More QE for Europe...

More QE for Europe... The euro tumbles again... Seven-year highs for housing... Why the boom will continue... Good news for airlines... The latest on Apple and Icahn... 'The best capital allocator I've ever found'...

 The European Central Bank (ECB) is speeding up its quantitative easing (QE) program...

Since the ECB began QE in March, it has been buying 60 billion euros of bonds each month.

But in a speech yesterday, ECB Executive Board member Benoit Coeure said the central bank will "front load" the program in May and June – by buying even more than 60 billion euros of bonds each month – to make up for an expected "low liquidity" period during the slow summer months. He said the bank may also "back load" with bigger bond purchases in September.

 Coeure said the recent plunge in European bonds is "no cause for concern," but that the "rapidity of the reversal" was worrying. He also claimed the announcement was not intended to calm the recent volatility in European markets before the summer slowdown in trading, but that's exactly the effect it had...

European stocks and bonds rallied on the news, while the euro tumbled as much as 1.6%.

 Coeure didn't say how big the "front loaded" purchases would be, but the takeaway is clear: ECB head Mario Draghi and his team are committed to doing whatever it takes to engineer their own version of the "Bernanke Asset Bubble" in Europe. As we mentioned in the March 19 Digest, the table is set for a massive rally in European stocks.

 Back in the U.S., data this morning showed new home construction surged last month to the highest levels in seven years. Housing starts increased 20.2% to a 1.14 million annualized rate, the highest since November 2007.

Our colleague Paul Mampilly isn't surprised. As we noted in the April 2 Digest, Paul thinks this trend is just getting started...
 

I believe housing construction is going to continue to be strong for a long time... certainly longer than anyone expects right now. Why? Because we simply haven't built enough houses.   You probably think that's crazy, but it's true. Let me explain. You see, on average, we need about 1.5 million housing starts per year. We haven't come anywhere close to that for more than seven years now. Three more years and it'll be a decade of underbuilding.

Paul explained that it's not just that we haven't been building enough new homes... but existing homes are getting old...
 

The 2013 American Housing Survey showed that the median age of a house is now 40 years. In other words, our housing stock is old and getting older. And we haven't come close to building enough over the last seven years to replace this housing. Based on the survey, 79% of the houses in the United States were built before 1990... 66% were built before 1980... and 50% were built before 1970. You get the point.

And he thinks there are still plenty of opportunities to profit from this trend...
 

To make a long story short, everything is in place to keep housing and construction economic activity going for a long time... I'd say at least three years. That means many of the companies involved in homebuilding and related activities are going to see higher sales and earnings for a prolonged period. These companies include homebuilders, housing-materials companies, suppliers, etc. The best way to get exposure to these stocks in one shot is the SPDR S&P Homebuilders Fund (XHB). It has a mix of companies from homebuilders to retailers to suppliers... all of which will benefit from this trend.

 Of course, Paul isn't the only Stansberry analyst bullish on housing...
 

As we've mentioned many times, Steve Sjuggerud was one of the first analysts anywhere to turn bullish on housing. And he's still bullish today.

In fact, Steve thinks housing is the best place to invest in the U.S. today. In the May issue of True Wealth, he explained why...
 

It might surprise you to hear this... At this moment, far more of my own personal net worth is in north Florida real estate, compared with the stock market. The value today in Florida real estate is incredible. But it isn't just Florida. Housing and real estate in most of America is cheaper than almost anyone realizes. You see, for the typical home buyer, housing value has little to do with actual home prices. And it has everything to do with monthly payments. "Can I afford the monthly payment on this home?" That's the question home buyers have to answer before pulling the trigger. And right now, the answer for most folks is "yes." Here's why... Two things have happened... 1) we saw the worst bust in house prices in generations and we still haven't fully recovered, and 2) mortgage rates are near all-time lows, below 4%. Because of these two things, house prices are near record levels of affordability. Take a look...   I've been writing this for years, but the story is still true today. It's still one of the best times in American history to buy a home.

 The airline industry is booming again, too...
 

According to industry trade group Airlines for America, U.S. airlines expect record-breaking passenger traffic this summer.

The trade group forecasted this summer's numbers would total 222 million passengers – 4.5% higher than last summer, or nearly 2.5 million passengers every day.

Airlines for America also reported that the 10 U.S.-listed airline stocks reported that both profits and revenues rose in the first quarter of 2015.
 

 JetBlue Airways (JBLU) and Southwest Airlines (LUV) – the top-ranking low-cost airline companies – have especially benefited from low oil prices. As the Wall Street Journal noted, labor costs have replaced declining oil prices as the top expense for airline companies.

Over the last 18 months, JetBlue and Southwest shares are up 130%-plus, while the price of West Texas Intermediate crude oil is down more than 35%...
 

 Still, we don't recommend investing in airline stocks. Porter explained why in Friday's Digest...
 

Legendary investor Warren Buffett says that someone should have shot Wilbur and Orville before they ever got off the ground, because on a net basis, the airline industry consumes more capital than it produces. Businesses that require both tremendous amounts of people and tremendous amounts of capital are tough. Businesses that require people and capital AND offer a commodity service to a largely unregulated market are impossible.

Airlines are a perfect example of this... and why Porter prefers investing in capital-efficient businesses like candy maker Hershey.
 

 Billionaire activist investor Carl Icahn is making headlines with another big call on Apple (AAPL)...

As we reported in the April 28 Digest, Icahn – who owns a $7 billion stake in the consumer-products giant – posted a message on social-media website Twitter saying the company was still undervalued and misunderstood. He promised to release a new report on the company soon, which he did on Monday.

In an open letter to Apple CEO Tim Cook, Icahn says the company is worth $240 per share – an incredible 85% above today's $130 share price – and believes the company should buy back even more shares.

 But Icahn's argument for the higher price might surprise you. From his letter (emphasis added)...
 

Apple is poised to enter and in our view dominate two new categories (the television next year and the automobile by 2020) with a combined addressable market of $2.2 trillion, a view investors don't appear to factor into their valuation at all.

That's right... Icahn believes Apple will soon be producing the "iTV" and "iCar." Despite reports in the Wall Street Journal that the company has officially "shelved" plans for a new television, Icahn believes it's coming, and it could be huge...
 

Excluding advertising, the addressable market for television is approximately $575 billion, which is larger than the smartphone market. Also, given that people spend an average of 12% of the day watching TV (equating to 25% of their free time), we view television's role in the living room as a strategically compelling bolt-on to the Apple ecosystem.

And while we've noted the many problems with electric-car maker Tesla, Icahn thinks Apple can break into the competitive auto market...
 

At $1.6 trillion, the enormous addressable market for new cars is approximately four times the size of the smartphone market... As a mobile device that is differentiated by design, brand, and consumer experience where software and services are increasingly critical, an Apple car would seem to be uniquely positioned.

But Icahn says even without these new products, Apple's existing businesses will continue to grow...
 

Apple's core ecosystem continues to improve and grow, now sometimes referred to as a "mega-ecosystem", a term we find increasingly appropriate, as we look at the breadth of its components, which now include existing products (iPhone, Apple Watch, Mac, iPad, Beats, Apple TV), software/services (Apple Pay, HomeKit, HealthKit, CarPlay, iCloud, iTunes, and rumored Beats Music, pay TV service)...

 Extreme Value editor Dan Ferris recommended Apple in June 2013. His subscribers are up 114% to date. In a private e-mail this morning, Dan told me his thoughts on Icahn's letter...
 

Icahn is just talking his book. If Apple hits $240, I doubt he'll stick around for long. Apple is an absolutely fantastic business, run by typical, so-so capital allocators. I think the world is learning that the iPhone is a better business than anyone thought when the stock traded for less than (a split-adjusted) $50 a few years ago. It did more than $212 billion in sales and generated more than $64 billion in free cash flow the last four quarters. That's a 30% free cash flow margin, which is absolutely off-the-charts incredible. But one mistake Icahn makes in his valuation is to assign full value to Apple's cash hoard. I've learned the hard way that most big cash hoards are there because management is bad at allocating capital. So far, Apple hasn't done any big, wasteful acquisitions. But if Icahn is right about the company getting into the business of actually making cars, it will be a disaster. It's hard to believe Apple would actually do it, but we know it's looking at it, so we have to think ahead. Apple isn't terribly expensive here, but I think the Extreme Value portfolio contains better deals among stocks with poorer sentiment than Apple (which means they're trading at lower valuations), all of which have much better capital allocators at the helm.

 The top "buy" in the Extreme Value portfolio is a stock Dan says is "easily the best capital allocator I've ever found in the natural resources space." The company has earned $13 for every $1 in capital it has deployed.

According to Dan, it sat on more than $150 million in cash for years, just waiting for the right opportunities to invest. It has now done so twice in the past year... raising its annual revenues from $3 million to roughly $40 million.

Dan says "that puts them among a handful of the most disciplined investors I've come across in my 17.5 years in the investment research business." To watch a presentation Dan published detailing his top recommendation today, click here.

 New 52-week highs (as of 5/18/2015): AXIS Capital (AXS), Blackstone Group (BX), WisdomTree Japan SmallCap Dividend Fund (DFJ), WisdomTree Japan Hedged Equity Fund (DXJ), KraneShares E Fund China Commercial Paper Fund (KCNY), ProShares Ultra Technology Fund (ROM), and ProShares Ultra S&P 500 Fund (SSO).

 In the mailbag, we field another question about trailing stops. Send your e-mails to feedback@stansberryresearch.com.

 "Hello Stansberry team, I have a struggle with the logic of stop losses which I think warrants an explanation by you. A good case in point is Steve Sjuggerud's April recommendation to buy long term Treasuries (UBT), because of the several compelling points he made about the potential direction of long term interest rates. Of course he recommended a stop loss in case the speculation did not go in the desired direction. Well, within less than a month, the stop was hit. Now here is the dilemma.

"What has changed in the speculative analysis? Is his original thesis still valid or not? If so, wouldn't it be an even better investment now at a lower price and we should hold it? I hope you understand my point." – Paid-up subscriber Art Laursen

Brill comment: This is a question we receive regularly from Stansberry Research subscribers. The short answer is that using a trailing stop loss (along with proper position sizing) helps protect you from a "catastrophic loss"... the type of loss that can wipe out your portfolio or ruin your retirement.

For example, using a 25% trailing stop on a position that makes up 4% of your portfolio ensures you're only risking 1% of your total portfolio if you're stopped out. As investing legend Warren Buffett said, "Rule No. 1 is never lose money. Rule No. 2 is never forget rule No. 1."

You can find more information on trailing stops and position sizing in our Education Center.

Regards,

Justin Brill

Delray Beach, Florida

May 19, 2015