Return of the Century Bond

by Addison Wiggin

  • Two signs investors are losing their minds…the return of the “century” bond

  • How “Dividend Aristocrats” spank the S&P… and the best income opportunity right now

  • One million people give up looking for work… The 5 picks apart September jobs report

  • Alan Knuckman with a short-term and long-term outlook for gold

  • “Valueless tripe”… and other bilge… in the mailbag

The jobs report was — drumroll, please — “worse than expected.” The Street was counting on a loss of 5,000 jobs. What they got was a big fat negative 95,000.

Not to worry, however. In the debt-addled world of stock market investing circa 2010, this is excellent news. It means the Fed will be more inclined to pursue the storied second round of quantitative easing (“QE2”)… thus propping up moribund stock prices.

Before the release of the jobs report, futures pointed to a loss. After the release, the Dow began flirting with 11,000.

Here’s another head scratcher: On Tuesday, Mexico sold $1 billion in 100-year bonds. Demand was 2.5 times the amount placed. The yield, at 6.1%, was even lower than Mexico paid for 30-year bonds six months ago.

With the deal, Mexico says it’s wrapped up all its needs for foreign capital markets financing through 2012. What do investors get? Dividends. As Jim Nelson outlines below, investors are willing to go anywhere in search of yield.

“The [credit] market overlooks fundamentals at its peril,” says a report from RBC Capital, reacting to the Mexican century bond and belaboring the obvious. The deal “adds to our concern that the credit market is now pushing itself back into bubble territory,” say RBC analysts Roger Appleyard and Simon Ballard, “with memories still all too fresh as to how such a buoyant mood was brought to its knees last time.”

“Enjoy the party while it lasts,” they conclude, “but caveat emptor; the music will surely stop at some stage and when the party ends, the hangovers could be extreme.”

Mexico’s scorching success comes six weeks after the rail firm Norfolk Southern reopened a “century” bond first issued in 2005. The original $300 million issue at 6% is now a $400 million issue.

Of course, this is great news for Norfolk Southern, locking in some (very) long-term financing.

But really, this says an awful lot about how frightened investors are. “It is a certainty,” observes Ian Mathias, the newest addition to our income investing team, “that the Norfolk Southern 100-year bond will suffer interest rate risk before it matures… unless the Fed keeps rates at 0% until 2110.

“At some point, these bonds will be a losing bet. There's a darn good chance Norfolk Southern won't be in business in 100 years. The Fed might not even be around then. Who knows? But investors are hoping they can pocket that 6% as long as rates stay low and sell the bonds to a greater fool long before 2110.”

And so it goes in a zero interest rate environment, when savers are punished and thus forced to reach for yield.

The reach for yield is so intense, investors are currently paying a premium for century bonds issued by Archer Daniels Midland in 1997.

At maturity in 2097, they’ll pay $1,000. If you wanted to buy them this week, it would cost you $1,212. But that’s exactly what some investors are doing — even though that cuts the bond’s effective yield from 6.9% to 5.7%.

“That goes against every principle of investing,” Ian notes, “unless there is reason to believe someone else will want to buy the bond for even more… or if higher yields of similar security simply can't be found. It's a mad world.”

Where exactly can you find that sort of yield? Not in a passbook savings account. And not in any of the other traditional savings vehicles…

  • A 1-year CD yields 1.17%

  • A 5-year CD yields 2.41%

  • A 2-year Treasury note yields 0.34% (a near-record low)

  • A 10-year Treasury note yields 2.37% (lowest since January 2009)

  • A 30-year Treasury bond yields 3.71%.

“Investors are desperate for yields,” says Jim Nelson, who helms our income-investing desk. “They hardly even care where they come from anymore.

“With Treasury notes hitting rock bottom over the last two years, yield seekers started piling in corporate bonds. Now they too have started to experience investor saturation.”

Now we’ve entered “the start of phase 3: the rush to equity yields.”

“So far this year,” Jim continues, “the S&P 500 Dividend Aristocrats index is up 11.6% — 2.56% of which was from dividends.” The Dividend Aristocrats index is made up exclusively of stocks that have grown their dividends every year for at least 25 years.

“Compared to the S&P 500's total return of just 3.9%, that's roughly triple the performance.” And it can yield some interesting-looking charts. Look how the year-to-date performance of dullsville consumer staple stocks like Clorox and Pepsi against, say, a big-growth tech outfit like Intel.

“We, on the other hand, DO care where our dividends come from,” Jim concludes, “and pick our stocks carefully. If desperate, income-starved investors want to buy our stocks for more than we paid, all the better. Some of our favorite plays are leading this new charge for yield.”

A terrific example is a U.S.-listed Brazilian power firm that just reached a 100% gain in less than two years. Double your money on a stodgy, safe-and-secure income play? We’ll take it, thank you.

The average open position in Lifetime Income Report is up 28% — including dividends — across an average holding time of 13 months.

Want to know Jim’s absolute favorite income play right now? It’s so rock solid, he calls it the “other” government-backed retirement program. Check it out right here.

For better or worse, every asset class is reacting this morning to the Labor Department’s monthly unemployment report — not just for its own sake, but also because of what it implies the Fed will do at its next meeting on Nov. 2-3.

Let’s hit the numbers first, then the market impact…

  • Private payrolls rose 64,000 (less than forecast)

  • Uncle Sam cut 77,000 temporary Census jobs (a process that’s almost over now)

  • State and local government (mostly local) cut 82,000 positions.

Result: 95,000 jobs lost in September. The headline unemployment rate was unchanged at 9.6%.

But the U-6 figure including “discouraged workers” and part-timers who want to work full-time jumped from 16.7% to 17.1%. That’s what happens when about a million people just give up looking for work in one month.

The greenback is showing some resilience despite the conventional wisdom on QE2. The dollar index is down to 77.3 this morning.

“There will be four big geopolitical forces,” started energy analyst Charley Maxwell at the ASPO-USA Peak Oil conference yesterday in Washington, D.C., “that will shape the future of oil.” Agora Financial publisher Joseph Schriefer was on hand and sends this report:

“If you’ve never read any of Charley’s material, you owe it to yourself to check him out. With over 52 years in the industry, he’s one of the oldest, most experienced oilmen out there. He was ranked No. 1 in his field by Institutional Investor in 1972, 1974, 1977 and 1981-1986.

“Charley’s old-school. He was the only presenter at this year’s Association for the Study of Peak Oil and Gas conference NOT to have a PowerPoint.

“Instead of pointing and clicking, he spoke slowly and clearly when he told attendees to keep an eye on the four big threats: Venezuela, Iraq, Iran/Israel and Nigeria.”

“Venezuela is running out of oil,” Mr. Maxwell told the assembled. “At some point, a civil war will break out, which will mean the end of imports. America could feel the pain within days.”

But that’s not the real problem…

The real problem is in Iran/Israel, where when a conflict breaks out, he predicts that Iran will block the Strait of Hormuz. Hmnnn, sounds familiar?

“They’ve got tankers full of cement already,” Charley continued. “And they’ll take ’em out there and sink them… fully and quickly blocking the passage. It'll be a mess.”

With over 90% of the oil coming out of the Middle East flowing directly through this sea passage, uhh… Charley’s right — this could be a problem.

“When this happens,” says Charley, “oil will open the next day at $125/barrel, guaranteed.”

What if a conflict doesn’t break out? Well, Mr. Maxwell still broke down the frightening specific forecasts of…:

  • $77/barrel oil in 2011

  • $84/barrel oil in 2012

  • $90/barrel oil in 2013

  • $105/barrel oil in 2014

  • $130/barrel oil in 2015.


  • $217/barrel oil in 2020.

“Charley gave two SPECIFIC ways to play the oil price spike,” writes Joe. “Both of those plays are already in the Outstanding Investments portfolio.

"With the first, you get the big player in the space. And with the second, you get a bite-sized company that someone's gonna gobble up at a premium…" Conflict or not, you can learn how to protect your family from $220/barrel oil in this presentation.

Oil is bouncing back from yesterday’s losses, at $82.72. The grain complex is trading “lock limit up” — that is, the exchange’s maximum allowed one-day rise — after the Agriculture Department cut its forecast for the corn harvest by 3.8%.

It’s been a breathtaking week for commodities overall… as we explore in this Speed Brief.

Gold has recovered a good bit of yesterday’s whacking, trading back up to $1,349. Perspective, please: Yesterday’s $30 setback looks like small potatoes in the context of a 19% gain year to date.

Looking back, “One of the strongest signs for a pending rally in gold/silver months ago,” explains Alan Knuckman, “was the failure to go down when the U.S. dollar rallied to multiyear highs.

“The 10% run-up in the dollar on global concerns had little impact on metals that have a direct correlation to currency. When prices couldn't go down, that was a loud alarm that prices were going to move up.”

Thus, Alan had his eye on $1,300 much of the year. “An upward move from lows at $700 an ounce to the repeated resistance at $1,000 set up a technical breakout move that was $300 higher.”

On Tuesday, he presciently told Resource Trader Alert readers, “The masses of analysts and media calling for higher prices may be right, but the dangers of being bullish NOW are a concern.”

Looking out longer term, however, “More upside exists when you adjust the 1980 gold highs for inflation to reach those heights of $2,200 an ounce.”

The run to $1,300 gold netted his readers a 221% gain last week… on top of a 114% gain just before Labor Day. Across the entire commodities space, Alan has bagged eight winners in a row in just the last three months. And over the last six months, following Alan’s recommendations could have netted you $59,903.

If you want in, we’re making it easy — with a full 50% off the regular membership fee. But this offer is available only through next Wednesday.

Silver, not getting quite the drubbing that gold did yesterday, is back over $23. The spot price as we write is $23.21, to be precise.

The Royal Canadian Mint is following the lead of the U.S. Mint in raising the premium it charges distributors for its signature silver coin. Starting a week from Monday, the wholesaler premium on a Silver Maple Leaf rises from US$1.50 to $2. The U.S. Mint did the same with its Silver Eagles a week ago today.

If collector coins are more your speed, First Federal still has some proof Kangaroo Silver Dollars from the Perth Mint. They’re available by exclusive arrangement to readers of The 5 through next Tuesday. (As such, we’re likely to be compensated if you place an order.)

“I am wondering if it is really a smart idea to purchase and hold physical gold,” a reader muses. “I mean, having only ‘paper gold’ is certainly a risk, but is owning and possessing physical gold any more secure?

“What would happen if, as has happened in the past, the U.S. government makes owning physical gold illegal and orders those in possession of gold to surrender it at a price the government deems reasonable (say, 80% of the spot value)?

“I hate to say that I don't trust the government, but they do have a record…”

The 5: Perhaps you ought to own it outside the country. Our friend and Vancouver vet Egon von Greyerz provides access to a vault under the Zurich airport through a website called GoldSwitzerland. If Egon’s minimum is too rich for you, try James Turk at

“The construction worker” who wrote in Wednesday “is absolutely correct: Construction work is extremely dangerous, and more dangerous than police work overall,” acknowledges the deputy sheriff who wrote in the day before. “Any one of us could be killed at any time by accident. My point was that I was tired of being attacked because I will receive a pension.

“By the way, $3,000.00 per year is put into my pension. As far as statistics, the average life span of a police officer is 59 years old. I don't know the average life span of other occupations. So don't worry, taxpayers, the law of averages suggests you won't have to pay my pension that long anyway.

“Although I'm hoping to beat the odds.”

“Speaking for myself,” another writes, speaking for himself, “I am on board to listen or read your opinions and forecasts. I don’t tune in for yet another Internet forum where unidentified ‘contributors’ call each other names or argue about economic policy.

“Why pad your forecast material with such valueless tripe? [Ahem.] If you want to include a letters or a feedback section, why not tack it on to the end so those who would rather not waste their time on it can avoid it?”

The 5: Isn’t that more or less what we do?

“Just want to say that I very much enjoy your daily 5 Min. newsletter. It’s short, to the point and uncannily insightful. I just wish more information ‘sources’ had the guts to call a spade a spade when it matters.

“Many thanks.”

And to you my friend,

Addison Wiggin

The 5 Min. Forecast

P.S.: Patrick Cox sends along the following…

How the Future Is Already Making Fortunes – Part II

On Wednesday, Oct., 13 at 10:00 a.m., I’m making an announcement you won’t want to miss. I’ve been working on the details behind this announcement for over two years.

It could have a tremendous impact on your future wealth, and health. Let me explain…

I bet you’ve heard, “You can’t change your genetics” dozens of times.

People think there’s a master code written for them before they’re born and they must live with it no matter what.

But what if science found a way to “turn off” certain genetic traits as we age?

You’ve been eating tomatoes for years that already use this technology. Scientists call it “sense” or “antisense” — depending on the gene mechanism they use.

After all, nobody likes overripe tomatoes. I know I don’t.

Years ago, scientists figured out how to “turn off” the gene that makes tomatoes ripen quickly. Now tomatoes are picked, cleaned, shipped and wait at your grocery store — without ripening until you get them home.

Fresher tomatoes are great. But they won’t make you wealthy. That’s why I’m excited about my recent research into a company that could “turn off” certain human disease traits.

This company’s pipeline of work includes just about any major ailment you can imagine.

This is heady research. The profit implications of even ONE successful candidate could cause a wealth shift in the markets. Much of this wealth could shift to thinkers like YOU.

The future will be full of ways to beat many problems we falsely believe are hopeless today — like “You can’t change your genetics.” We can, as it turns out. We are.

My point is simply this: The future is exhilarating. The road that leads there will be bumpy and disasters will strike. But for those who are properly prepared, the next 10, 20 and 30 years will be intensely profitable.

I’ll have more tomorrow — about a company that could provide clean, cheap, plentiful power for your future.

And don’t forget to check your email on Wednesday, Oct. 13 at 10:00 a.m. You’ll want to clear your morning schedule for this…


Patrick Cox

Breakthrough Technology Alert


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