Beware This Three-Letter Bubble

Dave Gonigam – April 30, 2012

  • “Mindless buying”: Chris Mayer spots a new stock bubble… and reveals where you want to be when it deflates
  • Zapping cancer with gene therapy and electricity: Patrick Cox identifies an “enormous opportunity” for early investors
  • The story the media won’t tell today about Americans’ income and spending
  • Credit is easing? Not so fast, says a prudent small-business owner… The strangest list of the richest people/ducks/dragons… your last shot at a substantial discount on our most-expensive service… and more!

   “There is a new bubble in the world’s stock markets,” Chris Mayer declares at the start of a new week.

It’s a bubble in exchange-traded funds, or ETFs. “The money flowing into these things staggers the mind,” says Chris. And little wonder: They’re essentially mutual funds tracking an index… but they trade like stocks. ETF fees are typically lower than mutual funds, and you can trade them any time of day.

During the first quarter of 2012, ETFs pulled in $67 billion — a 91% increase year over year. That figure alone isn’t the sign of a bubble, though.

   This is: “All that money flowing into ETFs means those ETFs are doing a lot of mindless buying,” says Chris.

“And it means that stocks not in the ETFs do not enjoy the same inflows.” For illustration, Chris turns to the real estate sector, and a couple of tables from the research firm Horizon Kinetics:

“These are the most popular real estate stocks,” Chris explains. “They are held by the most ETFs” — in contrast to this group:

“Note the remarkable differences in valuation between the two,” says Chris. “In the most popular group, you pay 3 times book for a 2.96% yield on companies with debt to equity of 1.66 times. In the not-so-popular group, you pay almost half the price on a book value basis. And you get nearly twice the yield on a company, with much less debt.”

And as the Horizon researchers point out, the same results show up in almost every other industry sector.

   This gets back to the “O” in Chris’ CODE criteria when looking for quality stocks: the presence of owner-operators, or insiders who own lots of shares.

“As it turns out, ETFs often exclude these companies,” Chris notes. “Because of heavy insider ownership, these stocks have less float, or fewer shares to trade. ETFs like lots of tradable shares. So ETF makers reduce the weight of the less-liquid shares — if they include them at all.”

Here’s where it gets really interesting: “As an owner-operator company repurchases shares,” says Horizon’s Steve Bregman, “their float decreases… This forces the ETF manufacturer to reduce the company’s weight in the index, if it is in an index, which in turn requires share sales by any index-based holders.”

Result: When smart insiders buy, index-based investors are forced to sell.

   In time, the ETF mania will run its course, says Chris: “Fashions come and go. Bubbles pop. What happens when those record inflows to ETFs reverse?”

“When that wave reverses and comes coursing back,” says Horizon’s Bregman, “it will try to move through a universe of stocks with a limited market capitalization and limited float. The impact would be large, indeed. And it might not be long in coming.”

If you want to outperform the market, “you have to construct a portfolio that does not look like the market’s favored sons,” says Chris. “You have to create a portfolio that offers better rewards for the risks taken. You want something like that second chart above — not the first.”

If you need help getting started, Chris offers ample guidance to his readers. You can join them here.

   Major U.S. stock indexes are down across the board this morning. Blue chips are hanging in strongest, small caps the weakest.

At this rate, the indexes will turn in a monthly decline for April.

   “The opportunity for early investors is enormous,” says Patrick Cox of a medical treatment called “electroporation.”

It involves penetrating the “skin” of your cells — their pores, as it were — with tiny jolts of electricity. Today, electroporation devices are standard equipment in medical labs, used for cells in culture.

But Patrick is on the trail of electroporation use for human patients. One of the most promising avenues is cancer treatment. Using a device about the size of a toaster oven, doctors take a probe attached to the device… and inject a gene-based therapeutic compound straight into a tumor.

Current trials involve the treatment of melanoma — skin cancer. And the results are promising: “These are late-stage melanoma patients who are very sick and have very low survival rates,” Patrick explains “Typically, they aren’t expected to survive past a year. Typical one-year survival rates using current care standards are 36%.” But this therapy nearly doubled the rate to 67%.

The market here is sizeable: “It is estimated that 123,000 new cases will be diagnosed this year,” says Patrick, “with 10,000 resulting deaths.”

And the trials show that this treatment can work on other types of cancerous cells. Even though the patients in the trial had melanoma, this therapy “worked on tumors in other parts of the body that weren’t directly treated.”

Patrick sees this company in the same camp as one called BioVex. It too developed its own delivery technology for gene therapies. Last year, it was bought out by Amgen for $1 billion.

Right now, the company Patrick is following has a tiny market cap of $10.5 million. An “enormous” opportunity for early investors, indeed. That’s what Breakthrough Technology Alert is all about — delivering life-changing gains by jumping onto transformational technologies in their first stages.

“The $45,000 profit I made,” writes a reader from Texas, “is staying in my portfolio. I’ll…invest in more of your future recommendations.”

“I made about $35,000 in 10 days!” enthuses a Florida subscriber.

“I sold too soon and made 400%,” says a Colorado subscriber. “Your research has been profitable beyond any rational expectation.”

Breakthrough Technology Alert is one of our most-expensive services. But through midnight tonight, you can gain access for more than half off. Here’s where to go.

   The Commerce Department turned in a deceptively positive report this morning on personal income and spending.

It shows spending grew 0.3% in March, while incomes grew 0.4%. Which would be fine, except about one-fifth of the income growth came in the form of government checks.

Meanwhile, the same report shows the Federal Reserve’s preferred measure of inflation — “core personal consumption expenditures” — rose 2.0% year-over-year. That’s right in the Fed’s sweet spot. Any resemblance to your own cost of living is entirely coincidental.

This will be a “big week” for market-moving numbers. The ISM manufacturing survey is due tomorrow, and the monthly unemployment numbers come out Friday.

The latter turned in a miserable performance last month — as opposed to the merely mediocre performance to which we’ve become accustomed — so there’s much hand-wringing about whether that’s a one-off event.

   Gold has surrendered some of last week’s gains as a new week begins. The bid has sunk to $1,652.

Silver, as usual, is proving even more volatile, down more than 1.5%, to $30.75.

   Copper begins a new week toward the high end of a range where it’s traded since mid-January. A pound of it fetches $3.85 this morning.

“Copper is a great commodity to watch and trade as a binary because it reflects global growth expectations,” says our market-sentiment maven Abe Cofnas. “Of course, there are supply and inventory variables that impact price action” — chief among them, China growth forecasts.

“It’s interesting to note that China subsidizes consumer purchases of appliances and this generates about 40% of China copper consumption!”

For a quick four-day copper play, Abe is counting on the price staying above $3.695 per pound. Cost of the play? $92. As long as copper ends the week above $3.695… it’s good for $100 by week’s end. “It’s an 8.6% return for the week if it works!”

Readers who play Abe’s trades for real had a terrific week last week: 10% gains on oil, 14% on gold, 20% on Germany’s DAX index and 94% on the British pound — all between Monday and Friday!

Interested in joining their ranks, but want to know more about how his system works? Get the scoop here.

   From the “we can’t believe someone wastes their time on this” department… we see the world’s richest fictional character is Smaug — the dragon from J.R.R. Tolkien’s The Hobbit.

In an annual effort, Forbes writer Michael Noer devoted god knows how many hours of original research to identifying the 15 wealthiest characters across a variety of novels, movies, TV shows, even comic books.

In concluding Smaug tops the list, Noer writes, “Taking into account a variety of factors including the estimated length of a dragon (64 feet), how many scales he has on his belly (822), the percentage of air in the treasure mound (30%) and the price of gold, silver and diamonds, I estimated the ancient wyrm to be worth $8.6 billion.”

Yeah, you thought we were joking.

Here’s the whole list… in which we learn that Jed Clampett’s oil fortune is more than seven times that of Monty Burns’ nuclear-power riches…

Is this inflation-adjusted, you wonder? It’s more than that. “Net worth estimates,” Forbes explains, “are based on an analysis of the fictional character’s source material, and, where possible, valued against known real-world commodity and share price movements. In the case of privately held fictional concerns, we seek to identify comparable fictional public companies. All figures are as of market close, April 1, 2012.”

Now you know….

   “Yes,” writes a reader with the sort of on-the-ground report of small-business conditions we always welcome, “I constantly hear that there is money to lend, money to lend, money to lend. (No, that was not an echo, I did that intentionally).

“Recently, I heard from a friend (real estate broker who has been a developer for years) who is developing resort/recreational lots in Wisconsin. He owns (outright — no loan on the land) hundreds of acres. This man had the ethics to buy out his partner when the partner developed an incurable disease, instead of fighting with the heirs later.”

“The land is lakefront, with beach club, float plane accessible, abutting a well-known golf course/resort, and not too far from one of the Indian casinos. Many lots have already been sold and have homes on them (both seasonal and full-time). Part of the land was for RV lot development.”

“To develop the infrastructure for the RV lots, he was looking for a loan. This is the email I recently received from him…

‘Was able to get a loan from a British lender ($150,000 at 5.8% interest only for five years). Hard money lenders in the states wanted 12-15% interest and up to 6 points. Upfront.

‘You would not believe the amount of paperwork required by Homeland Security to transfer funds from overseas. I had to sign my life away.’”

   “A few weeks ago,” another reader writes, “you folks ran an email I sent you about ‘of course, there should be a ‘Tax-Out.’ A week later, I was contacted by the IRS to undergo the first audit of my life. A nightmare!

“I shall chalk this up to ‘coincidence’ and stand by my previous note. Keep up the great work – don’t slow down.”

The 5: Wow. But yes, we’ll chalk it up to coincidence too — sounds as if they were gearing up for the audit well before you wrote in.

Besides… government has the means to scoop up nearly everything you do online… but there’s no guarantee they can make any sense of it. At least until the Utah Data Center is up and running next year, anyway…

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. Last chance: Discounted access to Patrick Cox’s Breakthrough Technology Alert expires tonight at midnight. If you want one of our most-expensive services at 55% off the regular fee… act here.

rspertzel

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