Editor's note: Yesterday, we said we would tell you about the best ways to invest in lumber and collect solid yields. Due to interesting market action today, we're publishing a different topic. We'll update you on the lumber trades later in the week.
Platinum hit a three-month high today, surpassing the price of gold for the first time since March 2012.
Anglo American Platinum, the world's largest platinum producer, announced today it will idle four mine shafts in South Africa, cutting output by 400,000 ounces a year. That represents about 6.6% of 2011 global demand (once you account for demand met by the recycling industry).
Platinum is a precious metal used in jewelry. But it also has industrial uses, including in car making. (It's a key component in catalytic converters.) And improving global economies mean higher sales for cars and jewelry... British research firm LMC Automotive forecasts global car sales will increase 2.4% to a record 82.7 million this year.
Last month, British bank Barclays estimated platinum supply would fall short of demand by 38,000 ounces.
The metal jumped as much as 2.7% to $1,701 an ounce – the highest since October 9 – on the news. Prices are up 10% this month. They rose 9.9% last year.
Take a look at this chart of the platinum-to-gold ratio...
Since November 1993, an ounce of platinum has historically traded for more than an ounce of gold. In September 2011, a market trough, gold surpassed platinum... And platinum remained cheaper until today.
Last week in the Market Notes column of S&A's free e-letter, DailyWealth, our editor in chief Brian Hunt noted how cheap platinum was. With stocks near a five-year high… it was hard to find bargain investments, Brian wrote. But platinum was one…
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For many years, an ounce of platinum was twice as expensive as an ounce of gold, and this ratio stood around 2. But since the credit crash, this ratio has fallen below 1. Platinum is cheap relative to gold. If the global economy keeps ticking higher, it won't stay that way for long. |
Platinum's recent spike makes one fewer "dirt-cheap" asset on the market. The increase in car sales and a supply crunch in South Africa have restored platinum's historic relationship to gold…
The Bernanke Asset Bubble is driving up the market price of everything… and the best way to protect your wealth is to own a share of "real" hard assets, like precious metals.
This important ratio just reversed...
A sharp price move today eliminated one more bargain-asset opportunity from the market. In today's Digest Premium... we explain what happened and why this precious metal is rising.
To continue reading, scroll down or click here.
This important ratio just reversed...
This important ratio just reversed...
A sharp price move today eliminated one more bargain-asset opportunity from the market. In today's Digest Premium... we explain what happened and why this precious metal is rising.
To subscribe to Digest Premium and access today's analysis, click here.
Lennar's earnings are up (again)... Berkshire's new real estate arm... 'Risk on' (again)... Price and risk joined forever... A key risk-avoidance tool... Germany's gold: a harbinger of higher interest rates?...
Miami-based homebuilder Lennar announced another round of solid earnings... The company's net income increased to $124.3 million in the fourth quarter, up from $30.3 million a year ago. Revenue increased 42% to $1.3 billion.
Lennar delivered 4,443 homes in the quarter, up 32% from the previous quarter... And the average selling price increased 7% to $261,000.
"Low mortgage rates, affordable home prices, reduced foreclosures, and an extremely favorable 'rent versus own' comparison continue to drive the recovery," CEO Stuart Miller said in a statement.
The company also reported its seventh straight jump in new home orders, up 32% to 3,983 homes. And its backlog at the end of the quarter was $1.2 billion.
Miller also said Lennar was "extremely well-positioned" to gain market share this year. He believes the company will post strong growth.
Ron Peltier, CEO of Berkshire Hathaway's real estate division, Home Services of America, appeared on CNBC this morning to discuss his outlook for the real estate market...
Berkshire Hathaway will roll out a new brand, a collection of real estate brokerage firms, under the name Berkshire Hathaway Home Services, in the second half of this year. We covered the full details here.
Warren Buffett, the founder of Berkshire Hathaway, is personally bullish on housing... Last May, in an interview with CNBC, he said:
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Somebody that's in a growing city that can buy a house at a price at 60% of what it was five years ago and they can borrow 80% of it at a 4% interest rate, they're gonna make money...
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Today, Peltier said "we clearly have a recovery" in real estate. He said 2011 was the bottom. And 2012 showed the first signs of recovery. (Prices were up 7%-8% nationally and unit sales were up around 10%.)
"We see the recovery continuing in 2013," Peltier said. "We have a switch from a surplus of inventory to a shortage of inventory, and we have demand far in excess of supply... Together with low interest rates and affordability at an all-time high... I think we will see sales units grow 10% again and prices in the high single-digits in terms of growth."
In today's issue of the S&A Short Report, editor Jeff Clark reiterated his bullishness on gold stocks...
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With the S&P 500 currently trading at five-year highs, there aren't many sectors trading at bargain prices. But gold stocks – which are down 24% on average over the past two years – are trading at historically low valuations.
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Many of the top names in the sector are trading with single-digit price-to-earnings ratios and are paying higher dividends than the S&P 500. Gold stocks are cheap relative to gold itself. And gold stocks are tremendously out-of-favor with investors – making them a good contrarian trade.
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The sector is poised for one heck of a rally... once it finally gets started. The trick is figuring out when that will be.
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Jeff has been slowly building positions in some of his favorite gold-mining stocks in preparation for the boom... And today, he added another gold miner to the portfolio. He believes this trade could return triple digits once gold stocks take off.
If you're bullish on gold stocks, like we are, and you'd like to start building some long option positions (which will explode once gold stocks rally), you can sign up for the S&A Short Report here...
As we discussed in the January 7 Digest, the market is in "risk on" mode. The Volatility Index (the "VIX"), the market's fear gauge, is low. According to Bloomberg, hedge funds are the most leveraged since 2008 and net long since 2004.
While this high leverage, apathy, and bullishness could point to a short-term correction, we're long-term bullish (thanks to the Global Bernanke Asset Bubble – a global increase of asset prices thanks to central banks' money printing).
One effect of "risk on" – and the lack of yield created by easy-money policies – is the outperformance of high-yield (aka junk) bonds... Their average yield fell below 6% for the first time in history, based on the Bank of America Merrill Lynch High Yield Master II Index.
So far this year, investors in U.S. junk bonds have made 1.3%, according to Barclays indexes. Meanwhile, investment-grade bonds (which sport lower yields) are down 0.2%.
The biggest gains in junk bonds were in the lowest-quality paper... triple-C-rated debt, which yields an average of 8.2%, has returned nearly 2% this year.
Investors are searching for yield (inflows into junk-bond funds reached their highest level since September last week). But it will end badly. Massive debt issuance and money printing will inevitably lead to inflation, which will wipe out the value of your yield. We're happy to hold high-quality stocks during inflation. But inflation crushes bonds... especially the riskiest ones.
Even without inflation, most bonds are simply too expensive today. (Remember... bond prices move in opposite directions as their yield. So as yields shrink, the market prices rise.) The 10-year Treasury is yielding about 1.83%. Even modest inflation will obliterate that return. Moody's Triple-A bond yield forecast for February is 3.98%. Current inflation cuts that return in half, and an uptick in inflation would erase it. (Not to mention, it's fully taxable.) Junk bonds as a group are not even yielding 7%, using Barclays High Yield Bond Fund (JNK) as a proxy. That's roughly 5% over Treasurys. Historically, junk-bond spreads have been most attractive above 8% over Treasurys.
It's not just bonds, either. All kinds of income-generating securities are too expensive these days. Many REITs yield less than 5%. The S&P 500 dividend yield is around 2%, and hasn't been above 6% since the early 1980s.
Investors simply refuse to learn about risk. They fail to appreciate the simple, powerful truth that risk is highly dependent on the price paid for a given investment. Most members of the investing herd never stop to think about what this really means...
It means you can lose 90% of your money paying too much for "safe, high-quality" blue-chip stocks... or make 20 times your money over the long term buying the lowest-quality debt securities.
Those aren't hypothetical results. They really happened. According to Oaktree Capital Chairman Howard Marks' latest memo, if you bought the "Nifty Fifty" blue-chip stocks – 50 large-cap stocks considered "buy and hold" growth stocks – in the late 1960s and held on, you eventually found yourself holding a loss as great as 90%. And if you bought a high-yield bond index at the end of 1979 and are still holding, you've made more than 20 times your money today... without ever being in the red.
I (Dan Ferris) have often stressed buying only high-quality businesses. I still think it's true that the great thundering herd of investors should follow the advice of the father of value investing, Ben Graham, and never put money into a low-grade enterprise. That's one of the reasons I've urged subscribers to load up on World Dominating Dividend Growers the past few years. They're the kind of "high-grade enterprises" most investors should focus their holdings on.
But without the most important reason of all – their cheap valuations – you would never have heard a peep out of me about them. During the past few years, many WDDGs were priced cheap enough to provide good returns. Price is always the final arbiter for me when making any recommendation. For example, I wrote volumes for six years about Wal-Mart when it was in the high $40s and low $50s... but I've been mum about the stock since it soared into the high $60s and mid $70s last year (except to brag a little, of course).
The ultimate determinant of risk is not asset quality. It's the price you pay. No asset is so safe it can't become too expensive and risky to own. And likewise, almost any asset is safe at a cheap enough price.
To understand the relationship between risk and asset prices, remember one sentence: Price and risk go up and down together. When prices rise, so does risk. When prices fall, risk falls, too.
The failure to understand the direct correlation between price and risk is why most investors lose money when they buy and sell stocks and bonds. Most people behave as though risk rises when prices fall, so the more prices fall, the more scared investors become. The more prices rise, the more euphoric and greedy investors become. They've got it totally backwards. At market extremes, the paradox is at its peak. At market tops and bottoms, the herd becomes a great mass of moths flying at full speed into a giant flame.
The inability to understand investment risk will never change for most people. It's a good thing, too. If human beings were any good at learning from their mistakes, it might put us out of business.
Because of the huge risks in many income securities today, I'm planning to dedicate the February issue of The 12% Letter to the topic of risk. I'll provide a complete rundown of several income securities and how safe or risky we think they are and why. We'll address risks in junk bonds, equity REITs, business development companies, royalty trusts, master limited partnerships, and mortgage REITs. We'll also share our short list of top "safe income" picks.
When you sign up for The 12% Letter, you also gain access to two special reports. One is called "The Unadvertised Retirement Program" and contains our exclusive list of World Dominating Dividend Growers. Another is called "An A.O.P. Retirement" and contains our short list of the best pipeline master limited partnership stocks. Both reports contain the key risk-avoidance tool – the maximum price above which you should no longer buy each stock.
In fact, every recommendation in The 12% Letter comes with that all-important key to risk avoidance. You can't succeed as an investor without avoiding risk, and you can't avoid risk without knowing the price below which it's safe enough to buy a particular stock or bond.
To learn more about a subscription to The 12% Letter – and gain access to those reports – click here. (You won't have to sit through a long promotional video.) And if you decide The 12% Letter isn't for you within four months, you can get a full refund.
Right on cue, as we warn investors about low interest rates and high risk in income securities, a possible sign of higher interest rates appears...
According to an exclusive story from German newspaper Handelsblatt, Germany will take some of its gold out of the New York Federal Reserve (where it holds 45% of its reserves). Germany will also pull all of its gold from the Banque de France (11% of reserves). It's repatriating its reserves back to Germany, where it currently holds 31% of the gold.
This is a clear sign Germany doesn't trust the U.S. and French central banks (which claim to hold German gold in full). Remember in 2008 when investment banks (which rely on each other for overnight funding) stopped trusting each other? Lending dried up and interest rates spiked.
This is a much bigger deal... If central banks don't trust each other, who will buy the huge amount of debt sovereign issuers must sell just to pay their bills?
New 52-week highs (as of 1/14/13): Berkshire Hathaway (BRK), Guggenheim BulletShares High Yield Corporate Bond Fund (BSJF), iShares Germany Fund (EWG), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), Johnson & Johnson (JNJ), Monsanto (MON), RPM International (RPM), 3M (MMM), Chicago Bridge & Iron (CBI), Hershey (HSY), American Financial Group (AFG), Travelers (TRV), Alleghany Corp (Y), Blackstone Group (BX), Kohlberg, Kravis Roberts (KKR), Becton-Dickinson (BDX), Southern Copper (SCCO), Union Pacific (UNP), Government Properties Income Trust (GOV), CVS Caremark (CVS), Emerson Electric (EMR), and GenMark Diagnostics (GNMK).
Our readers come to the defense of Jeff Clark. We stand by our claim that he's one of the best options traders we know. You can weigh in here... feedback@stansberryresearch.com.
"I don't know what Jeff Clark Mr. Cole has been following but it can't be the Jeff Clark that publishes Advanced Income and Short Report. I started with AI less than a year ago and then decided to try a few of the higher price letters when the lowly little Advisory worked so well. By May of 2013 I was following Doc and Jeff like crazy and made the decision to get into Short Report. I have never had more than 40k invested in any of these recommendations at any one time and yet I am within $2000 of paying for the Alliance membership that I joined last month. That's about a 25% return on my investments and I didn't get seriously testing the waters till May of last year. Most of that gain has been in the last 6 months since I committed a little more as I got more confident. I love Porter and Doc really everyone but Jeff is THE BEST. He has taught me a ton, ton, ton already. One of the coolest moments just happened. In Direct Line Jeff gave the signal that it was time to take a scalp short over the weekend. He did not recommend anything specific of course, I made my own choice of how to trade this. After the trade was over Jeff went over the details and I took exactly the same trade and got in and out within 1cent of where he did. I'm learning, I can ask no better and hope there is no better praise. Thanks Jeff and all. As for Mr. Cole, well he is simply wrong." – Paid-up subscriber Bill Pennock
"I've subscribed to three of your newsletters, and I sadly cannot opine or even give a grade seeing as I am still a novice investor; although I truly appreciate the information you and your team put out day after day to help us learn a few things about wealth creation. So far this year I've purchased shares of Intel, MGM, Cheniere, & Microsoft. The only position I am down on is MSFT, -8.09% and that would be my fault for buying in at too close to the entrance point. But, my biggest winner so far is Cheniere, I got in around your reference price and have made 35.40% as of today so far on the recommendation. I've been following your advice, which is given in the three publications, of using a trailing stop loss and it's nice to know that even if I stop out of some of my positions, I'll have made a modest and preserved my capital. What I can give a grade on is the value of the wisdom given by many of your analysts, Doc Eifrig, Dan Ferris, and yourself.
"I give you all an A++, and the reason for that remarkable grade is because you've lifted the blinders off my eyes about how the traditional investment strategy of pouring money into a mutual fund for someone to manage isn't the only way to become wealthy over the long-term. Giving me the courage to be in control of my own portfolio and using investment strategies such as put selling and covered calls is what I will always be grateful for. I'm really glad I signed up for your investment newsletter after 'The End of America' commercial campaign. I don't always follow the suggestions of your monthly newsletters, and the research is always top notch, but when I do buy you've all never led me astray. A++ for the wisdom and clarity you provide from a 25 year old investor." – Paid-up subscriber JC
Regards,
