Legendary investor Jim Rogers thinks China is a great place to put your money. He has called it "the most important country in the 21st century."
However, in the near term, there is over-capacity in China. The country has made massive capital investments over the past two decades. And we're seeing evidence of inflation there… particularly in Hong Kong real-estate prices. So I would be neutral at best on China in the current environment.
You really can't know when things will crack. What's likely to happen is that inflation will begin to get out of control. Sooner or later, asset inflation is going to spill over into soft commodities, like food, and labor costs.
Every central bank in the world is printing money, and they print in response to one another. So as the Fed puts out $80 billion, $90 billion, or $100 billion, it forces the Chinese to print. Even the Swiss are printing right now.
Coming into this week's Value Investing Congress in Las Vegas, I (Sean Goldsmith) was curious what the speakers would discuss. With the stock market around its all-time high... there aren't a lot of "values" in equities.
And with major institutional investors – like private-equity firm (and True Wealth holding) Blackstone Group and real-estate investment firm Colony Capital – pouring billions of dollars into housing... the prices there don't seem as appealing as they did a year ago. And typical net real-estate yields have dropped from mid-double-digit percentages in 2009 to 5%-7% today.
Jeff Pintar, founder of real-estate investment firm Pintar Investment, told conference attendees he has invested around $400 million in 2,500 houses across the U.S. He's still looking for deals in the "smile" states. (Those are the states that form a smile shape along the southern border of the U.S.: California, Texas, Florida, etc.)
And the housing trade is getting more and more crowded... Pintar mentioned that Goldman Sachs has raised a couple billion dollars to invest in single-family homes. We're sure we'll see more major players come into the space.
But True Wealth editor Steve Sjuggerud believes you can still make money in housing... As he wrote in the April 23 issue of his e-letter DailyWealth:
My thesis is that housing is in the early stages of an incredible boom fueled primarily by low interest rates...
I believe house prices in America will soar beyond what anyone can imagine.
Getting back to this supposedly "bad" news reported yesterday... Yes, it's true, specifically the NUMBER of previously owned homes that were sold fell by 0.6%. But that's less than a percent... no big deal.
The more important thing is, what is happening to the PRICE?
"The median price of an existing home rose 11.8 percent, the most since November 2005," Bloomberg reported yesterday... "to $184,300 last month from $164,800 in March 2012."
This wasn't a one-off price improvement. According to real estate data provider CoreLogic, house prices have increased on an annual basis for 12 consecutive months. This is a real trend.
To me, the housing recovery trend is unquestionable. And it's about to get much crazier...
You see, we have a "perfect storm" in place for higher housing prices...
• There aren't enough homes for sale right now. In January, housing supply reached a 13-year low.
• Meanwhile, demand is high. (My colleague Brett Eversole is buying a house as I write. His mortgage company – a nationwide bank – says it will take 45 days to close on his house, because it's swamped with buyers.)
• Houses are cheap. We are coming off the greatest bust in housing prices in our lifetimes!
• Thanks to record-low mortgage rates (at around 3.5% for a 30-year mortgage), housing is literally more affordable than ever.
I understand that you can never know the future. But these conditions are as good as it gets for a rise in home prices.
Yes, the data will fluctuate... It won't be a straight line higher. You will have data like Bloomberg yesterday, where you will see a down month. It's just like stock prices – even in a roaring bull market, stocks will still have down months.
I believe we are in the early stages of a roaring bull market in housing.
Of course, not everyone is in a position to go out and buy a house… So, Steve has recommended several ways to profit from the boom in housing in True Wealth. Six of them are still "buys" in his portfolio. To learn more about True Wealth and access his housing recommendations, click here...
Where else were the presenters finding value? Kazakhstan and Iraq...
Seriously. Two investors presented on buying a Kazakh bank and an Iraqi soft-drink distributor. That suggests how far some folks are stretching to find value. (To be fair, the Iraq investor runs an Iraqi fund.)
David Einhorn, founder of hedge fund Greenlight Capital, said on a conference call this morning that he has increased his holding in computer and consumer electronics giant Apple. "We've added to our Apple position," Einhorn said. "Now, we just wait for the release of Apple's next blockbuster product."
Earlier this year, Einhorn publicly agitated for Apple to return cash to shareholders. He later applauded the firm for returning $100 billion to shareholders, saying the moves make Apple "more shareholder-friendly."
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Porter originally told Digest Premium subscribers on February 5 that he'd be interested in Apple shares at around $400. They were trading around $450 at the time. Then, when Apple shares approached that level, he wrote in the April 26 Digest Premium:
I think it's still safe to buy the stock at this price. At less than $400 a share, the market is essentially telling you Apple's gigantic cash hoard will never, ever be distributed to shareholders – that it's worthless. That's probably an overly negative assumption.
Still, some people were willing to make that assumption. Clearly, the sellers believe Apple's future would be significantly less rosy than the past.
I think the cash factor is a red herring. Shareholders are always loath to give up any kind of asset. They typically get paid based on increases to earnings. If you have a lot of assets, it's easier to increase your earnings. So they always want to keep assets. That's why I pay a lot of attention to return on assets. I think it's one of the best measures of quality in any business.
Apple's return on assets is still more than 20%. Its management team could say in its defense, "We know what we're doing. We need to hold onto our cash so we can invest in new products and technologies at our discretion to maintain our franchise and our brand." Looking at the numbers, it's hard to argue with them.
One of the most interesting comments I (Dan Ferris) have heard at the Value Investing Congress so far came from John Hempton of Bronte Capital Management. He commented on Herbalife, the multi-level marketing company that's famously being accused by hedge-fund manager Bill Ackman of being a Ponzi scheme.
Ackman has said Herbalife has thousands of "distributors" who never sell any of Herbalife's expensive vitamin products. That means it's not selling to end users. It's just in the business of signing up gullible distributors by promising them riches.
Hempton said those distributors aren't really distributors. They're really customers. They sign up with Herbalife as distributors to avoid paying retail taxes and get a discount on the products they buy. He said the company has always been that way. By Hempton's reckoning, Ackman seems to have missed this point.
I spoke with Hempton after his presentation. He's long Herbalife… and so is octogenarian asset manager Carl Icahn.
Before traveling to Las Vegas, I attended the Berkshire Hathaway annual meeting, held every year on the first Saturday in May in Omaha, Nebraska. It's a must-attend event for me... an opinion that is increasingly shared by investors worldwide. More than 30,000 people crowded into Omaha's CenturyLink Center for this year's event.
It's a strange pilgrimage. We all know what Berkshire chief Warren Buffett is going to say. He'll tell us the company's culture is its competitive advantage. He'll tell us he likes great businesses. He'll tell some young person the best investment he can make is in his career. He'll say U.S. corporate taxes aren't too high (and his partner, Berkshire Vice Chairman Charlie Munger, will disagree).
All that and more was said again this year. But there were a few new wrinkles...
For example, Buffett was asked what Berkshire would look like 10 years after his death, a question he gets every year. He said the culture will be preserved, as he always does. But this time, the 82-year-old billionaire acknowledged he has a successor as CEO: "[The board of directors] and I are solidly in agreement as to who that individual should be."
The issue of Buffett's succession came up in a way I've never heard before... Well-known short-seller Doug Kass of the Seabreeze Partners hedge fund asked Buffett about the plan for Buffett's son Howard to serve as Berkshire's nonexecutive chairman. Kass wanted to know how Howard was qualified to run Berkshire other than by "accident of birth." It was a bit shocking, causing a few murmurs in the audience. Howard was sitting right in front of both men as the question was asked.
Buffett said Howard won't be running the company, hence the term "nonexecutive." He'll be there to preserve the culture. He'll be there to make sure the CEO is right for Berkshire and its shareholders.
I got the impression Howard is more of a safety valve, since his father said he thought it was highly unlikely a CEO would ever be installed who would fail to preserve the culture. Poor Howard! He's now the Rodney Dangerfield of Berkshire Hathaway.
And another surprise… Buffett and Munger usually hold down investor expectations, telling shareholders that Berkshire's large size will keep it from earning the returns in the future that it's earned in the past.
But this year, Munger took a different tack: "I think we'll do better than the giants of the past." Munger isn't saying the returns are going to be as good as past Berkshire returns. But he's willing to say Berkshire will outperform other big companies.
New 52-week highs (as of 5/6/13): Advent Claymore Convertible Securities & Income Fund (AVK), Berkshire Hathaway (BRK), WisdomTree Japan Hedged Equity Fund (DXJ), iShares iBoxx High Yield Corporate Bond Fund (HYG), iShares Dow Jones U.S. Insurance Index Fund (IAK), iShares Dow Jones Home Construction Index Fund (ITB), SPDR Barclays High Yield Bond Fund (JNK), AllianzGI Equity & Convertible Income Fund (NIE), PowerShares Buyback Achievers Portfolio (PKW), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Constellation Brands (STZ), Prestige Brands (PBH), MGM Resorts International (MGM), RPM International (RPM), Corning (GLW), American Financial Group (AFG), Loews (L), Brookfield Asset Management (BAM), Blackstone Group (BX), Kohlberg Kravis Roberts (KKR), Chart Industries (GTLS), Cheniere (LNG), Superior Energy Services (SPN), Union Pacific (UNP), Microsoft (MSFT), and Teekay LNG Partners (TGP).
In today's mailbag… one subscriber takes us to task for self-promotion. Is your vitriol overflowing? Spew some here: feedback@stansberryresearch.com.
"I have been an Alliance member for many years. I watched your business grow from its first tentative steps to what it is now. You have every right to be proud of your achievements. Congratulations!
"There is a saying in private banking circles: MONEY SHOUTS, WEALTH WHISPERS. You Porter are in the MONEY class. (I'm with the other group…) With every year and with every uptick in the S&P500 you become louder. Ever since you asked Jim Rogers as to what his net worth was, I stopped tuning in to, what I regard, as your purely self-promotional 'Stansberry Radio' station. I get better to-the-point coverage on stations such as King World News etc.
"Recently, however, in order to hear the legendary Rick Rule, I, once again, gave your broadcast a try. I don't have the time to listen (I'm busy enjoying life) so I scanned the transcript instead. Half of the show was a self-descriptive narrative of your boating exploits where we all had to be told, down to the greatest of details, what type of marine engines you have. Porter, give me a break. Who the hell gives a rats arse as to how many important friends you have, what country club memberships, how many Rolex watches, what kind of oceanfront property, what boat, wine collection or other assets you possess? From humble beginnings years ago you seem to have become a self-opinionated windbag.
"The reason why you don't fit in with your country club crowd is simple: You bore everybody to death with your self-centred personality and your obvious bragging skills. I can only imagine an Atlas 400 trip with a collection of Porter-sized egos, all in desperate need of an audience and no listening skills anywhere.
"I respect your views on pretty much every investment-related subject you cover within the universe of your publishing business. You are right on target. Keep it coming but, please, turn down the volume on the 'Porter Personality Cult.'" – Paid-up subscriber Peter
Porter comment: Publishers don't have the luxury of whispering.
Regards,
Sean Goldsmith and Dan Ferris
Las Vegas, Nevada
May 7, 2013