Record-low yields for junk bonds... Lending companies money for 50 years... Burrito bonds... New high for Alcoa... The world's most hated commodity... Lululemon crashes... Porter's best issue ever?...
Investors continue to flood the bond market with cash... bidding up the junkiest of paper and sending yields to record-low levels...
We've been pointing out the absurdities in the bond market in these pages for the past few months.
Last year, yields for high-yield corporate credits (so-called "junk" bonds) dropped to less than 5% for the first time in history, hitting a record-low 4.96% in May 2013... And that was just four months after junk yields dropped to less than 6% for the first time ever.
This week, junk-bond yields again fell to less than 5%... On June 10, junk-bond yields, as measured by the Bank of America Merrill Lynch High Yield Index, closed at 4.98%.
As we pointed out in the June 4 Digest... Investors are paying a premium for junk bonds...
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Companies are issuing record amounts of debt... And the premium investors require to buy riskier corporate debt over Treasurys is at its narrowest since July 2007 – just before the financial crisis. According to Bank of America Merrill Lynch, investors receive 125 basis points (1.25%) more yield in corporate bonds over comparable Treasurys.
We noted the return of payment-in-kind (PIK) bonds, which allow the issuers to pay back debt by issuing more debt. And the likely record issuance we'll see of collateralized loan obligations (CLOs) – bundles of high-yield bonds – this year.
Today, we present the 50-year corporate credit and the "burrito bond"...
Sales of corporate bonds maturing in 50 years hit a record $33.5 billion for 2014 as of Wednesday, according to research firm Dealogic. Issuance for so called "ultra-long" corporate debt was $56.5 billion in 2013 – up 84% from 2012.
The Financial Times noted building-supply company Johnson Controls sold $450 million of 50-year bonds as part of a $1.7 billion offering on Tuesday. Demand for that ultra-long segment of the offer exceeded $3 billion. And the 50-year debt only paid 30 basis points (0.3%) more than the company's 30-year debt. In other words, investors are extending their duration risk by 20 years for 0.3% more in yield.
According to multinational banking giant Barclays, long-term corporate debt has returned 9.2% so far this year... That compares with 3.1% for corporate bonds maturing in 10 years or less. Folks are excited to lock up their money for decades at record-low interest rates...
One British company hopes folks are equally as excited about burritos...
London fast-food restaurant Chilango is looking to raise 1 million pounds to help the restaurant expand. The four-year bond, which people can invest in through crowd-sourcing site Crowdcube, pays an 8% coupon. The minimum investment is 500 pounds... And anyone who invests 10,000 pounds gets a free burrito every week for the lifetime of the debt.
In October 2013, DailyWealth Trader went long Alcoa (AA) in a classic "bad to less bad" trade. Alcoa is a global leader in aluminum manufacturing and engineering.
The aluminum business, like all commodities, is prone to major booms and busts. It's sensitive to economic cycles. When the economy slows down, aluminum tends to bust. When the economy picks up, aluminum tends to boom.
Last October, aluminum appeared to be in the "bust" part of its cycle. The metal's spot price hit $0.80 a pound, a multiyear low. At the time, Alcoa shares fell from $18 to $8. It was hard to imagine sentiment could get worse for the company.
DailyWealth Trader editor Amber Lee Mason recommended getting into Alcoa below $8.75. Global economic growth would improve sentiment toward Alcoa, she reasoned.
The trade was not based on everything becoming "perfect" with Alcoa. That's the beauty of investing in hated assets… like aluminum last fall. Things only have to get a little better in order for us to make money.
Sure enough, sentiment in the aluminum sector changed from "bad to less bad" on beliefs the global economy is improving...
Though the price of aluminum has changed little since the recommendation, the demand for aluminum has grown. According to the Metals Service Center Institute (MSCI), total aluminum shipments from the U.S. are up to 533,600 metric tons during the first four months of 2014. That is a 10% increase from the first four months of 2013.
And Alcoa shares are rising with the sector's improved outlook. DailyWealth Trader readers are up more than 64% on the recommendation.
On the topic of "bad to less bad"... We can't think of a commodity that's more hated than uranium at the moment. Natural resource expert Rick Rule, CEO of Sprott U.S., spoke about uranium at our Natural Resources Investment Conference in Dallas last month.
Amber outlined some of Rick's thoughts in a recent Growth Stock Wire:
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You can read the complete essay here...
In November 2013, Stansberry's Investment Advisory recommended one of the largest independent energy producers in the country – Anadarko Petroleum.
Anadarko got whacked in December after a judge ruled it may be on the hook for billions of dollars of environmental liabilities due to a former subsidiary company, Tronox. The stock tumbled from $83 a share to $78 in one trading day. But Porter and his team urged readers not to sell.
Then, in April, Anadarko jumped 14.5% after a judge ordered the company to pay a $5.2 billion fine to settle the case.
You can read more of that story here.
Yesterday, Anadarko gained nearly 5% to hit a 52-week high on rumors that ExxonMobil may acquire the company. Neither company commented on a potential deal.
According to Barron's magazine, JPMorgan analysts say a suitor would have to offer at least a 20% premium to Anadarko's net asset value (an estimated $140 per share).
Based on that, we could potentially see a deal for Anadarko at $168 a share – a 56% premium to Wednesday's closing price.
Stansberry's Investment Advisory readers are up 21% on the recommendation.
It was a rough day for athletic-apparel maker Lululemon...
The luxury sportswear brand, which gained its following making high-quality yoga clothes and accessories for women, fell more than 15% today on disappointing earnings.
The company earned $19 million, or $0.13 per share, compared with $47.3 million, $0.32 per share, in the same period last year.
Now LULU says it anticipates full-year earnings of $1.71-$1.76 per share, down from prior guidance of $1.80-$1.90 per share. LULU also narrowed slightly the range of its revenue forecasts to $1.77 billion-$1.8 billion compared with its previous expectations of $1.77 billion-$1.82 billion.
And this isn't the first hiccup for the company... Lululemon plunged around 24% in the December and January after its "see through pants" fiasco... The company's female customers complained about the transparency of some models of its yoga pants. The company's founder, Chip Wilson, blamed the problem on the women... Not his product. He was quoted on Bloomberg TV saying that "some women's bodies just don't work [for the pants]."
Now compare faddish Lululemon with Nike – a long-lived, global business with an iconic brand.
Lululemon is a $5.5 billion market-cap company. Its 2013 sales totaled $520 million, and it earned $109 million. Meanwhile, Nike's market cap is $66 billion. For full-year 2013, Nike had revenues of $25 billion and earned $2.5 billion.
And Nike has been providing stable dividends to shareholders for years. Currently, Nike pays out a $0.24 dividend per share (1.3% yield) on common stock. Lululemon pays no dividend.
During the past six years, Nike has bought back 88 million shares, reducing shares outstanding 9% from 982.2 million to 894 million. Lululemon just authorized $450 million in buybacks.
Both Nike and Lululemon's share prices have doubled since June 2010... But as you can see in the following chart, Nike has taken shareholders on a steady climb higher, while LULU has bounced them around with big volatile swings.
For many investors, it's a lot easier to hang on to Nike as it plows higher, than it is to endure LULU's ups and downs. It's just one more example of why we prefer owning shares of established high-quality companies for the long term.
New 52-week highs (as of 6/11/2014): Apache (APA), Anadarko Petroleum (APC), Activision Blizzard (ATVI), Callon Petroleum (CPE), Carrizo Oil & Gas (CRZO), ProShares Ultra Oil & Gas Fund (DIG), Devon Energy (DVN), Freehold Royalties (FRU.TO), Greenlight Capital (GLRE), Halcon Resources (HK), Integrated Devices (IDTI), Altria Group (MO), Sprott Physical Platinum and Palladium Fund (SPPP), and Skyworks Solutions (SWKS).
In today's mailbag… one subscriber praises the work Porter's growing team of analysts is providing. Send your e-mail to feedback@stansberryresearch.com.
"Thought the June issue [of Stansberry's Investment Advisory] was packed with fantastic research.
"Especially enjoy the [coal] write up detailing why such a hated commodity can be a good opportunity. I would NEVER have invested in coal if it wasn't for Porter and his teams excellent research. I've noticed the quality of Investment Advisory content improve exponentially since I joined the Private Wealth Alliance many years ago. I can't believe I have access to this kind of detailed research for the rest of my life (or Porter's) for only $500 (that's what I paid)." – Paid-up subscriber Matt Vestrand
Goldsmith comment: Thanks for the kind words, Matt. Porter actually sent an e-mail around the office saying he thinks his latest issue is one of the best he has ever produced. If you're not already subscribing to Stansberry's Investment Advisory, you can do so here...
Regards,
Sean Goldsmith
June 12, 2014
Doc Eifrig: Real-world signs the economy is improving…
Retirement Millionaire editor Dr. David "Doc" Eifrig follows several real-world indicators to gauge how the U.S. economy is faring. In today's Digest Premium, he shares his latest readings…
To subscribe to Digest Premium and receive today's analysis, click here.
Doc Eifrig: Real-world signs the economy is improving…
Editor's note: Retirement Millionaire editor Dr. David Eifrig tracks the U.S. economy using numerous real-world indicators… And right now, he says things are pointing up.
In today's Digest Premium, adapted from episode 155 of our Stansberry Radio podcast, he shares some optimistic signs he's seeing…
One of the things that's well-studied and pretty clear is there's not much of a correlation between gross domestic production (GDP) – the output of an economy – and the stock market.
So GDP has lagged, but the stock market is hitting all-time highs. So you have to be careful what you look at when forming macroeconomic opinions.
My analysts and I take a bottom-up and top-down approach. As I explained to my Retirement Trader subscribers in a recent issue:
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From the macro side, one of the things that can hurt returns is inflation… less so in stocks than in bonds.
You can have inflation of between 1% and 4%, and stocks generally can do very well. Many of the companies stay viable because they can raise prices in that environment. They have market share, and they're leaders in their product categories.
In general, we like to look at the economy to see what sectors are moving, how they're moving and what they are doing. For example, I follow something I call the "cabbie index." It's real simple… I get in a cab and ask the driver a very sincere question… It's "how long have you been driving a cab?"
I usually do that before they start getting too far, because then some of them wonder if I'm questioning their route or driving skill.
And if someone says a long time, I ask them how business is. They think I'm making small talk, but I keep digging until I get the answer I want… How does business compare with 10 years ago or five years ago, when the legs fell off the table?
I've been to Vegas twice in the last two months, and the cabbies say things are at least where they were right before the bubble popped. So the veterans and new drivers are all saying things are at least as good as they were at the peak. So say we're at all-time highs in taxi service in Vegas.
That's confirmed by what I'm seeing on airline flights. They're full, and it's hard to get last-minute tickets.
And good restaurants are busy. Not necessarily full, but busy.
I also look at the wine business… In particular, I look at brands of wine being moved at discounts on some of these online flash-sale sites. When I start seeing names I don't recognize moving, for me, it's a sign the economy is doing better than when you recognize the brands that are moving.
For example, three or four years ago, brands like Silver Oak and Mondavi were selling at a discount. Those are big names.
I haven't seen those names recently… And I don't know a lot of the wines moving on the flash sites or even in large warehouse sellers.
These are signs the economy is improving.
In tomorrow's Digest Premium, Doc will share his thoughts on inflation moving forward.
– Dr. David Eifrig
Editor's note: Tomorrow, billionaire technology entrepreneur Mark Cuban is appearing on the James Altucher Show – part of the Stansberry Radio network. He's one of our highest profile guests to date. And we're sure he'll have insightful information to share. To make sure you don't miss James' discussion with Mark Cuban, click here to sign up for the James Altucher Show podcast. It's completely free.
Doc Eifrig: Real-world signs the economy is improving…
Retirement Millionaire editor Dr. David "Doc" Eifrig follows several real-world indicators to gauge how the U.S. economy is faring. In today's Digest Premium, he shares his latest readings…
To continue reading, scroll down or click here.