It's not too late for real estate... Listen to Porter on the radio... New high for one of our favorite Big Pharma companies... Why long-term yields won't rise... The ECB pushes bond yields lower... An update on 'currency wars'...
One of True Wealth editor Steve Sjuggerud's favorite investments is still a buy...
For years, Steve has been urging his readers to take advantage of the historical bargains in real estate. He laid out his straightforward argument in the March 2011 issue of True Wealth...
Mortgage rates hit their lowest levels in U.S. history in late 2010. When were mortgage rates even close to this low in the past? Just after World War II... And what happened, just after World War II, when they were this low? We saw the greatest post-war boom in housing prices – by far.
Mortgage rates bottomed in the mid-1940s, and home prices bottomed at about the same time. Then the greatest boom in home prices in our lifetimes started. Today, we are coming off record-low mortgage rates.
Steve also noted that there was another powerful force working in the housing market's favor...
Based on the 40-year history of the Housing Affordability Index, houses are more affordable than they've ever been. "Affordability" takes three factors into account: home prices, your income, and mortgage rates. The basic idea is simple. What do people think about when they buy a house? It's not the price of the house, really... It's the payment. People think, "Can I afford this mortgage payment on my monthly income?"
When mortgage rates hit 20% in the early 1980s, monthly house payments were ridiculously high... It was the least affordable time in American history. The second least affordable time in American history was at the peak of the housing bubble in 2006. But – news flash – home prices have crashed. They're cheap! And mortgage rates recently hit record lows. Since household incomes nationwide haven't fallen nearly as much, homes are now more affordable than ever.
Steve personally put his money where his mouth was. He purchased 70 acres of waterfront property in Florida, a beachfront condo for half its current market value, and raw land in northern Florida for less than 10% of what it was under contract for in 2008.
He knew that if things simply went from "bad to less bad" in housing, the upside potential was massive...
When things look good, you often lose money investing, because conditions can easily change... things can turn for the worse. The majority of the gains I have made in my career – in the shortest amount of time – have been made when things go from Bad to Less Bad.
You can make money at other times... but it takes much longer, and the amounts are typically smaller. Now is a moment when things are getting Less Bad in housing.
That month, Steve told True Wealth subscribers that it was the best time in history to buy a house. He recommended a "one click" way to profit from the housing boom through shares of the Dow Jones U.S. Home Construction Fund (ITB). Steve knew that once things became "less bad," shares of ITB – whose holdings included homebuilder Toll Brothers and home-improvement stocks Lowe's and Home Depot – would soar.
Steve's thesis was spot on. Last month, ITB hit a seven-year high. It's one of his biggest winners, up 106%.
We checked in with Steve today. He told us that despite the big run higher, he's still extremely bullish on real estate. And he has put his money where his mouth is. He told us he has "far more of my net worth in real estate investments as opposed to stock market investments right now."
Switching gears... As you may have seen, Porter stopped producing a free podcast late last year. His views and rants are now available only to Stansberry Radio Premium subscribers. (Subscribers, please note that a new roundtable episode is due out this week.)
However, a few weeks ago, Porter was a guest on Peter Pham's "The Big Trade Show" podcast. In it, they discussed parenting, global economics, wealth disparity, and more. You can catch the episode free on iTunes by clicking here.
Speaking of Porter...
One of Porter and his research team's highest-conviction ideas continues to march higher: Bristol-Myers Squibb (BMY) just broke out to a new 14-year high.
The Stansberry's Investment Advisory analysts had plenty of reasons to be bullish on the $110 billion drug maker. Bristol-Myers has seven billion-dollar drugs, which fight everything from cardiovascular disease to rheumatoid arthritis and AIDS. Porter's team was particularly drawn to one of its cancer drugs called "Yervoy." As they wrote in the October issue...
The radical growth in revenue we expect from these new drugs will probably develop over the next three to five years. Don't buy Bristol-Myers expecting to make a killing overnight. The stock already has a lot of good news priced in. It's going to take FDA approvals for additional big cancer markets (like lung cancer) to get this stock moving higher. These approvals often take longer than analysts expect.
Shares have been on a tear since mid-February on news that another one of its cancer drugs received the FDA approval Porter's team had been hoping for. They updated subscribers on the situation in the March issue...
On December 22, the U.S. Food and Drug Administration approved Opdivo as a treatment for melanoma. On Wednesday, Opdivo was further approved for treating "squamous non-small cell" lung cancer, sending shares up nearly $4 in a single trading session.
According to Bristol-Myers, 11,500 lung cancer patients are eligible to use the drug, but approval for "non-squamous" lung cancer would be an even bigger score for the company. That news could come before June.
Last week, U.S. regulators approved Opdivo. We checked in with Dave Lashmet, who led the research on Bristol-Myers...
Opdivo adds about 50% to the survival time of smokers with lung cancer... and it does so with limited side effects. It's such a profound survival advantage that the trial stopped early because it wasn't fair to the people on traditional chemotherapy. This trial covers about 25% of all lung-cancer patients. Another trial, including most other smokers, will finish later this year.
Lung cancer is the single-largest killer among cancer patients... so this is a big market. It's about 10 times larger than the advanced skin-cancer market, where Opdivo was first FDA-approved. The market was pleased, but we still think there are more approvals like this to come.
Because Opdivo treats your immune system – waking it up to a cancer that's hiding inside of you – it should work on any cancer with minimal side effects. Porter and I searched 16 years to find safe and effective cancer drugs like this as investments. In Bristol's Opdivo and Yervoy, we found them.
Stansberry's Investment Advisory subscribers are up 33% since Porter and his research team recommended shares in early October.
Yesterday, we shared some research from Steve Sjuggerud showing that stock prices have actually risen when the Federal Reserve has previously increased interest rates. Steve wrote an updated version of that essay in today's DailyWealth, where he shared another key point...
The Fed controls short-term interest rates. But it doesn't control long-term interest rates – those are set by the financial markets. The conventional wisdom is that – if the Fed raises short-term interest rates, then long-term interest rates would follow them higher. You can see the logic... but it doesn't have to happen.
Just because the Fed raises short-term interest rates, it doesn't mean that long-term interest rates have to go up. For example, the last time the Federal Reserve raised short-term interest rates, long-term interest rates stayed roughly the same, between 4% and 5%. Take a look:
We wrote more about the nature of interest rates – and why a Fed increase doesn't mean long-term yields will rise – in the January 6 Digest. We also shared a piece from Dr. David "Doc" Eifrig's Income Intelligence...
Even if the Fed did raise short-term interest rates – the only interest rates that it directly controls – it's unlikely that long-term rates like the 10-year or 30-year Treasury would rise in tandem. The Fed is "powerless," and it's all because you – along with billions of other savers – still have your money in the markets. The Fed can't push up interest rates because interest is the "price" of borrowing money. Prices, of course, are determined by supply and demand. It's basic economics.
Despite the Fed's posturing, interest rates on everything but overnight loans between banks reflect the supply of bonds outstanding and the demand, as determined by the amount of dollars ready to buy up bonds. You can't short-circuit the supply-and-demand equation. There's no such thing as "artificially" low interest rates, like some Fed skeptics argue. Bonds will rise and fall based on changing investor perceptions leading to higher or lower demand... not because of a decision from a central bank.
With the European Central Bank (ECB) beginning its quantitative easing yesterday, we're sure to see plenty of demand for bonds. The ECB will buy 60 billion euros of bonds a month.
Zoso Davies, a credit strategist for banking giant Barclays, estimates ECB bond purchases will exceed net supply of bonds by a factor of three to one, reducing supply by 840 billion euros.
Financial blog Zero Hedge shared a chart showing the ECB will monetize 144% of German government-bond issuance this year.
According to inside sources cited by Bloomberg, the ECB is already buying bonds with negative yields. As we noted previously, about one-third of European sovereigns now sport a negative yield. Seven "eurozone" countries now have bonds with negative yields.
According to the sources, the ECB bought five-year German notes along with Belgian and Italian securities.
German five-year bonds ("bunds") now yield -0.09%. Yields are negative going all the way out to seven years... and they're headed lower as the ECB will be forced to move out on the timeline in search of positive yield.
The ECB won't buy bonds with a yield worse than -0.2% (the rate it charges lenders to park funds at the central bank).
The latest from the ECB has sent the euro closer to parity with the U.S. The currency fell to less than 1.08 versus the dollar – a 12-year low...
Elsewhere in currency wars – the global race to devalue paper money – the Japanese yen hit a new seven-year low against the dollar...
And we saw a five-year low in the Australian dollar...
We've written several lengthy pieces about the global currency wars, so we won't get into much more detail today. If you haven't been following along, be sure to read Porter's January 30 Digest. As he explained...
The most important reason governments always debase their currency: It allows debt to be repaid cheaply. Governments always want to spend far more than they can raise through taxes. Sooner or later, these debts must be paid off. And the No. 1 way governments chose to pay down their debts is simply by printing money to do it.
Likewise, using paper money – which is constantly expanding – allows governments to "socialize" financial risks, while allowing certain favored groups (like banks) to reap windfall gains.
The destruction we're seeing in global currencies is the biggest macroeconomic story today.
The global economy is lagging, so central banks are cutting interest rates and printing money to stoke inflation. And deflationary forces are still winning.
But the game can't go on forever. There are trillions of dollars of newly minted cash waiting to enter the system. And when it does, things will look much different than they do today.
For one, deflation could become a thing of the past... We may see prices across the board skyrocket. And while paper currencies are getting destroyed, we should see much higher gold prices, which will soak up extra liquidity.
Given the size and importance of this trend, it's important to understand what's happening and to realize the major implications for stocks, bonds, gold, and every other asset class.
I can't encourage you enough to pick up a free copy of currency expert Jim Rickards' book, The Death of Money. Jim is one of the smartest guys we know when it comes to monetary policy and the economic result of reckless central banks.
We even asked Jim to write an exclusive "bonus" chapter just for Stansberry Research subscribers. In it, he explains which assets he recommends owning today... and why they'll perform well during a time of massive inflation.
This book is so important that we've arranged for you to get a free copy of his book. We just ask you to pay the $4.95 to cover shipping and handling. The currency wars are here. It's up to you to understand what's happening. You can learn more here.
New 52-week highs (as of 3/9/15): Bristol-Myers Squibb (BMY), Cempra (CEMP), PNC Financial Warrants (PNC.WS), and Varian Medical Systems (VAR).
The positive feedback continues to flow in about Porter's essays on Warren Buffett. If you haven't chimed in, let us know what you thought at feedback@stansberryresearch.com.
"Hey Porter, your Thursday and Friday essays were two of the best you have ever penned. Simply fantastic. Your analysis of Berkshire Hathaway and Mr. Buffett's changing investment strategy were not only informative but very unique and original in their nature. My sincerest congratulations!
"In regard to Mike Jensen and the school of efficient market theorists he represents, I would like to submit the following. Very simply, the market, is not some inanimate object. The market is alive. The market is composed of thousands, perhaps millions, of rational and irrational human beings that make buying and selling decisions every day. Human beings are not very efficient. Just take a look around the world and you will see what I mean.
"With that in mind, how then can the market be efficient? It is simply impossible for the market to be efficient because the drivers of the price action (human beings) are inefficient. How would Mike Jensen account for high frequency trading, where some market participants have access to information (price data) other participants do not? That's not very efficient, is it? In fact, there are lots of anomalies in the market that can be tapped for one's advantage because the market is by nature, inefficient.
"Maybe that's why Graham and Dodd referred to it as 'Mr. Market.' They recognized, a long time ago, that the market wasn't efficient because it was comprised of human beings and therefore they attempted to put a persona on it. That's something that evidently escaped Mr. Jensen and his students." – Paid-up subscriber Steve Previs
"Stansberry Team, thank you for the insightful work from Porter on Warren Buffett's investments the past two weeks! The 'intellectual smackdown' story last week was fun to read. I especially enjoyed this last one showing the difference in Buffett's investments since 2000. I've never seen anyone else explain it this way and the change in 'capital efficiency' (not in a good way) of Buffett's latest investments certainly explains the performance hit over the past 15 years. It's a great reminder for all of us to keep checking our own investment thinking and portfolio to make sure we have not strayed away from what works best.
"It would be great to see an article on how Buffett could turn things around. Should he sell the railroads? Could he keep his latest investments, albeit capital intensive, and offset those by buying more well run insurance companies (like Extreme Value recommendation Lancashire Holdings) or other great brands (like Stansberry's Investment Advisory recommendation COH) to return to beating the market? How much would he have to buy and how long would it take to return to his market beating performance?" – Paid-up subscriber J.B.
Regards,
Sean Goldsmith
March 10, 2015
