Mr. Market is having an anxiety attack.
The S&P 500 opened down more than 2% today, at a six-month low. Oil was down $2 to $68 a barrel. The 10-year Treasury yield hit 3.1% today – down 89 basis points from the beginning of April. The short-term deflation everyone warned of is happening. Before you jump all over us, let us be clear... We still think the future holds hyperinflation. But the European banking crisis has investors scared. Ironically, though this selloff was spurred by a lack of confidence in currencies, investors are fleeing to the safety of U.S. dollars – the world's worst currency, except for all the rest.
Gold historically performs poorly during deflationary periods, as people prefer the increased buying power of cash. But gold is up today to $1,197 an ounce. Gold is the ultimate anticurrency. It's no one else's liability.
If you want to know where the short-term deflation I just mentioned comes from, ask a friend who is buying or selling a house. Specifically, ask him about the appraisal process. All over the country right now, appraisals are coming in 10% or more below what the comparable sales suggest. Komrade Obama frontloaded demand for housing with his tax credits. Now, the credits are gone and so is the demand. Appraisers don't have enough recent comparable sales to work with.
My house was appraised with only one local comparable. The appraiser had to get special permission to go outside the area for more. Active listings, pending sales, and real estate-owned properties were used, instead of just the usual completed sales. Appraisers have to use whatever they can find. Normally, distressed properties are the exceptions and don't really change appraisals. But now, there's more distressed property than anything else. About 52% of the listed homes in my town are distressed. The banks insist appraisers use them. If the comparables in your neighborhood suggest $100 a square foot for homes like yours, assume it'll appraise for $90. No kidding. It's that bad.
With nearly all collateral plummeting in value on the back of Obama's tax credit expiry, the air is being let out of the banking system once again. The banking system's lending and deposit activity is the engine of inflation. When it sputters, economic activity slows and prices fall. But that never lasts long, as the Fed cranks up the money presses to try to revive it.
I have so many questions when I see stock and commodity prices decline... My first question is about stocks: Are there any good bargains yet? The answer is a resounding yes. So far, the only true bargains are among the World Dominator stocks. These companies dominate their industries globally. Each World Dominator is the No. 1 company in its industry. They have a huge competitive advantage in the marketplace, often through their unmatched size and scale. They earn consistently high returns on capital. Since they employ massive amounts of capital, they generate huge free cash flows year after year, through crises, regulatory changes, bear markets... you name it. They're the greatest income generating stocks in existence, raising dividends year after year for decades. One World Dominator has raised its dividend every year for 54 years. Another has raised its dividend every year for 36 years – every year since it went public.
I've recommended eight World Dominator stocks in Extreme Value. Today, as the market declines and all my trader friends prepare to go long again, six World Dominators are selling below my maximum buy price. Skittish speculators make up the mass of the investment herd. They're scared. They're selling stocks. Real long-term investors are salivating at the chance to buy the greatest businesses in the world at unprecedented valuations.
One of these stocks is the cheapest I've ever seen a World Dominator stock at any time since I've been covering them (about four years now). Imagine a company like Coca-Cola or American Express trading at less than 10 times free cash flow, and you'll have an idea of the once-an-eon opportunity I'm talking about.
You can only get access to my World Dominator list by subscribing to Extreme Value. I publish the World Dominator list with current buy/sell advice on the back page of every issue of Extreme Value. I publish a list of Extreme Value stocks currently at buy levels every week in the Extreme Value weekly updates. To sign up and get access to my list now, click here.
Mr. Market's fear-induced panic inspires yet another question. If OPEC controls the price of oil, when and where do we get to see this great influence? Did we see it today, as oil fell $2 a barrel? Did OPEC push oil to $147/barrel? When it crashed to less than $40, was that OPEC again, throwing us off its scent with a little market manipulating legerdemain? I don't really know the answers here. I'm just asking the questions. Is OPEC passé?
And what about Treasury bills? I wouldn't buy this garbage with Komrade Obama's money, and I can't stand that guy. Yet, every time Mr. Market loses his lunch, Treasury yields fall as investors rush to what is absolutely, overwhelmingly, undeniably the world's safe haven of choice: its reserve currency, the U.S. dollar...
Well... almost the whole world. I run down to my coin guy and buy more South African Krugerrands. And with stocks down and gold up, it certainly seems today many other folks are making the same trip for the same reason.
Still, I don't like it when people buy Treasuries as a safe haven. It's unnerving. It's like watching all the children in town fleeing their parents and lining up outside the front door of a pedophile. It's revolting and sickening, and it can't end well for the poor little fools. They act purely out of ignorance.
Some kids are smart, though. They get wise and run the other way. According to Bloomberg, speculators are buying gold faster than we can mine the stuff:
Exchange-traded products backed by bullion added 41.7 metric tons in the week to May 14, the most in 14 months, data from UBS AG show. China, Australia and the 15 other largest mining nations averaged weekly output of 41.6 tons last year, researcher GFMS Ltd. estimates.
Speaking of the difference between being smart and acting out of pure ignorance...
Outgoing Fed Vice Chairman Donald Kohn told a European Central Bank meeting today, "Judging when an asset is getting away from its fundamental value is almost impossible." The poor ignorant fool thinks he's issuing a proclamation from on high, or perhaps providing insight and guidance to a generation of investors (albeit by telling them no insight is possible). But really, Kohn is merely admitting before the entire world he hasn't a clue what's going on around him. Given that his job is institutionalizing ignorance and mediocrity, he earned his pay today.
Fear affects different businesses in different ways. Bankers, for example, become more afraid to lend. My own ongoing home-buying experience confirms this. I'm still expecting my mortgage broker to call any day now, requesting the dimensions of my right arm for possible loan collateral. Good thing I never had kids of my own.
The benchmark three-month LIBOR (London Interbank Offered Rate), the rate banks charge each other for overnight loans, has more than doubled since March to 0.54% – its highest point since July 2009. German state-controlled lender WestLB AG said it paid 0.565% to borrow dollars for three months. We're still a long way from the crisis peak of 4.818%, but it's clear banks these days are more scared to lend.
Bankers might be afraid to lend, but Mr. Market isn't afraid of mortgages. In fact, if you watch the markets day to day, mortgages backed by government-sponsored entities (like Fannie Mae and Freddie Mac) tend to behave a bit like Treasuries. When Treasuries rise (and Treasury rates fall), the iShares Barclay MBS Bond Fund (MBB) rises, too.
Mr. Market also likes Annaly (NLY). Its shares rose more than 3% today. Annaly shares are down this year because investors feared the Fed would increase the Federal Funds rate, increasing Annaly's borrowing costs. With markets falling, inflation is out of sight and mind, and no one is worried about a rate hike anymore.
The only way lower long-term rates can hurt Annaly is if its mortgage holders try to refinance en masse. The value of Annaly's mortgage book would fall in that case. Fortunately for Annaly right now, few mortgage holders are creditworthy enough to refinance. I don't know from beans about reading price graphs, but my trader colleagues here at S&A tell me Annaly's price chart looks like it's carving out a bottom.
Goldman Sachs is another gainer today. Mr. Market seems to be in agreement with us, in our belief that investors expect Goldman to pocket big profits by trading opposite its clients in the panic.
New highs: none, zip, zero, nada, ixnay on the ighshay.
Finally today, more questions. How is it possible that we send our best and brightest to Washington, and the only thing they never fail to do is screw up? It reminds me of what Edward Abbey said: "One man alone can be pretty dumb sometimes, but for real bona fide stupidity, there ain't nothin' can beat teamwork." Send me your questions here: feedback@stansberryresearch.com.
"In the middle of November, 2008, Porter recommended NLY in PSIA. I recorded the following recommendations in my stock performance spread sheet: 'Buy below $14. Do not use a fixed stop because of possible volatility. Expect to sell at around $20 or 2X book value.'
"I bought the stock at $13.77. With the dividends, the investment is up 41% (annual yield of 25%). The last four quarterly dividends equal 18% of the purchase price. As long as NLY continues to pay that kind of dividend, I suspect my heirs will wind up with the stock.
"I think this underscores the importance of taking dividends into account in a trailing stop." – Paid-up subscriber Richard Shaw
"Bought some NLY re recco 12% Letter way back. Have gotten div every month since. Saw a 18.96% return report (not yours) and another report (not yours) advising sell. NLY hasn't come close to my 25% trailing stop. I like it, maybe I might get a few more shares, though you haven't so advised. Everyone seems afraid of NLY's business.
"My point. A pat on the back to counter the gripe about NLY. Help your ego a little. I like your stuff. Is helpful." – Paid-up subscriber Blake McFeely
"You left out that GE owns NBC and has been pro Obamma. Or that GE's president serves on advisory boards for the President. Just coincidence that GE gets such favorable treatment from this administration." – Paid-up subscriber David Perry
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
May 25, 2010