Go for the Weaklings

Dave Gonigam – March 20, 2012

  • Standing conventional wisdom on its head: Chris Mayer on why you want to buy stocks in countries with weak currencies
  • 2010 and 2011 redux: Dan Amoss on what to do during a “career risk” rally
  • Byron King’s forecast borne out in real time: How it’s not too late to jump into the year of the takeover in rare earths
  • A no-needle medical breakthrough… three steps to solid, reliable income… vindication for pension-fund gold bugs… and more!

   “Every institutional investor has to have it,” Chris Mayer told us last night over beers at the new clubhouse here at Rancho Santana. “And now they have to have it even more.”

He was speaking of Apple and its decision to start paying a dividend, however paltry. The firm already makes up 7.4% of the Russell 1000 Growth Index, a common benchmark for growth-stock mutual funds. A regular payout opens Apple to even more funds that wouldn’t touch it otherwise.

Now headlines abound talking about Apple heading to $700. Chris still thinks it’s a sell, for reasons he laid out a few days ago.

So once again as we turn our backs on respectable opinion, where do we find investing opportunity this morning as our editors meet to exchange ideas?

   Turns out Nicaragua has one of the more attractively priced stock markets in the world. At least if you’re in the United States.

Let’s back up a little. “It’s a bit of unexamined conventional wisdom,” Chris says, “that has investors wanting to own stocks in countries with strong currencies. The idea is that you’ll gain not only from rising stock prices, but you’ll enjoy a windfall as the currency gets stronger.”

Sounds great in theory. But in practice, “you’d be better off if you did the opposite and bought the stocks of countries with weak currencies.” At least that’s the conclusion of research published in the Credit Suisse Global Investment Returns Yearbook 2012.

“On this chart,” Chris explains, “you see how various major currencies have performed over the last decade. Read it this way: On the left are currencies where the dollar gained value against that currency. As you move rightward, the dollar weakens against those currencies.”

“From left to right (or weakest to strongest) the currencies are: Turkish lira, Mexican peso, South African rand, Indian rupee, Russian ruble, Brazilian real, British pound, South Korean won, Hong Kong dollar, Polish zloty, Swedish krona, euro, Singapore dollar, Chinese yuan, Japanese yen, Norwegian krone, Canadian dollar, New Zealand dollar, Australian dollar and Swiss franc.”

The best-performing currency against the dollar? The Swiss franc. “The dollar lost 42% of its value against the Swiss franc,” says Chris. But Swiss stocks? Down 31% for U.S. dollar-based investors.

“By contrast,” Chris goes on, “the worst currency was the Turkish lira, which lost value against the U.S. dollar. The latter gained 248% against the lira. But Turkish equities delivered a return of 310% over that time frame.”

Looking back on 40 years of data, the stocks in the best-performing currencies delivered an 11.1% annualized gain. But stocks in the weakest-performing currencies turned in a 30.1% annualized gain.

   “Ha!” says Chris. “I can your hear brain popping as a long-held belief is rubbed out by the cold facts.” So, you ask, what are the weak currencies that point to potentially hefty returns?

Well, the Nicaraguan cordoba is down 22% versus the dollar in the last five years. Other currencies that have lost ground during that time include Turkey’s new lira, Vietnam’s dong, Argentina’s peso and the Icelandic krona.

“Consider these fields of study,” says Chris. These are places to sniff around. The study tells us that stocks exposed to these currencies are likely to deliver outstanding results to U.S. dollar-based investors.

[Ed. Note: Along with Addison, Chris is among the panel of experts who will lead the Rancho Santana Sessions later this week — hosting an intimate gathering of Reserve members interested in offshore investing.

This is nuts-and-bolts stuff: tax planning, estate planning, legal hoops to jump through and the ever-present question of how to invest IRA money overseas. Don’t feel as if you’re missing out by not being here; look for email updates from the Sessions starting on Thursday. And you can always sign up for audio recordings of the sessions, start to finish. Only three days remain in which to lock down the lowest price.]

   “I feel as if I’ve been time traveling” says Dan Amoss. And that’s not only because he’s here at Rancho Santana, two time zones behind what he’s used to.

We’ve had several months of a trading environment resembling the tops in 2010 and 2011. And for a third time, Dan finds himself yet again shouting about risks while most investors believe the Gospel According to Bernanke: “Money printing creates bull markets.”

“Money printing cannot increase the value of stocks,” Dan says, resigned to belaboring the obvious, “and, in fact, will destroy the value of certain stocks by distorting the economy with malinvestments. But money printing can impact stock prices in the short run.”

   Thus a new day dawns with the S&P 500 at another high last seen in June 2008. The futures point to a tiny drop at the open.

“This stock market,” says Dan, “has lately taken on the characteristic of what I call a ‘career risk’ rally. In today’s investment climate, the vast majority of fund managers don’t stay in business if they think too independently. If money managers decide to not participate in a rally because valuations or fundamentals don’t warrant investing, they tend to lose assets and get fired.

“A few decades of this investing culture — complete with Greenspan and Bernanke ‘puts’ — has resulted in scary levels of groupthink. The less that fund managers can think and act independently, according to their best judgment, the less efficient the market becomes.”

Meanwhile, retail mutual fund investors have largely stayed out of the market. Result, says Dan? “A far less robust market structure.”

His guidance going forward? “Follow the economic evidence and company-level evidence, with full acknowledgement of how deficits and money printing distort them both.”

   Oil’s down a bit this morning, to $107.26. Saudi Arabia, we’re told, will be turning up the spigots again. Cabinet ministers are promising a “return [of] oil prices to fair levels”.

And what would those levels be? In January, the kingdom’s oil minister pegged it at $100. Presumably, he meant Brent crude, which is the price paid in most of the world, and which this morning sits at $123.98.

How they’ll pull it off no one’s saying — they’re promising more details later today — but they’re promising to reopen old oil fields. We shall see…

   “The deals are going to happen, and this year!” says Byron King, barely able to contain his excitement at seeing one of his forecasts borne out.

In our Jan. 18 edition, he saw 2012 as the year of the takeover in rare earths. “The only way that most small RE players can stay in business,” he said, “is to achieve the credibility they need from making some sort of deal with larger players.”

That process is now under way in earnest, with Molycorp’s acquisition of Neo Material. “Molycorp needs to marry up its rare earth ore and concentrates with a value chain that includes refining, processing and marketing,” Byron explains. “Meanwhile, Neo Material has built up a nice developed processing chain, research capability and customer contacts all across the end-use user community.”

Molycorp has had a meteoric rise… and an equally meteoric fall. Byron anticipated it well, delivering a 178% gain to his readers in only four months early last year. He’s keeping his ear to the ground for the next big-money handshake in the rare earth space. One of his favorite prospects is still way undervalued, in his estimation.

   Clinical trials are under way for a whole new method of monitoring blood sugar in real-time. A small device under the skin will keep track of glucose levels… and transmit the information wirelessly to the patient’s doctor. No more appointments, no more needles!

“A number of important studies,” says Patrick, “have previously shown that more-aggressive monitoring and control in hospitals of sugar levels, hyperglycemia and hypoglycemia provide dramatic benefits — including lowered mortality, length of stay and cost statistics.”

The device has already proven effective in previous studies with diabetics. And this round of testing won’t take long. “The only required things are a lot of blood tests to verify that the wireless system readings are accurate. Once the two sets of readings are completed, analysis begins. Critical care patients should present no special problems, so the probability that the company will have very positive data in the near to medium term is extremely high.”

From there, the sky’s the limit, says Patrick: “If you want painless, noninvasive access to the metabolism, for either readings or drug delivery, you have to go through this one company. This is an enormous platform, and at some point, it’s going to become obvious to a lot of people in high places.”

Subscriptions to Patrick’s premium advisory, Breakthrough Technology Alert, are currently available at a handsome discount.

   “What the heck is going on here?” says our income specialist Jim Nelson, surveying his bailiwick.

“High-yield bonds are now trading at levels previously unheard-of. Investors are willing to sacrifice capital protection to collect decent income checks. Meanwhile, even more-aggressive income investors are running out of options…literally. The Volatility Index, or VIX, is at five-year lows. Meaning investors are calm and not buying hedging protection for their stocks.”

“And when you look at equity income, the picture is just as bleak. Sure, the 500 companies in the S&P 500 expect to pay out more in dividends over the next 12 months than in any other period in history. But the index is still yielding only 2%.”

Under the circumstances, it’s remarkable how Jim has pulled off an average 5.7% yield if you bought all his open positions at the recommended price. And those yields are growing at high single-digit rates every year.

What’s his strategy? First, as you might expect, he examines yield. “When looking at yield, the No. 1 characteristic has to be can it beat inflation? If a company doesn’t pay a high enough income yield to return more than what currency decay takes away, you need to look elsewhere.”

Too many investors look only at yield and stop there. Jim takes two more steps. The second is growth. Are those dividends growing every year? “It is amazing how quickly your effective yield can grow when you have increasing payments.”

Finally, he examines whether that growth is sustainable. “Is the company able to compete? Will a decline in one market destroy the company’s ability to generate cash?”

“This may sound way too obvious to be effective,” says Jim. “But it’s amazing how many income seekers forget to objectively judge each criterion before placing their bets.” You can start putting Jim’s strategy to work in your portfolio right now.

   After a minor move up yesterday, gold gave it all back and then some in overnight trading. At last check on an early Tuesday morning, the spot price was $1,650 on the nose. Silver’s at $32.39.

   Central banks have been snapping up gold at recent discount prices… or so anonymous traders tell the Financial Times.

“Central banks have definitely been looking at gold as an asset class much more closely,” said one FT source, “since European central banks stopped selling.” Which, indeed, they have, after a series of hefty sales.

The Bank for International Settlements — the central banks’ central bank — scooped up as much as 6 metric tons worth $300 million last week. That coincides with the lowest prices, in U.S. dollars anyway, in two months.

   Dutch pensioners can have their gold back. Readers with sharp memories will recall last year the Dutch central bank cracked down on Vereenigde Glasfabrieken, a glassworkers union that had built up gold to 13% of its pension fund.

The union was ordered to cut its gold holdings to only 3%… but after complying, it continued to fight the matter in court. Now it’s won: A court in Rotterdam has overturned the divestiture order.

Of course, there’s the not-small matter of the union missing out on gold appreciating 25% in euros over the last year. The court will soon decide whether the central bank will have to pay damages. Oh, that would be sweet…


Dave Gonigam
The 5 Min. Forecast

P.S. Barely 24 hours remain if you’ve not yet examined how much you’re entitled to in “unclaimed account credits.”

This is not unlike those “free money” stories you see now and then: forgotten apartment security deposits, uncashed overtime checks and lost insurance refunds that end up sitting in state government coffers waiting to be reclaimed.

In this case, we recently completed a customer-service software upgrade that reveals exactly how much you’re entitled to in additional Agora Financial services that you’re not even aware of. Heck, we weren’t aware until we finished the upgrade.

Still, we have to clear our books eventually. These unclaimed credits come off the table tomorrow at 5 p.m. EDT. It takes only moments to find out how much you’re entitled to — here’s where to go.


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