We have long mocked the intellectual depravity of the "deflation camp." How, we asked these soft-minded people, could you honestly expect paper money to enjoy a sustained increase in value? And why, upon watching the enormous expansion of our money supply, would you expect anything but a matching decrease in the purchasing power of that paper money? Everyone ought to know slicing a pizza into 16 slices instead of eight doesn't increase the total amount of pie. It could only influence how many people get some pizza...
And ever since we saw the Fed turn up the presses in the fall of 2008, we knew it was only a matter of time before the economy boomed, prices soared, and our creditors began to question the legitimacy of the dollar as the world's currency.
Intel's results today should cause even the most cross-eyed deflationist to re-examine his premise: Intel's fourth-quarter profit soared 10-fold this year and revenue jumped 28%. Gross profit margin hit an all-time high of 65%. My friends, business is booming in certain core industries and prices are rising – fast.
What companies make a lot of money during periods of high inflation? Banks. To save the banks, the government is going to sacrifice the U.S. dollar. So if I'm right about a big, looming inflation, then you'd expect to see outrageous profits coming from U.S. banks. The best-run U.S. bank, JPMorgan, did even better in the fourth-quarter than Intel. It quadrupled its fourth-quarter earnings to $3.3 billion. The majority of earnings, $1.9 billion, came from the firm's investment banking division.
Here's another thing you ought to know about bonds. In Wednesday's Digest, I showed you why most investors should focus on bonds... not stocks. Yes, that's a curious thing for a newsletter publisher like me to write about. After all, most of our products focus on stocks.
But I know it's true. Bonds are far safer than stocks and, if you'll use just a bit of common sense, you can easily make more money in bonds than you will in most stocks. Unfortunately, outside of our own True Income letter, there's very little written about how to invest in bonds. How can you get started without buying an expensive newsletter?
Now... Check out this website. It's the website for the Financial Industry Regulatory Authority (FINRA) – the brokerage industry's self-police. Among its other functions, FINRA keeps tabs on the bond market by collecting trading information.
Using the FINRA website, you can access market information on bonds by simply typing in the symbol of the company whose debt securities you're interested in. For example, you can choose to search for bonds by "symbol." So to look up Ford's bonds, I just punch in "F" – and, presto, all of Ford's bonds that have traded recently will appear. (There are actually 10 pages of Ford's bonds... so I have to scroll through a few pages to find a long-dated benchmark bond. I pulled up this one – F.GSO (CUSIP No.: 345397VH3) – a 2015 bond paying a 12% coupon.
What's my best advice on bonds? First, never buy a bond unless you're certain the collateral value of the bond will cover 100% of the debt. Just like you wouldn't make a loan to a stranger without collateral, likewise you shouldn't lend to corporations without coverage.
Second, make sure you're going to earn an interest rate that's commensurate with the risk of default. Even if you're protected by collateral, you don't want your money stuck in a bankrupt bond for 24 months without getting any interest. So if you think a company might be in trouble, make sure you're getting paid a high rate of interest.
Finally, I'd never buy a corporate bond at anything near par (usually $100). Why? That's one of the big secrets of the bond market...
At least once every 10 years, investors dump corporate bonds en masse. When they do, you will have the opportunity to buy safe corporate bonds for around 50 cents on the dollar. That means you'll get a big capital gain when the company redeems the bond at par ($100), and it means the yield you'll earn for the duration of the bond will be 100% bigger than normal.
Think about it. If you buy a 10-year bond at par ($100) that's paying a $10 coupon, you'll earn 10% a year for the duration of the bond. At the end of 10 years, you'll have earned $100 in interest. And you'll get $100 in capital returned as well. Your $100 has turned into $200 – that's a 100% gain.
But... imagine if you bought the same bond for $50. You'd still get $10 a year for 10 years. And you'd get $100 when the bond was due. Your $50 would turn into $200. That's a 300% gain. Buying corporate bonds at a big discount is both vastly more profitable and much safer. (You obviously don't need as much collateral to protect you if you're buying a bond at 50 cents on the dollar.)
With these facts in mind, let's look at that Ford bond. This bond is trading at a significant premium to par. If you buy this bond, you have no chance at a capital gain. It will cost you $115. And Ford is only going to repay you $100 when the bond matures in 2015. That doesn't sound like a good deal does it? Not to me. (Most investing success really boils down to common sense...)
Plus, the premium price means this bond is only yielding 8.325%. That doesn't offer you much protection against the real risk that Ford, like General Motors, will eventually slip into bankruptcy. Keep in mind, a year ago this bond was trading for less than $50. It might have been a great deal then. But it sure doesn't look like a good deal now.
Just to reiterate what I told you on Wednesday, bonds are vastly safer than stocks. They can make you a tremendous amount of money – if you have the discipline to wait and only buy when bonds offer safety, high yields, and significant capital gains.
Poke around on FINRA's website. Look up a few bonds. And if you want to learn more about bond investing, I highly recommend a subscription to our bond letter, True Income. It's written by Mike Williams, who has been a professional bond analyst since 1972. He has two "how-to" guides for new bond investors: Bond Investing Primer and True Income Basics. Both reports are free for subscribers. If you want to make money in bonds, Mike is the best guy I know to show you how. Sign up for his newsletter, True Income here.
If you're going to buy stocks... the best ones are usually small, cheap, and relatively unknown. That part of the market is Frank Curzio's specialty. His Penny Stock Specialist readers are already making a killing...
One of Frank's favorite trading techniques is buying shares of strong businesses when they temporarily fall out of favor and onto his under-$10 share price radar. This technique involves tracking stocks with strong underlying businesses that normally trade for $15 or $20 per share, keeping them on a watch list, and jumping into them in case one experiences a "hiccup" and falls below $10.
"I can't explain for sure why this strategy works so well," Frank tells us. "I can only tell you that it's an extremely reliable way to make 30%-50% quickly and safely. Find companies with lots of long-term potential, and jump into them when they reach the magic single-digit area... because they bounce back like crazy... often in just a few months. "
Frank's latest way to profit on this idea is small-cap Take Two Interactive (TTWO). Take-Two owns the rights to one of the most successful videogame franchises of all time, Grand Theft Auto. The stock traded around $12 for most of last fall. Then, after announcing several game releases would be delayed, Take Two shares plunged to less than $8. Frank recommended jumping in around $7.90. As Frank predicted, shares have bounced back to more than $10, for a 27% gain in just 45 days.
In the past few years, Frank has performed this under-$10 bounce with Massey Energy, Ashland, and DynCorp International. This strategy alone is worth 10 times what we're going to charge for Penny Stock Specialist. Alliance readers currently have access to Frank's service. We'll be sending along subscription details in the next few weeks.
Hershey is now talking to credit-rating agencies and lenders as it nears a bid for Cadbury. Hershey is trying to structure a bid that won't harm its investment-grade debt rating. The company has also been drafting commitment letters with lenders JPMorgan and Bank of America to secure a multibillion-dollar loan.
As PSIA and Digest readers know, I don't expect either bank to extend credit to Hershey. I predict Warren Buffett will finance the deal... Hershey is the exact type of business he likes to own, and the deal will require between $5 billion and $10 billion in financing (Buffett's sweet spot). And the trade I've recommended around the Cadbury takeover will be one of the most profitable in my career.
There's still time to get into the trade because my recommendation doesn't initiate until Hershey actually makes a bid. This will be one of the safest, long-term trades you make in your life. I expect you will make 20 times your money over the next 20 years. To learn more, click here...
New highs: Central Europe & Russia Fund (CEE), Powershares Dynamic Biotech Fund (PBE), Johnson & Johnson (JNJ), Cohen & Steers REIT & Preferred Income Fund (RNP), Burlington Northern Santa Fe (BNI), AmeriGas Partners (APU), Altria (MO), Intel (INTC), Icahn Enterprises (IEP), Korea Electric Power (KEP), Tejon Ranch (TRC), H&R Block (HRB), Sprott Resources (SCP.TO), International Royalty (ROY), Akamai (AKAM), Enzon Pharmaceuticals (ENZN), MAG Silver (MVG).
In the mailbag... a Peak Oil punching bag. Gimme an easy target and I can't resist. Send your comments here: feedback@stansberryresearch.com.
"I subscribe to get investment ideas not political opinion. I already get all the political opinion that I need from other blogs, newsletters, newspapers, books, and magazines. I suggest that you split The S&A Digest into two digests: one on the subject of investing and one on the subject of politics. I'll read the former." – Paid-up subscriber Jim Moule
Porter comment: We await the day when politics plays no role in economics. That day would feature sound money (gold), balanced budgets, and a tax policy that follows the constitutional standard of treating all citizens equally under the law. We're not holding our breath.
"You have already taken a couple swipes at the Peak Oil believers this year. I wonder how much time you've actually put into studying this idea and thinking it through. It seems kind of dumb to say over and over that Peak Oil is proven wrong because we found more natural gas. Oil is a liquid fuel and natural gas is, well, a gas. They are obviously not the same thing. You cannot run most of the world's vehicles on a gas but only on liquid fuels, mostly gasoline, jet fuel. etc. from oil.
"The vast majority of oil is used for vehicle fuel and not power plants or other uses where you can fairly easily substitute nat gas. You should really spend some time on this idea and look at worldwide production, export levels (as more countries use more of their production on their own populations) and discoveries that will take years or decades to enter production vs. consumption. I think you'll be surprised. I could go on for much longer but that should give you enough leads to follow. Horse meet water." – Paid-up subscriber Mark
Porter comment: The good thing about Malthus is, later in his life he repudiated all of his previous teachings about scarcity. You'd be wise to follow his lead...
The interesting thing to me about all of the big ideas that get so popular is they are all nonsense. Global warming? Peak Oil? These theories are so implausible and so filled with internal contradictions they make no sense. It is as if all of the world's goofy political slogans: equality, fraternity, liberty... workers of the world unite... I will share the wealth... etc. have somehow morphed into pseudo-science. If I've learned one thing in my career as a publisher it's people will believe literally anything.
Regards,
Porter Stansberry and Sean Goldsmith
Miami Beach, Florida and Managua, Nicaragua
January 15, 2010