Rules for Investors with UNG and GLD

[Joshua Brown]

Potentially good news for gold lovers.

Hard to believe, but a recent article in the illustrious Wall Street Journal actually deigned to bash the almighty Eric Sprott ? Oz, Alexander and Nimrod of the gold world, a man who?s every word is precious to the oro-phile among us.

Details of the article are of less interest. The fact that it was printed we take to be a potential contrarian signal, indications (albeit early) of a coming bottom to the shiny metal?s collapse.

Hooeeeee!!!

Nevertheless, it was a damning sight. The Sprotter?s record was trotted out by the world?s most widely read paper and exposed for the dirty underwear it was.

This was the well-heeled Canadian?s ugly chart ?

[Joshua Brown]

Although the conventional wisdom is that the choice to purchase a home is the most important and expensive economic decision the average person or couple will make, there is another choice that is even costlier and more important -- the choice to have children.

Raising children is an extremely expensive undertaking. This is particularly true if both spouses work and outside child care is necessary. One recent study found that annual child care costs varied by state, ranging from $4,863 to $16,430 per child. In addition, the Census Bureau reported in 2011 that child care costs have increased dramatically since the 1980s.

No matter how you slice it, this is one huge expense. The fact that the rising costs for families hasn't translated into increased salaries for child care workers (per the Census Bureau's report) can mean only one thing: Someone is making huge profits in the child care business. After recovering from the shock of these figures, I went to work to discover a way to profit from them.

The child care business is primarily a fragmented industry of small-time operators ranging from home-based centers to regional chains. However, a newly public player in the space has expanded its child care system internationally.

Specializing in employer-sponsored child care, Bright Horizons Family Solutions (NYSE: BFAM) had its IPO on Jan. 30. Boasting a market cap of $2.2 billion, Bright Horizons consists of 880 child care and early-education centers in 42 states and a variety of other nations, including India. It boasts the capacity to care for nearly 100,000 children, an increase of 13% from the same time last year.

The company's third-quarter results were strong: Revenue was up 15% from a year ago, to $309 million; adjusted net income soared 119%; and earnings per common share rose 75% after dilution and adjustments. In addition, operating cash flow in the first nine months of this year was just over $120 million, up from $93 million from the same period last year.
Bright Horizons is an active buyer of other child care centers, with one recent acquisition being Children's Choice, a chain of 49 employer-sponsored day care centers in the United States.

Share price jumped on the IPO date to a high of $28; the price then eased into the $38 range and consolidated between $34 and $38. Starting in November, shares started selling off down to the current $33 area.

[Joshua Brown]

Michael Bloomberg?s first election for the New York City Mayoralty took place just a few weeks after 9/11 and he saw the city through its rebuilding. He had also taken over during the midway point of a recession that began with Wall Street?s post-millennial crash. A short-lived boom followed beginning in 2003 but within five years, the Mayor was back in crisis management mode again. This time, the financial sector ? which accounted for an enormous chunk of the city?s tax base and about 230,000 jobs ? was quite literally melting down. Some of New York?s most crucial employers, like Bear Stearns and Lehman Brothers, were vanishing right before our eyes. The effect of this, our worst market crash and financial crisis since the Great Depression, was harrowing. The streets, restaurants and stores were eerily quiet for a long time, there was an emptiness everywhere that just a year early would have been unimaginable.

And despite all of this historic tumult, concentrated as it was in the New York City area, Hizzoner never blinked.

Crime stats actually improved throughout the Great Recession and real estate values have since rebounded everywhere. Under Mayor Bloomberg, some 12,000 blocks, or 40% of the city, have been aggressively rezoned for modernization and development. And while many have nitpicked about some of his nanny-esque leanings on social and health issues, there?s been a shockingly small amount of true controversy on his watch. Bloomberg?s had quite a run through some incredibly difficult times, with barely a scratch on him to show for it.

His support for New York?s financial sector ? which wasn?t exactly an easy stance for a public official to take ? has meant a great deal for our recovery and the ongoing prosperity of the city in which we live and work. That was Mayor Mike having burgers with Lloyd Blankfein at Goldman HQ in the wake of the Greg Smith NYT op-ed that opportunistically trashed the entire workforce of that firm. And there was Mayor Mike once again, clearing out the Occupy Wall Street disaster after allowing it to run its course and make its point (it didn?t have one, turns out).

A lesser politician might have felt compelled to adopt the anti-finance rhetoric of the times and pile on to The Street at its most vulnerable moments. But Bloomberg understands how important the money business is for all New Yorkers, the enormous amounts of wealth it brings in for everyone. Roughly 20% of the nation?s securities industry jobs are located in New York City. The financial sector employs 9% of all NYC workers and we make up 31% of the tax base. Supporting the financial industry through the clean-up of a terrorist attack, two recessions and a firestorm of populist outrage may not be the legacy that Bloomberg is most proud of, but it may turn out to have been his most important achievement over his three terms in office.

I had the chance to say farewell to Mayor Bloomberg on behalf of Wall Street in today?s New York Post. They?ve got a special pull-out section called Bloomberg: The Legacy if you can get your hands on a print copy.

[Joshua Brown]

Random Thoughts

As I preach, when a market isn't too far away from new highs, one or two big up day can make all the difference in the world. Monday was "one day" but we're going to need a little more.

The Ps ended off their best levels but they still managed to hold on to well over ?% of their gains.

The Quack also tailed off its best levels. It still finished up nearly ?%.

The Rusty was the big star of the day. It tacked on nearly 1 ?%. No tailing action here.

Monday's action is much better than a poke-in-the-eye but we going to need some follow through. Follow through is key-stop me if you've heard that before.

So where are we? Net Net, the indices haven't made much forward progress in quite a while. So, Monday notwithstanding, the market has lost some momentum. This is perfectly normal as long as it is just taking a breather.

The next question is, so how do you know that the market is just taking a breather? Obviously, if it goes on to make new highs then your question is answered. It's anything in between that you have to watch for. If support-see recent columns---gets taken out and/or we start getting sell signals, then we'll know that it more than just the pause that refreshes.

Overall, Monday was a good day. The action internally was still a little mixed though.

Major Airs turned back down and still look questionable. You know my system here, right? Short them when they make new highs. I'm half kidding. It's just a tough business. Give me something like a little biotech with the promise of curing a horrid disease vs. an airline with all its associated problems.

Speaking of Biotech, it was off to the races there but it then fizzled out. Still, it managed to hold on to just around 1/2%.

Areas such as Health Services, Energies, and Medical Instruments bounced but they still look questionable at best. They have formed Bowties and/or First Thrusts down. Email me if you need these patterns.

Regional Banks put in the mother-of-all rallies, coming back from their recent slide with a vengeance.

Resorts & Casinos banged out new highs as did the entire Leisure sector.

Ditto for Brokerages, Selected Defense, Manufacturing, and several others.

Areas like the Semis put in a decent rally-up around 1 ?%---but still remain range bound.

Again, it was a good day but things are still mixed.

So what do we do? I'm still seeing a few speculative longs setting up. These high volatility (or what some would call Beta) stocks can often trade contra to the overall market (come to the chart show and I'll give you some current examples). This is a good thing while the market finds its way. I'm still seeing few shorts setting up but I think if you already have a few on, there's no need to add. The caveat is always, unless you really really like a setup. I think for now we are in a "really really" type of market. Be super selective in your stock picking. Unless you think you have the mother-of-all opportunities, walk away and wait for follow through.

[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