The wealth gap and housing...

The wealth gap and housing... Banks making billions on IPOs... Nobody thinks banks can fail... Another company trying to leave the U.S... Russia cuts Ukraine off from gas... 49 dead in Ukraine... A conference call with one of the most important men in resources...

 

 The growing wealth divide in the U.S. is steepening... And we're seeing it play out in the housing market.

 

Since 2007, inflation-adjusted income has declined 9% for the bottom 40% of U.S. households. Meanwhile, incomes for the top 5% have improved a bit, according to the Census Bureau.

 

The median U.S. household income is now about $51,000. According to Zillow, a real-estate data firm, Americans historically bought homes worth three times their income. Additionally, they would pay a 15% premium for a new home. That would bring the cost of a new house, based on historical terms, to $176,000.

 

Today, according to Zillow, the nationwide average price of a newly built home is $320,000, compared with $270,000 for a pre-existing one. An average new home now costs more than six times the median U.S. household income – double the historical average.

 

 Such is the miracle of record-low interest rates, interest-only loans, and "teaser" loan terms. Folks use cheap debt to bid up asset prices across the board.

 

Still, housing sales have recently slowed...

 

Redfin, a real-estate broker, reported inventory of homes for sale up 9.1% in May. This is the highest number of new listings in four years. At the same time, existing home sales have fallen 7.6% in 2014.

 

Rising prices are one reason home purchases are slowing... Redfin reports the median home price is more than 8% higher year over year, in the month ending May 2014.

 

 Also, many home buyers have exited the market due to some combination of bad credit, no money, and fear. U.S. homeownership is at 19-year lows. And U.S. rents are at all-time highs. The median rent in New York City, for example, recently hit $3,100 a month.

 

 We showed you how to take advantage of the trend of increased rents by recommending shares of American Homes 4 Rent (AMH) – one of the largest single-family landlords in the country. Stansberry's Investment Advisory readers are up about 17% since Porter and his team recommended it in October.

 

And housing starts have not recovered. The number of new mortgage applications has not climbed since 2009-2010.

 

 Overall, home prices are up, and the inventory of available homes is rising. Yet the very top of the housing market remains strong. Sales of the most expensive 1% of homes were up 35.7% in 2013. And they are up 21.1% so far this year, according to Redfin. In places like New York and San Francisco, housing is now more expensive than its peak in 2006.

 

 We asked True Wealth editor Steve Sjuggerud for his current views on the housing market... Steve has been bullish on housing for years. He believed prices would soar as the "Bernanke Asset Bubble" – the resulting price inflation from the Fed's money printing – pushed up asset prices across the board.

 

Steve sent us this e-mail rebutting the recent housing numbers...

 

Prices are up... That's good! Just like the stock market, as soon as prices went up, people got worried that they couldn't stay up. Then they went higher. The same will happen in housing.   The argument that people are spending more of their income on a home relative to its price is not quite true. Price-to-income fails to take low mortgage rates into account.   Inventory is up. No worries. It will get mopped up easily. There is no housing supply coming.   Existing home sales are actually up in the latest figures.   Everyone wants to sound the alarm…   But according to the IMF, "In the U.S., house prices are rising fast but are not overvalued. Prices are 13.4 per cent below their long-run average relative to incomes. Prices are 2.6 per cent above their long-run average relative to rents."   No worries from me.

 

 Signs of a top...

 

Banks have collected $3.15 billion in fees to date this year from global initial public offerings ("IPOs")... That's up almost two-thirds from the same period a year ago, according to news service Thomson Reuters and financial-services consulting firm Freeman Consulting.

 

We've been following the IPOs of hyped companies like social-media services Twitter and Facebook and online-game publishers Zynga and King Digital... When lots of companies come to market (aka cash out) and soar out of the gates... it's often a sign things are getting frothy.

 

And the biggest IPO of them all has yet to occur – the potential $200 billion debut of the Amazon of China – Alibaba. We wrote about that deal here.

 

That $3.15 billion in fees doesn't include the work banks have done on acquisitions (we'll discuss one giant acquisition in a moment).

 

 Another sign of a top...

 

The cost to insure large banks against failure has fallen to pre-crisis levels. As we've said many times, the markets have short memories.

 

To insure against a bank failure (either for speculation or as a hedge if you own bank debt), an investor can purchase credit default swaps ("CDS"). A CDS is a derivative that rises in value as a bank's risk of default increases. Like an insurance policy, the holder of the CDS pays a small amount of money every year to insure a chunk of debt against collapse.

 

 And today, the cost to insure against a bank failure is the lowest since Lehman Brothers collapsed in September 2008.

 

A Barclays index of CDSes for U.S. banks hit 86 basis points (bps) this month (meaning it costs $86,000 a year to buy $10 million worth of protection). That's the lowest since July 2007. CDS protection peaked at 701 bps in March 2009 (it cost $701,000 to buy $10 million worth of protection) – just before the Federal Reserve started quantitative easing.

 

 Over the weekend, health care giants Medtronic (MDT) and Covidien (COV) officially confirmed they will merge.

 

Regular S&A readers are familiar with Medtronic. It's a longtime holding in Dr. David Eifrig's Retirement Millionaire model portfolio. Medtronic is one of the world's leading medical-device makers (its name has been synonymous with pacemakers for years)... and an extraordinary dividend-payer. Covidien is an Irish-based medical-device manufacturer.

 

Medtronic will acquire Covidien in a "tax inversion" deal.

 

The purpose of a "tax inversion" deal is to obtain beneficial tax rates. Typically, a U.S. company will move to a lower-tax domicile in Europe. In this case, Medtronic will establish a new company in Ireland, home of Covidien. The new company will buy both Medtronic and Covidien.

 

With the new company, Medtronic's new corporate-tax rate will be the 12.5% Irish rate versus 35% in the U.S. That means billions of dollars in extra profits for the company.

 

 "Doc" recommended Medtronic in early 2011 because of its dominant position in medical devices... which has allowed it to increase its annual dividend payment for more than 30 consecutive years.

 

As Doc stated:

 

What makes Medtronic special is its dividend. A company that keeps growing by producing cutting-edge technologies and rewarding shareholders is the kind of company we love to own at Retirement Millionaire.   As I write in Retirement Millionaire all the time... nearly half the total return from stock investing comes from dividends, not just price appreciation of the stock. If we can find businesses that steadily grow their revenues and profits, while increasing the payments to the owners... we'll get rich.

 

Currently, Medtronic pays a 1.8% dividend. Typically after an inversion deal, the new offshore company raises its dividend to reflect the lower tax rate. Expect more gains ahead for Medtronic shareholders. Doc's readers are already up more than 60%.

 

 Russia today announced it had officially cut off Ukraine's gas.

 

In recent weeks, it had started to look like aggression between Russia and Ukraine was cooling off. Russian troops were pulled from the border with Ukraine, and Russian President Vladimir Putin made some conciliatory statements.

 

But over the weekend, tensions heated up again. Russia moved Ukraine to a "prepayment" policy, meaning Ukraine must pay for their natural gas before they receive it. Pro-Russian rebels in Ukraine also shot down an airplane, killing an estimated 49 Ukrainian soldiers.

 

S&A Global Contrarian editor Kim Iskyan updates us on the situation:

 

But as we warned, talk of de-escalation in the conflict between Ukraine and Russia was premature. Russia won't be leaving Crimea, which it invaded in February, and violence has continued in parts of Ukraine that are heavily Russian. Late last week, the U.S. said that it had evidence that Russia had provided separatist rebels in eastern Ukraine with military material, including tanks and rocket launchers.   This flies in the face of countless claims by Putin that the so-called "green men" in Ukraine who are inciting unrest are independent agents, who have nothing to do with the Russian government. Then, 49 Ukrainian soldiers and crew died on Saturday, when a military transport plane was brought down by rebels in the separatist-controlled city of Luhansk, in eastern Ukraine.

 

 But Kim says this violence is just the beginning of Ukraine's issues...

 

Not coincidentally, Russian gas giant Gazprom cut off gas to Ukraine – and therefore to much of Europe – today. Ukraine owes Russia billions of dollars for gas. Negotiations about when Ukraine is going to pay have been dragging on for a few weeks. But discussions reached an impasse last week, as the two sides remain far apart on how much Ukraine will pay Gazprom for gas. And the underlying problem is that Ukraine's government, after decades of epic corruption and bad policy, is broke.

 

 If it's true that Russia is supplying Ukraine with weaponry, it would represent a major escalation in the conflict. And all of this could lead to further sanctions, Kim says...

 

The next stage of economic sanctions on Russia will be rolled out sooner rather than later. Gazprom supplies Europe with around one-third of its gas... and much of this gas goes through Ukraine. Ukraine can easily siphon off gas meant for Europe that flows through its pipelines. So in practice, when Gazprom cuts off Ukraine, it cuts off Europe, too.   That might inspire the European Union, which has been reluctant to alienate major trade partner Russia, to put some teeth in sanctions against Russia... These might include trying to isolate Russia's financial system from that of the rest of the world by making it more difficult for money to be transferred to or from Russia.

 

Markets hate uncertainty. Ukraine and Russia have supplied plenty of it lately... but most markets have ignored it, and continued to move higher. That might change at some point soon... but a hot war, after the U.S. and Russia have entered a new phase of the post-Cold War world, could cause problems.

 

 On Wednesday, Frank Curzio is hosting a special conference call with the chairman and founder of a mineral-exploration company we think could make early investors a fortune. A board member of the company (a man who initiated projects valued at more than $6 billion) is also joining us on the call.

 

Unfortunately, I can't share the names of these men... The company they're involved in trades for only $1 a share. And if word got out we're bullish on the firm, shares would skyrocket.

 

On the June 18 call, these two men will talk about their company's major gold projects... and a secret resource pile this firm controls that could be worth more than its entire current market capitalization.

 

 Again, this call takes place this Wednesday, June 18 at 5:30 p.m. Eastern time. If you'd like to learn about one of the most interesting and little-known opportunities in the resource markets today, you won't want to miss this call. You can learn how to listen in here...

 

 

 New 52-week highs (as of 6/13/2014): Alcoa (AA), Apache (APA), Anadarko Petroleum (APC), British Petroleum (BP), Carrizo Oil & Gas (CRZO), ProShares Ultra Oil & Gas Fund (DIG), Devon Energy (DVN), Eni (E), Freehold Royalties (FRU.TO), Cambria Foreign Shareholder Yield Fund (FYLD), Integrated Device Technology (IDTI), Intel (INTC), ONE Gas (OGS), Sabine Royalty Trust (SBR), Sanchez Energy (SN), Superior Energy Services (SPN), and The Travelers Companies (TRV).

 

 In today's mailbag... a couple subscribers take us to task. How have we offended you lately? Tell us at feedback@stansberryresearch.com.

 

 "I usually have no trouble agreeing with Porter, but I'm going to balk at his statement: 'I believe the universe operates according to certain physical laws – stuff than can be measured, tested, and repeated. Ghosts don't fit into that worldview.'

 

"I have three degrees in the sciences, and have taught it at the collegiate level, and am always amazed that people believe that things can't exist if they haven't been proven. In fact, it may only be a matter of time until it is proven, so a good scientist, while not necessarily believing in ghosts, must at least believe that they are possible, and may simply be awaiting the technology or methodology that proves their existence.

 

"Remember that there was a time when the concepts of electricity, a round earth, and planetary orbits weren't proven, but that didn't mean that they didn't exist. It is a subtle principle, but an important one. And given Porter's sublime grasp of most things subtle, I am surprised that it got by him. Other than that, it was a great missive, Porter. And by the way, I have indeed been using your Alpha strategy with good results. Maybe your ghost is lucky for us." – Paid-up subscriber Ric Barta

 

 "I have been a subscriber joining this year I submitted an email to you but did not get a reply let alone an acknowledgement. As a result I think it's because I am 'Johnny Foreigner.'

 

"As a result on your spring offer, I was sorely tempted to take it but do not trust a company that does not do the basics. Hello! Customer service at which you Yanks really are the worst in the world and verified by your complete silence to me. My experience with U.S. web-based companies could be the basis for a book on how not to do it.

 

"I am very close to shutting you down as a lost cause a shame for though you blast us with info to buy your products every day you cannot reply to a simple request. The ball is in your court." – Paid-up subscriber John Richard Winsmore Seaton Corfield

 

Goldsmith comment: We always love when subscribers accuse of wrongdoing based on their own negligence...

 

John... I see you sent us an e-mail on May 21... And Porter personally responded on May 25. How many other companies do you know where the founder personally fields questions from customers?

 

Regards,

 

Sean Goldsmith

June 16, 2014

 

How Mark Cuban made his first millions...

 

Billionaire entrepreneur and Dallas Mavericks owner Mark Cuban recently appeared on The James Altucher Show.

 

In today's Digest Premium, Mark explains how he made his first millions and started his path to becoming one of the richest men in the world.

 

To subscribe to Digest Premium and access today's analysis, click here.

How Mark Cuban made his first millions...

 

Editor's note: Today's Digest Premium is adapted from Episode 24 of The James Altucher Show. In it, billionaire and entrepreneur Mark Cuban revealed how he made his first millions. Tomorrow, we'll share how Mark managed to turn $3 million into $20 million, despite "partying like a rock star"...

 

 

 Going back to when I was a kid, I always wanted to work for myself. That was my first passion. So before I started my first company MicroSolutions, I got fired. I didn't have a lot of choices, but I had a customer come with me.

 

I started MicroSolutions with no money. Six guys living in a three-bedroom apartment, sleeping on the floor. But I just went for it. And it wasn't because I was passionate about systems integration. It wasn't because I was passionate about computers, even though I liked them. I had never really studied computers in school, but I got into it, and the more I worked at it, the better I got at working with software, writing software, and doing networking.

 

The better I got at it, the more passionate I became about it. The more passionate that I became about it, the better I got at it. But it was really putting in the time, and my desire to be self-employed and to be an entrepreneur that really drove it.

 

 But let me give you kind of a preamble to that. So I had MicroSolutions, and you also have to realize that in college, I had a bar. It was called Motley's Pub, and we got busted for having underage drinkers, and we had a wet t-shirt contest that had an underage participant.

 

So I went through a period with that business where I just wanted to survive month to month. And when I got to Dallas, I got a job at Your Business Software. I lasted nine months before I got fired – so I didn't have a track record of a lot of longevity. When I started MicroSolutions, I wanted to be profitable month to month to month. That was my short-term goal. I didn't have money to absorb any losses. I wasn't going out there looking for investors. I didn't raise any money. It was all sweat equity.

 

My initial motivation was surviving and paying my bills month to month, and that's why I lived with six guys in a three-bedroom apartment. We used to take turns writing checks to each other so we'd have a little bit of float time until it cleared the bank and use that to pay our rent. I mean, I had nothing. I just wanted to make enough money every month to pay my bills, and then slowly but surely grow.

 

 My next goal, once that started to happen and I got into Year 3 and 4 and 5, my goal really wasn't to have $1 million in the bank or $2 million or $10 million. My goal was to retire. But my parameters were that I was willing to live like a student. So I felt like if I could get to $1 million saved, then I could live like a student. Back then, interest rates were a lot higher, so I thought I could live off $100,000 a year at 10%. Then I got to $2 million, then a little bit more, then a little bit more, and then I retired when I sold MicroSolutions because that was my goal. I wanted to retire by the time I was 35... And I made it just before 30.

 

We sold MicroSolutions for $6 million. I took $1 million and distributed it to the 80 employees, and then I brought in a partner who was a tech partner who I split the rest with. I walked away with around $2 million after taxes when it was all said and done. I had saved up over $1 million by the time we sold it, because we were doing really well. In the history of MicroSolutions, we never had a losing month, let alone a losing quarter or year, so I was really able to save a lot of money as it got toward the end.

 

– Mark Cuban

How Mark Cuban made his first millions...

 

Billionaire entrepreneur and Dallas Mavericks owner Mark Cuban recently appeared on The James Altucher Show.

 

In today's Digest Premium, Mark explains how he made his first millions and started his path to becoming one of the richest men in the world.

 

To continue reading, scroll down or click here.