?Let all men know how empty and worthless is the power of kings,? said King Cnut, a 10th century ruler of Denmark and England.
The big surprise today was not that the Federal Reserve launched QE3, but the extent of it. ?For a start, they moved the ?low interest rate? target out to mid-2015. ?They left the commitment to bond-buying open-ended. ?The first-year commitment came in at $480 billion, in-line with previous efforts.
Reading the statement from the Open Market Committee, you can?t imagine a more aggressive posture to stimulate the economy. ?You have to wonder how bad the data that we haven?t seen yet is, not just here, but in Europe and Asia as well. The big question now is: ?Will it make any difference??
Asset markets certainly bought the ?RISK ON? story hook, line, and sinker in the wake of the Fed action. ?Gold leapt $30, the Dow soared 200 points, the dollar (UUP) was crushed, the Australian dollar (FXA) rocketed a full penny (ouch!), and junk bonds (HYG) caught a new bid at all-time highs. ?The real puzzler was the Treasury bond market, which saw the (TLT) fall 2 ? points. ?I guess this is because the new Fed buying will be focused on mortgage-backed securities at the expense of Treasuries.
I knew that if they were to do anything, it would be aimed at the residential real estate market, which has been a thorn in their side for the last five years. ?The reason we have 1.5% growth instead of 3% is real estate. Real estate is the missing 1.5%.
But what will be the impact? ?Some $480 billion of buying of mortgage-backed securities over the next 12 months will lower the 30 year conventional mortgage from the current 3.70%. ?But all that will do is enable those who refinanced for the last two years in a row to do so a third time. Those who are underwater on their mortgages and have only negative equity to offer banks as collateral will remain shut out. ?This will generate a big payday for mortgage brokers, but won?t trigger any net new home-buying which the economy desperately needs.
The harsh reality for the housing market is that the demographic headwind of downsizing baby boomers is so ferocious that the Fed is unable to piss against it. Here is the problem:
*80 million baby boomers are trying to sell houses to 65 million Gen Xer?s who earn half as much
*6 million homes are late or in default on payments
*An additional shadow inventory of 15 million units overhangs the market owned by frustrated sellers
*Fannie Mae and Freddie Mac are in receivership, which account for? 95% of US home mortgages.? Each needs $100 billion in new capital. Good luck getting that out of a deadlocked congress
*The home mortgage deduction a big target in any tax revamp. The government would gain $250 billion in revenues in such a move
*The best case scenario for real estate is that we bump along a bottom for 5 years. The worst case is that we go down another 20% when a recession hits in 2013.
It could be that 95% of the new QE3 is already in the market, and that the markets will roll over once the initial headlines and ?feel good? factor wears off. ?With the markets discounting this action for nearly four months, this could be one of the greatest ?buy the rumor, sell the news? opportunities of all time.
Whatever the case, I am not inclined to chase risk assets up here. Anyway, I am now so far ahead of my performance benchmarks for the year that I can?t even see them on a clear day.
Is That My Benchmark Out There?
My friends in the gold futures puts have been telling me that the Chinese have emerged as major buyers in recent months. ?Year-to-date imports have reached 458 tonnes, more than four times the amount during the same period last year ? that amounts to $25 billion in real money. ?This is on top of the country?s massive local gold production, which is kept entirely in country, the exact details of which are unknown.
Explanations run the entire gamut of possibilities. ?There is a concerted attempt by the People?s Bank of China to diversify away from Treasury bills, notes and bonds at a 60-year market high. ?Since the end of 2011, the Middle Kingdom?s holdings of Treasuries have increased by a mere $12.4 billion to $1.164 trillion.
The Chinese have been investing in the entire range of higher-yielding securities, including European sovereign bonds with near junk bonds and emerging market debt, like the bonds issued by Singapore. ?They have also aggressively stepped up their foreign direct investment, picking up important energy assets in Canada just last month.
The Chinese could be buying gold for the simplest reason of all: it?s going up. Private gold ownership carried a death penalty there four years ago. Today there are precious metals coin shops in every city center.? The government is now encouraging individuals to keep some savings in gold. ?With a middle-class now at 400 million, that adds up to a lot of buyers.
Gold remains my favorite asset class, and I?ll be looking to jump back in on the next dip.
?We don?t think the economy is going to be overheating anytime soon,? said Federal Reserve Chairman, Ben Bernanke.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
Long-term readers of this letter are well aware of my pleadings with them a couple of years ago to buy Apple (AAPL) stock at $250 with a target of $1,000. Certainly, the 200 readers who work for Apple noticed. ?That was back when the main concern about the company was that Steve Jobs would die young.
In view of the upgrades present in the iPhone 5 announced today, I am going to have to raise my long term target for the shares to $1,600. ?And it could achieve that lofty price in as little as two years.
First, the specs: The new iPhone will be thinner, faster, and lighter, with a longer battery life. ?The new phone is a paper thin 7.6 mm thick and weighs 112 grams, 18% thinner and 20% lighter than the model 4s. ?The screen gains ? inch to 4 inches in able to accommodate a full HD format.? The new A6 processor is twice as fast as the old one. ?It offers full 4G LTE connectivity to handle wireless video. Talk time is extended to 8 hours, and 10 hours for web surfing. ?The camera jumps to a near professional 8 megapixels. ?In short, it is head-and-shoulders above any potential competitor.
You can preorder the phone from Friday. ?Some analysts see 50 million phones shipping in the next quarter and 170 million in all of 2013, generating 85% of the company?s total revenues. ?The order flow is expected to be so massive that economists think it could add as much as 0.3% to US Q4 GDP.
Apple is the ultimate value play. ?Looking at the forward financials, the stock is still astoundingly cheap, despite a 70% gain so far this year. ?It is selling at a bargain basement 11X 2013 earnings ex-cash. It has a dividend yield of 2%, no debt, and is growing at 15% a year.
By comparison, the S&P 500 is growing at 5% a year at best, offers a dividend yield of less than 2%, has debt of 35% of capital and sells at a 14X multiple. ?In other words, it is more expensive, slower growing, yielding less, with fewer assets backing the shares. ?Why anyone looks at other stocks than Apple is beyond me.
On top of this, Apple has a cash mountain of $120 billion which is growing at a prolific rate, and it has a fantastic lineup of new products in the pipeline. ?The recent Samsung patent win will do a lot to scare away potential competitors. ?The franchise value of the company is huge.
You can also throw in the longer term arguments for the company that I have made before. ?After being shunned for decades, Apple products are now in the process of going mainstream corporate. ?A future China deal will give it access to 600 million new subscribers there. ?Any other new products on top of the iPhone 5, like Apple TV, an iPad mini, or enhanced iPods, will just be cream on the cake.
The trick is how to buy the stock, as it has been all year. ?We seem to get one 20% dip a year, as we saw in April this year and October, 2011 ? usually around an earnings disappointment or a generalized market selloff. ?Use the next one of these to load the boat. ?This is the stock you sock away for your kids? college educations or your own retirement, as I have done.
Steve Jobs would be smiling.
Nice Job, Steve!
?First, thanks so much for your Global Trading Dispatch Trade Alert service, which is not only a wealth building tool, but offers a comprehensive trading education. ?I sometimes trade your recommendations, and sometimes use your guidance to make more aggressive options and futures plays. ?I especially liked your call on gold (GLD).? It?s working very nicely for me.?
--Darell
USA
Take those predictions, forecasts, and prognostications with so many grains of salt. ?They have a notorious track record for being completely wrong, even when made by the leading experts in their fields. In preparing for my autumn lecture series, I came across these following nuggets and thought I?d share them with you ? There are some real howlers:
1876 ?This 'telephone' has too many shortcomings to
be seriously considered as a means of communication.?
-- Western Union internal memo.
1895? ?Heavier than air flying machines are impossible.?
-- Lord Kelvin, president of the Royal Society.
1927 "Who the hell wants to hear actors talk?"
-- H.M. Warner, founder of Warner Brothers.
1943 ?I think there is a world market for maybe five computers.?
-- Thomas Watson, Chairman of IBM.
1962 ?We don't like their sound, and guitar music
is on the way out.?
-- Decca Recording Co. rejecting the Beatles, 1962.
1981 ?640 kilobytes of memory ought to be enough for anybody.?
-- Bill Gates, founder of Microsoft.
?Facebook was being priced as if it were a beautiful woman without a blemish. ?If any kind of blemish appeared, they will kill the stock. ?I?d rather own Google or Apple,? said my old friend and former client, Leon Cooperman, CEO of mega hedge fund Omega Advisors.
?This has been the worst year for active managers in history. We have never seen numbers of people missing benchmarks so large. As the markets have moved up, the tracking error has grown. People are missing about a third of the upside in the markets,? said Thomas Lee, a chief equity strategist at JP Morgan.
