LTRO is a flop... Politicians lying again... Spanish CDS nears record... Buffett buying Europe... Why you should avoid dental x-rays... Sjuggerud's 1,000% trade... Porter: a real American hero...
Europe has begun a new round of quantitative easing.
On December 21, 2011, the European Central Bank (ECB) started a program called long-term refinancing operation (LTRO). LTRO is essentially the same idea as the U.S. Federal Reserve's quantitative easing… except rather than printing money to directly purchase assets, Europe is printing money to send straight to the banks. The goal with LTRO is to provide European banks a three-year loan at 1% interest.
In the first round of LTRO, 523 financial institutions borrowed a total of 489.19 billion euros. But that wasn't enough… Soon after, European markets and bond prices fell.
So on February 29, the ECB announced another round... This time, 800 financial institutions received 529.53 billion euros. In total, the ECB has loaned 1 trillion euros since December. This money is solving the banks' immediate need for cash, but not addressing their long-term solvency issues.
The banks are essentially taking their LTRO money and purchasing sovereign bonds... This government bond buying keeps yields down temporarily. But what happens when the money printing stops? As UBS said in a recent report:
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[A]s soon as the LTRO window is closed, we are once more counting down to the point at which banks' funding is challenged – a point which will be accelerated by the macro volatility implicit in trying to run a single currency without socializing the debts of the currency area. |
Yesterday, Italy sold 2.88 billion euros of three-year bonds at yields of 3.89%... It paid 2.76% the last time it issued debt on March 14. That's a 113-basis point increase in one month. (A basis point represents 1/100th of a percentage point.) When rates rise that quickly… it means the market is extremely skeptical.
But Italy's deputy finance minister, Vittorio Grilli, dismissed the run-up, saying the country's bonds are as strong as ever… and the only reason it didn't sell more bonds in yesterday's auction is because "it didn't need funding at an unfavorable yield."
Said another way, Italy is lying about the security of government bonds. And the market knows it.
Last week, Italy announced its banks borrowed a record 270 billion euros from the ECB in March. That's up 75 billion euros from the month before. Rest assured… Italy will be back at the ECB teat soon.
Today, Spain announced bank borrowings from the ECB. The result, as you would have guessed, is similar to Italy's. Spanish banks also borrowed an extra 75 billion euros in March than they did in February, for a total of 227.6 billion euros. And today, Spanish credit default swaps (CDS) – an insurance policy that pays out in case of default – increased to 491 basis points, just two points short of the all-time high reached last November. And Spanish 10-year bond yields jumped 10 basis points to 5.92%. (Italy's 10-year is at 5.47%).
Despite the round trip in asset prices, bond yields, and risk spreads, European banks are already starting to pay back their LTRO loans. As one European bank CEO told the Financial Times…
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There are two reasons to repay early. First, I don't think it will be wise for us all to be paying back everything in three years' time. Second, we need longer-term finance than three years. We have been busy raising it over the past few months, even though we've had to pay a lot more for it. |
What the CEO's really saying is that the European banking system won't be able to repay 1 trillion euros when the loans come due in three years. And the banks will still need longer-term, private funding. In other words, there's no way Europe can solve its financial problems in three years.
With the rout in European stocks (markets are down some 40%), some blue chips there are getting attractive. You might think it's crazy to buy any European stocks right now. But as Paul Mampilly – an editor at The Palm Beach Letter – wrote in today's DailyWealth… by getting into world-class businesses for around 15 times earnings and earning 3% dividend yields, you can gain exposure to European markets with little risk.
In fact, one of the world's greatest investors, Warren Buffett, is scouring the European markets for these kinds of deals. From a recent interview with CNBC...
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I just thought these eight companies were terrific companies that were cheap. These companies will do fine regardless of what happens in Europe – and there will probably be plenty that happens in Europe. And they obviously were affected by the European crisis. And in the end, those eight companies I bought are going to be there 5, 10, 20, 50 years from now. |
Paul has two guesses about which companies Buffett's targeted...
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Nestle, a giant Swiss consumer-products company, fits Buffett's profile perfectly. It makes baby food, chocolates, coffee, ice cream, and more. Its 10-year growth rate is 10%. And it gets 40% of its growth from developing countries. |
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Last year, the $200 billion company generated $9.5 billion in profits. It's trading at about 16 times 2012 earnings. And it pays a dividend yield of 3.5%. |
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Another investment I'm sure Buffett likes is Danone. Based in Paris, Danone produces and distributes food products worldwide. It owns brands like Evian water and Stonyfield Farm. Danone's 2011 growth rate was 6.5%. |
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Last year, the $33 billion company generated $1.874 billion in free cash flow. It's trading for 15 times 2012 earnings. And it has a dividend yield of 2.75%. |
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You can buy both companies in the U.S. The ticker for Nestle is NSRGY. The ticker for Danone is DANOY. Many online brokers can also buy the stocks directly on European exchanges, though higher fees usually apply. |
In recent Digests, we've been trumpeting the financial achievements of Dr. David Eifrig in his Retirement Millionaire newsletter, like teaching his readers the proper way to view their gold and silver holdings and the value of proper asset allocation (the weightings of different assets like stocks, bonds, metals, etc. in your portfolio).
But he doesn't stop at financial wisdom…
Doc, as we call him around the office, also has a medical background. He's a board-certified eye surgeon. And in his monthly letters, he devotes several pages to health tips and debunking many common beliefs about modern medicine.
For example, in the May 2011 issue of Retirement Millionaire, Doc wrote about the dangers of vitamin D... Many people were outraged, accusing him of ignoring the benefits of the popular supplement. But soon after, the Cleveland Clinic released a study supporting his views.
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People who get dental x-rays every year are at a higher risk of developing cancer. High levels of radiation at one body site can cause cancer in that area. If you are having specific health issues that require an x-ray, you should have it done. But otherwise, an annual x-ray isn't worth the risk. |
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I had my last dental x-ray in 2005. At the time, I protested, but was promised that the radiation was safe. I haven't had any issues with my teeth. A good dentist can find problems without needing annual x-rays. |
This week, the Washington Post reported on a recent American Cancer Society study showing a link between certain kinds of dental x-rays and brain tumors. You can read the full article here.
As we've said in recent weeks, we believe Doc's common-sense approach to protecting your health and savings have helped countless subscribers. And his Retirement Millionaire newsletter provides a huge wealth of information on money and investing. His model portfolio – which is stocked income-producing investments – was among the highest-rated last year, earning an A+ from Porter in our annual Report Card. To learn more about Retirement Millionaire and gain access to all of his ideas on health and money, click here.
In the March 23 Digest, Porter described a poorly understood asset Steve Sjuggerud discovered to take advantage of a rally in bank stocks…
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[Y]ou might find it interesting to know my colleague Dr. Steve Sjuggerud agrees with my outlook that bank stocks are almost certainly going to go way up over the next several months. And he's found an even better – though slightly riskier – way for you to profit from this situation. |
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As he wrote in a recent True Wealth Systems newsletter, huge gains are likely: "793% is our 'base case.' And returns of 1,233% are possible if things simply go back to normal..." |
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What Steve found is truly unique. I can literally guarantee you haven't heard about this opportunity anywhere else – because the government created it so the government itself could make a huge amount of money during the inflation it's going to create. That's why I love Steve's approach: It takes a tool the government created to enrich a few insiders and uses it to benefit our subscribers. |
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I can't give away the details – that wouldn't be fair to Steve, who discovered all of this stuff – or to his subscribers, who have paid for the research. But I strongly urge you to check out Steve's report on the situation. |
New 52-week highs (as of 4/12/12): W.R. Berkley (WRB), Texas Pacific Land Trust (TPL), and Intel (INTC).
Finally, someone who appreciates the work we do here at the Digest… although we suspect anyone who would call Porter an "American hero" is either a relative… or drunk. What do you think of our work? Let us know at feedback@stansberryresearch.com.
"My wife inherited a 10% share of 134 acres of corn farm in NE Iowa. Each of 10 siblings got 10%. We have been buying out the others over the years and now have 20%.
"The farm is rented to a local farmer. We get income from the rent. The University of Iowa Extension Service has well researched and current land prices. History of corn prices is available on the web as is the historical price of gold. I was preparing to buy more shares from a selling family member but wanted to be sure I had good value so I charted the price per acre in ounces of gold and in bushels of corn. The curves are all hyperbolic right now which makes me very nervous. Yet the land price was still a bargain relative to gold so I was going to buy.
"A local appraisal was made at $8000 per acre, much higher than the University of Iowa Extension Service data and an adjacent farmer offered $9200 per acre. So everyone in the S-corp including me will be selling to that farmer. So I am out of the farm business at 59 yrs old." – Paid-up subscriber Dale Carlton
"I bought 525 acres of farm ground in 1997 and another adjoining 120 in 2009. It has been the best investment I have ever made. The land has gone up 400% in value and the original ground that i bought is averaging a 10% return before any price appreciation of the land. Just last year I started raising cattle as the prices look to be strong for a number of years. On the ground I am using for a cow- calf operation I am thinking I can make 200 250 dollars an acre depending on the price of cattle at the time I sell calves. Just as the return has improved the costs of inputs have also risen dramatically that is why Ag stocks have performed well. The better the farmers and ranchers do the higher the prices to do business seem to go up.
"With all the attention the Asia markets are getting with their growth in the standard of living the need for protein for the worlds population is going no where but up! I had heard that if the protein needs of China would double from their current low level that there is not enough protein in the world to feed China. Many nations can not feed themselves without importing food.
"The worlds population is supposed to grow substantially over the next 30 years and that will but even more strain on the worlds agriculture markets to supply the worlds needs. There most likely will be allot of ups and downs but i agree with Jim Rogers the macro economic trends look very good for a number of years for American Agriculture." – Paid-up subscriber DE
"You're my new American hero. You've done a fabulous job at giving a good synopsis of America in decline. I only wish others would open their eyes & read, think and understand what is happening around them. Thank you for all you and your researchers do. Keep up your good work." – Paid-up subscriber Heather Johnston
Good investing,
Sean Goldsmith
New York, New York
April 13, 2012