Rules for Investors with UNG and GLD

[Joshua Brown]

The 30-year Treasury is quite possibly the worst investment option out there right now... even your Uncle Dave's coin and baseball card collection might offer better long-term returns.

Let's forget for a moment about the Federal Reserve's intention to taper quantitative easing, which has already begun to place upward pressure on interest rates (and thus downward pressure on bond prices). And let's forget that the longer a bond's duration, the greater its sensitivity to interest rate movements. So with every basis point uptick, nothing will feel the pain more acutely than the 30-year "long bond."

Let's even forget that Uncle Sam's credit rating has already been downgraded by at least one ratings agency.

Even if interest rates don't rise and Congress miraculously balances the budget -- a best-case scenario -- you're still tying up your capital for the next three decades at a paltry rate of around 3.5%. But here's the kicker: When your principal is finally repaid in the distant future, those dollars will have lost much of their purchasing power.

Just ask anyone who bought one of these bonds back in 1983. Maybe they lent the government $30,000, enough money to buy three average new cars at the time. Now, when they get that money back at maturity, it will only get them one new car.

How much do you think your $30,000 will have eroded by 2043?

So if lending money out for 30 years is one of the worst things you can do, then borrowing it for 30 is quite possibly the smartest.

Instead of locking in today's paltry rates as the payee, you're locking in as the payor. Oh, and the lender can't refinance if interest rates move against them, but the borrower can.

Finally, instead of lending full-valued dollars today and then receiving devalued dollars back tomorrow, you'll be doing the exact opposite: receiving full-valued dollars upfront and then repaying with depreciated ones later.

That's the opportunity you have with a 30-year mortgage right now. Taking out a 30-year loan is essentially like taking a short position in the 30-year Treasury.

But here's the thing... You can even take it a step further and buy real estate as an investment, specifically single-family homes.

Here's why I think this is one of the best investments you can make...

1. While the overall national housing market has made great strides toward recovery, thousands of quality homes are still listed at bargain (if not fire-sale) prices. Why not take advantage and make those borrowed dollars stretch even further?

2. Real estate is a durable hard asset that should appreciate in value as the dollar slowly weakens. A maturing bond only gives back what you paid in. No more, no less. Meanwhile, an average home that sold for $75,300 in 1983 is worth $247,900 today.

3. That house won't be a vacant, idle asset. Find a tenant and generate steady monthly rental income along the way.

So you could park $200,000 in a long-dated Treasury and collect about $7,000 in annual interest. And that's all you'll get -- capital appreciation potential is nil. Or you could invest that cash in a four-bedroom/three-bath Victorian home with a corner lot and rent it out for maybe $1,000 a month, or $12,000 per year. And it's not a stretch to say the home might appraise for $300,000 within the next decade.

Of course, these numbers are purely hypothetical. But scenarios just like this are playing out in thousands of cities across the country. Many of the best deals (the luxurious beachfront condos selling for pennies on the dollar) are long gone. But there are still plenty of attractively priced homes that can generate impressive rental yields of 10% or more.

But don't just take my word for it. Listen to Warren Buffett. The Oracle himself said it would be smart for affluent investors to purchase not just a second or third home, but "load up" on "hundreds of thousands" of single-family homes.

The "smart money" is already following Buffett's advice. You see, for decades single-family homes were the exclusive realm of local landlords with a handful of properties. But for the first time, it has attracted heavy buying interest from large institutional investors.

Private equity groups, hedge funds, and others have already scooped up more than 100,000 properties, investing $17 billion in the process. By itself, Blackstone Group (NYSE: BX) has sunk $5.5 billion into purchasing more than 32,000 homes.

Goldman Sachs compiled some numbers and determined that the single-family home rental market could actually be the newest major asset class. Nationwide, there are 14 million rental homes with an aggregate market value of $2.8 trillion.

Unfortunately, most of us lack the spare cash to buy up entire neighborhoods or invest in new residential developments. Most of us would only be able to buy one or two rental properties to get started at best.

That's why I've been telling readers of my High-Yield Investing newsletter about a special asset class that allows regular investors to get in on the action. I call them "Eisenhower Trusts." That's because, thanks to an obscure law signed under President Dwight Eisenhower, smaller investors have access to a "loophole" which allows them to use the same wealth-creating tools as America's wealthy elite.

- Nathan Slaughter

[Joshua Brown]

361 Capital portfolio manager, Blaine Rollins, CFA, previously manager of the Janus Fund, writes a weekly update looking back on major moves, macro-trends and economic data points. The 361 Capital Weekly Research Briefing summarizes the latest market news along with some interesting facts and a touch of humor. 361 Capital is a provider of alternative investment mutual funds, separate accounts, and limited partnerships to institutions, financial intermediaries, and high-net-worth investors.

361 Capital Weekly Research Briefing
December 16, 2013
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA

[Joshua Brown]

Tuesday links: die-hard discipline

?Tis the season. From Science Friday some science book picks from 2013 including Clive Thompson?s Smarter Than You Think: How Technology is Changing Our Minds for the Better.

Quote of the day

Rick Ferri, ?Multi-factor investing isn?t for tourist investors. The strategy requires die-hard discipline, which means a complete understanding of all risks.? (Rick Ferri)

Chart of the day

[Joshua Brown]

In the aftermath of the Fed?s first hint at tapering this past spring, mortgage rates shot up a bit along with the entire complex and the narrative was that the Fed just opened its stupid mouth too soon and staked the housing recovery right through the heart. ?That?s the end of the cycle,? we were told. The new home sales data softened concurrent with the rise in mortgage rates and the pundits drew a line between A and B to explain it.

But just-released data from the month of October tells us we may have been premature ? it could be that the housing market is digesting these (minimally) heightened rates and plowing on ahead. If this is the case, there are positive implications for the rest of the economy as QE begins to unwind ? an affirmation that we can, in fact, tolerate rising rates without stumbling.

Here?s Bank of America Merrill Lynch?s US Economics team this morning:

New home sales: Sales of new single-family homes climbed 25% in October, reversing the weakness in summer and early fall. This mini-downturn in sales was seemingly in response to the spike in mortgage rates this spring and the gain in October suggests it was transitory.

[Joshua Brown]

There is a dangerous malady sweeping the United States.

According to the Centers for Disease Control and Prevention, over a third of American adults -- more than 72 million people -- suffer from this ailment. It is a well-known cause of killers like heart disease, stroke, certain cancers and Type 2 diabetes.

Unfortunately, here in the U.S., many aspects of advertising and the general culture actually seem to promote this condition, even though it costs Americans an estimated $147 billion in annual medical costs -- nearly 10% of all U.S. medical spending. The American Heart Association has gone so far as to call this issue an epidemic and has projected that 44% of the U.S. population may be afflicted with this condition by 2030.

If you haven't guessed, I'm referring to obesity. While the causes of this malady are many, society does little to curtail the constant promotion of factors that eventually result in an obese population. High-fat and high-sugar foods are not only usually among the least expensive, they are the most readily and easily available, not to mention the most heavily advertised.

Fortunately, many companies are focused on solving the obesity epidemic. The leading names in this space are Nutrisystem (Nasdaq: NTRI), Medifast (NYSE: MED) and Weight Watchers International (NYSE: WTW). Out of these three, I think Weight Watchers will make the best investment for 2014.

I can hear some of you now: "Are you kidding me? Shares have plunged nearly 50% this year, and the chart looks absolutely terrible." Well, you are 100% correct -- but that's the reason I like the stock right now. Let me explain.

Founded in 1961, Weight Watchers is an international health-oriented company that provides nutritional, exercise and behavioral modification tools to facilitate weight loss. The company boasts more than 1 million members who attend weekly meetings, and consumers spent over $5 billion on Weight Watchers branded products and services in 2012.

Given the current obesity epidemic, one would assume that Weight Watchers would be a thriving business. However, the company's stock price has been in a downward spiral. In the third quarter, revenue dropped 8% from a year ago, to just below $394 million, but still beat consensus estimates of just under $387 million. In addition, earnings per share came in at $1.07 for the quarter, beating consensus estimates of $0.83.

Weight Watchers has been hurt by a decline in the number of subscribers, a result of the availability of free smartphone applications that provide similar weight loss guidance. However, it's important to note that despite offering online community encouragement, those free apps don't provide the critical one-on-one counseling that Weight Watchers does.

Weight Watchers recently took the bold step of suspending its dividend in an effort to increase liquidity. In addition, the company recently appointed a new technology officer and president to bring fresh ideas, and a new CEO took the helm in August.

In my view, Weight Watchers needs to overhaul its marketing and integrate technology into personalized programs. Combining the constant reminder of a smartphone app with weekly personal meetings would create a powerful weight loss system. Remember, the personalized network of meetings and advisors is what sets Weight Watchers apart. Competition will have a difficult time replicating this network.

The new management remains decidedly downbeat into 2014. CEO James Chambers said, "While we are working aggressively on both near-term commercial activities and longer-term strategic initiatives, 2014 will be a very challenging year."

I think due to its strong branding and unique value proposition of the support network, Weight Watchers' share price will soon turn around. In addition, the technical picture is indicating an approaching oversold condition and support in the $31 range.

[Joshua Brown]

While December 2013 may seem like a pretty quiet end to a strong year for U.S. stocks, the VIX is actually on a tear thus far through the month. It closed out November at 13.70, and is up some 17% since then to close at 16.03 today. Against the average decline of 3.1% we noted, that?s a visible bump. And considering that the typical move from now through year end is another 1.1% increase, it looks like the rally in expected volatility may be around to ring in the New Year.

Is volatility on the rise? You?d never know it unless you were looking at the Vix itself ? the market commentary of late is quite complacent with only tomorrow?s Fed meeting standing in our way of closing out the year quietly.

And yet vol is having a big month, unbeknownst to most.

Here?s Nicholas Colas, chief market strategist at ConvergEx Group with his take on what we could be seeing:

The historically anomalous move for the VIX in December 2013 forces one question to the fore: is this the beginning of a return to more ?Normal? volatility, or just some year-end insurance buying by active managers looking to lock in their gains? There are good arguments for both camps:

We?ve experienced a remarkably quiet year for volatility in U.S. stock markets, and even at its current reading of 16 the CBOE VIX Index is still well below its long run average of 20. We chalk that up to the Federal Reserve?s interest rate and Quantitative Easing policies. Aside from a few weeks of doubt in June, these have been the market?s best friend and constant companion throughout 2013.

How long will the Federal Reserve and equity markets be able to hold onto their friendship? That?s the question for 2014, and it makes sense that options investors would want to hedge their portfolios ahead of Wednesday?s FOMC meeting as well as those in Q1 2014. It has been a great run from the lows in March 2009, equity valuations are fair (if not a little full), economic fundamentals are only slowly improving (and about time, too) and corporations are not yet fully out of their foxholes and hiring.

Of course you?d start to hedge with options ? makes all the sense in the world.
At the same time, there is a strong correlation between the year-to-date performance for the sectors and asset classes in our study and the recent moves in their Implied Vols. Options players aren?t bidding up the VIX for gold or silver because, well, who cares about precious metals these days? Same for corporate bonds for that matter.

Given this relationship between performance and Implied Vol, it is equally easy to write off this year-end rally in the ?VIX of? winning equity sectors and market caps to risk aversion in the final days of the year.

You?ve had a great year ? of course you?d hedge out your risk. Makes all the sense in the world.

The truth is BOTH these explanations resonate. Volatility got way too cheap ? and complacency too high ? in 2013. There?s a great temptation in market commentary to call everything either a ?Bubble? or a ?Generational low?. Life rarely hit such extremes, so I am reluctant to hitch my wagon to either train too often. Still, reversion to the mean ? in this case ?20? on the VIX ? is a powerful force in life and markets. As old time TV detective Baretta used to say, ?You can take that to the bank.?

[Joshua Brown]

I don?t know that the retail investor matters anymore. They didn?t come back to the market after the 2000 crash. The idea that the individual investor believes in the stock market now is challenged. We have a market that is increasingly institutional investors trading back and forth with each other?, said Dan Greenhouse, chief global strategist at BTIG.