A paper world... Rand down... CMBS up... Annaly sells and buys new paper... News Corp. buys $5 billion in stock... U.S. has 35 years of shale gas... Greenblatt: The 18% that wasn't... Komrade O's big plan (not!)... The true paper hedge...
It's still a paper world. Everywhere I look in the news today, paper is flying in all directions...
South Africa's paper currency, the rand, was flying out of fearful hands today. It has suffered its biggest three-day decline since March. The rand tends to move with the euro, the currency for 45% of South Africa's exports. The euro is weakening as the debt crisis continues to unfold in Europe.
Plenty of new Wall Street paper is on the wing, too...
Goldman Sachs, Citigroup, Wells Fargo, Royal Bank of Scotland, and Deutsche Bank are all issuing new commercial mortgage-backed securities (CMBS) today. The total issuance will be $3.7 billion. Goldman and Citi are offering $1.5 billion of commercial mortgage bonds linked to 131 properties in states including Texas, Arizona, and California, according to Bloomberg. Wells Fargo and RBS are offering $1.48 billion on 132 properties in states including California, Wisconsin, and New York. Deutsche Bank is offering about $685 million in debt on 168 U.S. hotels… about 60% of which are Marriotts.
I don't know who is buying all that paper… But I know Annaly, the big mortgage REIT, is going to buy about $100 million of residential mortgage paper. It's selling $100 million of its own equity paper at $17.70 a share to raise the necessary cash.
Media mogul Rupert Murdoch's News Corp. is trying to increase the value of its paper. It's raising its share repurchase plan from less than $2 billion to $5 billion. That's about 11.7% of News Corp.'s current market cap. The company says it will make the repurchases over the next 12 months. That's like a tax-deferred 11.7% dividend payment. The stock rose less than 1% on the news… so News Corp. might have another 10.7% or so of upside this year.
Value investing guru Seth Klarman's Baupost Group – which is well-known for its excellent, in-depth research – had about 19 million News Corp. "A" shares as of March 31, 2011, according to SEC filings. The shares are worth about $295 million today, about 12% less than they were worth on March 31.
We encourage you to take a moment and read Brian Hunt's Market Notes in today's DailyWealth. He points out the paper euro had been holding up against the paper U.S. dollar just because investors aren't sure which is the bigger sham. Meanwhile, it hit a record low against the world's great currency – gold – which is decidedly not paper. And today, that spread went even wider. Gold is currently trading at a record 1,118 euros per ounce.
Meanwhile, the paper just keeps flying... and falling... The euro fell to less than $1.40 today. And sovereign yields continue to soar. Italian 10-year bonds rose to more than 6% for the first time. Spanish 10-year paper hit 6.12%. And Irish 10-year debt hit a euro-era high of 13.57% – up from 11.6% only five days ago. It's clear the market isn't convinced the European bailout and austerity measures will work.
With all the paper money flying around these days, we're bullish on hard, tangible assets… including one of our favorite resources: natural gas.
The U.S. Energy Information Administration (EIA) has issued a new report. It says we've got enough shale gas in the United States to last 35 years, at 2010-demand levels. Shale plays are where the gas is trapped in tight rock formations. It hasn't been until relatively recently that the technology to tap shale gas was well developed enough. The EIA report is called, "Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays."
The report says there's about 750 trillion cubic feet of shale gas in the U.S. – about 31 years of supply based on 2010 consumption. But the EIA just estimated all the gas we've yet to develop. It didn't include proven reserves, inferred reserves in actively developed areas, and undiscovered resources as estimated by the U.S. Geological Survey (USGS). Adding those numbers on, we'd get about 862 trillion cubic feet of shale gas in the U.S.
Last year in the U.S., we used about 24 trillion cubic feet of natural gas. Divide 862 by 24, and you get about 35 years' worth of shale gas. And remember… this is just the shale gas we're talking about. Shale gas accounted for less than one-fourth of all U.S. natural gas production in 2010.
I've got three natural gas plays in Extreme Value. One of them is ExxonMobil, the biggest gas producer in the U.S. While marginal producers struggle, ExxonMobil will cut costs, keep its balance sheet clean, buy back its stock, and continue to pay rising dividends with the excess cash it generates. I don't worry so much about oil and gas prices with ExxonMobil. After all, it made money in 1999, when oil bottomed out near $10 a barrel. It will do just fine with oil trading for more than $100 a barrel and natural gas around $4 per thousand cubic feet lately.
ExxonMobil is the sort of stock the overwhelming majority of investors ought to own. It's a big, safe, well-managed business. And investors can enroll in its dividend reinvestment plan (or DRIP). That's the best way for most people to be involved in the stock market. First, you find the best companies, buy them when they're cheap, and sign up with the DRIP. That's how you make the market's long-term compounding work for you.
It's sad to say, most folks don't know how to make compounding work. They buy at the top and sell at the bottom. In my weekly Extreme Value update yesterday, I told subscribers about a recent Forbes interview with hedge-fund investor and financial author Joel Greenblatt.
Greenblatt told Forbes' own Steve Forbes about the best-performing mutual fund of the last 10 years (though he didn't name the fund). It went up 18% a year… an excellent performance, considering the overall market fell during that time.
But the average investor in the fund didn't make 18% a year. In fact, the average investor in that fund LOST 11% a year. Why? Because the average investor bought at the top and sold at the bottom. Greenblatt went on to describe how the best investment managers performed worse than the market much of the time.
The fact that getting rich in stocks requires periods of getting poorer in stocks is something the average person simply cannot tolerate. They miss the opportunity to reinvest rising dividend streams when stock prices are lower. So they miss out on the surest bet in the market.
Learn to focus on elite businesses. Reinvest your dividends. Be patient. It's a winning formula for investors.
Komrade Obama is encouraging Congress to create a 10-year plan to reduce the record fiscal deficits he's created. He wants to ink a plan before August 2. That's when the U.S. starts defaulting on its debt if it doesn't raise the federal debt limit.
When I read about debts and deficits in the news, I can't help thinking about how an individual or typical household would respond to a similar crisis. Would they run out and borrow more? Maybe, but it would only increase the likelihood of a bankruptcy.
Any family that truly wanted to reduce its debts and avoid bankruptcy would immediately cut expenses and start living within its means. It might start selling as much stuff as it could, raising cash to pay off its debts. As soon as the crisis was acknowledged, the transition would be dramatic and instantaneous. They'd wake up spendthrifts one day and be reborn as misers the next. They'd have an entirely different lifestyle. And unless they wanted to get in trouble all over again, they'd never go back to their spendthrift ways. Their lives would never be the same again.
I wonder if anyone believes Komrade Obama is serious about becoming more financially responsible. I hope no one is that naïve. Naïveté is a luxury we can no longer afford…
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New 52-week highs (as of 7/11/11): V.F. Corporation (CFC), WD-40 Company (WDFC).
Today, we ask a small favor... Many of you have written us about the fortunes you've made using dividend reinvestment programs (DRIPs). But we know more of you are out there…
DRIPs are one of the safest and best ways for income investors to collect huge dividends. If you've had success using DRIPs, we'd love to hear from you. How long have you used DRIPs? What percent returns have you achieved? What yield are you currently collecting? Send your notes to feedback@stansberryresearch.com. Include "DRIPS" in the subject line.
"What do u mean telling people in the digest that clark's EUO trade is up 36% in 3 trading days? it's up somewhere around 6%. it's been hovering around $17 for a long time and it has moved to near $18 is all. is that just a mistake that u will correct or do u do that with all your reports?" – Anonymous
Goldsmith comment: Jeff recommended buying call options on EUO – not the underlying security. But at least you're half right... It's not 36%. After today's rout in the euro, his trade is up more than 46%.
Also, Jeff just sent another recommendation out this morning. He said one of his favorite indicators for the gold sector is flashing a "buy" signal and "there's plenty of upside potential left."
Already, Jeff has booked big gains trading Market Vectors Gold Miners ETF (GDX) and Kinross Gold (KGC). But he found another stock that has 10-to-one upside potential... a stock left behind in the recent gold stock rally. This stock has approximately 50% more reserves than Kinross Gold, but it's valued around 50% less. Based on Jeff's upside target for this stock, he expects his trade to return 175%. To learn more, click here...
"I am a recent subscriber and have been trying to find out how to buy gold. I am concerned if the dealer reports the sale if it is over a certain $ amount or if the gov decides to seize the records of the dealers. I hate to be too paranoid (it seems a moderate amount of paranoia is justified in this time.) Can you give me some paths to buy gold with the idea to keep Uncle Sam away from my stash? I appreciate the newsletters. My investment councilor was skeptical when I said buy silver. Thanks for the help." – Paid-up subscriber Don Bingham
Goldsmith comment: We recommend using Van Simmons of David Hall Rare Coins (800-759-7575) and Michael Checkan of Asset Strategies International (800-831-0007) to buy gold coins or bullion. As for your other questions, you will have to discuss that with them.
"I am new to this, so please excuse my ignorance. Just curious as to why you advise to 'never enter stops into the market? Keep such information private'?
"If I don't enter the order, I may be late on taking the action since I cannot monitor real time. Maybe I should subscribe to a separate notification system to alert me?" – Paid-up subscriber Eric Powers
Ferris comment: If you put your stop in the market, it's like showing everyone your hand in a card game. Other investors can immediately adjust their strategy to beat your hand. If you buy a stock for $10 and tell the market you intend to cut your losses at $7.50, it'll bid $7.50 as quick as it can. It's a little like buying a house for $300,000 and telling the whole world you'll sell it for $225,000 to the first bidder. It defeats the purpose of the stop.
My explanation is oversimplified, but that's the gist of it. Keep the stop to yourself, and base it solely on closing prices. Don't show the market your hand.
Goldsmith comment: If you would like a service to help you track your trailing stops outside the market, we recommending using Trade Stops. You can learn more about it here.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Buenos Aires, Argentina
July 12, 2011