- Profiting from Renaissance art with a mere $1,000 grubstake
- Making sense of late October’s monster rally
- A front-runner in the race for an Ebola vaccine
- An elusive but lucrative treatment for macular degeneration
- Crack shack or mansion, U.S. version… humorless readers get snippy… how banks create money from nothing… and more!
We begin a new week with a strange proposition: You can parlay someone else’s priceless art collection into regular tax-free checks for yourself every month.
Our tale begins in the 15th century… and ends only when you decide you don’t want to collect the checks anymore. But the story’s best told by starting in the middle, at the present moment. Let’s go…
European bank stocks are in a tizzy this morning, after the European Central Bank released results of a “stress test” yesterday.
The ECB ran the balance sheets of 130 banks through a hypothetical crisis. Twenty-five of the banks were found to be short on capital as of year-end 2013. But 12 of those banks have already made up the shortfall during 2014, so it’s 13 banks that need to clean up their act — 10% of the total.
Shares in the banks that came out strongest in the tests, like Austria’s Erste Bank, are up big today. But at the other end of the scale, there’s Italy’s Monte dei Paschi; trading has been suspended twice as shares plunged 20%.
Don’t count out Monte dei Paschi; it has a history going back to 1472. If it survived centuries of European wars and the scourge of fascism, it can probably survive a restructuring at the behest of the ECB. How exactly it plays out, we don’t know yet, but…
Near as we can tell, none of the ECB bureaucrats is telling Monte dei Paschi to part with its priceless art collection.
The bank’s headquarters in Siena hosts a collection of works dating from the 14th through 19th centuries, many of them commissioned by the bank. Here’s just one small sample — a 17th-century oil painting of the Virgin Mary and her sleeping child by Raffaello Vanni.
The work is called Madonna col Bambino e sette Serafini. Sit tight:
We’re getting to the part about the tax-free checks…
“The bank’s commitment to recovering and enhancing the vast artistic heritage of the city and province of Siena has focused on enlarging the collection,” says the bank’s English-language website, “in an effort to give more substantial representation to the Sienese school of art.”
So if the art stays, how will Monte dei Paschi shore up its books? That brings us to an obscure set of bureaucratic rules for banks known as Basel III…
Basel III is a series of voluntary guidelines that most of the developed world’s banks plan to follow so they can survive a bank run during a financial crisis.
It’s the brainchild of an international body called the Basel Committee on Banking Supervision, based, logically enough, in Basel, Switzerland.
Critics say the guidelines don’t go nearly far enough in forestalling a genuine crisis. But that’s not the point today. The point is how Basel III is altering global money flows, and how you can take advantage.
“According to Basel III, municipal bonds are considered safer than U.S. Treasuries in some cases,” says our income specialist Neil George.
That’s right: Hundreds of foreign banks are going to be all but forced to load up on U.S.-issued municipal bonds to comply with Basel III rules.
And munis have already enjoyed a surge of foreign buying: “Over the past decade, the amount of muni bonds bought by foreigners has surged 1,100%,” says Neil.
Basel III will only accelerate that trend because under Basel III, “banks get more credit for owning munis, on top of the better returns than U.S. Treasuries.”
Mind-blowing, huh? And munis already have a tail wind — up 26.7% the last five years, and 7.9% the past year alone.
“So munis are hot and getting hotter,” says Neil.
“But acting on this knowledge can be difficult for everyday investors,” he adds.
“The municipal bond market is currently worth around $3.7 trillion. It’s made up of bonds from states, cities, counties and even territories, covering just about every civil project you can imagine. With so many choices, it can be tough to find ones that offer the biggest payouts with the least risk.”
Unless you use the workaround Neil has discovered. Put it to work and you’ll start collecting those checks — up to three a month, if you like. And remember, they’re tax-free — the income is effectively invisible to the IRS. Neil shows you the easiest way to start collecting “ghost income” when you follow this link.
Stocks are catching their breath this morning after logging their best week of the year. As we write, all of the major indexes are in the red, but not by much. The S&P 500 sits at 1,960.
“The S&P bounced hard last week because the S&P came down to test the long-term uptrend line that we’ve been watching for the last couple of weeks,” says Jonas Elmerraji of our trading desk.
Recall when the market swooned earlier this month, it broke an uptrend going back to the start of 2013. That’s the dotted line. But the longer-term uptrend going back to the euroscare of autumn 2011 remains solidly intact. That’s the solid line.
“Moves don’t get much more textbook than what we’ve seen on this chart,” says Jonas. “We’re at a place where we got our bounce and we’re seeing watch list names look attractive again. We’ll wait for our next trade signal to jump in.”
The race to develop an Ebola vaccine has a clear front-runner, says Ray Blanco of our tech team.
“By the end of the year, a company I’m watching expects to have from hundreds of thousands to millions of doses of Ebola vaccine manufactured and available. It’s using a live VSV virus with an inserted Ebola gene as its vaccine. This is a type of vaccine that can be produced quickly, and the amount of doses that will be available will depend on the size of the dose that’s needed. The Phase 1 trial will reveal that information in just a few weeks.”
Ironically, Ray thinks even a successful Ebola vaccine will prove a lesser factor in the company’s success. Much more promising is a cancer vaccine in the works. Already, Technology Profits Confidential readers have cashed out part of their position for a 211% gain. But with a 122% jump in the last 10 days, there’s more where that came from…
“After Alzheimer’s disease, I’d bet that people most fear macular degeneration as they get older,” says our Stephen Petranek, keeping us on the science-and-wealth beat.
Macular degeneration is a progressive blindness in the center of the retina, called the macula. Current treatments zero in on the “wet” variety of the disorder. Unfortunately, about 90% of the 1.6 million new cases reported each year in the United States are the “dry” variety.
Before year-end, a company on Stephen’s radar will begin recruiting patients for a study of a treatment that tackles both forms. “Patients will receive several hundred thousand stem cells in the eye and then will be followed for a year at specific intervals to determine side effects or toxicities as well as whether they see better,” he explains. “After a year, they will be followed at longer intervals.”
The company is one of five biotech players Stephen believes have the potential to deliver “ultra-wealth.” Every one of them could change life as we know it for the better — dramatically. And make early investors wealthier — phenomenally. But the train is about to leave the station, for reasons Stephen explains at this link. His presentation comes offline tomorrow at midnight, so give it a look while there’s still time.
You think there just might be a housing bubble developing in Silicon Valley?
Two years ago, The 5 had some fun with a website called Crack Shack or Mansion? — in which you were shown various properties around Vancouver, British Columbia., and asked to guess whether they’re drug houses or properties worth $1 million or more.
Surely, a U.S. version of the site could be developed with a focus on Palo Alto, California — home to companies like HP, Tesla and Skype.
At least that’s what comes to mind looking at this property…
Bonus points: It might be infested with rodents
Yup, it’s a mansion. “We thought it would possibly go for $650,000, maybe $700,000,” neighbor Dave Ashton tells KPIX-TV. “Then when it came out originally for $1.6 million, and then they raised it to $1.8 million, we were, like, I’m kind of dumbfounded.”
Prospective buyers weren’t even allowed inside, the joint is so rickety. But it still got two bids. The winning bidder is an investor group.
On top of the $1.8 million price tag, chances are it’ll cost another $1 million to tear it down and start over. Besta luck…
“I consider the term ‘flyover country’ insulting,” writes an indignant reader after Friday’s episode, “to the several million people who live in the area of the United States that produces most of your food, fiber, fuel and electricity, to name a few things.
“We live here because we want to rather than live in a giant sewer pond like New York, Boston, et al. Why would your newsletter choose to disparage a significant number of your subscribers?”
The 5: Sheesh, doesn’t anyone have a sense of irony anymore?
For the record, your editor grew up in flyover country and still feels profoundly connected to flyover country despite having spent the last seven-plus years voluntarily exiled in the BosWash corridor.
“Check your facts,” a reader chides. “Fractional banking reserves are magnitudes below the 10% number you quoted.
“I’ve read 1% or 2%, but much less more often. Don’t publish government-based crap. It’s insulting and cause to discontinue receiving your 5 Min. Forecasts.”
The 5: Ummm… We were running a letter from a reader, not citing chapter and verse.
[Wow, people were quick to lash out on Friday. Sunspot activity?]
On the same subject, another reader weighs in with more gentility, even prefacing his remarks with the standard 5 buildup…
“I thoroughly enjoy reading The 5 every day… here it comes… but….
“Your recovering banker is using mental gymnastics a la eggs versus chickens in stating that loans create deposits. You cannot loan what you don’t have. He is arguing that a loan recipient will deposit and that 90% of said deposit then can once again be lent, etc., etc. — the phenomenon known as velocity in finance — but he ignores that the initial deposit is usually from wages or savings.”
The 5: Sorry, but no… and it’s not only Chris Mayer who says this.
Here’s a simple illustration drawn by the late Harry Browne in his first investing book, 1970’s How You Can Profit From the Coming Devaluation. Say you’re a bank and you get $1,000 in deposits on a given day. Conventional wisdom says if you have to keep a reserve of, say, 16.5% [Note to the irony challenged: This is an example], you would loan $835 and keep $165. Thus, assets would total $1,000.
“But it doesn’t work that way,” Browne wrote. “Instead of viewing the $1,000 as our total deposit structure, we’ll use it as the reserve base and build a much larger deposit structure on top of it.
“We then make new loans totaling $5,000 — by opening new checking accounts for the borrowers. Whenever anyone asks for a loan, we just add the amount of the loan to his checking account balance… In other words, we’ll grant loans by issuing deposit slips for money we don’t actually have.”
With that method, there’s $5,000 in loans and $1,000 in deposits (16.5% of $6,000). Assets thus total $6,000. If you’re a bank, you’d much rather have $6,000 in assets than $1,000.
“I have another ‘but’ on the gold story,” writes the same reader.
“It beats me that the ‘experts’ can’t reliably figure out the volume of mined gold and who holds it. Since every ounce ever mined still exists (unlike other commodities, gold is not consumed) and the total annual production is relatively small, it ought not to be a monumental task. To say that China may have either 2,000 tons or 4,000 tons therefore suggests nonexpertise in this field, or a deliberate hype.”
The 5: Well, yes, but who actually owns X gold bar sitting in a vault at the New York Fed? For years now, Western central banks have “leased” their gold to commercial banks, and those commercial banks have sold that gold to Asian buyers — including the Chinese central bank.
No wonder we underscore the need to keep your precious metals in your own possession…
Best regards,
Dave Gonigam
The 5 Min. Forecast
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