Over the years, we've warned investors many times about the accounting problems and the gross corruption of Fannie Mae and Freddie Mac. Congress wants to point the finger at Wall Street for the housing mess... but it was Fannie and Freddie that made the whole thing possible by subsidizing and guaranteeing mortgages. (And paying out millions and millions of dollars to politicians along the way.) You can bet Chris Dodd and Barney Frank won't allow any investigation into the corruption at Freddie Mac or Fannie Mae.
But the suicide of Freddie Mac's longtime accounting executive and CFO, David Kellermann, sure does raise a lot of tough questions. Like... why would someone hang himself in his own home, while his family was asleep upstairs? Just for future reference, dear subscribers... If they ever find me, dead from an apparent "suicide," please know someone killed me.
Update on the Carl Icahn/Kirk Kerkorian battle over MGM... Rumors abound that casino mogul Kerkorian may sell The Mirage casino in Las Vegas to fend off unwanted attacks from Icahn. We'll know soon: MGM Mirage has until May 15 to come up with a restructuring plan. To raise cash and hopefully make its two approaching payments, MGM has set a deadline of next Tuesday for bids on its two Mississippi casinos and one near Detroit, which could be worth a combined $1.5 billion. If no one bids on the properties – a realistic scenario – the company may consider selling The Mirage.
Racetrack owner Penn National Gaming is rumored to be interested. It's sitting on a $1 billion cash kitty, thanks to Fortess Investment Group, which had to pay a huge break-up fee when its deal to privatize the company fell apart. One thing is certain: The shareholders of MGM aren't going to like the terms of whatever deal is struck. If you want to bet on a Las Vegas rebound, don't bet on MGM.
The big rally in stocks, powered by the government's printing presses, makes it feel like the worst is over, doesn't it? And maybe it is... But according to research conducted by the New York Times, $537 billion in mortgages will mature before the end of 2010 – much of which is on commercial real estate. Almost $90 billion worth of commercial real estate is already in default. I would tread very carefully in financial stocks, and I'd watch my stop losses closely.
We wrote it, did you short it?
Defaults reached 7% of the book in 2007, resulting in $300 million in losses in Capital One's car-loan business. But at least the collateral backing these loans is somewhat recoverable. Imagine a similar rate of default in its much larger book of U.S. credit-card obligations (about $50 billion). Such a default rate would produce losses of $3.5 billion, enough to wipe out Capital One's annual profits. But I think the losses in credit cards will end up being even worse than the losses in mortgages and autos – especially as unemployment begins to increase. – Porter Stansberry's Investment Advisory, December 2008
Capital One announced an $86.9 million quarterly loss last night. Its charge-off rate for U.S. cards increased to 8.4%. The company expects its charge-off rate to "cross 10% in the next couple of months" and only sees things getting worse through the rest of the year. In my December 2008 issue, I wrote a 10% charge-off rate throughout Capital One's entire book would nearly wipe out the company's equity, and the stock would fall to zero by the end of this year. We're getting closer.
Kudos to Badiali... In his latest issue, S&A Oil Report editor Matt Badiali noted that oil service companies were the cheapest they've been in 20 years, and could easily return hundreds of percent in the next few years. He recommended three companies... and they're up between 20% and 45% in a matter of weeks.
If you're interested in commodity investments, Matt also recently recommended a small gold-miner that holds a deposit containing at least 94 million ounces of gold... which makes it the single-largest gold deposit in America today. The 94 million ounces is worth around $84 billion (at today's prices). Matt expects to make several hundred percent on the stock when large mining companies buy it out. To get more information on Matt's favorite gold mining stock, click here...
New highs: none.
In the mailbag... More subscribers are making piles of money, safely, by selling put and call options. As long as volatility remains high, you have no reason not to sell options. A lot of people who had never done it before have made tens of thousands of dollars in the last six months. Have you done well with our advice? Let us know: feedback@stansberryresearch.com.
"I use what I call the Porter-Clark strategy. The put strategy along with the advanced income strategy of Jeff Clark and occasionally a little option action from Jeff's Short Report and direct line. But now on almost every pick that I decide to invest I start with selling puts to try to get in at a lower price. If the put exercises I will then sell covered calls on at least part of the shares that I own. If my covered calls exercise, I then again sell puts if I still like the stock and want to get back in. Using this strategy I have realized gains of over $30,000 in three months on a starting account balance of $130,000... " – Paid-up subscriber Richard L. Anderson
Porter comment: I remember when I wrote the original sales letter for Put Strategy Report last October, I begged people to try the strategy. There had never been a better environment for selling puts during my entire career... and probably not since the Great Depression. With the Volatility Index (VIX) – a measure of option pricing – over 50, it was nearly impossible not to make money selling puts. I knew anyone who took my advice was going to make a huge pile of money.
I'm happy for your success. You've made 23% on your account in three months. That's about 92% annualized. That suggests to me you've been taking a bit more risk than I've recommended. If you're careful about the stocks you're trading and wait to get your price when you sell puts, you will probably continue to do well. But with the VIX under 40, it will get harder to make the huge returns you've enjoyed so far. I think you'll do better if you lower your expectations a bit. Making 50% a year with safe trades is better, in my mind, than making 100% taking chances.
"Porter, I love your no-bullshit commentary. Bless you for teaching me how to sell puts. And Jeff Clark is a godsend of concise commentary of where the markets are in three time scales. Totally user friendly. He's my rudder in a pitching sea of TMI. And my thanks to Mike Williams for his not-really-junk bond research that has empowered that corner of my portfolio. I know it's only about me, and I take total responsibility for carving out my fate, but you have assembled the sharpest knives in the drawer." – Paid-up subscriber Barry.
"The bank that I work for just completed an FDIC exam. During the exam, FDIC made the bank write off 80% of a trust preferred securities investment issued by over 200 banks. (CDO) When we asked the reason for such a write off when over 90% of the issuers were paying the answer was simple, the FDIC had reviewed the financials and came to the realization that these banks are in poor financial shape and will not be able to continue paying.
"If you read between the lines what FDIC is saying is that 8 out 10 banks are going to fail. The other 20% of the investment was downgraded to substandard... Maybe it's time for newsletters like yours to start demanding that FDIC report the CAMELS rating for all the banks they examine. If the public knew the rating you would see a major run on the 'Bad Banks.' We all k now the reason the FDIC will not report these ratings, $$$$s." – Paid-up subscriber Roy Clark
"Thought you may find it interesting that although the clowns at Capital One aren't loaning money, they are giving it away. Yes honest, $100.00 to open a checking account. That sounded desperate to me. I laughed. They're assholes." – Paid-up subscriber Shawn McGuire
Porter comment: They're also offering unsustainably high interest rates on CDs through their bank (formerly called North Fork Bank). Corus has been doing the same thing. Both banks should be closed by now because their depositors should be running in fear. Instead, people are piling in to take advantage of the high rates. And why not? They're backed by the government. This is one of the many examples of what's wrong with federal guarantees for banks. It allows the worst of the banks to draw capital from the best of the banks.
"I wanted to drop you a quick note to express my interest in Porter's '400 Club.' I am a 43-year entrepreneur and investor. I started my first business at the age of 24 and retired when I turned 40. More to the point of The 400 Club, I recently emigrated from America to Australia. While Australia is not a tax haven, quite the contrary, it is a much better locale to raise kids and hopefully provide them with some options as far as escaping the American bill that will come due for them and their children. And speaking of kids, in 2008, I did an extensive study of jus soli (aka birthright citizenship) countries. Based on the criteria I developed, we chose to move to Uruguay for the birth of my son in early 2009. He is now a full-blown Uruguayan citizen and will have a great 'bailout option' (no pun intended) should he choose to renounce his U.S. citizenship when he turns 18..." – Paid-up subscriber Franklin Nyman
Porter comment: Watching the government rack up debts that will be impossible to repay while narrowing the tax base (at least 50% of Americans pay zero federal income tax) at the same time is very scary. It seems more and more certain the deficit will spiral out of control. Not only has the government gone mad with spending and corruption, but it also expects about 10% of the population to pay for essentially all the costs. The math simply doesn't add up: 10% of the population can't (and won't) pay for all of the costs of a socialist federal government.
And, by the way, before you respond with the typical Democrat vs. Republican nonsense, this problem has nothing to do with traditional politics. Both parties have grown the size and responsibilities of government. Both parties have added to the national debt. And both parties support the narrowing of the tax base – because that's what makes good political sense in an unlimited democracy. Promise the voters they can live at the expense of their neighbors – and the next five generations.
Unfortunately, we know from history this kind of political system can't last for long – for lots of reasons. One important reason: The rich will leave. Or they will stop working. They will hide their incomes or only invest in tax-protected vehicles. And we know the political response will be tougher laws on emigration, taxation, more money printing, and eventually, capital controls that make it impossible to protect yourself from a massive currency devaluation. That's the script. We've watched the same things happen dozens of times around the world following World War II and the introduction of a global paper currency standard, which allowed governments to run huge deficits and finance their activities through inflation and devaluation. We just never thought we'd see it happen here.
Today, the idea of leaving America in search of freedom and financial security seems like absolute madness. But it won't for long. And by the time most people wake up to the very real threats to their standard of living, it will be too late. Again, before you respond with some crazed invective about how this isn't OBAMA!'s fault, blah, blah, blah – save yourself the trouble. The trends I'm talking about are cultural and fiscal, not ideological. Read the original Communist Manifesto. It's nearly identical to today's government policies. Any politician who tries to oppose the landslide of modern entitlements is immediately labeled a kook and is unelectable.
Whether you think we ought to have free health care and drugs for retirees, more military spending than the rest of the world combined, a bankrupt retirement scheme based on government debt, government guarantees for the banks, etc. doesn't matter to me. I'm not interested in pie-in-the-sky ideas about how the world should work. I write about how the world does work. And I can tell you this with 100% accuracy: You cannot support the world's reserve currency when you are the world's largest debtor, when you plan to finance annual deficits exceeding $2 trillion with progressive income taxes and money printing. Our economy is a charade. And when it falls apart, the consequences will be devastating.
Regards,
Porter Stansberry
Baltimore, Maryland
April 22, 2009