Tue, Mar 12, 2013|Sean Goldsmith

Tops and bottoms...

Why one billionaire's efforts to save Detroit will fail…

A few years ago, I (Dan Ferris) said bonds were at the blow-off top of a multi-decade bull market... only to see rates continue to move lower and bond prices continue to surge higher.

I deserved to be wrong. I knew then that calling market tops and bottoms is a fool's errand. But I'm done with this destructive habit...

Still… you'll find plenty of other folks ready to take a stab at prognosticating. Take Bill Gross, for example. He runs asset management firm PIMCO's massive Total Return Fund, with nearly $290 billion of assets. Gross said it was time to sell Treasurys a couple years ago... and missed a huge rally. Today, he's reducing Treasury holdings again, as well as mortgage-backed securities holdings.

Now, an analyst at brokerage firm Edward Jones has joined the chorus. Tom Kersting, a fixed-income strategist, recommends reducing holdings in long-term bonds. Kersting says his firm is "more conservative" and that it's trying to prepare investors for higher interest rates.

I don't worry about interest rates going up. I focus my attention on an elite group of blue-chip, dividend-paying stocks. You see… despite what a lot of folks think… dividend-paying stocks outperform the market whether rates are going up or down...

It's a common worry that dividend-paying stocks will suffer if interest rates rise. But it's a myth. Independent financial research firm Ned Davis Research Group found that dividend stocks outperformed non-payers from 1927 to 2011 whenever the Fed raised rates. Dividend-payers returned 2.2% per year, while non-payers returned 1.8% per year. And Ned Davis discovered that dividend-payers beat non-payers when interest rates fell, too. During the study period, dividend-payers returned 10% a year when rates were falling, versus a -2.5% return from non-payers.

The lessons are simple and clear. Famous money managers don't have all the answers. Calling tops and bottoms and worrying about interest rates is a waste of time when you stick with great dividend-paying stocks… Those investments will keep your money safer while earning you higher returns in periods of both high and low interest rates.

However… as we've pointed out many times… as long as this environment of low interest rates and government money printing continues… plenty of stocks will thrive…

For example… Two Harbors – one of Steve Sjuggerud's favorite "virtual banks" – just hit a 52-week high today...

"Virtual banks" – more commonly known as mortgage REITs – borrow money at low interest rates and invest in mortgage bonds paying higher interest rates. And Two Harbors invests 80% of its money in government-guaranteed bonds. So there is essentially no default risk. (If the mortgages default, Uncle Sam is on the hook.) Two Harbors invests the other 20% in "mispriced" bonds... These bonds are not government-guaranteed, but they pay a higher yield to make up for the extra risk.

And unlike other virtual banks, Two Harbors has started investing in single-family homes in the U.S. On a conference call with investors last year, Two Harbors President Thomas Siering said:

Two Harbors has invested approximately $150 million in its portfolio of single-family residential properties of roughly 1,370 homes... We continue to acquire properties in Arizona, California, Florida, Georgia, and Nevada... With home prices in some of our target markets down 50% or more from recent peak levels, we have been able to acquire properties at significant discounts to replacement cost.

Steve wrote more about Two Harbors' home purchases in this October DailyWealth essay. He told readers that shares were still attractive back then. Since then, Two Harbors shares are up 16%.

Two Harbors' biggest risk is rising interest rates. But Federal Reserve Chairman Ben Bernanke has promised to keep rates low for years, allowing Two Harbors to profit from an artificially high interest-rate spread. (That's the difference between its borrowing cost and the interest it collects on the mortgages it purchases.)

Still… despite the Fed's best efforts… the interest-rate spread started decreasing last year... The Fed's actions pushed mortgage rates to record-lows. And short-term interest rates started creeping up. The narrowing spread means virtual banks make less money. And when less money is coming in the door, these companies have to pay smaller dividends.

Because most investors buy these stocks looking for income, the combination of lower profits and lower dividend payments sent shares of virtual banks falling.

But in November, Porter told readers to hold on... Even if these companies cut their dividends, you'd still be collecting low, double-digit yields... Where else can you find that in today's market?

To date, True Wealth readers are up 53% on Two Harbors since June 2011. They're up 48% and 39% in two of Steve's other virtual bank recommendations. Meanwhile, his subscribers continue to collect double-digit annual dividend payments.

In last Friday's Digest, Porter wrote about the Dow Jones reaching new highs... He posed the following question:

Do new all-time highs on the Dow Jones Industrial Average indicate that our country is no longer in danger of the End of America scenario I've outlined over the past several years?

To recap, Porter's End of America scenario argued that our nation's mounting debts and loose-money policies will eventually lead to the U.S. dollar losing its place as the world's reserve currency. You can read the full Digest here.

Porter showed why his End of America scenario is still valid. He compared the Dow's rise with the increase in prices of a variety of goods, including energy, cars, and food. The evidence was clear... The rise in prices was caused not by an improving economy, but from a weakening dollar. He concluded...

Don't regard new highs in the stock market as a sign that we're out of the woods when it comes to the serious problems we face because of our runaway government spending. Instead, I think the collapse in the purchasing power of the dollar is making stocks appear to be worth more, because their prices, in nominal terms, have gone up. In reality though, all that's happening is that the dollar is falling in value.

But there's another data point Porter didn't mention... According to the U.S. Department of Agriculture, nearly 48 million Americans owned an electronic benefits transfer (EBT) card at the end of 2012. In other words, nearly 20% of Americans are on food stamps.

As long as so many Americans remain dependent on government largesse – and cling to the great fallacy that we can live at the expense of our neighbor – we'll never solve the problems that have resulted in our unimaginable debt load and the need to print an ever-mounting pile of paper dollars.

We just received a very interesting e-mail...

Our colleague Tom Dyson tells us he's found "the next IBM."

Regular Digest readers will recall us mentioning the IT services giant from time to time. Extreme Value readers are up 7% since I (Dan) recommended it last August.

I'm extremely picky about the quality of businesses that make it into the Extreme Value portfolio. But IBM's 16% profit margins and $20 billion in annual cash flow allowed it to make it into the club.

IBM is also a major holding of the world's greatest investor, Warren Buffett. He owns more than 6% of the stock, a $13 billion stake. It's a stock that can safely build your wealth over a long, long time. Thus, when I hear a claim of "the next IBM," I take notice...

Tom tells us his brand-new issue of The Palm Beach Letter focuses on a stock he believes will generate safe 12% returns for investors for at least the next few years (and likely a lot more). IBM has built an extraordinary business over the past decade or so by reinventing itself. It's gotten away from the low-margin business of selling hardware (like computers and printers) and into higher-margin businesses like software and IT services. Tom sees his new recommendation making the same smart moves.

Tom's new recommendation is cheap. It's priced 10% below book value and trades at a little more than five times free cash flow. Last year, the company bought back 10% of its shares and raised its dividend more than 30%. And last year, it distributed 55% of its profits to shareholders through dividends and buybacks.

One Wall Street guru has already taken notice and bought $177 million of the stock. Tom is urging readers to buy the company before the rest of Wall Street and the investing public catch on.

As many readers know, Tom was a longtime S&A analyst. A few years ago, he launched The Palm Beach Letter with entrepreneur and wealth-building expert Mark Ford.

Mark is one of Porter Stansberry's mentors. Over the last 35 years, he has built a reputation as one of the country's foremost experts on wealth-building. But unlike most "experts" in this field, Mark actually "walks the walk." He's a serial entrepreneur and a New York Times bestselling author who has built dozens of businesses... and a huge personal fortune.

Mark now spends his time with family, mentoring entrepreneurs, and managing his investments. He also shares his unconventional wealth ideas with people in books and financial newsletters.

As one of the world's largest investment publishers, we've read, met, published, and worked with just about every investment guru in the world... So we feel qualified to judge the ideas Mark and his team are sharing with Palm Beach Letter subscribers. We can say they are of the highest quality in the world.

As we've detailed dozens of times in the Digest, building a solid foundation of basic financial knowledge is the ultimate way readers become rich... not scoring on a "hot tip" or a big options trade.

That's why we've gone to great lengths to share our best "timeless" ideas... like proper asset allocation... how to identify a great business... intelligent position sizing... how to buy discounted corporate bonds... and how to sell put options.

Ideas like intelligent asset allocation are far, far more important to your long-term success than trying to score big in mining stocks... or hitting it big on one options play. However, most investors have no idea that this is the case.

That's the reason The Palm Beach Letter has quickly become one of the most useful investment-research advisories in the world. Sure, the letter features many stock and bond recommendations. But readers also receive a huge amount of educational material from Mark... material that can quickly transform your financial situation.

It's only after someone understands Mark's concepts that investment research can be truly useful.

To make sure you take full advantage of this opportunity, we're willing to make an outlandish guarantee. It's one that will strike many of our fellow publishers as crazy. Right now, you can try out The Palm Beach Letter, risk-free, for a whole year. If you decide it's not for you, The Palm Beach Letter will refund your purchase price... and Stansberry & Associates will send you an additional $50 check, which you can ask for three months after your purchase.

Again... If you decide The Palm Beach Letter is not for you, you can get 100% of your money back... and Stansberry & Associates will send you an additional $50 check. You'll simply have to call our customer service team. After we've verified your cancellation, we'll send you your money. (This offer is only valid once per household.) We're that confident that you'll benefit from Mark and Tom's work. You have nothing to lose by reading through Mark's educational materials... and a lifetime of knowledge to gain.

If you're interested in learning about the stock Tom calls "the next IBM" – and you would like to subscribe to The Palm Beach Letter, click here to get started with your one-year, risk-free trial. (There is no long promotional video to watch.)

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New 52-week highs (as of 3/11/13): ProShares Ultra Biotech Fund (BIB), Berkshire Hathaway (BRK), WisdomTree Japan Hedged Equity Fund (DXJ), iShares Australia Fund (EWA), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Insurance Fund (IAK), iShares Biotech Fund (IBB), Allianz Equity & Convertible Fund (NIE), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Johnson & Johnson (JNJ), Automatic Data Processing (ADP), Monsanto (MON), Cisco (CSCO), 3M (MMM), American Financial Group (AFG), Loews (L), Travelers (TRV), Blackstone Group (BX), Kohlberg Kravis Roberts (KKR), Becton-Dickinson (BDX), Cheniere Energy (LNG), Chevron (CVX), Range Resources (RRC), Union Pacific (UNP), Two Harbors (TWO), Wells Fargo (WFC), Sysco (SYY), and Target (TGT).

In today's mailbag, three subscribers write in responding to Porter's feedback answer from yesterday. Send us your notes to feedback@stansberryresearch.com.

"I think the issue with Jim and so many subscribers (and so many in our country today) is what I call the 'victim mentality.' If something doesn't work out as they planned, not as they were promised but as they planned, their first response is to blame someone else. Stopping for a moment, thinking, and evaluating the situation never occurs to them. This situation, as described, could have been solved very quickly if Jim had either sent an email to customer service or called customer service. This matter would have been solved by your customer service team in about 5 seconds (maybe longer if it was a Monday).

"From my point of view the only thing your company could do to make this type of situation a bit easier for subscribers would be to make the terminology in your advertising and report titles match a bit better. However, I just disproved my own theory. I typed 'five magic words' into the search feature on your website and the report Jim was looking for came up as No. 5 in the search results. Now they will be angry it was not No. 1.

"Keep up the good work and keep treating your detractors with respect. The way your treat those who disagree with you (that is often putting it mildly) tells us quite a bit about you and your intentions." – Paid-up subscriber Tim Bickerstaff

"Wanted to let you know that I started as a S&A subscriber a little over a year ago; S&A Alliance, Retirement Millionaire and a couple other of the very inexpensive $99 or so newsletters. As of December 2012 just upgraded to Flex Alliance ... best decision I ever made for myself and my Family. I've learned so much from you and your excellent editorial staff about the markets, finance, economics, and just plain common sense. Thanks so much. I definitely feel like I'm getting everything and more for what I've paid. Keep it up!" – Paid-up subscriber Jeff Toon

"You are being much too sensitive and you should not dignify these stupid gripes. With such a well publicized refund policy some people can't even be spoon fed. If they are not willing to read and study on their own there is not much anyone can do to help them. You are doing a great job. Your philosophy is right on. The breadth, knowledge and skills of your team is incredible. But save your energy and brush it off. I'm just delighted to be on board. Thank you." – Paid-up subscriber Stan Robinson

Regards,

Sean Goldsmith and Dan Ferris

Miami Beach, Florida and Medford, Oregon

March 12, 2013

Recently, I (Porter) was reading the latest out of Detroit…

Michigan governor Rick Snyder was debating whether or not to appoint an "emergency financial manager" for Detroit… The city has lost one-quarter of its population since 2000. Tax revenues are falling off a cliff. And it amassed a $326 million deficit in 2012.

I wrote one of my most popular essays ever on the disaster that is Detroit. You can read that essay here.

Detroit was supposed to be the great shining example of the new socialist America. When Lyndon Johnson was president, he started the Great Society program. And part of that was a project called Model Cities. The federal government doled out big block grants to several cities – including Oakland, California... Camden, New Jersey... and Detroit… These cities were, of course, all led by democratic politicians. And these politicians were empowered to reorganize the cities. The first and largest expenditure was Detroit (about $100 million). The effort began in 1966.

The 1967 riots that destroyed the center of Detroit and resulted in the National Guard being deployed occurred right in the center of the "model city." The first thing all this public money did was enable a bunch of people to stop working and stay up all night drinking and gambling… It turns out those folks don't like their gambling parlors to be raided by the police. When the police did enter, it sparked a huge riot. Lots of people were killed and lots of businesses were burned down.

Even then, the politicians in Detroit were reluctant to do anything to stop it because they thought it would make things worse. So it burned out of control for around a week before the National Guard arrived.

This was the start of Detroit's decline. And it just got worse from there. After the riots… the car companies put up another $400 million. And that money was also wasted…

All that happened was anyone who was honest and hard-working fled the city… Everyone who was corrupt or dependent came to the city. So the socialist experiment ended as all socialist experiments end – More houses are empty and abandoned in Detroit than are lived in… and it's the absolute worst place to live in America in terms of public safety.

But Detroit has been a dead man standing for at least 10 years. None of this is new, nor should it be news to anyone.

What is shocking to me is that having seen all these policies fail, the black community in America does not take up arms against them. There is no hue and cry from black leaders anywhere to stop the socialization of the inner city. Instead, they demand more and more of it. Give us more dependency, give us more welfare, give us more reasons to not go to work.

I don't understand it. But that's what's happening across our country, thanks to the wicked connection between the dependency culture of the inner cities and the black politicians who pander to it.

I think Detroit is toast, but at least one billionaire disagrees…

Dan Gilbert, the founder of Quicken Loans and owner of the NBA's Cleveland Cavaliers, has invested $1 billion in Detroit over the past three years (including purchasing nearly 3 million square feet of commercial space downtown). He still lives in the city. And he's moved 7,000 of his employees to Detroit. He's even offering employees who buy property in Detroit a $20,000 gift on the condition they live in the city for five years.

It's amazing that Gilbert still lives in Detroit… But his efforts will fail.

You cannot pay someone to live in Detroit. It just won't work. Detroit is too terrible of a place. It's a waste of capital. Gilbert should have used that money to straighten out the politics in Detroit.

If the city cut taxes, social services, and bureaucracy, businesses would move there and thrive. That would allow the city to focus on public safety. If you would make Detroit a safe place to live, then people would move back there. If it could do that, Detroit would be fine. But until then… nothing will change.

– Porter Stansberry with Sean Goldsmith

Why one billionaire's efforts to save Detroit will fail…

Detroit is one of the worst cities in America. It's broke, and it's dangerous. Still, one Detroit-born billionaire is using his personal fortune to try and save the city.

In today's Digest Premium, Porter explains why this man is putting his billions toward the wrong thing…

To continue reading, scroll down or click here.

Why one billionaire's efforts to save Detroit will fail…

Detroit is one of the worst cities in America. It's broke, and it's dangerous. Still, one Detroit-born billionaire is using his personal fortune to try and save the city.

In today's Digest Premium, Porter explains why this man is putting his billions toward the wrong thing…

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

Tops and bottoms... Dividends beat all... Steve's housing bets... 20% of Americans on food stamps... Dyson: 'The next IBM'... This 'guru' walks the walk...