Monday, April 1, 2013

The market is still thirsty for junk bonds… The coming stock boom… Gold stocks are cheap and about to rally… The latest from Japan… Jim Rogers is terrified of Cyprus… Making money in real estate…

What can I say... dividends, dividends, and more dividends. Aivars Lode

Global high-yield (aka "junk") bond issuances hit $148.6 billion in the first quarter of 2013… That's 25% higher from the same period a year ago. And the U.S., U.K., and China are leading the activity, according to data provider Dealogic. The combination of record-low interest rates and excess capital sloshing through economies is driving up the price of risky assets (and driving down the yield).

Still, there's more demand for high-yield bonds than companies can meet… On March 19, Owens-Illinois, a glass- and plastic-packaging company, sold 330 million euros of high-yield bonds in Europe… Demand was 3 billion euros – so the issue was nearly 10 times oversubscribed.

 And all of this is occurring with junk-bond yields at record lows… According to a Merrill Lynch index, the average U.S. junk bond yields a little more than 5.6%. Junk-bond yields in Europe are less than 5.2%.

 Take a look at this chart showing the spread between junk bonds and 10-year Treasurys:

 Dr. David Eifrig addressed junk bonds' popularity in his latest issue of Retirement Millionaire
Investors spent much of 2012 "stampeding" into bond funds. This is a classic sign of risk aversion and fear of a volatile and uncertain stock market. And yet with interest rates still near all-time lows, people are still moving gobs of money into bonds and bond funds. But as the chart below shows, people are finally starting to put money back into stocks… and at the same rate they're putting money into bond funds…

This spike higher in equity flows is the critical difference between 2013 and previous times of low interest rates and muted inflation… like last August, when I wrote that investors' love affair with bonds represented the "worst investment deal on Earth."

Once folks realize that dividend yields on stocks are higher than the interest rates on bonds and that stocks have the potential to grow their payments over time (which bonds can't)… stocks could be in for a "Very Good Year"…

 Steve Sjuggerud has a similar outlook. In the March issue of True Wealth, Steve told readers we'd see a "great migration" into equities that could send the market soaring nearly 100% from today's levels. He listed the reasons he believes this migration will take place…
1) U.S. stocks are the best value they've ever been during my investing lifetime. The upside potential in U.S. stocks over the next three years could be the biggest in my near-20-year career. And all stocks have to do is return to their average.

2) Zero-percent interest rates are here to stay. Low interest rates are the real "rocket fuel" to this boom. The good news is there's no chance the government will raise interest rates over the next two years. Meanwhile, we have perfect "Goldilocks" conditions for investing… not too hot, not too cold – JUST RIGHT. THIS is the investing sweet spot… This is where the biggest gains happen over the longest stretches.

3) Lastly, today's zero-percent rates will force Mom and Pop America to "migrate" into the U.S. stock market… pushing the stock boom into "bubble" territory, possibly in 2015.

 And in Digest Premium last weekPorter said he's still bullish, despite record-high stock prices:
Even though the S&P 500 is trading at all-time highs, I am still bullish.

I became bullish on the global equity markets in late 2011 when the European Union turned on the printing presses and began to match the Federal Reserve's money printing (aka quantitative easing). When global central banks are printing tons of money, you're going to have a huge initial feel-good rally…

People believe their money is still sound. So they go out and buy companies and build new infrastructure and start new businesses. Economies all over the globe heat up.

 Porter argues this new money is "a mirage" created by the Federal Reserve. And the rally will eventually end. However, now is the time to be invested and enjoy big gains.

 The global flight into riskier assets will send sectors across the board soaring. But we think you'll see some of the biggest gains in gold stocks – one of the most beaten-down sectors in the market today.

We discussed gold stocks in the March 27 Digest. Both Jeff Clark and Porter are bullish on the sector. Jeff is buying based on technical signals. (Several of his "buy signals" are going off.) And Porter likes gold stocks based on fundamental analysis. As he wrote in the latest issue of his Investment Advisory
Compared with the value of their gold production, gold stocks, as a whole, are as cheap today as they were at the bottom of the gold-stock market during the crisis of 2008. Back then, we recommended buying a basket of gold-mining stocks (GDX) to take advantage of this very unusual situation… That recommendation doubled speculators' money in about a year. (We eventually closed the position in May 2011 for a 91% gain.)

Right now, the market cap [of the gold stock I recommended] is 32% less than the value of its assets… discounts this steep in the share price have happened only seven other times since 1994. The average return 12 months later if you bought in these dips is more than 50%.

 If you're interested in buying gold stocks, we recommend you read Gold Stock Analyst, written by our friend John Doody.

John is one of the best gold-stock investors we know. He's made a fortune for himself using his proprietary techniques. And he's produced huge returns for his readers. From 2000 through the end of 2012, John's method for investing in gold stocks has returned 1,239%… crushing the gains from the S&P 500 (13%), gold (515%), and an index of gold stocks (222%).

 Steve Sjuggerud is not only bullish on the U.S. stock market… He has also named Japanese equities his "No. 1 opportunity for 2013."

In the December issue of True Wealth, Steve explained how newly elected Prime Minister Shinzo Abe would want to do in Japan what Federal Reserve Chairman Ben Bernanke was doing here in the U.S… but multiplied by a factor of 10. Abe is bent on kick-starting Japan's economy with a slate of inflationary policies (like zero-percent interest rates). Steve says Abe will do whatever it takes to bust Japan's 30-year deflation bout.

And to date, Steve's Japan investment thesis is playing out according to plan…

 The Bank of Japan (BOJ) – the nation's central bank – says business sentiment in Japan is improving.

The BOJ interviews businesses of all sizes in manufacturing and nonmanufacturing sectors each quarter. It compiles the results in a survey called the Tankan report, which measures business confidence across key industries.

The first-quarter 2013 survey released today shows the outlook from large manufacturers has improved. A Financial Times article on the report credited the improvement on a weaker yen helping bump up profits (by making exports cheaper). Confidence among nonmanufacturers also improved.

The Financial Times says companies expect further improvements following Abe's aggressive efforts to push Japan's economy into overdrive… While the survey shows business in Japan is getting better, the index still languishes in negative territory, indicating Japan's executives remain cautious. The index has not registered a positive (optimistic) outlook since December 2007.

Now, in the wake of the positive Tankan report, the BOJ will meet this week for the first time since Haruhiko Kuroda took over as the central bank's chief. Kuroda said he would "do whatever it takes" to end deflation. He told parliament last week, "Achieving the 2% inflation target in two years is something that I have in my mind."

Since Steve's December issue, Japan's benchmark Nikkei 225 stock index is up around 20%. The True Wealth model portfolio holds two positions that will benefit from a rising Nikkei – the WisdomTree Japan SmallCap Dividend Fund (DFJ) and the WisdomTree Japan Hedged Equity Fund (DXJ), which hedges currency risk. True Wealth subscribers are up 33% on the small-cap fund, DFJ, since Steve recommended it in February 2010. They're up 19% on DXJ since December.

 Over the weekend, Cyprus announced large-account holders in the nation's banks could lose as much as 60% of their money. We won't rehash all the details of Cyprus' situation today. (You can read our write-up from a week ago here.)

However, at heart, the failure of Cyprus' banking system underscores how socialist thinking and policies have corrupted allegedly "capitalist" economies around the world.

 Jim Rogers, the outspoken investment guru who co-founded the Quantum fund with George Soros, says Cyprus' actions were the last straw for him…

"What more do you need to know? Please, you better hurry, you better run for the hills," Rogers said last Thursday on CNBC. "Think of all the poor souls that just thought they had a simple bank account. Now they find out that they are making a 'contribution to the stability of Cyprus.'"

Like Porter, Rogers believes the decision to "tax" deposits of more than 100,000 euros in Cypriot banks is out-and-out theft that might be duplicated whenever it seems expedient. Rogers is also concerned the move sets a dangerous precedent to be used elsewhere.

"The IMF has said, 'Sure, loot the bank accounts.' The EU has said, 'Loot the bank accounts,'" Rogers said. "So you can be sure that other countries, when problems come, are going to say, 'Well, it's condoned by the EU; it's condoned by the IMF. So let's do it, too.'"

Rogers said he's reducing the size of his European accounts to ensure they're within the balance guaranteed by central banks.

 In the U.S., the Federal Deposit Insurance Corp. (FDIC) guarantees deposits up to $250,000. But should we encounter a similar situation, it will be messy… The FDIC is broke. And the only avenue to repay depositors in the U.S. is to print even more money. All the more reason we hope you own some gold

 New 52-week highs (as of 3/29/13): None, the market was closed for Good Friday.

 "I'm a small investor I started with 100,000. In 2008 I bought my first foreclosure. I bought a triplex with a new roof for 70,000. Cleaned and rented one unit at a time. I did as much as I could myself. I rented each unit for 700 per [month]. At the end of 5 weeks as I rented the last unit, I also signed a contract to sell. I made 22,000, plus a small amount of rent.

"It was a cash closing in 10 days. That got me started. I bought 7 foreclosures in one and a half years. After I bought and sold 4, I made enough to buy 2. I kept the last 2 duplexes for rental income. I stopped buying because I had my 3rd back surgery and a knee replaced. I just started looking again there is nothing for sale left at the good prices. I know that my income now is so much better than what I was getting on a 100,000 cd. I was getting 1%, now I am getting 2,800 a month. A lot of work pays off. Happy hunting." – Anonymous

 "My wife and I began buying rental property in 1985 and soon had 18 homes we were managing, in addition to our full-time jobs. We sold the last of them in 2002 when we felt the market was getting crazy.

"We started looking again this past summer based on S&A recommendations. The first one we looked at was $85K, but we passed on it due to a nonconforming basement. After many offers on bank REOs and short sales in the $120K-145K range, we got our first unit in Nov. for $171K. It had a finished basement, 4BR, 2 Baths and about 2K finished square feet. We had 10 renters interested the first day we posted our ad on Craigslist and rented it for $1275 before our first payment was due.

"We put a backup offer on a short sale in Feb. for $173K and when the first buyer backed out we got it. It was 1200 sq ft 3BR, 2Baths and appraised for $192K. We rented it for $1300 to a couple with 3 kids moving in from out of state, who just missed renting the first house we bought. They moved their stuff into the garage 4 hours after we closed and took possession a week later after we had it painted and the carpets cleaned. Our first payment is not due until April 1st so we had 1 1/2 months of rent to build a safety cushion.

"These are both in Berthoud, CO about a block from each other. We decided on Berthoud because of the good schools and because there were only 4 houses listed for rent in the whole town. Last week, we made an offer of $173K on another 3 BR house that was only 1K sq ft and listed for $186K. It sold the first day of showings and had 3 other offers. I'd say the market is heating up dramatically in the last 6 months. We're glad we got in when we did and thank you for your advice." – Paid-up subscriber Bob A.


Sean Goldsmith

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