How to make a fortune from market misconceptions...
How to make a fortune from market misconceptions...
Once most investors buy a stock, they figure the higher (and faster) that stock's price flies, the better. But in today's Digest Premium, Dan Ferris, editor of Extreme Value, explains why long-term buyers of equities should be perfectly happy to see those shares stay "cheap" for years and years...
To continue reading, scroll down or click here.
How to make a fortune from market misconceptions...
Once most investors buy a stock, they figure the higher (and faster) that stock's price flies, the better. But in today's Digest Premium, Dan Ferris, editor of Extreme Value, explains why long-term buyers of equities should be perfectly happy to see those shares stay "cheap" for years and years...
To subscribe to Digest Premium and access today's analysis, click here.
Tesla versus the man... 'Commodities bottom not here yet'... Shipping going bust... Wilbur Ross steps in... Social Security runs out in 2016... Tom Dyson's shocking new presentation...
Tesla Motors is back in the headlines today...
The electric-car maker wants to sell its cars directly to consumers in company-owned Tesla stores, bypassing the traditional dealer/franchise model. But car dealerships want their cut... and they're not going down without a fight.
Tesla's retail stores would violate state franchise laws, some of which go back to the days of Henry Ford. The Wall Street Journal says the laws exist to prevent big car companies from undercutting their own franchisees on price. The laws have helped insulate car dealers from troubles other bricks-and-mortar businesses have suffered due to Internet competition.
In Oregon, Tesla has one store, but the car dealers are trying to get it shut down. Colorado also has one Tesla store and won't allow another to be built. In Texas, Arizona, and Virginia, Tesla is allowed to have "galleries," where you can look at a car... but they're not allowed to sell them. You can order a Tesla by phone or over the Internet.
Customers can buy a Tesla car in a Tesla store in New York, New Jersey, Massachusetts, California, Illinois, Washington, Pennsylvania, Illinois, and Washington, D.C.
Car dealers are just another government-protected industry. It's another network of good ol' boys. They're feeding from the same government trough that so many other businesses are.
In this case, I (Dan Ferris) am sympathetic to Tesla's plight. It's unethical for car dealers to use the government to shut out competition. And it's unethical for the government to allow such abuse.
But in terms of investment, the situation adds further risk to an already speculative stock. Tesla is a brand-new company selling a brand-new technology in a highly capital-intensive, competitive business that already has a huge infrastructure of gasoline fueling stations in place.
Tesla is selling an electric car that starts at $60,000 and costs another $30,000 to get a decent set of upgrades, including a better battery that allows for a slightly longer driving range on a single charge.
I'm not advocating shorting shares of Tesla here. But I would definitely avoid the stock for now. It's too speculative and risky.
In the June 7 Growth Stock Wire, S&A Editor in Chief Brian Hunt presented three charts showing the destruction in some of the world's biggest mining stocks. Many major miners have seen their shares drop 30%-plus over the last two years due to slowing demand from China and Europe. Brian says you should still avoid the sector... We're not at the "wash out" bottom yet.
Slowing demand for these commodities is one reason rates for "dry bulk shippers" – which carry cargo like coal, iron ore, and grain – have cratered. Take a look at this 10-year chart of the Baltic Dry Index, the bellwether index for dry bulk shipping rates...
The bigger reason the shipping sector is suffering is cyclicality. Like the commodity business, shipping is highly cyclical... When times are good, shipping companies order lots of new tankers (which can take a few years to deliver). Eventually, a glut of supply occurs and day rates plummet.
In March, for example, there were 20% more vessels than cargoes – the largest glut since the early 1980s, according to Clarkson Plc, the world's largest shipbroker.
Eventually, shipping companies scrap older ships and idle their existing fleet. Tankers trade for less than half their original cost. Day rates slowly recover... Demand for new ships increases... And it starts all over again.
As our friend, expert resource investor Rick Rule, likes to say, "The cure for low prices is low prices."
And we may be approaching the bottom of the cycle in shipping...
Earnings for many companies in the sector can't meet operating costs.
Excel Maritime, a large dry-bulk shipper, announced plans to seek bankruptcy on June 11. Korea's largest dry-bulk shipper, STX Pan Ocean, sought bankruptcy protection on June 7. Two other companies, Genco Shipping and Eagle Bulk Shipping, are on the verge of default...
On May 1, Genco had to restructure its debt to short-term to comply with its loan covenants. Eagle Bulk said it could breach its covenants by next March if rates don't improve.
Erik Stavseth, an analyst at investment bank Arctic Securities, told the Financial Times, "There's [no ships] making money and no ability to pay the banks what they owe them." He said rates had been at best just covering operating costs since the beginning of the year. Average rates for the largest dry-bulk ship were $6,976 on Friday – under the approximately $10,000 operating cost.
Billionaire distressed investor Wilbur Ross believes the shipping industry will turn around in 2014...
Ross and a consortium of investors purchased a fleet of 30 tankers that haul gasoline and diesel for $900 million two years ago. His investment firm, WL Ross & Co., also has a majority stake in Navigator Holdings, which controls one-third of the world's mid-sized liquefied petroleum gas carriers.
"We're going to do a lot more in shipping even than we have," Ross told Bloomberg in May. "Shipping has a great oversupply of vessels that came from over-ordering a few years back. We think 2014 may be when it turns around."
Shipping is poised to be an incredible contrarian trade... Shipping companies can't afford to operate. They're declaring bankruptcy every month. Day rates are at rock bottom. Speculators who nail this trade could potentially double or triple their money in the next 12 months if they time it right. But getting the timing right isn't easy... As we've seen with gold stocks, sectors can wallow at the bottom for much longer than anyone expects.
It's one of the most controversial things we've ever written at S&A: Social Security is a Ponzi scheme.
Many people get very upset when we write it... but sadly, the evidence keeps mounting that Social Security is bankrupt...
The program taxes current workers to support retired workers... but the system will soon run out of cash.
A recent report shows just how close to the edge we are...
According to the Social Security Board of Trustees, the Social Security disability insurance trust will be completely depleted by 2016. This dire situation led the trustees to state in their summary that "more far-reaching legislative measures are required to maintain the solvency of Social Security relative to Medicare."
In other words, expect some more major changes to come in the near term. According to consumer financial services firm Bankrate, one expert has even testified to Congress proposing the minimum age to start collecting Social Security be raised from 62 to 64.
Will this idea be approved in Congress? We have no idea. Social Security is often referred to as the "third rail" of American politics... because suggesting changes can be fatal to a politician's career.
Regardless of how things play out... It's clear you cannot and should not rely on government largesse to secure your retirement. And saving money in tax-advantaged accounts is critical... Because whatever solution is found... you can be sure your tax bill will go up as a result. There's no other choice.
That's why a few days ago, we hinted at one of the best ways to grow your money tax-free. Your money grows much faster than it does in long-term CDs... You can take it out any time without penalty. And you don't need to report it to the IRS. Our colleague Tom Dyson first brought this to our attention.
Tom spent a full year researching this before trying out this idea. Now it has become his single-largest position, with 20% of his family's wealth now in this account. Unfortunately, only one American in 1,500 has this account. We hope you'll take the time to learn more about it...
Tom has put together a presentation to share what he's learned about this investment and has agreed to let Digest readers view it for free. You can watch this video here.
New 52-week highs (as of 6/17/13): Cisco (CSCO), DCP Midstream Partners (DPM), Fidelity Select Medical Equipment & Systems Fund (FSMEX), and Medtronic (MDT).
In today's mailbag, one reader offers his point of view from World War II... and another gives two reading recommendations. Send your e-mails to feedb
"I was intrigued by what [Mark Pittman] wrote. I saw Fascism from the inside as I was a POW in Germany when the B-17 I was piloting was shot down. My dog tag had an 'H' (for my religion) on it. Since you know I was in WWII, you also know I am in my 90s. I don't buy green bananas and know I will not see the coming attempt to subvert our country.
"What we are seeing here is only the camel's nose. But the direction it is pointing is into the tent. We are letting the fascistic model take over our society as well as our political structure. I remember Kruschev beating his shoe on the podium at the United Nations and shouting 'We will bury you!' He meant the U.S. and he meant economically. He didn't succeed but these people seem to have hooked onto the right formula – bury us in debt and destroy our reserve currency position. We have the means to beat 'them'. It is right under our feet. But we must pump it up in the next few years or surrender what we prize most – our freedom." – Anonymous
"Re yesterday's interview with Richard Maybury, I offer a question and 3 comments below. Have you ever read the following two books?
"The Revenge of Geography by Robert D Kaplan of Stratfor
"Civilization: The West and the Rest by Niall Ferguson at Harvard U., Oxford and the Hoover Institution
"I think you will find that read together, the two books will give you the most comprehensive understanding of world affairs today by seeing how the interaction of geography and the extraordinary developments in the numerous fields of human endeavor, but especially in Europe and America after 1500 have brought us to the place we are at today.
"In 1411, the Forbidden City was under construction in Beijing, then the largest city in the world. In 1453, the Ottomans captured Constantinople. The future imperial powers of Europe accounted for about 10% of the world's surface and 16% of its population. By 1914, 11 Western empires controlled nearly three-fifths of the world's territory and population, and a staggering 79% of economic output. By 1990 the average American was 73 times richer than the average Chinese. Why? Competition, Science, Property, Medicine, Consumption and Work!
"You will be acquainted with Mackinder's theory of the World Island becoming after WWI fully occupied with a closed system of political ownership. The Monroe Doctrine notion of a vast and virtually sovereign are in the Americas was inspired by a friend of Henry Clay, inspired by the German notion of Lebensraum. A Swedish professor coined the term geopolitik. The adoption of Western dress arose from invention of standard sizes that enable mass production of textiles. The Iranian plateau, home of the world's first super power, remains the pivot for world history with languages and cultural traditions that have survived. Iran also possesses key geographic elements – location, population and energy resources essential to global geopolitics. No wonder they confound us so. The river of history spits in your eye.
"It also provides a basis for humility in America in looking at matters of foreign policy, where we have been so ineffective of late. Our leadership in both parties appears clueless in so many ways, in the main because they have never read either of these books and do not comprehend the different forces at work in our world. Together these books have provided more insight than in all my years of schooling and international business." – Paid-up subscriber Ken Hoyt
Regards,
Sean Goldsmith and Dan Ferris
Miami Beach, Florida and Medford, Oregon
June 18, 2013
Sean's note: In today's Digest Premium, Dan Ferris, editor of Extreme Value, explains why long-term buyers of stock should be happy to see the prices of their holdings stay "cheap"...
In the June issue of Extreme Value... Dan recommended subscribers buy shares of a "World Dominator" whose shares have sold off this year. As we wrote in the June 6 Digest, we believe it could end up being one of his highest-returning positions ever.
In the following excerpt from the issue, Dan explains why he'd welcome more bad news and low valuations for this company...
One reason my latest World Dominator recommendation is so dirt-cheap is the market doesn't like the fact that it doesn't pay out more cash to shareholders. That sounds bad – and I've criticized it myself in the past – but with this company, it works in your favor.
Let's say you're like me, a committed lifetime buyer of equities. Your ideal stock is a wonderful business that stays wonderful for decades, gushing cash flow, growing relentlessly in good times and bad... and whose shares remain cheap. The company's growth and share repurchases will push the share price up over time and still be cheap enough for us to buy...
A company that consistently trades at six times earnings but grows at double-digit rates should still have a rising share price over time. If it generates $1 this year, it'll trade at $6 a share. If it generates $1.50 next year, it'll trade at $9 a share, and so forth. The share price can rise and still be cheap. That would be ideal.
One of the best examples of a high return from a cheap stock is Philip Morris (which split into Altria and Philip Morris International in 2008). In his book The Future for Investors, Jeremy Siegel notes that Philip Morris outperformed the S&P 500 by an astounding 9% per year from 1957 to 2003. A $1,000 investment would have become $4.6 million, with dividends reinvested. Siegel notes the tobacco giant's enormous legal troubles and explains...
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It hardly matters what the negative perception is, as long as the business keeps gushing cash profits – as Philip Morris' descendant companies, Altria and Philip Morris International, are doing today.
It's the same with all cheap World Dominators. As long as they stay cheap, you can keep buying shares (and reinvesting dividends). And you'll compound at higher rates because you're paying less for the business. Simply put, price determines your return. The less you pay, the higher your return.
Editor's note: Dan's latest World Dominator recommendation is one of the best-known companies in the world. And it's also one of the cheapest high-quality companies in the market today. This recommendation could turn out to be Dan's best ever. To learn more about Extreme Value, click here...