Saturday, January 10, 2009
High-grade corporate bonds will outperform other asset classes this year, according to a survey of financial professionals by the Financial Times. Exactly how safe is corporate credit right now? According to the FT, "US investment-grade corporate bond prices, for example, imply a cumulative default rate of 36 per cent over five years, assuming a typical recovery of 40 cents in the dollar... This is more than 7.5 times higher than the worst default rate in any previous five-year period."
To put things in perspective, the default rate for investment-grade bonds between July 2007 and July 2008 was 0.13% – a far cry from 36%. And these bonds are yielding around 6% compared to 2.5% for 10-year Treasuries.
Steve Sjuggerud found a way to collect much higher yields in bonds, over 20%, by taking on a little more risk. The investment Steve found is "off the charts" attractive and hasn't yielded so much in over 20 years – as far back as his data goes. Even if things get way worse than they are now, you'll still collect huge yields and capital gains. He doesn't expect to ever see this opportunity again.
True Wealth subscribers already have access to Steve's latest report. If you're interested in receiving Steve's research, consider signing up for our Private Wealth Alliance. You'll receive Porter Stansberry's Investment Advisory, The 12% Letter, Doc Eifrig's new letter, the S&A Oil Report, and, of course, Steve's True Wealth for life. Best of all, you can access all these services for only $1.
From a reader: With many commercial property REITs facing huge impending interest and principal payments from their borrowing of the last few years, is the ProShares UltraShort Real Estate ETF (SRS) a good way to take advantage?
The SRS ETF is based on the Dow Jones Real Estate Index, which contains some of the best-capitalized real estate companies. For example, Annaly Capital Management (NLY) makes up more than 5% of the index. Annaly is a great stock to own, as we've covered several times. There's no way I'd want to be short Annaly with mortgage spreads as wide as they are right now.
My point? There are huge discrepancies in the capital structures of different real estate firms. Some – for example General Growth Properties – cannot earn enough money in rents to even pay their interest expenses. Others, like Annaly, are making a killing right now thanks to the wide mortgage spreads. So when it comes to shorting real estate, I think it pays to be very selective and not rely on ETFs.
Alcoa (AA), the world's largest aluminum maker, will lay off up to 16,000 employees, around 15% of its workforce. It will also reduce capital expenditures by 50% and cut an additional 135,000 tons of smelting capacity – on top of the 615,000-ton reduction announced in October. The 750,000 total tons represents about 18% of the company's production.
Alcoa's move is similar to that of Freeport-McMoRan (FCX), the world's largest copper producer, when it cut production in December. While production cuts sound bad, it's actually a prudent move for the companies. Aluminum and copper are down around 50% and 60%, respectively, in one year. It doesn't make sense for Alcoa and Freeport to crank out maximum output at these depressed prices. Instead, they'll take supply off the market, wait until prices gradually rise, and then increase production again. Of course, it's a giant cycle, and we'll see the same crash in the future.
Did anyone completely avoid the train wreck? Yes, actually. Our friend Chris Weber put out a special edition of his letter, The Weber Global Opportunities Report, on November 21, 2007. This was about one month after the peak of stock prices. He told his readers to sell all their stocks and to hold only gold and cash. The update was titled "Bear Market Signal: Everyone Out."
The Dow closed below its previous low today. This triggers sells on the DIA and QQQQ as well as the Singapore ETF... What happened today is a very serious thing... I have had a small amount of my holdings in stocks, and after today I am getting out of much of those. Gold continues solid, and I would have the bulk of my holdings now in metals – actual physical metals – and cash.
Two weeks later, with his subscribers howling in protest about being told to sell, Chris followed up, explaining he wasn't permanently bearish, just very afraid of stocks at the moment: "I am prepared for a period where nearly everything drops except, surprisingly U.S. dollars."
In the business of financial forecasting, Chris Weber is without peer. And he has been doing it for almost 40 years.
He has also been a generous friend and mentor to me since we first met in 1996. Chris, congratulations on yet another amazing market call. You richly deserve the wealth you've earned through your spectacular investing career.
Date Range:1/1/2009 to 1/8/2009
Date Range:1/1/2009 to 1/8/2009