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Weekend Edition

How to track huge, hidden changes in your savings account
Saturday, May 11, 2013

 We're working on a new currency report...
 
Regular readers know we're concerned about the long-term health of the U.S. dollar. It's the central theme of Porter's "End of America" thesis. (His video has been viewed more than 20 million times.) In short, the U.S. government is headed for a slow-motion default on its debts and obligations.
 
While we can't predict where the value of the dollar will be five years from now, we can comfortably predict it will get to that value with great volatility. Most Americans will be rocked by this volatility. S&A readers will be prepared for it... and should be positioned to prosper from it.
 
 Most folks believe currency fluctuations don't affect them... or that the whole subject is just too boring to pay attention to. After all, how much can the value of your bank account really swing up and down?
 
The answer is A LOT.
 
Below is a 10-year chart of the U.S. dollar index. It measures the dollar's value against a basket of foreign currencies, like the Japanese yen and the euro. It's the generally agreed-upon measure of the dollar's global trade value.
 
One glance at the chart below, and you'll see that our prediction of currency volatility isn't outlandish. It displays the value of our bank accounts. And it's bouncing up and down with tremendous volatility. Double-digit percentage changes in value are taking place in the span of months... not years.
 
Think holding U.S. dollars in a bank account is a boring, conservative idea? Think again.
 
Rallies and Declines in the U.S. Dollar (USD)
 
 Wells Fargo (NYSE: WFC) is the biggest mortgage underwriter in the U.S. and the nation's largest small-business lender. Those are two reasons the company is Retirement Millionaire editor Dr. David "Doc" Eifrig's favorite bank. (More on that in a bit.)
 
Wells Fargo just announced it would expand its small-business lending. The company is placing more than 1,500 additional loan experts in local branches and expanding its portfolio of credit products. The stock hit a new high this week, reaching its pre-crisis peak.
 
Wells Fargo (WFC) Back to Pre-Crisis Levels
 
According to The Wall Street Journal, the moves come after loans to commercial and industrial companies expanded at an 11% annualized rate in the first quarter. That's the sixth double-digit gain in the last seven quarters. More than one-quarter of U.S. banks have cut their credit costs.
 
 Warren Buffett, Wells Fargo's largest shareholder, likes the bank today. Like Doc, Buffett is bullish on the U.S. economy... And as people buy more houses, Wells Fargo makes more money. Plus, Buffett believes Wells Fargo will take an even larger share of the U.S. mortgage market (from around 34% of all loans to 40%).
 
 In addition to its lending dominance, Doc likes the bank's gushing cash flow and how well it treats shareholders. The company paid out nearly $5.5 billion in dividends last year (up from $3.4 billion in 2011). And it buys back a ton of stock... Wells Fargo repurchased nearly $3.9 billion in shares last year and has already bought $1.4 billion in shares this year.
 
Retirement Millionaire subscribers who bought Wells Fargo on Doc's recommendation are up 16% since April 2012.
 
 Investment conglomerate Berkshire Hathaway is selling $1 billion worth of new bonds at its lowest yields ever.
 
Half the offering was $500 million of five-year debt yielding 1.3%, just 0.57% over comparable Treasurys. The rest was in 30-year debt yielding 4.3%, 1.35% over comparable Treasurys.
 
During Saturday's Berkshire Hathaway annual meeting in Omaha, Nebraska, which I (Dan Ferris) attended, Buffett said he felt sorry for people holding on to fixed-dollar investments. He said holding cash and Treasurys has been "brutal."
 
Richard Cook of Cook & Bynum Capital Management in Birmingham, Alabama, told Bloomberg that "Berkshire issuing debt is effectively an efficient way [for Buffett] to short the bond market." If you don't understand the comment, think about it. Buffett isn't buying bonds, he's selling them. Shorting means selling.
 
 The annual Ira Sohn Investment Research Conference was held this past week in New York. Every year, some of the world's best investors present their latest stock, bond, or other investment recommendations at the event. And proceeds from admission fees are donated to help fight pediatric cancer.
 
We're intrigued by one of the recommendations that was reported on...
 
 Well-known bond investor Jeffrey Gundlach made a short-sale recommendation on Chipotle Mexican Grill (NYSE: CMG). The quotes from Gundlach's presentation were colorful, but don't offer much insight.
 
"I hate the chart, I like the products," he said. "I do not like the price-to-earnings (P/E) ratio. I am not impressed with earnings growth... I am not attracted to anything related to middle-class consumer discretionary income... All you need to compete with CMG's core business is a taco truck."
 
Those comments are silly. Chipotle trades at close to 40 times earnings. That's too expensive for me to buy, but it grows like a weed on steroids. Sales have doubled the last five years and earnings have risen 270%. Chipotle is consistently profitable, with double-digit net margins. The number of restaurants is up 30% in the last three years. If the P/E ratio were 90, that'd be really crazy. But at 40, it's just a little stretched.
 
And saying a taco truck can compete with it is just plain ridiculous. It's like saying all you need to compete with McDonald's is burger patties and a flattop grill.
 
 So Gundlach is shorting a highly profitable company with rapidly rising sales and earnings. Chipotle was spun off from McDonald's. The people running it are some of the world's best in the quick-service restaurant industry. You can't short a fantastic business run by great people just because the P/E ratio is a little rich.
 
Regards,
 
S&A Research




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