As you might have heard... I was invited to ring the bell at the New York Stock Exchange opening on Monday morning, along with Steve Sjuggerud. Yes, we worried this might mark the top in the market for Stansberry Research. Like I told our friend Rick Rule, the legendary resource investment banker, back in 2007: It's awfully hard to be contrarian when you're popular. But there's a bit more to the story... and I think you'll find the explanation valuable.
Our old friend, Eduardo Elsztain, invited us to a ceremony at the NYSE. Eduardo, you may recall, is the head of a group of Argentine land and real estate holding companies (Cresud, IRSA). Over the last 30 years, Argentina has suffered one financial crisis after another – all caused by the same kind of politics that have come to America lately. Out of all of the speculators, investors, and business experts we know, nobody is better equipped or better prepared to make money in U.S. real estate over the next several decades than Eduardo, because he has literally been through this before – time after time.
We invited Eduardo to speak at our Alliance conference last November in Hong Kong. We wanted him to tell our best customers what was about to happen in the U.S., and we wanted to give them the opportunity to invest directly with Eduardo, who was in the process of setting up his distressed U.S. real estate fund. This new fund, alongside Eduardo's listed company IRSA, made its first big U.S. acquisition last week. To celebrate the deal, Eduardo was ringing the bell at the NYSE.
Here's what we were celebrating... IRSA, along with Eduardo's other investors, agreed to purchase 5.7 million shares (10.5%) of Hersha Hospitality Trust (HT) for $2.50 per share. Hersha owns 73 middle-market hotels in major metropolitan markets, primarily in the Northeast corridor. What did Eduardo see in Hersha? The company controls more than $1 billion in assets, but the stock has a market cap of less than $200 million. The stock is cheap because Hersha also has more than $800 million in debts.
Here's the interesting part: Nearly all of Hersha's obligations have low, fixed interest rates and maturities after 2012. Eduardo is essentially making a bet that between now and 2012 inflation wipes out the real value of these debts. Eduardo also got a little insurance. In exchange for the equity investment, Hersha granted Eduardo's group the option to buy another 5.7 million shares at $3 a share anytime before July 31, 2014 – though these options are capped at $5. Said another way, for an average price of $2.75, Eduardo is buying 21% of Hersha. That's roughly 15 hotels for $31 million – or about $2 million per hotel.
I did the same kind of analysis on MGM's 2005 acquisition of Mandalay Bay, where I calculated MGM was paying $2 million per hotel room. I'd much rather pay $2 million for the entire hotel than for a single room.
If Hersha survives this downturn, we estimate Eduardo will make his investors something between 400% and 1,000% on their investment. We hope many of our Alliance members got into this deal. It was worth the trip to Hong Kong, wasn't it?
Insiders are pouring into the latest Inside Strategist recommendation... In less than a week, the three-top executives at this major technology firm bought $4.3 million in stock. And according to one company insider, these same three executives have loaded up on price dips in the past – and made millions. We think they're about to make millions more...
If shares simply return to historical valuations, Inside Strategist readers will make 300%. And that doesn't factor in the company's enormous growth potential... In the future, do you think more or fewer people will be watching movies and listening to music online? We can say, with near certainty, the answer is more. And this company will be the No. 1 beneficiary of the need for increased bandwidth and storage capacity.
This could be one of our biggest winners of the year. To subscribe to Inside Strategist, which costs less than $4 a week, click here...
Readers of my newsletter, PSIA, must have been a little surprised by the dire warning I gave about the coming inflation in my last issue.
The big risk is what happens next. Having turned on the presses to save the day, who will have the political clout and the desire to shut them off? OBAMA!'s budget calls for annual deficits in excess of $1 trillion for the next eight years. Thus, by the end of this year, not only will all of the damage from the mortgage collapse ($5 trillion) be replaced by new money and credit, there will be significant inflationary pressures in the economy. Very few people understand this.
Currently, the total debt in the United States is nearly $60 trillion. That's $186,000 per person in the United States, or $750,000 per family. Looking at the numbers this way should make it obvious to anyone: These debts can never be repaid. And without heavily progressive taxes on the rich these debts could not even be financed. Last year, total debt increased by $3 trillion – roughly eight times faster than GDP. None of these figures include any of the unfunded government obligations, like Medicare or Social Security. And here's the kicker: Nearly all of these debts were created since 1990 ($45 trillion).
At the risk of sounding like a real kook, I advised my readers to make sure they own real liquidity (gold), a year's worth of prescription drugs, and at least part of a farm. (Even if you can't buy a farm directly, you can subscribe to a farming co-op and receive your share of the farm's production.)
I admit... the advice sounds bizarre. But when I look at the numbers above, I can't escape these conclusions. Sometimes you have to be willing to turn off the "that can't happen" regulator inside you and allow your brain to reach the logical conclusion, no matter how strange it sounds. I had to do that when I was researching GM. I had to do that when I was researching Fannie and Freddie. I looked at the numbers and thought, "This is crazy... This can't be happening..." But of course, it was happening. The numbers weren't lying, even if I didn't like what they were telling me.
And, alas... I'm not the only person looking at the numbers who is concerned. Warren Buffett delivered much the same warning via a New York Times op-ed piece yesterday. Buffett notes the current U.S. deficit, at 13% of GDP (or $1.8 trillion), is officially in "uncharted territory." There are only three ways to decrease that deficit. The first two, of course, are raising taxes and/or decreasing government spending. But politicians will avoid doing these for fear of not being re-elected. So the only plausible cure for the deficit is to inflate. Says the Oracle:
The Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington's printing presses will need to work overtime... With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can't come close to bridging that sort of gap.
David Einhorn's Greenlight Capital filed its quarterly holdings disclosure with the SEC last week, and the investor – famous for his call to short Lehman Brothers – is back on the defensive. Greenlight currently has 24.25% of its $6 billion fund in S&P 500 puts (SPY). The long puts aren't an outright bet on a falling market, though Einhorn is wary of the massive gains since March. Einhorn says he "observed a decline in [the S&P 500 puts'] underlying volatility (i.e. price) in the face of what we still see as tremendous uncertainty in the economic outlook." You can read the full letter here.
If you agree the market is due for a major correction, don't miss Jeff Clark's latest Short Report (out yesterday)... He's found a specialty retail stock on the verge of a big breakdown. The stock currently trades around $40, but one of Jeff's most reliable indicators is signaling the stock could fall to $32. When this fall occurs, his recommended puts will soar 250%. Jeff shorted another specialty retail stock on August 4 after seeing a similar setup – readers already sold half their position for a 100% gain in two weeks. To learn more about Short Report and access Jeff's latest trade (which is still a good buy), click here...
You will hopefully recall my long-standing bearish position on natural gas, including my famous $3.25 "line in the sand" wager with gas bull Rick Rule. Not even hurricane fears can prop up the market this year: Natural-gas futures fell to a seven-year low of $3.096. Rick owes me dinner. And I like expensive wines...
New high: FirstSolar (short).
In the mailbag... everyone seems to be drunk again. That's the only explanation for so many positive letters. We're only kidding about the drinking thing, of course. Thanks for supporting our business and thanks for letting us know we're making a real difference in your financial life. Send your comments (good or bad): feedback@stansberryresearch.com.
"Thank you for being frank regarding your feelings on the pending American Armageddon. It has been an issue that I have been ruminating on for the past 18 months or so. Without a lot of money, I am somewhat limited (e.g., I cannot buy my own farm just yet), but everything you said resonated with me. I'm sure it also resonated with others. In fact, some of the things you talked about, I have already made gains in doing.
"Having said that, I appreciate you sharing about the farm, the Nicaragua beach house, and the double passport. The specifics are very helpful. And this is the kind of thing you will not get from anywhere else, especially not an INVESTMENT newsletter. I have never read anything close to the kind of advice you have consistently given us. I've been a reader for a few years now and I like how you seem to care about our entire well-being, not just our stock-based investments.
"As long as you continue to write, I will continue to subscribe to your newsletter. Your words may save many lives, my friend. As a physician, not even I will likely have that kind of effect, en masse, over the span of my career. I know that to write like that, opens you up to a lot of scrutiny. But I appreciate you letting us in on your intimate thoughts. Thank you." – Paid-up subscriber Christopher Rake
Porter comment: Thanks very much, Christopher. We most certainly do care about our readers. And while we don't like having to offer dire warnings, we have to report the facts as we find them.
"Just a few words from a satisfied subscriber to several of your newsletters. I thought today's S&A Digest was the best one so far. I've never laughed so much about the often-used WSJ phrase. HOME DEPOT will certainly be out of business in probably less than 10 years if things keep going as they are, for sure. As far as the political digs and comments, personally it has opened my mind up to a new way of thinking. Even though I voted for him (for many, many reasons), I now feel his Change for America may, indeed, be for the Destruction of America.
"Just like that idiot Bush (I never voted for him, by the way) could spend hundreds of billions of our hard-earned tax dollars on a vengeful war (and his Do Good Philosophies) and almost totally undercut our Constitution (more than any other president has ever thought of), Obama has been swept in to office by doing the same basic destruction Bush did except he uses the Fed and their 24/7 printing presses to do his dirty work rather than the blood of some of our youngest and most treasured citizens." – Paid-up subscriber DV
"In the Monday Digest, you show how the FDIC is quickly going insolvent, if not already so. On the frontlines, I started to notice last month in all my business checking accounts that my bank now debits a monthly 'FDIC INSURANCE' fee apparently based on the amount in the account (essentially a tax on cash assets). Imagine the backlash if the OBAMA gang tried to pull that off in consumer/retail checking accounts (I don't it past them though). Yet one more way these OBAMA guys plan to keep fleecing business and production into non-existence. Beware the fury of a patient man... a revolution nears." – Paid-up subscriber Steve
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
August 19, 2009