I'd bet not one in 100 investors realizes last year was the worst year for the U.S. government bond market in more than three decades. The U.S. government bond market is the world's largest securities market. The question I've been wrestling with is: If this bear market in U.S. government debt continues (and there are very good reasons to suspect it will), what will investors buy when they sell U.S. government bonds?
They've got three choices... They could buy shorter-duration U.S. bills and notes. Plenty of evidence suggests lots of investors are doing that. Demand for short-term U.S. paper was so high in December some bills actually traded for a negative yield. Sooner or later though, the tiny yields (or even negative yields) and the weak U.S. dollar will force more investors to buy something else. That's why you see emerging-market bonds trading at record high levels. I bet emerging-market bonds continue to rally in 2010. And then, some wise investors who don't trust emerging-market bonds anymore than U.S. bonds will buy gold.
I bet these trends all continue for a long time: very low yields on U.S. government bills and notes, soaring emerging-market bond markets, and soaring gold prices. Of course, the surest bet of all is simply shorting the U.S. long bond. A bankrupt nation won't continue to pay less than 5% a year on fixed-rate, 30-year debt for long. You should also remember, the previous bull market in U.S. government bonds ran from 1981 until 2009 – 18 years. The bear market that follows is likely to be long and painful.
You might be wondering... What does the U.S. government bond market have to do with me? Maybe you only buy stocks. Maybe you'll never short the U.S. bond market or buy a Turkish government bond. No problem. But over the course of my career, I've learned you'll make your best long-term gains when you can identify an inevitable long-term trend and get in on it early. The biggest, most inevitable trend I see in all of the world's markets is in the U.S. government long bond. Understanding the ramifications of what's likely to be a decade or longer bear market is probably the most important investment question we face today.
Why is Visa an inflation hedge? Visa operates the world's largest retail electronic payments network and manages the world's most recognized global financial services brand. Visa has more branded credit and debit cards in circulation than anyone else. And... this is the key: The financial institutions that license their brand do so on the basis of transaction volume.
The more money people spend on their Visa-branded debit and credit cards, the more money Visa earns. Ergo, the more money that exists, the more money Visa will make. It's perfectly correlated to inflation. And Visa has the most to gain from inflation out of all of the credit-card networks because it is the largest, by far. – PSIA, June 2009
We recommended Visa last June, when it was trading for $65. It's now going for roughly 50% more. The company's market dominance and scale is simply unmatched: Visa controls 73% of the U.S. signature debit market. To have a more complete understanding of the key role Visa plays in the global banking system, read this New York Times article on the company.
Poor Lenny Dykstra. As we've recounted over the years, nothing is more pathetic than watching an aging ballplayer go to pieces. And just when you thought things couldn't get any worse for Dykstra... he goes and trashes his own house. Literally. Dykstra was forced out of his California mansion after defaulting on the massive mortgage. He bought the house from Wayne Gretzky for $18.5 million in 2007 and tried to sell it soon thereafter for $25.7 million. Nobody bought. The house is worth an estimated $11.5 million now... at least that was the price before Dykstra trashed the place.
According to a representative from the firm hired by Dykstra's bankruptcy trustee to maintain his former property, "The home was littered throughout with empty beer bottles, trash, dog feces and urine, and other unmentionables." The main drain line in the house was also left undone, allowing raw sewage to seep into the home. It's like a car crash. You can't help but watch. See a video of Dykstra discussing his bankruptcy, and tons of other great Dykstra stuff, at The Daily Crux.
In his most recent Short Report, out today, Jeff Clark named his "Trade of the Year for 2010." Jeff first started looking at this trade on December 1. The stock has since gotten even cheaper. Jeff is calling the bottom. And he's constructed a trade that will net you cash upfront. If the stock reaches Jeff's upside target, readers will make as much as 260%. But the stock only has to move $0.20 (a couple percentage points) for the trade to be profitable.
Jeff also announced his trade of the week – a short position. According to one of Jeff's most trustworthy indicators, this market (one of the most overbought in 2009) will make an "explosive move" to the downside. He expects a 100% return in one week. This could be the most profitable issue Jeff's ever published. To get in on his Trade of the Year and Trade of the Week, click here...
New highs: Fairholme Fund (FAIRX), iShares Hong Kong (EWH), Cresud (CRESY), New York Times (NYT), iShares High Yield Bond Fund (HYG), Burlington Northern Santa Fe (BNI), AmeriGas Partners (APU), Kinder Morgan Energy Partners (KMP), Humboldt Wedag (KHD), Longleaf Partners (LLPFX), Prospect Capital (PSEC), Akamai (AKAM), Dana Holding (DAN), Enzon Pharmaceuticals (ENZN), Northern Dynasty (NAK), Jinshan (JIN.TO), Eldorado Gold (EGO), Rex Energy (REXX), Encore Acquisition (EAC).
We'll repeat our request from earlier this week. Don't let 2010 go by without sending us a note. We read them all. We want to hear from you. Send them here: feedback@stansberryresearch.com.
"As a counterpoint to your comments regarding Chesapeake CEO Aubrey McClendon, allow me to share another side. First, your readers may not know that he founded the company, so, yes, he gets greater leeway than most. Second, he is a fantastic natural gas man even as he appears to be an idiot regarding personal finance. Third, the annual reports are very, very clear – a rarity these days. Fourth, it is a company anyone can actually understand. CHK produces natural gas, in North America only (no currency risk, little political risk), and only onshore (no hurricane risk). It is a simple business that does not stray from what it does best. And for those reasons, CHK can be an excellent investment at the right price." – Paid-up subscriber Miles Newton
Porter comment: I admit I don't know the criteria for being judged a "fantastic natural gas man," but what I do know is a guy who can't avoid personal financial catastrophes probably shouldn't be the CEO of a public company. What Aubrey McClendon did is plain to see for anyone who wants to look. He borrowed billions and billions of dollars and bought more natural gas properties than anyone else over the last 10 years. Long before any of these bets have paid off (and lots of them have already gone bad), he was paying himself $100 million a year or more. Now, being a gas man might involve being something of a gambler. But why would an investor back a gambler who is cashing out long before the game is over?
Maybe Chesapeake will avoid bankruptcy via asset sales – maybe. (It owes more than $5 billion before the end of 2013.) But in my mind, the more critical question is, why, during one of the biggest natural gas booms of all time, did Chesapeake produce zero free cash flow? In 2006, 2007, and 2008, Chesapeake spent $29 billion on property and drilling. It only brought in about half that much in cash profits.
That means during the biggest boom ever in natural gas, Chesapeake went heavily into debt. I admit I don't know everything about natural gas... but I do know it's a cyclical business. And I know you shouldn't spend your whole wad at the top of the market. How Aubrey McClendon gets to be a fantastic gas man – and gets $100 million a year in pay – without knowing this most basic law of his industry is beyond me.
"I just received my December 2009 statement from my broker. Since having lost about 60% of our funds [before reading your letters], I elected to be my own consultant and purchased The 12% Letter as one of my reads. I added Matt Badiali's [S&A Resource Report], because it seemed a natural for me. Adding another letter or two as time went on and subsequently became an Alliance member.
I could not have made a more intelligent financial move, in my life. When calculating our recovery of the losses incurred, I found we had increased what was left of our account by approximately 150%, from March thru December, by reading Porter's, Matt's, Dr Sj's, Braden's, Dan Ferris, Dr Huang's and the various other parties writing the various reports.
"Incidentally, I was somewhat surprised when Porter mentioned Scott County, Tennessee, as I had lived in Oneida for a few years, while exploring for oil in Scott and Morgan Counties, from 1969 to 1975. I used an attorney named Stansberry who was with the law firm of Baker, Stansberry, et al. That was a very unusual name for the area and no doubt Porter is related to my former attorney in some way.
"Looking forward to another boom year and recovering all of my losses and perhaps making a profit to offset the upcoming inflation our president and his host of radicals, Marxists, etc., that are causing the destruction of our nation as we knew it. Again, a great big thank you to all and a Happy New Year too." – Paid-up subscriber Richard
Porter comment: Yes, that's my Uncle Don. It's a small world...
"Who is 'we' when you're talking about calling the bottom in natti last year? Who said 'this is the bottom – buy with both hands, back up the truck!'? It depends who your subscribers believed on your staff. There were a couple who talked around the subject and dipped their toes while others were saying 'wait, the bottom is yet to come when storage fills up.' It's easy for you to say 'we called it' when you have so many writers on your staff and one or two happen to discuss the subject, but I don't believe any of your writers were crazy bullish, 'you've got to buy it now,' on gas at any point last year. It seems a bit hollow to me for you to claim you called the bottom in gas. Maybe I'm wrong and I missed it, but I was watching for the buy signal from you guys. I guess I've got it now." – Paid-up subscriber Gary S.
Porter comment: Well, I said it several times this fall in The Digest... but my most complete "buy natty gas now" analysis was published on September 11, 2009, in my newsletter, PSIA:
Right now, nobody wants natural gas. The current record-low valuation of natural gas as compared to oil tells you market participants have come to believe natural gas will never be valued at par with oil again. That's impossible, of course, because as the price of a commodity falls – especially one as useful as natural gas – consumption rises.... And using a gold ratio chart, we can also see natural gas has probably never been cheaper. (See that chart below – the price of natural gas as measured in ounces of gold)...
These factors lead me to believe we are approaching a once-in-a-decade opportunity in natural gas. It's worth watching closely. And I know every great investor in the world is doing the same thing. I know because I've spoken to a handful of them about natural gas. I know because legendary investors have been buying lots of natural gas-related stocks.
Finally, I've been in the markets long enough to know, when you see an anomaly like this, it's going to attract a lot of capital... At some point in the next year or two, lots of people are going to make a killing in natural gas. I want you to be one of them... From a valuation perspective, there's no doubt in my mind it is time to buy natural gas.
I went on to recommend buying a small natural gas drilling firm that was trading for about 20% of book value. We doubled our money right out of the gate and ended up stopping out for about a 50% gain.
"Dear Mr. Stansbury - your article on GE's possible bankruptcy was bold...and disturbing. But is there a mistake in it? GE did not receive any Govt. bailout money, according to my research. What were you referring to, or was this a mistake in your analysis??? Further, GE has many solid businesses, including huge overseas sales. It's hard to imagine that there is no value there, in spite of the debts. Today, you say that Buffett's preferred shares would give him access to GE's assets should bankruptcy occur. Again, is this accurate? The bondholders would have first claim on the assets, not the preferred holders. Presumably, there'd be little left for preferred holders. I await your reply." – Paid-up subscriber John Quatrini
Porter comment: Well... your research is wrong. The government gave GE around $500 billion in debt guarantees, allowing it to borrow money it otherwise couldn't have. Buffett doesn't take chances. Before he ponied up for GE, he made sure the government was going to guarantee its debt payments through 2012. The question now is, will his involvement allow GE to refinance? That remains to be seen. But in any case, Buffett's position in bankruptcy will probably be assured by later purchases of debt.
Regards,
Porter Stansberry and Sean Goldsmith
Miami Beach, Florida and Baltimore, Maryland
January 6, 2010