goals; perseverance, however long it takes, pays off in the end." – Paid-up subscriber J.P.
Regards,
Sean Goldsmith and Dan Ferris
Sea Island, Georgia and New York, New York
October 23, 2012