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Weekend Edition

This trader is skeptical of Porter Stansberry's "End of America"
Saturday, January 21, 2012

 In Retirement Millionaire, Dr. David Eifrig made 26 recommendations in 2011... 22 of them (84%) were winners. He produced an average return of 11.5% for his readers. Here's what Porter Stansberry recently wrote about Doc...
 
What more can you say about Dr. David Eifrig's performance except "outstanding"? Doc, as we call him, was far more bullish than I was. And he has done a world-class job getting his subscribers into top-quality blue-chip stocks, like VF Corp. (up more than 63%), McDonald's (up more than 42%), and Coke (up 27%).
 
He's also avoided almost any significant losses. Only two of Doc's recommendations ended up being significantly down (Google and Cisco). In a mostly flat market, Doc's formula of buying conservative, high-yielding stocks that are safe has worked very, very well.
 
You often hear us praise "contrarian" investing, or taking the opposite of the popular view. Going against the majority often produces the greatest investment results. But it's never easy being a contrarian, as there's comfort in consensus. It's especially difficult being a contrarian when the guy who coined the phrase "the End of America" signs your paychecks... and he thinks you're wrong.
 
But it worked out for Doc last year. He was skeptical of Porter's End of America thesis. While Porter was making his readers money on the short side, Doc urged his subscribers to pile into blue chips. He also directed them to invest in municipal bonds... And subscribers who followed his advice enjoyed huge returns. For example, among the bond funds he recommended, Invesco Insured Municipal Income fund (IIM) is up 33% since he wrote about it in March 2011...
 
 Municipal bonds were one of Porter's least favorite asset classes of the year. We dedicated a few writeups to the problems of the municipal bond market. (You can read some of our commentary here.) And after the mayor of Harrisburg, Pennsylvania decided she didn't want to pay the city's debt, Porter wrote an essay titled "A Serious Warning About Muni Bonds."
 
We still believe our long-term bearish thesis on munis is correct. But today, we cede to the market. And the market still loves muni bonds. According to fund tracker Lipper, U.S. mutual funds and exchange-traded funds (ETFs) that buy munis saw net inflows of $1.1 billion in the week ended last Wednesday – the largest weekly inflow since March 2010. Muni funds had inflows of $523 million the previous week. And this is after munis returned more than 10% last year, beating even U.S. Treasurys.
 
 But the inflow of capital means one thing – lower yields. Earlier this month, the yield on 10-year Treasurys hit 1.71%, the lowest level since at least 1981. And the lower Treasury yields are bringing down bond yields across the board.
 
Yields on 20-year municipal bonds with an average Moody's rating of Aa2, the third-highest, fell to 3.62% in the week ended January 12. That's the lowest since April 1967... "We're in the middle right now of just a powerful rally," said Joe Deane, who manages $16 billion as head of municipal bonds at money-management firm PIMCO. "You have to let the new-issue market begin to put supply back into the marketplace because, at the moment, the market is on the tight side."
 
 Despite the low yields, Doc is still bullish. In his latest Retirement Millionaire, he wrote...
 
[T]he municipal bond market should continue to perform well. The default rate in this and the high-yield sectors remain very low. And most of the bonds are priced as if they're expecting 10%-14% default rates. For now, we'll continue to collect our income and plan for capital gains as the economy slowly improves through the presidential elections this year.
 
 In that same issue, Doc lays out exactly how you should construct your portfolio for 2012. To learn more about Retirement Millionaire and access Doc's favorite names for this year, click here...
 
 Looking ahead, we're seeing lots of conflicting signals from investors right now...
 
The American Association of Individual Investors (AAII) Sentiment Survey says investors are 49% bullish and 17% bearish. That's extreme bullish sentiment... well beyond the average levels of 39% bullish and 30% bearish.
 
In a simple weekly survey, AAII asks a self-selected group of investors if they're bullish, bearish, or neutral on stocks for the next six months. It tends to be a decent contrarian indicator. So the bullish sentiment right now appears to be a near-term sell signal.
 
But hold on a minute...
 
 If you take a slightly longer time frame into consideration, maybe investors look really scared, not bullish...
 
Through December 2011, investors made net withdrawals from equity mutual funds for eight months in a row – eight months of selling. That's the first time that's happened in at least 20 years, according to Bloomberg. That's really bearish sentiment. The market bottomed in early October... but investors just kept selling.
 
Investors' actions last year have yielded a clear result: Stocks are cheaper than they were a year ago. Last year at this time, the S&P 500 was trading for more than 15 times earnings. Now, it's less than 14 times earnings.
 
If you're a trader, you should be careful going long stocks right now. But if you're a long-term, value-oriented investor, you're probably finding some good deals.
 
 Dan Ferris recently found a fantastic deal for 12% Letter readers. It's a great American business. It's consistently profitable year after year, gushing billions of dollars in profit. It treats shareholders better than the vast majority of companies do... buying back billions of dollars' of stock and increasing its dividend by 20% last year (a pace he expects to continue for at least five more years). It earns a consistent profit margin, year after year like clockwork, a huge hint that it's got a huge advantage over its competition.
 
And you can get all this for less than 12 times earnings. That's an absurdly cheap price for a business so resilient that it grew every year, right through the financial crisis. To find out more about this safe, cheap, high-quality company, try a subscription to The 12% Letter by clicking here.
 
Regards,
 
S&A Research




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