How to end up in a Las Vegas jail...
I got my wish... Apple closed at less than $400 a share on June 24. And if you purchased on my recommendation, you'd be up more than 25% today.
Apple's share price has increased since then, mainly because it was simply too cheap. Also, we're in the midst of a bull market. It also helps that billionaire activist investor Carl Icahn recently took a position in the company – and said he's asking CEO Tim Cook to make large stock repurchases.
Apple is another great franchise business that meets a lot of our requirements for these long-term kinds of investments. Apple's return on equity is more than 30%. It's trading at around 10 times earnings. And I think that it will be a very long-lived franchise, even though it competes in the technology space. (We discussed the difficulties in technology investing in regards to Facebook here.)
Apple also has something most technology companies don't have – a very personal form of locking in the customer...
In my case, I have thousands of songs and hundreds of movies and tens of thousands of photographs all managed for me by Apple on its servers, which are optimized to work with Apple hardware. So they've locked me into this idea, which is called a "walled garden." All the things that I want and need as far as my online life are now managed by Apple. It would be expensive for me to switch to buy other kinds of hardware and start using other kinds of software. That is a very powerful franchise that would be very difficult for anyone else to compete with.
The Chinese might be corrupt, but they're not stupid. And they're not broke.
This week, Bloomberg reports that four senior managers at China's giant state-owned oil company PetroChina have been canned as a result of a corruption probe. Specific details haven't been released.
With a market cap of around $230 billion, PetroChina is China's largest oil company. It's the "ExxonMobil" of China, except it's operated by the state. And these weren't middle managers getting busted. They were big shots. The news caused a large selloff in PetroChina shares.
Getting busted for corruption in China is like getting busted for lewd behavior in Vegas. A little is tolerated... even encouraged. You have to act like a real a**hole to end up in jail.
Still, the Chinese who aren't in jail are buying huge amounts of gold, art, and jewelry...
The famed high-end auction house Christie's recently reported its first-half results. Christie's saw a 21% increase in bidders from China over the previous year.
High-end jewelry chain Tiffany's just reported its quarterly results. Sales across most of the world were flat. But sales in the Asia-Pacific region climbed 13% to $254 million.
The World Gold Council, a gold industry trade association, reports that demand for physical gold bars and coins in China surged 157% compared with the same period last year.
As for large-scale gold purchases by the Chinese government, it's one of the biggest unanswered questions in the world...
We know China has a centuries-old affinity for gold. We know it wants to compete on the world stage as a major economic and geopolitical power. To do that, it needs a sound currency... preferably backed by the largest gold hoard on the planet. We know China is the world's top producer of gold. But exports are banned. We know its central bank is buying lots of gold... but we don't know how much... for good reason.
"If you're China, the last thing you want to do is be transparent about your gold purchases, because it will drive the price up," currency expert Jim Rickards recently told Forbes magazine. "You want a big pile of chips. The U.S. has a big pile of chips. Europe has a big pile of chips. The U.S. has 8,000 tonnes of gold, 17 members of the euro system have 10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000 tonnes, they are a player."
The Forbes article goes on:
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There's a cliché about China attributed to Napoleon. Napoleon, who lusted for conquest and went so far as to invade Russia, reportedly said, "Let China sleep; for when she wakes she will shake the world."
Some folks believe the next report of China's gold holdings will "shake the world." Meanwhile, the U.S. will still be spending trillions to "police the world."
China continues to be the subject of an extremely important question that affects you – the investor: In what state will China's economy be in a year... or two... or three from now?
I (Brian Hunt) tend to dismiss most of these big, very hard to answer questions. It's much easier to simply focus on buying great values and trading isolated, extreme market conditions. But the "China question" is an important one...
Some very bright people – like legendary short-seller Jim Chanos – believe the country is a powder keg of malinvestment. They believe the Chinese economy is not just going to stop growing at a 7%-plus rate – but will actually start contracting and enter recession. Since China is the world's second-largest economy, a severe recession there could hammer stock prices all over the world.
Predictions of economic disaster are notoriously hard to get right. They are often years – even decades – too early. The world has a way of not ending. On this idea, I bring up one of the most important bull markets you're not hearing about... the bull market in shipping stocks.
Shipping stocks rise and fall with the health of the global economy. An easy way to monitor the global shipping business is with the Guggenheim Shipping Fund (SEA).
This fund holds companies that transport oil, coal, grain, natural gas, and manufactured goods across the world's oceans. Danish shipping giant Maersk, which is the world's largest container-ship operator, is the fund's largest holding.
Like most all assets, shipping stocks were hammered in the 2008/2009 credit crisis. Due to industry overcapacity and a sluggish economy, shipping stocks kept falling even after the crisis. SEA fell from $27 per share in 2010 to its 2011 low of $13 per share.
But as you can see from the chart below, SEA has rebounded off its lows. Shares have climbed from $13 to $18. This month, shares broke out to a 52-week high... and are very close to a multiyear high. This upside breakout is more reason to say things in China and the global economy in general "can't be all that bad."
If you missed yesterday's Digest, please make sure to read it here. It's one of the most important issues – paid or free – we've sent out this year. It was spurred by questions on how to invest in response to the upcoming U.S. bombing of Syria.
In a nutshell, we recommend you react to the Syria news the same way you'd react to news of a dog biting a mailman in Wichita, Kansas... or to news on who won the local t-ball game. By ignoring it.
If elite investors like Warren Buffett do anything in response to situations like Syria, it's buy great businesses at good prices when panicked investors sell them.
In addition to understanding yesterday's Digest, we urge you to read a new, 100%-free educational report we just compiled on the world's best income-producing stocks.
This report is a compilation of our best ideas on the world's safest income stocks. While there are links on how to access Dan Ferris' paid research in this report, reading the report itself is free. They are some of the most important ideas you'll ever learn as an investor in common stocks. Click here to check it out.
New 52-week highs (as of 8/28/2013): Fluidigm (FLDM) and Virginia Gold Mines (VGQ.TO).
In today's mailbag, a couple subscribers comment on yesterday's Digest on Syria and the power of economics over politics. Send your e-mail to feedback@stansberryresearch.com.
"Good column today. But please don't discount the fact that the 'phony crisis' in Syria has the possibility to escalate into a major crisis, or even WW III. The U.S. can't keep lobbing missiles into Middle Eastern countries with impunity. And our leadership team is filled with rank amateurs attempting to make the tail wag the dog in order to distract the public from their scandals and economic problems. This 'phony crisis' has the potential of blowing up in their faces and hurting the American people in multiple ways." – Paid-up Subscriber Jerry
"I lived and worked in Alaska during the 1970s, the period where the pipeline was being built. I met quite a few people who were leaving the state during that decade, and they often said that they were leaving because of the local politics (which were different from now).
"That's when I, personally, understood that 'shopping trumps politics.' I knew perfectly well that these people were leaving for economic reasons, period. They only used the excuse of politics for some other reason – to sound knowledgeable and in control perhaps. But it was pure baloney.
"Now that particular political climate has been replaced by an entirely different one and business keeps chugging along, unaffected. I well remember Dan's essay from two years ago because it was and is thoroughly true. At my stage of life I wonder that anyone can even doubt it!" – Paid-up subscriber Jarl McDonald
Regards,
Brian Hunt
Delray Beach, Florida
August 29, 2013