Our negative interest-rate world... The new negative-carry trade... Doc's Big Pharma bonanza... Intel's gloomy forecast... Railroads are shipping less coal... An explanation of book value...
Since 2007, around $210 billion has flowed out of stocks. Meanwhile, more than $1.25 trillion has flowed into bonds. Take a look at this chart from Doc Eifrig's latest issue of Retirement Millionaire...
U.S. bond prices have fallen for the past 30 years... The 10-year Treasury now yields less than 1.5%. Most people buy bonds for income. And the yields they receive today are dismal. But investors continue rushing for the perceived safety of sovereign debt. (U.S. Treasurys are viewed as virtually risk-free – the ultimate safe-haven asset – since the dollar is the world's reserve currency.) People are scared and irrational.
Stocks are much cheaper than bonds today. And in many cases, offer better yields. (Blue chips like semiconductor giant Intel – which we discuss below – and giant cigarette-maker Altria yield 3.3% and 4.6%, respectively). But stocks have plenty of room for upside. Bonds, on the other hand, are "zero bound." In other words, yields shouldn't go below zero since a negative yield would mean investors were literally paying to hold a borrowers debt. And since bond prices move in the opposite direction as the yield... a downside limit on bond yields should also constrain potential capital gains.
And with yields so low, bonds don't have much room for capital appreciation. As "Bond King" Bill Gross – who manages the world's largest mutual fund, the PIMCO Total Return Fund – wrote for the Financial Times in February:
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What incentive does a U.S. bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed? What incentive does PIMCO or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is 2 per cent of par and the downside substantially more? |
As Gross points out, bonds have far more downside (increasing yields) than upside today. Still, investors are pouring money into fixed income.
Currently, six countries have negative yields on government bonds maturing in two years or less – Germany, Denmark, Finland, Switzerland, the Netherlands, and Austria. (Denmark and Switzerland are outside of the European monetary union.)
And today, investors accepted negative yields on two-year German bonds at the primary auction. The average yield on the 4.2 billion-euro bond sale was negative 0.06%.
Switzerland's two-year bond has the lowest yield at negative 0.55%. Why do investors pay to own these bonds when there's little room for capital appreciation?
Some strategists think it's a currency play... Investors will stomach a small, negative yield for the potential of currency appreciation should the euro disband (or should certain countries leave the euro). The money they're parking in government bonds would then be revalued with a stronger currency.
It's like hedge funds buying credit default swaps (insurance contracts on debt that pay out in case of default) leading up to the subprime crisis... It's a negative-carry trade, meaning losses are guaranteed, but finite. As we saw during the crisis (when hedge-fund managers like John Paulson made hundreds of percent), the upside can be huge.
Yields on government debt could always go lower – markets can stay irrational for a long time. But our money's on stocks. Take Dr. David "Doc" Eifrig's Big Pharma recommendations, for instance. Abbott Laboratories, Johnson & Johnson, Eli Lilly, and Pfizer all traded at 52-week highs today. Doc has all but Pfizer in his Retirement Millionaire model portfolio.
DailyWealth Trader co-editors Amber Lee Mason and Brian Hunt discussed the uptrend in these stocks in today's issue...
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Over the past several months, we've been keeping tabs on Big Pharma. Like our colleague Dr. David Eifrig (editor of the outstanding Retirement Millionaire and Retirement Trader advisories), we think the "big picture" is favorable for the world's big drug makers. |
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Aging Baby Boomers will keep demand for drugs high... and allow Big Pharma to keep paying big dividends. Many stocks in the sector are cheap and pay dividend yields of 4%-6%. It's also important to note that "Obamacare" should produce extra demand for all types of health services... including Big Pharma's drugs. |
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As we've noted several times, these stocks are in a "slow and steady" uptrend. You can see it in shares of PJP, a health care-focused fund. Over the last two years, PJP is up 81%. You can also see it in one of Doc's favorite health care stocks, Eli Lilly (LLY). |
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A longtime Retirement Millionaire recommendation, Eli Lilly is the world's 10th-largest pharmaceutical company. It has a long history of producing major blockbuster drugs (like Cymbalta and Cialis). It's a stellar dividend-payer, yielding 4.5%. And shares have returned 22% in the past year, advancing in a smooth, "stair step" uptrend... |
Doc's Retirement Millionaire portfolio is loaded with high-quality companies paying huge, healthy dividends. In his most recent issue, Doc added another high-quality, high-yielding stock to the list...
This company is one of the biggest and best-known in its sector... You know the name... And you've certainly seen its trademark commercials on TV. I can't give away any details, but I can say it operates in one of Porter's favorite sectors.
This company has grown earnings 50% since 2008. But its shares are 33% below their peak price in mid-2008. The company trades for less than sales and less than two times free cash flow. And it pays a safe, 3.1% dividend. Since 2007, it's increased the dividend nearly 65%.
If you're serious about investing and discovering how to safely load a portfolio with lots of high-quality, dividend-paying stocks, you should be reading Retirement Millionaire. In addition to excellent investment recommendations, Doc – who is a board-eligible eye surgeon – also offers his readers loads of health tips and money-saving secrets. The education alone is worth more than the cost of the subscription (which you could recover with one year of dividends from his latest recommendation).
We want you to read Retirement Millionaire, so we're making an incredible offer... You can try this service for four months. And if you don't like it, we'll refund 100% of your money with no questions asked. To access Doc's Retirement Millionaire and learn which super-safe dividend-paying company he recommends for subscribers... click here. (You won't go to a long promotional video.)
One of our favorite real word indicators posted a disappointing forecast yesterday... Intel, the world's largest chipmaker, provides semiconductors to 80% of the personal computer market. Tracking Intel gives you insight into global demand for computers. And the company isn't bullish for next quarter.
Intel posted second-quarter net income of $2.83 billion, down from $2.95 billion a year earlier. Revenue rose 4% to $13.5 billion. The market liked the news... Shares are up more than 3% today.
But the world's largest chipmaker also estimated third-quarter revenue of $14.3 billion. Analysts were expecting $14.6 billion. Intel also cut its revenue growth forecast for 2012 to 3%-5%, down from a previous forecast of "high single-digit growth."
"As we look at the rest of this year, our expectations of economic growth versus where we were at the beginning of the year have come down and so we've brought down expectations of revenue growth," Intel's Chief Financial Officer Stacy Smith told an interviewer on CNBC last night. He noted softness in mature markets and a slowdown in emerging markets.
Although Intel's lowered forecast is bad news for the global computer market, it's not enough to shake our faith in the stock as a long-term investment. As Dan Ferris (who includes Intel among his list of World Dominating Dividend Growers) told us in an e-mail this week…
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Intel growing 3%-5% is fine with me. The company doesn't need to grow at high rates to be a fantastic investment. At 3%-5% a year, it'll still gush billions of free cash flow every year and pay out a healthy and growing cash dividend. Intel pays out just over one-third of its earnings in dividends. There's plenty of room for it to continue to raise the dividend at double-digit rates for years to come. |
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The balance sheet is incredibly solid, with about twice as much cash and investments as debt. The margins are as consistently thick as they've always been. And now, we've just learned it'll grow 3%-5% this year. In what meaningful way is this gloomy? |
Michael Ward, CEO of the railroad CSX, appeared on CNBC this morning to discuss his company's latest numbers... Ward said shipments of "utility coal" were down 37% year over year due to low natural gas prices. Meanwhile, automotive shipments were up 27%. Ward said carloads were flat and, excluding the fall in coal traffic, the company's earnings were up about 6%.
We're not surprised by the decline in coal shipments. There are two main markets for coal – steel-making (metallurgical or coking) and power generation (steam coal, or "utility coal" as referred to by Ward). Metallurgical coal is high quality and can't be displaced by natural gas. Competition from natural gas, on the other hand, could crush steam coal.
More and more companies will substitute coal for natural gas with prices for the cleaner-burning fuel at less than $3 per thousand cubic feet (mcf). And with new drilling technologies resulting in a glut of supplies coming from previously inaccessible shale formations across the U.S., we expect gas to remain cheap.
Porter's been covering the conversion to natural-gas power in his Investment Advisory. In his June issue, Porter wrote...
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Coal has been the bedrock fuel for the U.S. power industry for generations... pretty much as long as there has been a U.S. power industry. Even today... while most people think of it as a dirty, relic of the industrial age, coal fuels nearly half of the power consumed every day in this country. However... "King" coal's dominant position as the fuel for electricity generation has never been more threatened. |
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Of the major power-generation fuels... coal is the worst polluter. It is a significant source of sulfur dioxide and nitrogen dioxide. Burning coal also emits a lot of the "greenhouse gas" carbon dioxide, a popular boogeyman of the environmentalist crowd. By comparison, natural gas is much cleaner burning. |
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But coal has historically held on to its market position in the U.S. because it is incredibly abundant and, as a result, cheap... These are exactly the advantages natural gas is taking away. – Stansberry's Investment Advisory, June 2012 |
New 52-week highs (as of 7/17/12): Berkshire Hathaway (BRK), iShares Nasdaq Biotechnology Fund (IBB), ProShares Ultra Health Care Fund (RXL), Utilities Select Sector SPDR Fund (XLU), Abbott Labs (ABT), Johnson & Johnson (JNJ), Eli Lilly (LLY), Monsanto (MON), Integrys Energy Group (TEG), Enterprise Products Partners (EPD), Hatteras Financial (HTS), Two Harbors (TWO), 1st United Bancorp (FUBC), CVS Caremark (CVS), and Altria Group (MO).
Another slow mailbag today... Just a balance sheet question. Any other technical questions we can answer for you? Let us know at feedback@stansberryresearch.com.
"A question. Is the 25% discount to tangible assets you are talking about the same as Price/Book?" – Paid-up subscriber Mike Boileau
Goldsmith comment: Book value is simply a company's assets minus its liabilities. Tangible book value applies only to the company's tangible assets (think real estate, inventory, cash, etc.). To get tangible book value, you remove the intangibles (like goodwill) from your calculation.
Regards,
Sean Goldsmith
New York, New York
July 18, 2012