‘Massive Wealth Destruction’ Is About to Hit Investors: Faber

Dr. Marc Faber

Published: Monday, 2 Apr 2012 | 8:12 AM ET

Runaway government debts have triggered uncontrolled money printing that in turn will lead to inflation that will decimate portfolios, according to the latest forecast from “Dr. Doom” Marc Faber.

Investors, particularly those in the “well-to-do” category, could lose about half their total wealth in the next few years as the consequences pile up from global government debt problems, Faber, the author of the Gloom Boom & Doom Report, said on CNBC.

Efforts to stem the debt problems have seen the Federal Reserve expand its balance sheet to nearly $3 trillion and other central banks implement aggressive liquidity programs as well, which Faber sees producing devastating inflation as well as other consequences.

“Somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation or through social unrest or through war or credit market collapse,” he said. “Maybe all of it will happen, but at different times.”

The "Law of Volatility" at Work

It didn't take long for investors to forget about risk... but the DailyWealth "law of volatility" will remind them.

There are few sure bets in the financial markets... and few definitive "this is the case, and it always will be" statements we're comfortable making. But one we'll stick by forever is, "Calm periods of rosy headlines and softly rising prices will always be interrupted by periods of wrenching volatility... and vice versa." That's just the way the world works. Statisticians call [2] it "reversion to the mean [3]."

For a picture of this "always the case, always will be" phenomenon, we present the past three years of the Volatility Index [4] (the "VIX [5]"), the most popular gauge of market [6] volatility and investor fear. When the VIX is low (below 18), it indicates investors have few worries and see blue skies ahead. When the VIX is high (above 30), it indicates panic and confusion.

In early 2010, investors were enjoying the "good times" of the market recovery. The calmness was shattered by the flash crash (spike "A"). In mid-2011, investors were enjoying another calm period... which was shattered by the European debt crisis (spike "B"). As you can see in the lower right hand corner of our chart, the VIX has plummeted in the past three months. It's just a matter of time before a new crisis catapults the VIX higher.

One Of The Best Stock Market Indicators Out There Is Screaming Buy

So, what's next for stocks after the best quarter in 14 years?

Bank of America's Savita Subramanian thinks they could head up much further.

According to the firm's proprietary Sell Side Indicator, strategists' bullishness receded in March to 55.8, marking the sixth decline in eight months.

From Subramanian's note to clients:

With the S&P 500’s indicated dividend yield near 2%, that implies a 12-month price return of 12% and a 12-month value of 1580. Although this is not our official S&P 500 target, this model is an input into our target, which incorporates valuation, sentiment and technicals. Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 93% of the time, with median 12-month returns of +23%.

To be clear, this is a contrarian indicator:

The Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month. We have found that Wall Street’s consensus equity allocation has historically been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa.

Subramanian's official current year-end target for the S&P 500 is 1,400.

Here's a chart from Subramanian's report:

Ellis Martin Report with Sprott Money’s CEO Eric Sprott

from OpportunityShow:

In this exclusive feature, Ellis Martin interviews Sprott Money CEO Eric Sprott for a wide-based discussion of today and tomorrow’s commodity market issues: gold vs silver,stocks and bullion, recession or is it depression, recovery or collapse supply and demand and the virtual reality purveyance of the banks and the Fed, the media and the politicos. Mr. Sprott predicted early on the market collapse of 2008. Listen to his current observations.

It's the Best Time to Own These Stocks in 25 Years

I know this sounds crazy... but the U.S. banking sector hasn't been this healthy in 25 years.

And that gives you the opportunity to make great money in bank stocks.

If you're like most people, you can't stand the idea of owning a bank stock. I know many folks who saw their retirement accounts devastated in 2008... thanks in part to the losses big banks helped create. The rebound has been very slow... So the financial industry has spent several years in a period of little-to-no growth.

But now, the sector is staging a quiet recovery. You can see the recovery in this chart – one of the most important charts in all of finance – which tracks the growth in commercial and industrial lending...

"Commercial and industrial lending" is basically another way to say "loans to grow businesses." As you can see, the absolute levels of lending are approaching the pre-recession levels of late 2007.

Last year, commercial and industrial lending grew nearly 10%, and it shows no signs of stopping.

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That's good news for the sector. Banking is a volume [2] business... Banks make money by borrowing money (in the form of deposits, on which they pay a low amount of interest), while lending money out at much higher interest rates.

This "interest spread" is attractive right now. Short-term rates are low. And recently, longer-term rates have been increasing. That means improving interest-rate spreads. More lending activity and a better interest-rate spread equal more profits for the banks.

This environment has helped banks "heal" themselves. The banks' capital as a percent of assets is the highest it's been since 1938. "Capital" is the amount left over after you subtract the liabilities from the assets. It's like the "net worth [3]" of a company. Now at 74-year highs, this ratio is a sign that the wealth of a business is growing.

And similarly, the liquidity of banks as a percent of assets is at a 25-year high. "Liquidity" measures how much cash and short-term assets are available. It provides protection should liquidity be needed (as in the sudden contraction of interbank credit for several weeks in 2008). But it also provides opportunity should interesting loans and deals come up for the bank.

Taken together... the increasing capital and liquidity measures show that not only are the banks' businesses more valuable, but they have the strength to grow their businesses or avert trouble... depending on what the future brings.

But the stock market [4] doesn't quite believe it yet... bank stocks are still relatively cheap. My colleague Brett Eversole just produced this chart below... which uses DataStream information on the U.S. banking sector. As you can see, bank stocks are trading at historically low valuations.

It's been a rough five years for banks. But as I've shown you, the crisis has passed... And they're as healthy as they've been in 25 years. And considering the sector is historically cheap, now is a great time to buy bank stocks.

Here's to our health, wealth, and a great retirement.

Do NOT do This with Your Investments

"Steve, since the market is up so much lately, I'm looking for stocks and sectors that have been left behind," a smart friend of mine said last week.

"Oh no," I thought. "That is exactly the wrong thing to do."

I understand what he's hoping to do... I understand that rationally it makes sense.

But investing doesn't work that way.

Think about Apple (AAPL) versus Research in Motion (RIMM) as an example. Since the summer of 2009, shares of Apple, which makes the iPhone, are up 400% and shares of Research in Motion, which makes the BlackBerry, are down 80%.



Any time along the way, you could have said, "Well, Apple is up, and RIMM is down, so I'll buy RIMM." And any time along the way, you would have been wrong.

In my True Wealth newsletter, we're up 42.8% in ROM, a tech stock fund we bought last March. (Apple actually makes up 22% of ROM.)

We rode Apple and the other major tech stocks all the way up. And we're still holding them.

We have not bought RIMM... even though I'm sure there's an argument that it's cheap. So why not sell Apple and buy RIMM?

Legendary investor Warren Buffett has explained it best in the past: "I would prefer to buy an outstanding company at a fair price rather than an ordinary company at a cheap price."

He wasn't saying this about Apple and RIMM specifically... he was speaking in general terms.

Over the last year, Apple has been an outstanding company at a fair price. RIMM was an ordinary company at a cheap price. And look what happened. Buffett was right...

In the September True Wealth, I reiterated my buy on Apple and the other tech giants, making the case that they were "outstanding companies" at "fair prices." I published a list of the tech-stock fund's top holdings and their price-to-earnings (P/E) ratios:

Apple's forward P/E was nine. RIMM's was five. Since then, Apple is up nearly 60%. And RIMM has lost nearly half its value.

The message is simple... Don't make the mistake of buying ordinary companies at cheap prices. Instead, buy outstanding companies at fair prices.

Look... this has been an amazing bull run in stocks. If a stock DIDN'T rise in this bull run, something is wrong with it... It is "cheap" now for a reason.

Most people think that it's safer to buy a "cheap" stock – one that didn't participate in the big run higher. They think that there's some safety there... They think that it can't fall as much as the ones that ran up, simply because it doesn't have as far to fall.

I can see how you can think that... But having been a participant in the markets for two decades, I know this isn't how it works. Buying the previous underperformers doesn't provide you any protection at all from a market bust.

When the bust comes, they all come down... Heck, if anything, people want to keep the "outstanding companies" (as Buffett called them) and quickly dump the "ordinary" companies.

Once the market has run up like it has, the temptation is to look for deals among ordinary companies. Resist that temptation... Trust me, it doesn't work.

Learning this lesson was hard for me. I burned myself a few times looking for bargains after bull runs before I got it.

It doesn't have to be hard to learn. Now you know it. Don't let yourself get burned by it, too...

Dr. Steve Sjuggerud
Founding Editor, DailyWealth

This High Tech Dividend Stock is a "Buy"

I think now is a great time to buy dividend paying stocks.

Even Bill Gross, the largest bond investor in the world, is advising investors to look at dividend paying stocks for income. The dividend stocks Gross likes can be boring and most traders prefer the excitement of a tech company.

This week, I found the best of both worlds -- a stock that combines dividends and high tech growth potential.

While scanning large cap stocks this week, I spotted an electric utility company with amazing high tech potential. You see, energy is an evolving market. Utility companies are being forced to deliver cleaner energy and this requires smarter engineering.

This also creates an opportunity for innovative companies. Electricity companies already have a wire into each house and they can use this to capture useful information and transmit it easily along their existing power lines. This is the idea behind the Smart Grid that will help meet the energy needs of the future. The infrastructure is already in place for smart electric companies to become giants in their industry.

We could see Southern Company (NYSE: SO) evolve into that kind of company. SO provides a standard company description talking about electricity generating capacity and the number of customers they serve... and then they add "In addition, the company offers various wireless communication options, such as talk, cellular service, text messaging, wireless Internet access, and wireless data services; and wholesale fiber optic solutions to telecommunication providers under the Southern Telecom name." Cable companies compete with phone companies by offering package deals and in the future we may see SO offering these kinds of deals to customers.

SO might have a bright future, but they also have a long history of delivering returns to their share holders. This boring utility has outperformed the S&P 500 over the past year, the past five years, the past ten years and over the past thirty years. Over the last thirty years, SO has delivered an annual gain of 16.3% a year.

It also pays a current dividend of about 4.2%. The company has paid a dividend for 257 consecutive quarters (over 64 years) and has increased it in each of the last ten years. There are no guarantees for investors, but this dividend seems safe, and it is paying about twice the yield investors can get with ten-year Treasury notes.

It is important to consider alternative to Treasuries. The interest rate on those notes is fixed and if inflation accelerates, investors will face losses. With dividend paying stocks, the dividend can rise with inflation and investors may be able to maintain their income. This could lead to increased demand for dividend stocks, and that would help SO.

We are already seeing some buying demand in SO. This is a relatively long-term trade so the monthly chart will be used to evaluate the potential reward and risk. Based on the depth of the decline into the 2009 bottom, SO should be expected to encounter resistance near $46.33. This price is equal to 62% of the size of the decline added to the breakout point. The stock has been consolidating near that level since December.

Once the initial resistance level is broken, SO could reach $51.02 based on that pattern. That price target is found by first identifying the depth of the decline - $38.75 was the closing high in December 2007 and the March 2009 low was $26.48, a difference of $12.27. This difference ($12.27) is added to the breakout point (the old high of $38.75) to obtain a target of $51.02. Markets often display a pattern of symmetry in declines and advances. That old high also serves as a stop on the trade and traders should assume the trend in SO has reversed if the price closes below $38.75.

Momentum, shown here as the rate of change (ROC) indicator, is moving higher and looks ready to break above its moving average. That buy signal has delivered consistently profitably and low risk trades in SO in the past. This has been a winning trade almost 70% of the time for long term traders willing to hold the stock for at least a year.

This is a trade that can be considered as a substitute for fixed income investments. Bonds offer significant risk relative to their yield and dividend paying stocks have more potential upside than Treasury securities for now.

The portfolio for my "boring" 26-week ROC strategy continues to be unchanged again this week. That strategy continues to be holding Vanguard REIT (VNQ), SPDR S&P 500 ETF (SPY) and Vanguard Small-Cap ETF (VB).

-- Michael J. Carr

A Low-Risk Speculation in the Gold Market

We have a big opportunity in gold miners right now...

As I told a colleague, I think investors who miss the opportunity now will look back on March 2012 and wonder, "Why didn't I load [2] up on those stocks when I had the chance?..."

You see, despite the selloff of the past month or so, there are a lot of things to like about gold stocks right now...

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According to my colleague Jeff Clark, editor of the S&A Short Report, gold's chart suggests we could see "sharply higher" gold prices this summer. That should boost gold stocks. Yesterday morning, Jeff told his subscribers that the gold stock sector is technically oversold.

Also, they're undervalued according to industry guru John Doody, editor of Gold Stock Analyst. And they're fundamentally cheap, selling at an average six times next year's earnings [3].

But I think this chart makes one of the most compelling arguments for owning gold stocks today. It shows the past two years of price action [4] in GDX, the big gold-stock fund (the blue line), and the gold price (the gray line). Take a look...

Right now, GDX is trading for around $50 per share. It hasn't been that low in price since mid-2010... when gold was just over $1,200 per ounce. Gold is going for just under $1,700 an ounce right now. In other words, gold miners are priced like gold is going to fall nearly 30% from here.

I'm not saying that can't happen. Gold is a historically volatile asset [5], so anything can happen.

But in the long term, the engines behind gold's decade-long bull market [6] aren't going away. Growing Asian nations are still buying gold. And Western governments in the U.S. and Europe have taken on debts and obligations that cannot possibly be paid with sound, honest money. They will be paid with devalued, debased paper money. Gold and silver, being "real money," will rise as a result.

At these levels, gold-stock investors don't even need gold to rise. Gold at today's prices means historically fat profit [7] margins for gold miners... which will drive higher earnings. That makes buying shares [8] a low-risk speculation [9] right here.

Chart of the Day - Digital Realty Trust (DLR)

The "Chart of the Day" is Digital Realty Trust (DLR), which showed up on Friday's Barchart "All Time High" list. Digital Realty on Friday posted a new all-time high of $74.04 and closed up 1.43%. TrendSpotter has been Long since Feb 23 at $70.90. In recent news on the stock, Digital Realty on Feb 17 reported Q4 adjusted funds from operation (FFO) at $1.03 per share, above the consensus of $1.01. Morgan Stanley on Feb 16 initiated coverage on DLR with an Overweight and a target of $76. However, Jefferies on March 15 downgraded DLR to Hold from Buy due to valuation. RBC Capital on Feb 27 downgraded DLR to Sector Perform from Outperform but raised its target to $75 from $71. Digital Realty Trust, with a market cap of $7.8 billion, is a real estate investment trust that owns and manages technology-related real estate.