Europe loads the cash bazooka... Financial 'Armageddon'... The market soars... AB InBev buys Grupo Modelo... Homebuilder CEO: Housing market has 'stabilized'... New highs for Big Pharma... How do World Dominating Dividend Growers beat inflation?...
"The market will not turn around until it believes Europe's leaders have the resolve to inflate their debts away, as the U.S. has done in spades since 2009. It's a safe bet that's exactly what they'll do at some point this year" – Porter Stansberry, May 2012 Stansberry's Investment Advisory
While German Chancellor Angela Merkel threatened to veto any bailout of the weaker European nations, we knew eventually Germany would cave. Germany couldn't let Spain, Italy, Greece, and their banks (which are de facto sovereign credits as too-big-to-fail entities) fail. The results would be disastrous. Again from Porter's May 2012 issue…
|
Simply put, we don't believe Europe's monetary authorities are going to let a run on the banks develop. Why not? That outcome would be disastrous for the world's major corporations and big banks. And these institutions exert massive influence on the world's major political leaders. A banking crisis is bad for business. That's why it won't happen. |
|
At 4:30 a.m. in Brussels today, after 13.5 hours of deliberation, leaders from the 17 countries in the European monetary union agreed to lend bailout funds directly to banks. In other words, the European Central Bank will now print as much money as it needs to "fix" every bank in the European Union. Get ready for a cash bazooka…
This is a temporary fix... Europe's biggest problem is its high debt levels. As we've said since the bailout of the U.S. financial system began in 2008, you can't fix a debt problem with more debt. Expert investor and government critic Jim Rogers told CNBC this morning the European bailout would lead to financial "Armageddon."
We agree this will happen eventually... But as we saw with the U.S. bailout, a few trillion in fresh capital can float markets for a long time...
The re-flation trade, as we predicted, is back on... The S&P 500 is up almost 2% today. Oil is up nearly 6% to more than $82 a barrel. Gold is up 3%.
Deutsche Bank, Europe's largest bank, and Banco Santander, Spain's biggest bank, are both up nearly 7%... UniCredit, Italy's largest bank (and one of our favorite whipping boys) is up more than 14%.
We turned bullish on banks in the second quarter of this year because we anticipated the world's central banks would continue bailing them out by manipulating the money supply. Even with mountains of cash heading for the world's largest financial institutions, you still need to be careful where you put your money. As we saw with Bear Stearns, even if a bank is bailed out, the shareholders can still get burned (meanwhile, creditors escaped unscathed). You need to buy banks with high-quality capital... For example, we like Wells Fargo.
Today's rally is pushing many of our top recommendations to new highs. We'll take the rest of the Digest to discuss...
World Dominating beer-maker Anheuser-Busch InBev, an Extreme Value holding, today announced it would buy out Mexican brewer Grupo Model for $20.1 billion. (It already owns 50% of Grupo Model.) The deal would create a global company with $47 billion in annual revenue... And more important, it would allow AB InBev to push Corona, Grupo Modelo's top brand, worldwide.
AB InBev jumped more than 6% today to more than $78 a share. As of this afternoon, Extreme Value subscribers are up 64% since Dan's May 2010 recommendation.
The biggest winner from today's AB InBev announcement was another of Dan's World Dominators, Constellation Brands. Dan recommended Constellation in his June 2011 issue. He wrote…
|
Constellation Brands is the largest premium wine producer in the world. Premium wine is wine that retails for more than $5 a bottle. Constellation is also the second-largest wine producing company of any kind (after E&J Gallo, a privately held company). Perhaps Constellation will overtake Gallo some day... In its supplier rankings on May 3, beverage industry sales and consulting firm CM Profit Group said Constellation was "fast on the heels" of E&J Gallo. |
|
Constellation has at least a 15% market share in premium wines at all price points in the North American market. It's the largest wine company of any kind in both Canada and New Zealand. Canada is the world's largest producer and consumer of ice wine. Constellation owns Canada's largest ice wine brand, Inniskillin. |
|
Constellation also has a 50% stake in Crown Imports, the No. 1 beer importer in the U.S., through a joint venture with Mexico's Grupo Modelo. It has 43% of the U.S. imported beer market. This makes Constellation the largest beer importer in the U.S. |
|
Crown Imports has the exclusive right to import, market, and sell Modelo's brands, including Corona Extra, Corona Light, Coronita, Modelo Especial, Pacifico, Negra Modelo, and Victoria in all 50 U.S. states. It also has the exclusive right to import, sell, and market St. Pauli Girl and Tsingtao in all 50 states. These brands are huge, and you can't get them in the U.S. without buying them from Crown. |
Today, Constellation announced it would buy Modelo's 50% stake in Crown Imports. So if Anheuser-Busch wants to sell Corona in the U.S., it's going through Constellation. The stock is up 24% today. Extreme Value readers are up 27%.
In the March 2011 issue of True Wealth, Steve Sjuggerud told readers to buy a house...
|
Right now – today – is the best time in history to buy a house in America. |
|
You might think it feels scary out there – that house prices will never go up. But remember two things: First, just a few years ago, people thought home prices would never go down. And second, it ALWAYS feels scary at a market bottom. |
|
Today, I'll show you why it's the best time in history to buy. I'll start with two hard facts... |
|
Fact No. 1) Mortgage rates hit their lowest levels in American history in late 2010. |
|
|
|
Fact No. 2) Homes are more affordable than ever. |
Of course, not everyone can buy a house at the urging of a newsletter writer. So to profit from the trend, Steve also recommended buying the Dow Jones U.S. Home Construction Index Fund (ITB) – which holds a basket of homebuilder stocks as well as housing-related companies like Home Depot and Sherwin-Williams.
|
One day, as hard as it is to believe right now, we will end up in a place where there's not enough new homes out there to meet the demand for them. Homebuilders will be building new homes as fast as they can... and they won't be able to keep up. That will drive new home prices higher. |
|
The time to buy shares of homebuilders is, quite frankly, when nobody needs a new home. Homebuilders are the cheapest, of course, when nobody is interested in a new home... and when things are so bad, nobody can even see the point. |
|
Things got this bad in 1973-1974. The stock market crashed, falling nearly 50%. Shares of homebuilders fell 90%. The economy went into recession. Home prices fell (adjusted for inflation). In 1975, housing supply peaked and housing starts bottomed. The stock market started to rally. And housing prices started to climb. |
|
The REAL money back then was made in shares of homebuilders... |
|
Homebuilders kicked off a bull market, resulting in a 1,064% gain. Change the dates from 1973-1974 to 2008, and the story is identical to today. |
This morning, the $768 million market-cap homebuilder KB Home reported a better-than-expected quarterly loss of $0.31 per share. And revenue increased 11% to $302.9 million. The company said it sold 1,290 homes in the quarter... Sales improved in central and southeast U.S. And average sale prices improved 9% to $233,000.
The company's Chief Financial Officer Jeff Kaminski said KB Home will "aggressively pursue" land and development. CEO Jeffrey Mezger said he believes the housing market has "stabilized." KB Home soared more than 10% on the news.
And ITB (which does not hold KB Home shares) jumped nearly 4% to a new high. True Wealth readers are up 27% on the recommendation.
Finally, Dr. David "Doc" Eifrig's Big Pharma recommendations of Eli Lilly and Abbott Labs hit 52-week highs today. Doc likes Big Pharma stocks because they're some of the safest in the world. (Lilly and Abbott also pay dividend yields of 4.7% and 3.2%, respectively.)
As populations age in major countries, demand for health care will rocket higher. And as emerging markets grow, one of the first things the people will spend their newfound wealth on is improved health care. It's a major, macro trend he's following… When I asked Doc why he likes Lilly and Abbott, in particular, he responded…
|
Lilly has a couple huge drugs in the pipeline... One just came out for diabetes that showed great efficacy, and diabetes is its area of expertise. A drug for rheumatoid arthritis also showed great results. |
|
Abbott's entering Phase III trials for a drug that treats showed good results for endometriosis, which is a major disabling disease for women. It's a huge market. |
|
Plus, Abbott is a global, diverse business... In addition to drugs, it has nutrition candy bars that are designed to balance protein, carbohydrate, and fat intakes... It's in so many different things. |
New 52-week highs (as of 6/28/12): iShares Dow Jones U.S. Home Construction Fund (ITB), Alico (ALCO), and Altria Group (MO).
With all stocks ripping to new highs, who's talking about bonds? One guy below... Send your feedback to feedback@stansberryresearch.com.
"Porter often talks about once you understand and start purchasing bonds you won't go back to the stock market. I've come to find that I am a much more conservative investor than I thought and seeing the dividend payments come in like clockwork goes a much longer way with me than watching my stock account bounce up and down like a rubber band. What is Porter's stance on how large a chunk of an investment portfolio can / should be tied up in bonds. Does he recommend some general guidelines or just keep adding bonds as you have the funds?" – Paid-up subscriber Scott Reasinger
Goldsmith comment: We're legally barred from giving individual advice… and even if we could… The answer varies depending on the individual's circumstances, including risk tolerance and income needs.
But in general… the question you ask is about "asset allocation," something Doc Eifrig has written about extensively in his Retirement Millionaire newsletter. Most recently, in June, Doc said his typical subscriber could safely put about 39% of his portfolio in stocks, 36% in fixed-income investments (including bonds), about 5% in what he calls "chaos hedges" (which include precious metals), and the rest in cash.
"Quick question for Dan... I will be looking to retire in 10 years time. Since I am investing in WDDG stocks, how badly will I be hurt over the next five to 10 years with the inevitable rise in interest rates? I know it should not affect the dividend income I earn (given historical returns) but won't it take a big chunk out of my asset value as those stocks decline to reflect the higher returns expected by the market? We can't expect these low interest rates to last forever (just like housing prices didn't go up forever) and at some point our WDDG's will have to adjust for higher market rates." – Paid-up subscriber Mike Beaudin
Ferris comment: I can't predict interest rates or stock prices, nor can I comment on your individual retirement plan. (As Sean noted above, I'm legally prohibited from offering individual advice.)
In general, I think investors who sell World Dominating Dividend Grower (WDDG) stocks just because interest rates may rise are making a classic mistake – dumping a fantastic business based on a macro scenario that didn't impair the company's business the last time it happened. I don't expect higher interest rates to stop WDDG businesses from growing. As they grow in value, over the long term (say 10 years or more), I expect their market valuations to reflect that growth in value.
You're right to point out that as the market trades sideways... ratcheting up and down, over the next five to 10 years… equity valuations should fall. Stocks average around 14-15 times earnings today. Over the next decade, we could easily see that level drop to less than 10 times earnings.
That, for me, is a dream scenario for WDDGs. It means over time, on average, your reinvested dividends will buy more and more future dividends. I think we're coming into what I'd probably call "The Golden Age of Equity Investing," where you can buy more and more WDDG dividends year after year.
Regards,
Sean Goldsmith
Baltimore, Maryland
June 29, 2012