The Dow Jones hit a new all-time high yesterday, crossing 15,000 before closing at 15,056.20.
As you can see at the end of today's issue, many stocks across S&A portfolios are hitting new highs.
But remember, the rally we're experiencing is due to Federal Reserve Chairman Ben Bernanke's policy of quantitative easing. The Fed is buying $85 billion in U.S. government debt every month. Through the Fed's policies, our government has effectively printed trillions of dollars since the financial crisis began. And in a recent announcement, the Fed said it would consider increasing stimulus.
It's all part of what Steve Sjuggerud calls the Bernanke Asset Bubble. In short, Bernanke is goosing all asset classes. Bond yields are at all-time lows (meaning prices have gone up). Those low yields are forcing investors into riskier and higher-yielding assets like junk bonds and stocks. Junk bonds (aka high-yield bonds) are also at all-time highs.
We can't know the future... but we believe this rally could go on for some time. Make sure to protect your profits by minding your trailing stops. And don't chase gains through excessively risky assets.
I read a story this morning in the Wall Street Journal about pension funds investing in new-construction, high-end commercial real estate projects. They're investing alongside private-equity firms in projects like the Baccarat Hotel & Residences in Midtown Manhattan across from the Museum of Modern Art. The development will cost $400 million... And the developers are planning on selling condos for up to $60 million apiece. Every unit will have a Baccarat crystal chandelier.
"[Pension funds have to] take more risk to get double-digit returns," said Bob Jacksha, chief investment officer of the New Mexico Educational Retirement Board.
As the top approaches, complacent investors are blind to risk. They see only opportunity. And they fear missing out on the coming gains. Of course, that's the exact wrong mindset…
In his most recent letter to investors, Seth Klarman, founder of hedge fund Baupost Group, discussed today's complacent market environment. Klarman is one of the best value investors in the world. And he hates risk. Over two decades, he's regularly achieved double-digit returns for his investors while keeping half his fund – which now has more than $20 billion in assets – in cash.
From Klarman's letter to investors (as published in financial blog Zero Hedge):
Most U.S. investors today have a clear opinion about what everyone else has no choice but to do. Which is to say, with bonds yielding next to nothing, the only way investors have a chance of earning a return is to buy stocks. Everyone knows this, and is counting on it to remain the case.
While economist David Rosenberg at Gluskin Sheff believes government actions could be directly or indirectly responsible for as many as 500 points in the S&P 500, or 30% of its current valuation, traders have confidence in Ben Bernanke because betting that his policies will drive equities higher has been a profitable wager.
Bernanke, likewise, is undoubtedly pleased with these speculators for abetting his goal of asset price inflation, though we all know that he will not call them first when he decides to reverse direction on QE. Then, the rush for the exits will be madness, as today's "clarity" will have dissolved, leaving only great uncertainty and probably significant losses.
Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals--recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S. – is the riskiest environment of all.
I'm writing today's Digest from Las Vegas... The Value Investing Congress – one of the best investing conferences we attend each year – concluded yesterday. Value investors worship Berkshire Hathaway chief Warren Buffett. Attendees hear scores of quotes from "The Oracle of Omaha" over the two-day event… including perhaps his most famous line: "Be fearful when others are greedy and greedy when others are fearful."
People are greedy today. They're ignoring risk. The Volatility Index (the "VIX"), the market's fear gauge, is below 13. It's close to its lowest level since before the financial crisis. Investors are very complacent.
We're not saying it's time to get out of the market. The Bernanke Asset Bubble is in full swing, and the rally could go on for another couple years… But the higher the market goes, the more cautious investors should be.
Wells Fargo (WFC) is the biggest mortgage underwriter in the U.S. and the nation's largest small-business lender. Those are two reasons the company is Retirement Millionaire editor Dr. David "Doc" Eifrig's favorite bank. (More on that in a bit.)
Wells Fargo just announced it would expand its small-business lending. The company is placing more than 1,500 additional loan experts in local branches and expanding its portfolio of credit products. The stock was up nearly 1.5% midday, hitting a new high and reaching its pre-crisis peak.
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According to The Wall Street Journal, the moves come after loans to commercial and industrial companies expanded at an 11% annualized rate in the first quarter. That's the sixth double-digit gain in the last seven quarters. More than one-quarter of U.S. banks have cut their credit costs.
For more on Wells Fargo's mortgage-lending dominance, be sure to reread the April 3 Digest.
In that issue, we also covered why Warren Buffett, Wells Fargo's largest shareholder, likes the bank today. Like Doc, Buffett is bullish on the U.S. economy... And as people buy more houses, Wells Fargo makes more money. Plus, Buffett believes Wells Fargo will take an even larger share of the U.S. mortgage market (from around 34% of all loans to 40%).
In addition to its lending dominance, Doc likes the bank's gushing cash flow and how well it treats shareholders. The company paid out nearly $5.5 billion in dividends last year (up from $3.4 billion in 2011). And it buys back a ton of stock... Wells Fargo repurchased nearly $3.9 billion in shares last year and has already bought $1.4 billion shares this year.
Retirement Millionaire subscribers who bought Wells Fargo on Doc's recommendation are up 19% since April 2012.
We're working on a new currency report...
Regular readers know we're concerned about the long-term health of the U.S. dollar. It's the central theme of Porter's "End of America" thesis. (His video has been viewed more than 20 million times.) In short, the U.S. government is headed for a slow-motion default on its debts and obligations.
While we can't predict where the value of the dollar will be five years from now, we can comfortably predict it will get to that value with great volatility. Most Americans will be rocked by this volatility. S&A readers will be prepared for it... and should be positioned to prosper from it.
Most folks believe currency fluctuations don't affect them... or that the whole subject is just too boring to pay attention to. After all, how much can the value of your bank account really swing up and down?
The answer is A LOT.
Below is a 10-year chart of the U.S. dollar index. It measures the dollar's value against a basket of foreign currencies, like the Japanese yen and the euro. It's the generally agreed-upon measure of the dollar's global trade value.
One glance at the chart below and you'll see that our prediction of currency volatility isn't outlandish. It displays the value of our bank accounts. And it's bouncing up and down with tremendous volatility. Double-digit percentage changes in value are taking place in the span of months… not years.
Think holding U.S. dollars in a bank account is a boring, conservative idea? Think again. And expect to hear more about our currency report in the coming weeks...
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New 52-week highs (as of 5/7/13): Advent Claymore Convertible Securities & Income Fund (AVK), WisdomTree Japan Smallcap Fund (DFJ), WisdomTree Japan Hedged Equity Fund (DXJ), Cambria Global Tactical Fund (GTAA), iShares Dow Jones U.S. Insurance Fund (IAK), iShares Dow Jones U.S. Home Construction Fund (ITB), AllianzGI Equity & Convertible Income Fund (NIE), PowerShares Buyback Achievers Portfolio Fund (PKW), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), V.F. Corp. (VFC), Prestige Brands (PBH), Monsanto (MON), RPM International (RPM), American Financial Group (AFG), Loews (L), Alleghany (Y), Becton-Dickinson (BDX), Medtronic (MDT), Chart Industries (GTLS), DCP Midstream (DPM), Superior Energy Services (SPN), Union Pacific (UNP), and Wells Fargo (WFC).
In today's mailbag... The debate on Porter's brashness rages on... You can weigh in here... feedback@stansberryresearch.com.
"I really enjoy your newsletters, and read them daily. I too am an Alliance Member, and find great value in your services.
"I found the May 7, 2013 – in Digest Premium – discourse, between you and an alienated Alliance Member interesting. I want to commend you on your habit of publishing dissent, for it provides a healthy forum for contrary views. Through this process, perspective is widened.
"The conflict between you and the Alliance Member can be summarized, in my opinion, through comparing Warren Buffett to Donald Trump. The former being understated performance, and the latter being brash arrogance. Your position that publishers do not have the 'luxury of whispering' is valid, at many times. When people are not listening to critical points, thespian enhancement can be used, to awaken the somnolent. Your General Motors CEO piece did this brilliantly, giving artistic presentation, to corporate malfeasance.
"The important question however remains when thespian enhancement is destructive. The alienated Alliance Member interpreted your actions to be self-indulgent bragging, instead of useful financial information. How much of this was your presentation, versus how much of this was envy, I cannot assess. However as envy, and covetous desires, are omnipresent, the truly wise consider this in their actions. Attaining perfection is impossible. Striving for perfection, as you are already fully aware, is noble. Hoping that you find this email useful. Keep up the great work." – Paid-up subscriber Sam Lewkowicz
"Porter does not strike me as a self-opinionated windbag or self-centered. I actually really appreciate that Porter shares that he has important friends, country club memberships, Rolexes, oceanfront properties, boat, wines. Investing advice is not necessarily good just because someone is wealthy, but it's certainly never good from people who are not.
"If one finds it boring or annoying to hear an investing advisor talk about his own wealth, then perhaps one could examine why one feels personally defensive about it, rather than happy for Porter. Thanks and great work as always." – Anonymous
"Yeah, it easy to whisper when you already have made it. But for little guys like me, I want to hear about the Rolex collection and the boats and the wine collection. Because guys like me want a goal. We are aspirational and crave the pep talks and all the rest of it. Gatsby can stay in his mansion and whisper to his friends." – Paid-up subscriber Kim Horchner
Regards,
Sean Goldsmith
Las Vegas, Nevada
May 8, 2013
I (Porter) love private-equity stocks. I think they're the greatest way to be an investor in the United States today. They're better than hedge funds. Right now, they're an even better investment than insurance – which subscribers know is one of my favorite sectors for long-term investment.
Private-equity firms are mysterious and often portrayed in the liberal media as sinister. Few investors understand how they work. But everyone knows one thing: They make a lot of money.
So… our government's loose money is a godsend for these firms. With Bernanke keeping interest rates near zero percent, these companies can essentially get unlimited amounts of credit for almost nothing. They can borrow money for next to nothing and invest it to earn 6%-8% a year with little risk.
I expect private-equity stocks will continue to go up. But remember… the rally that is lifting these stocks is artificial. It's not being fueled by a healthy economy, but by currency manipulation from central banks worldwide.
As we discussed last week, private-equity billionaire Leon Black told the audience at a conference held by the Milken Institute economic think tank, "We're selling everything that's not nailed down. And if we're not selling, we're refinancing." A number of other private-equity executives expressed a similar skepticism about the market's current highs.
These guys are probably early. This rally could continue for a couple years... Given the amount of inflation we're seeing, stocks could double from here. We could easily see the Dow Jones hit 30,000. When people are desperate to get out of the dollar, they're going to buy up stocks. And they will pay more for shares than they will pay now.