'Inflation is rearing its head'... Record dividends for S&P 500... Shipping stocks soar... Sears closes dozens of outlets... Buffett's BOA victory...
Goldsmith comment: With Porter finishing up this month's issue of Stansberry's Investment Advisory and recovering from his most recent back surgery, I'm on the Digest today. If you're missing him terribly, I'd urge you to listen to his latest radio segment. He goes on one of his famous political rants... This time, he explains why Democrats are so much more fun than Republicans. He also interviews my Digest co-editor, Dan Ferris, about value investing. You can listen here...
"Yes, inflation is rearing its head," Bill Gross, manager of the world's largest bond fund at the money management firm PIMCO, told Yahoo Finance. "We're seeing that in oil prices and other commodities, and we're seeing it in the numbers."
The economy is improving... The S&P 500 hit 1,400 yesterday for the first time since 2008. U.S. jobless claims fell to 351,000 last week – a four-year low – and mortgage activity is picking up. And with that improvement comes inflation. The consumer price index is up 2.9% in the last 12 months. Oil is trading for more than $105 a barrel. And Treasury yields are turning up...
Gross noted the Federal Reserve is scheduled to end "Operation Twist" in a few months. The program, whereby the Fed sells short-term debt and buys long-term debt, aims to keep longer-term interest rates lower. The yield on 30-year Treasurys is up to 3.42% today from 2.99% at the beginning of the year.
And inflation will only get worse if the Fed continues easing, which Gross expects (so do we)... Gross predicts the Federal Reserve will initiate a third round of quantitative easing (QE3), "and perhaps a QE4." Whenever governments have ended easing, "stock prices have fallen, and economies have slowed," he said.
If nothing else, yields will increase because they can't go much lower. The Fed is keeping interest rates at zero through 2014. And government debt yields around 2%. "It doesn't mean the beginning of a bear market," Gross said. "But it does suggest at least that the great bond bull market since 1981 is probably over."
If you're only making 2% in bonds, where do you turn for yield? Digest readers know we're bullish on World Dominators – the stocks of big industry-leading businesses that have vast financial resources and pricing power their competitors can't match. Even better, we like World Dominators that relentlessly increase their dividends. We most recently wrote about them here.
And according to Standard & Poor's analysts, S&P 500 companies have never paid more in dividends than they're paying today. Announced dividend payouts imply an annual dividend of $29.02 per index share, said Howard Silverblatt, S&P's senior index analyst. The previous record was $28.96 in June 2008 (dividends fell to $21.44 in August 2009).
And there's still plenty of room for companies to pay more. Today, S&P 500 companies are paying out 30% of profits in dividends. The historical average is 52%. And companies are cash-rich... At the end of 2011, U.S. nonfinancial companies held $1.24 trillion in cash. According to Moody's, the biggest cash hoards belong to Apple, Microsoft, Cisco, Google, and Pfizer. Of that group, Apple and Google don't pay dividends. Cisco's dividend is less than 2%.
"Companies have the money, they have the ability, and dividends are back in fashion," Silverblatt told Bloomberg. "We would expect to see more banks." In 2007, financial stocks accounted for 30% of S&P 500 dividends. Today, the amount is only 13%. But after the Fed's stress tests, banks are boosting their dividends... JPMorgan increased its quarterly dividend by 20% to $0.30 a share this week. U.S. Bancorp also increased its dividend and authorized share repurchases.
In another bullish sign for the economy, shipping stocks (a gauge of global economic health) soared today... Frontline was up more than 20%. Overseas Shipholding and Top Ships were both up around 10%. Why the sudden spike in this beaten-down sector? This is the market saying the worst is over (though shipping stocks are still scraping along the bottom, even after today's jump).
Oversupply and low shipping rates have plagued the sector for years... Last month, the Baltic Dry Index, a measure of shipping costs for dry-bulk commodities, fell to its lowest monthly average in more than 25 years. Ship owners ordered too many vessels between 2007 and 2009, when rates were at a record $230,000 a day. Now, there are lots of empty ships. But things are getting better. (The problems in Iran also helped the shipping industry, as oil from other destinations is being rerouted to make up for the shortfall.)
In the February 23 Digest, we discussed the problems Sears Chairman Eddie Lampert is having with the retail chain... The company posted a $2.4 billion loss in the fourth quarter and announced it was selling stores and spinning off noncore businesses. Sears also said it would reduce inventory by nearly $600 million... In the announcement last month, Sears said it planned to raise as much as $770 million by selling 11 stores and spinning out some smaller businesses.
The market loved that the business was failing (the quarterly loss was the largest in at least nine years) and that the chairman was selling off assets to raise capital. Sears rallied 20% after the announcement.
But we weren't so thrilled. We wrote at the time…
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That's three different initiatives, resulting in a single fact: Sears is shrinking. I'm not averse to shrinking businesses. Sometimes, getting rid of a noncore business or two makes you more profitable. But that's not what's happening at Sears. It's shrinking, and it can't get its margins up. It looks like it is slowly dying... |
Today, Bloomberg reports Sears will close 62 retail stores in the first half of this year. Shares rallied nearly 7% since the announcement. Sears is up 170% this year already.
None of this changes our outlook. A great manager can only do so much. Lampert proved himself in the hedge-fund world, making billions of dollars for himself and his clients. But Sears is likely too big a disaster for him to save. We're not saying you should short the stock... But as we said last month, "There are too many truly wonderful businesses in the world to bother with Sears."
Bank of America (BOA) has also rallied this year, almost doubling since January 3. Shares are now trading for more than $9.50. The stock is soaring after BOA "passed" the Federal Reserve's recent stress test. After falling 58% last year, Bank of America sold and exited some businesses and issued debt and equity to strengthen its balance sheet.
One big buyer of BOA equity was Warren Buffett. He invested $5 billion in the bank last August in return for preferred shares paying 6%... That annual payment equals $300 million a year. But the world's best investor may have a bigger payday on his BOA warrants. As part of the deal, Buffett has the right to buy 700 million common shares at $7.14 a share any time before September 2, 2021. If he exercised today, Buffett would make $1.72 billion in paper gains.
New 52-week highs (as of 3/15/12): iShares Dow Jones U.S. Home Construction Fund (ITB), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Technology FUND (ROM), Westport Innovations (WPRT), Abbott Labs (ABT), Exact Sciences (EXAS), Prestige Brands Holdings (PBH), Calpine (CPN), Chart Industries (GTLS), Target (TGT), Intel (INTC), Microsoft (MSFT), and Philip Morris International (PM).
In today's mailbag, someone discovered we had a run-in with the SEC. Who knew? Send your feedback to feedback@stansberryresearch.com.
"I understand you are under SEC investigation! Please explain." – Paid-up subscriber Stu
Goldsmith comment: We were investigated… and sued. We've written about the case many, many times. It isn't anything we shy away from. In fact, we created an entire website dedicated to the case. That should answer any questions you have.
Regards,
Sean Goldsmith
New York, New York
March 16, 2012