I live in a Florida seaside town. Every morning, I bike to work along the beach road. Expensive property sits on both sides of this road. Dozens of houses are for sale... and dozens more for rent. But last month, I noticed our first property auction...
This property would have sold for at least $500,000 in 2006. I know because, in 2006, I checked the price on a similar property a few houses down. The auction closed last month. The property sold for $212,000.
Airline fares are also down. I just bought a nonstop ticket from Florida to Las Vegas for $120 on Southwest. This peak summer-season ticket probably would have cost twice that much last year.
Local retailers are offering big discounts, too. Last weekend, I saw three retailers advertising liquidation sales with entire store discounts of at least 50%.
Even Internet retailers are using heavy discounts. I bought some bicycle equipment online last week. I got a 40% discount on the retail price... then another 20% discount as part of a Fourth of July sale.
The Federal Reserve may be inflating our currency, but when it comes to the prices of the goods and services I use, I only see deflation.
Cheap credit is the cause. Credit's been too cheap – on and off – for the last three decades. Cheap credit caused savers to spend more than normal and entrepreneurs and businesses to borrow and build more than normal. It led to overinvestment in production and service capacity.
Last year, we reached the peak of the credit and price boom... and now prices are falling. We're in what economists call a "debt deflation."
High-quality bonds are the secret to investing in a debt deflation. As the prices of everything around you collapse, the coupon payments you receive from your high-quality bonds appear to grow.
For example, imagine you own a $1,000 bond that pays $100 a year for the next 10 years. The bond matures in 10 years and redeems for $1,000.
The general price level in your neighborhood falls a little bit each year. In 10 years, you find the price level has fallen 20%. Now, the money in your bond has 20% more purchasing power than it did when you bought it initially.
Said another way, the price deflation will wipe out trillions of dollars in value. The assets don't go anywhere. We'll still have the same amount of land, houses, farms, and machines as we had before. They're just worth a lot less. Each dollar left over at the end – the surviving dollars – will gain in purchasing power.
The key is, in a debt deflation, many bonds will end up worthless... as the assets backing them lose value and the people and businesses servicing the interest on them run short of cash flow. You must only buy the quality issues that have no chance of defaulting. Investors will recognize the value of these bonds as safe havens and bid their prices up.
There are 1,232 "bond" securities trading on the major stock exchanges, including the NYSE, the AMEX, and the Nasdaq. These include convertible bonds, preference shares, debentures, mortgage bonds, and secured bonds. These bonds trade just like stocks. You can get quotes throughout the day, you can buy and sell them through any discount broker, and you can hold them in your retirement account.
Many of these instruments are risky garbage issued by large financial institutions. But occasionally, you can find a diamond. Earlier this year, for example, I found an 11% bond backed by an $800 million pile of cash.
For a list of all 1,232 exchange-traded fixed-income securities, go to www.quantumonline.com. It's free, but you'll have to register a username and password to get access. Once you're in, hold your cursor over "income tables" and click on "all exchange traded income securities." You'll be able to scroll through every "stock market bond" trading in America.
We're in deflation, and high-quality bonds are one of the best investments you can own in this environment. Familiarize yourself with Quantum Online... and consider adding some high-quality bonds to your portfolio.
Good investing,
Tom
P.S. I've trawled through the tables and picked out the six best bond investments covered by Quantum Online. Save yourself the hassle and subscribe to my newsletter. We're offering a risk-free trial... click here for the details.
Wyeth (WYE)... Big Pharma
Crucell (CRXL)... biotech
Andrea Biosciences (RDEA)... biotech
Dollar Thrifty (DTG)... cheap stuff
McAfee (MFE)... computer security
Stein Mart (SMRT)... retail
Inergy LP (NRGY)... pipelines
TC Pipelines (TCLP)... pipelines
Holly Energy Partners (HEP)... pipelines
NEW LOWS OF NOTE LAST WEEK
First Bancorp (FBP)... bank
Sterling Bancorp (STL)... bank
UCBH Holdings (UCBH)... bank
CVB Financial Corp. (CVBF)... bank
Harleysville National (HNBC)... bank
Central Pacific Financial (CPF)... bank
Associated Banc-Corp (ASBC)... bank
Pinnacle Financial Partners (PNFP)... bank
Susquehanna Bancshares (SUSQ)... bank
Today, I'm going to share several of my favorite technical indicators and patterns. Becoming familiar with them will help you to spot the best trading opportunities in the market.
