Mon, May 5, 2014|Sean Goldsmith

'The most terrible time in India'...

'The most terrible time in India'... The best values in 15 years... Two major catalysts... An update from Ukraine... A Cinco de Mayo travesty...

"The last three years have been the most terrible time in India," Indian hedge-fund manager Rahul Saraogi recently told our Steve Sjuggerud.

"India has endured corruption scandals, political scandals, high interest rates, lower investment, a weak currency, inflation..."

Steve turned bullish on India in February... His friend Rahul – whom Steve calls the "Warren Buffett of India" – thought the country presented a huge opportunity.

Rahul runs a small-cap Indian fund in Chennai. He has made huge profits after Indian stocks have gotten hammered. From the February issue of True Wealth...

He was born in India, and lives in India, but he received an Ivy League education in the United States. He knows both countries well. And he doesn't think things are so bad in India...

"The problem that every observer or commentator looking at India has, is that India has so much potential. Just because India has the potential to grow at 12%-15%, but it does not, people somehow believe that India is a basket case."

"India has had everything going against it. All of this negative sentiment has depressed stock-market values terribly. And yet, the country is STILL growing at 5%."

Steve invested with Rahul in late 2008 after Indian stocks had fallen 80%. In early 2010, Steve withdrew his money with a triple-digit gain. And today, Rahul says the values are even better...

I can find hundreds of small-cap companies trading at half of book [liquidation] value.

Rahul appeared on an episode of Stansberry Radio with Porter and Steve last week... And he says India is the cheapest he has seen in his career...

Now, what we don't realize is it has been six years since December 2007, and over the last six years, Indian companies have doubled, tripled, sometimes even quadrupled in size. And valuations are much, much, much below 2007. So you have a situation where companies and portfolios are in valuation terms at 15-year lows.

You combine this with a potential to have strong leadership, and that's why I told Steve that it's looking better than I've seen it in my career.

Porter agrees, saying "this is absolutely the time to allocate to India."

The strong leadership Rahul referred to is India's likely new Prime Minister, Narendra Modi. Modi is the current Chief Minister of the Indian state Gujarat. Since Modi took the helm, Gujarat has led India in GDP growth, with around 16% of the country's total industrial output and 22% of exports. That's impressive, considering Gujarat is responsible for just 5% of India's total population.

That's because Modi is business-friendly... He convinced Indian billionaire Raja Tata to build a car factory in Gujarat by removing the typical red tape. He has heavily invested in the state's infrastructure. And he has shunned the typical backroom dealings and bribery in India and the country's socialist ideals (for example, bidding for government contracts in Gujarat is done online). And he supports privatization of ports, water, and power.

In addition to a potential change in government, India is also growing like crazy... And its people are getting richer. As David Nadel – portfolio manager of the Royce Funds' International Smaller Companies Fund – told Barron's...

In eight years, India will have as many households with disposable income of $10,000 or more as the U.S. or the eurozone. And the nation is rapidly integrating into the global economy in such fields as pharmaceuticals (half of the world's FDA-approved pharmaceutical facilities are in India) and high-value-added information technology.

Thanks to government subsidies, rural land values are rising, giving the 70% of India's population that lives in rural areas more wealth. As Nadel said...

You have to just look at the uptake in mobile-phone adoption in India, where subscriptions have jumped from practically zero at the beginning of the millennium to over 900 million, to see the potential.

Barron's cited a report from a local Indian brokerage house saying the penetration rate for cars, computers, laptops, and air conditioners is less than 5%. It's less than 15% for refrigerators, washing machines, and motorbikes.

Meanwhile, Steve's True Wealth subscribers are up nearly 20% on the Market Vectors India Small-Cap Fund (SCIF) in less than four months.

Continuing on today's internationally themed Digest, S&A Global Contrarian editor Kim Iskyan sent us another update on Ukraine, which is spiraling into a civil war...

Dozens of people have died in violence over the past few days. Last week, the country's president acknowledged that Ukrainian forces are not in control in the southern and eastern regions of the country. There are more than 1,000 armed gunmen who appear to be supported by Russia in cities throughout eastern Ukraine. Dozens of FBI and CIA agents are in Kiev... and diplomatic efforts to de-escalate the situation are pretty much dead.

Friday's Victory Day holiday in former Soviet states – which celebrates the Red Army's victory over Germany's Nazi forces in World War II – could exacerbate the situation. And things are only going to get worse with the approach of the May 25 presidential elections in in Ukraine. It's too early to write off southern and eastern Ukraine... But at this point, it's difficult to see things going back to the way they were.

As Kim explains, Russian President Vladimir Putin will do whatever it takes to keep Ukraine under Russian influence...

As I've said before, Russia will do what it must to prevent Ukraine from "going west." Keeping Ukraine out of the European/western orbit is Putin's top priority. Russia has watched helplessly over the past 20-plus years as countries in the Baltic and in Central and Eastern Europe (which all used to behind the Iron Curtain) have joined the European Union and NATO.

In Russia's mind, Ukraine – which shares a border with Russia – is the last line of defense against the U.S. and Europe's slow but steady creep eastward. And if Russia can't get Ukraine to join its Eurasian economic union, Putin's dreams of putting the band back together will be shattered.

The obvious question is, what is Putin's endgame? Sanctions imposed by the European Union and the U.S. aren't going to do much to stop Russia... so it's more a question of Putin's motivations.

So far, Kim says, Russia's approach has been to undermine Ukraine's western-friendly interim government. But the problem is, Ukraine's top two presidential candidates are also likely to continue to push Ukraine toward the west (rather than toward Russia)...

Russia will do whatever it can to undermine the credibility of the late May elections... and supporting ongoing violence in southeast Ukraine is an important part of this strategy. But according to my former colleagues at a top political risk consulting firm in Washington, an outright invasion by Russia is very possible.

People are concerned that if Russia invades or tries to annex southeastern Ukraine, it might be just the first step. Russia might want to make a move on other countries in the region. But Putin is not interested in looking beyond Ukraine. Ukraine is a buffer with the west. Other areas that Russia could focus on (like northern Kazakhstan) don't have the same kind of strategic interest. And any country that is a NATO member is off-limits... Putin isn't interested in starting World War III.

Bringing Crimea into the fold isn't going to be cheap for Russia... And southern and eastern Ukraine are very poor compared with Russia. So the noise from Ukraine will continue for a long while, periodically rattling the market. But the good news is that Putin probably doesn't have his eye on anything else.

We'll end today's Digest with a note you should consider while sipping your Cinco de Mayo margaritas today...

Prices for limes, a major component in margaritas, have more than tripled over the past two months... Mexican farmers, who supply around 97% of limes to the U.S., agreed to set prices higher after a disease nearly destroyed the crop.

And consider this... Americans spend nearly $3 billion a year on margaritas, about 14% of all U.S. cocktail sales.

New 52-week highs (as of 5/2/14): Alcoa (AA), BP (BP), Dorchester Minerals (DMLP), Flinders Resources (FDR.V), Travelers (TRV), and W.R. Berkley (WRB).

A quiet day in today's mailbag. Are you selling in May and going away? Let us know at feedback@stansberryresearch.com.

"Steve says we are in the 7th innings of the bull run. How many innings are there left to go??" – Paid-up subscriber Roy

Goldsmith comment: Two...

"I may be able to retire before I drop over dead at work! You guys are worth every copper plated zinc penny that I pay for my subscription. Many thanks." – Paid-up subscriber Bruce

Regards,

Sean Goldsmith

Baltimore, Maryland

May 5, 2014

The cost to rent hits an all-time record...

Editor's note: Rent prices in the U.S. just hit another record high.

In today's Digest Premium, Stansberry's Investment Advisory research analyst E.B. Tucker explains why the trend is going to continue... and shares one company set to benefit from it...

The U.S. Census Bureau collects all kinds of data. And one of those data points is the average amount of money people are paying to rent a house or apartment.

This year's first-quarter numbers came out last week. Rents hit another record high. The average renter pays his landlord 16.2% more than he did in the first quarter of 2007, during the peak of the housing boom.

That's because there are more renters. And the trend of increasing renters will continue for a long time.

I (E.B. Tucker) started buying single-family homes in Florida in 2009 and 2010, when prices had collapsed. But price wasn't my only concern. As I explained in the October issue of Stansberry's Investment Advisory, we had reached an all-time high in the percentage of people who could buy a house. Going forward, I knew we'd see more renters.

In that issue, we published a chart of the U.S. homeownership rate. As you can see in the following chart, it has continued to fall ever since...

Like I said... fewer homeowners means more home renters. This is a long-term structural trend. And as it plays out, the pressure on rents will march upwards...

Renting houses is a "boring" business. And most landlords overpay for their properties. That makes the whole process more difficult. Home prices have risen for the last few years. Today, there aren't many values.

One of the companies we hold in the Stansberry's Investment Advisory portfolio – American Homes 4 Rent (AMH) – bought up more than 22,000 single-family homes when prices were lower. The company aims to own 30,000 homes.

But because the average list price for homes has risen so quickly, AMH formed a partnership with Johnson Capital Residential Investments, which specializes in buying distressed mortgages. AMH's new partnership will allow it to control property before it enters the real-estate-owned process, when the bank forecloses and is responsible for selling the home on the open market.

This partnership is yet another way AMH is trying to keep its costs low. If AMH can't find attractive homes on the market, it will buy distressed debt and hope to take control of the property in the case of foreclosure.

This focus on low costs comes from founder B. Wayne Hughes, a pioneer in the self-storage rental business, where cost control is critical.

On May 1, AMH collected more than 22,000 rent checks. It will do it again in June. Most importantly... it doesn't matter what happens in the stock market. That rent check comes in or the tenant goes. With a long-term trend of more renters entering the market, AMH shouldn't have any problems finding replacement tenants for a long time.

– E.B. Tucker

The cost to rent hits an all-time record...

Rent prices in the U.S. just hit another record high. In today's Digest Premium, Stansberry's Investment Advisory research analyst E.B. Tucker explains why the trend is going to continue...

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