Stock yields higher than bond yields... Bond investors: 'Total delusion'... China getting control of the yuan... Our directors finding home bargains... Buying rental properties...
Everybody wants to buy bonds these days, pushing yields down... Moody's triple-A bond yield forecast for the month of March is 3.96%. After taxes, you're looking at a little more than 2.5%. Inflation will certainly beat that over the next several years.
Since everybody wants to buy bonds, corporate America really, really wants to sell them while yields remain near record lows. Companies like IBM, Procter & Gamble, Walt Disney, and McDonald's have sold billions worth of debt this year, taking advantage of the opportunity to lower their interest expense. A couple weeks ago, Disney sold $1 billion of five-year unsecured debt at a yield of just 1.125%. Data tracking firm Dealogic says that's the lowest five-year coupon since it began keeping track in 1995. It also sold $400 million worth of 10-year debt at 2.55%.
I don't know what Disney plans to do with the cash… but it should use every penny to buy back its stock... which yields 1.4%, 27.5 basis points more than the bonds. McDonald's and Procter & Gamble also recently sold bonds yielding less than their stock.
Not many companies can do that. Right now, the S&P 500's dividend yield is around 2%. That's a little more than half what investment-grade bonds are yielding, even though such bonds are touching record-low yields...
On Friday, average yields on investment-grade corporate bonds fell to 3.79%, according to data from Barclays Capital. That's its lowest level in nearly 40 years.
If you convert that Barclays yield figure to a price-to-earnings (P/E) ratio, you get around 26 times pretax earnings. You can only justify a multiple like that if you believe you're going to see massive growth in the coupon.
But remember… these are bonds, not stocks. The coupon won't grow one penny the whole time you own it. So in the bond market today, Mr. Market is paying for growth that is contractually guaranteed never to arrive. Bond investors aren't merely hopeful. They have reached a state of total delusion.
And then there are junk bonds. The polite term for these riskier securities is "high-yield" corporate bonds… But the yields are down to a not-so-high 7% these days. That's above all-time lows… but not by much. (The record low is 6.81%.)
Why are we so obsessed with yields today? When the Fed shoves interest rates down in an attempt to prop up securities markets, risk becomes mispriced. A 7% junk-bond yield is a sign of mispriced risk.
The Fed is like a drug dealer pushing his new supply on his addicted customers, or at least a doctor who's gotten pretty loose with his prescription pad. The Fed knows this, too. And its leadership is starting to worry about it... Dallas Federal Reserve President Richard Fisher said in a speech to the Dallas Regional Chamber of Commerce yesterday, "The markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency, rather than administer further dosage."
And if you're wondering what corporations are raising all this debt to pay for it... well... part of the answer is their own stock. Market researchers at TrimTabs say share repurchases hit a five-month high in February of about $42.2 billion. Most share repurchases destroy shareholder value because they're made at prices that are simply too high. But I don't know that's necessarily the case these days...
It might be logical to assume the market is near some kind of peak. It's up 25% since early October, a huge five-month move. Yet stocks aren't anywhere near peak valuations. Bloomberg reported yesterday that the S&P 500, which represents about 75% of the U.S. stock market by market cap, trades around 14 times earnings – cheaper than all 34 times it has peaked since 1989. So... if we are near a peak in the stock market, it'll be the cheapest one in more than two decades.
The long-term average S&P 500 price-to-earnings ratio is a little more than 16 times earnings. Stocks aren't super-cheap, but they're not terribly expensive, either. If the world were a reasonable place, we should expect stocks to rise slightly or maybe just tread water for a while.
China's economic planning agency, the National Development and Reform Commission (NDRC), endorsed a plan for Shanghai to become an international yuan-trading center by 2015... It plans to increase the volume of financial transactions from $61.2 trillion in 2010 to $158 trillion per year. That would make it one of the largest financial centers of the world (on par with New York and London).
And it would give the Chinese government greater control over the yuan, which has been increasingly influenced by offshore markets. "There have been recent developments that have put Hong Kong's offshore market in the spotlight from time to time, such as its pricing of the yuan quite differently from the onshore market," a trader at a European bank in Shanghai told Reuters. "In this sense, the NDRC statement is published at a sensitive time and means the government once again wants to emphasize that it has the final say in the value of the yuan."
Why would China want greater control of the yuan? Well, we think China is secretly planning a major revamp of its currency... And it would cost Americans (both individuals and our government) billions of dollars. Our analysts have been studying China's currency moves for over a year, and they've produced an important special report you must read. Click here to learn more...
True Wealth editor Steve Sjuggerud remarked to us yesterday that despite his constant recommendations to buy a house, he didn't know a single person who's taken his advice... not even after Warren Buffett echoed his bullish housing call, saying he'd personally buy "a couple-hundred thousand single-family homes" if it made sense for him.
But maybe the message is starting to take hold…
We had our regular directors meeting today... One of our executives called in from home because he was in the middle of moving. He had read Steve's housing research in DailyWealth and True Wealth. He spoke to Steve and Porter (who is heavily invested in Florida residential real estate). Then, the executive found a house built by Toll Brothers in 2006... It went on the market in October for $300,000 less than the owners originally paid. And he purchased the house for $100,000 less than asking ($400,000 less than the original price six years ago), securing a jumbo mortgage at 4.375%. Plus, he sold his old house 16 days after it listed.
And after the call, another executive called Steve to say she also purchased a home in Maryland... She practically stole a foreclosure and secured a mortgage around 3.375%.
My wife and I (Dan Ferris) went out this weekend to look around for rental houses. Our real estate agent told us plenty of people are looking to buy rental properties... but many, many more are looking to rent them. She had a vacancy in one of her houses, put an ad on Craigslist, and got dozens of replies immediately… most of them from people with good jobs.
My wife recently spoke with other landlords. One man owns 29 houses in the area. He says it's not at all difficult to evict someone around here, but he's rarely had to do it. Another property owner said she's owned rentals for many years and only had one eviction the whole time.
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New 52-week highs (as of 3/5/12): Enterprise Products (EPD), BP (BP), and Philip Morris International (PM).
Can you help teach a newbie a thing or two about being a landlord? Have any of you taken Steve's advice to buy a house? Where did you buy? Was it for a primary residence or investment? We'd love to hear your stories... feedback@stansberryresearch.com.
"I'm a new subscriber to S&A. Please forgive my stupidity and explain something to me. I see your top ten and your all-time winners list, but if I have money to invest today what are you recommending I invest it in? I don't see any "current recommendations". How do I get in your game?" – Paid-up subscriber Dave
Goldsmith comment: Our top-10 list simply showcases the best-performing, open recommendations our analysts have made... It offers kudos for a great stock pick, and it fuels competition between our analysts to get on the list – which benefits you. But the stocks on the list aren't necessarily buys today. By definition… these stocks have appreciated a lot from their recommended prices.
Virtually all of our editors maintain current "buy/hold" recommendations in their portfolios. To see where they believe subscribers should put new money… read the latest issue of their advisories. On the back page, you'll find the model portfolio. Typically, stocks listed there as "buys" represent the best current opportunities.
"What a gift it is to open the Digest every night and read a true analysis of the financial news without the version given by the talking heads. After years of being an Alliance Member I find the value of what you offer consistently increases. What an education is available to those that wish to take advantage. The variety of investment choices are outstanding and as one matures as and investor the appropriate venue is there to take advantage of.
"And mature may not only mean becoming a more sophisticated investor, but mature may also mean focusing on a portfolio geared solely to retirement. How I wish I had had the wisdom of Retirement Millionaire years ago. And recently I have listened and prospered by the training videos produced by Jeff Clark on options. What an enlightenment. How can the members of the Alliance Group thank you enough. If we wish to take advantage of what you offer we can not help but prosper. Thank you Steve, Dan, Jeff, Dr Elfrig and all the other great Stansberry staff. What a pleasure this association has been." – Paid-up subscriber NDJ
Sean Goldsmith and Dan Ferris
New York, New York and Medford, Oregon
March 6, 2012