Ben Bernanke thinks he's Vito Corleone, the godfather of the famous novel and even more famous movies. The Fed chairman is making us an offer we can't refuse...
Bernanke's testimony before a Senate Banking Committee hearing today went something like this...
|
Maybe you don't raise the debt ceiling, Senatuh... maybe something bad happens. I'm not sayin' it will... But you know, Senatuh... bad things can happen sometimes. My cousin Tony, he stole from Linguini Bruddas once. Poor Tony had a bad thing happen to him, too, just like dem Lehman Bruddas, Senatuh. Nothin' I could do for Tony. Nothin' I could do for Lehman Bruddas, Senatuh. |
|
Remember how the whole global financial system almost collapsed? That was real bad. I'd hate to see anything happen to ya family as a result of any unforeseen events like that or maybe because of youse not raisin' the debt ceilin'. |
|
I'm not sayin' bad things is gonna happen. After all, there ain't no more Lehman Bruddas anymore, right, Senatuh!? I'm just sayin' on account of this debt ceiling not bein' raised and all... you don't know what's gonna happen... Senator. |
Bernanke then pulled out a fresh toothpick and shrugged.
Some people think Bernanke said something like, "The worst outcome would be one in which the financial system would be again destabilized, which we saw in Lehman, which would have extremely dire consequences for the rest of the economy."
But that ain't the way I heard it. I'm jus' sayin'.
Yahoo shareholders got a big, fat, ugly surprise yesterday – Chinese style.
The company's Chinese e-commerce venture Alibaba Group announced it is restructuring... and had transferred full ownership of its Alipay transactions business to Alibaba's CEO Jack Ma. Once again, investors in a Chinese company don't own what they thought they owned. This is why you're unlikely to catch me recommending an investment in a Chinese-domiciled company.
The transfer was done last year, and we're just finding out about it now. An Alibaba spokesman said the transfer was done to comply with rules issued by the People's Bank of China. The rules require controlling stakes in nonfinancial companies to be held domestically. How that benefits shareholders is unclear. It seems to have benefited Mr. Ma at great expense to shareholders.
Yahoo shares closed yesterday down more than 7% from Tuesday's closing price, knocking almost $1.8 billion off Yahoo's market capitalization.
Shady transfers to comply with central bank rules are just one problem you get with Chinese companies.
If Chinese central bank rules aren't enough for you, there's always the U.S. Congress (though it appears to have gotten it right this time). Congress and millions of other people are a little miffed at Goldman Sachs, the Wall Street mega bank. Goldman helped create a massive housing bubble so it could bet the other way – against its own clients – and make a killing by financially destroying the people it's paid to serve.
Widely respected bank analyst Dick Bove is concerned Congress won't be satisfied with Goldman until it gets a new board of directors and replaces top executives. "This is not a good investment," Bove said of Goldman Sachs in a recent report. "The stock should be sold." Goldman shares hit new eight-month lows this morning on news of Bove's sell recommendation.
If you want to know what could bring the stock market to its knees, look no further than Jeff Clark's essay in today's Growth Stock Wire about "Wall Street's Favorite Drug." Jeff is talking about leverage, and he says it has reached record levels...
|
Margin debt on the New York Stock Exchange has surged to its highest level since February 2008 – just before the S&P 500 dropped by half. Net leverage on the NYSE is now the second highest ever recorded. The only time in history leverage has ever been higher was back in June 2007 – at the absolute peak of the credit bubble. |
I can't imagine holding any stocks with leverage right now. This is one of the worst times in recent years to be holding almost any stock... let alone with leverage. This shows you how awful the average investor's memory is. The crash of 2008 happened when everyone began selling indiscriminately because they were all levered to the hilt and getting daily margin calls. But the assets they owned were a bunch of illiquid collateralized debt obligations (CDOs) and other Wall Street-engineered toxic waste. So they sold whatever they could... and the stock market lost half its value.
And here we sit again, three years later, borrowing to the hilt to speculate on overvalued stocks, bonds, and commodity prices.
Yesterday, we discussed the market entering "risk off" mode leading up to June 30 (the end of the Fed's second round of quantitative easing). The thesis is simple... Investors are selling commodities and other riskier assets, anticipating liquidity will dry up and interest rates will rise when the government stops buying up Treasurys. Commodity businesses, which have soared in recent years, are low-margin operations by nature. Rising interest rates kill these businesses.
Bloomberg recently polled 1,263 investors, analysts, and traders to ask where they're invested as quantitative easing ends. Nearly one in three said they will hold more cash. And 30% plan to reduce commodity investments. Also, 40% expect oil prices to fall in the next six months.
Commodity prices are plummeting. Silver fell as much as 6% today, hitting as low as $33 an ounce. Oil touched $96 a barrel before recovering.
But despite the decline, the world's largest commodities trader, Glencore, is going ahead with its initial public offering. And in what is surely a sign of a short-term top, the IPO is oversubscribed more than twice over. Glencore is offering up to 1.25 billion shares worth $11 billion. According to unnamed sources, U.S. money manager BlackRock wanted 31% of the shares. Highbridge Capital Management, a hedge-fund owned by JPMorgan Chase, wants $500 million. The Abu Dhabi sovereign wealth fund also wants a chunk (like it needs more exposure to commodities).
Last August, Stanley Druckenmiller, one of the biggest hedge-fund managers in the world, closed his fund. At the time, we wrote...
|
We think you'll see more of this – that is, more hedge funds going out of business – as the global credit bubble deflates. |
|
Druckenmiller's career happens to correlate perfectly with the largest inflation in history. As credit multiplied between 1980 and 2010, folks like Druckenmiller were paid unbelievable sums for managing the resulting capital flows. But... the credit spigot has been tightening up, at least for private capital. Now, the only bubble left is the one being blown up by Washington in the form of Treasury obligations. – August 18, 2010, Digest |
Since the "Druckenmiller event," we've seen more and more hedge funds close their doors. Today, James Lyle said he will close his three Millgate funds over the next two months and return all the capital. Millgate manages more than $750 million. Lyle said he will spend the summer coming up with a new strategy, which he hopes to market in the fall.
Lyle is known on the Street as a "Tiger Cub," meaning he's among the hedge-fund managers who learned his trade from Julian Robertson's legendary Tiger Global hedge fund. Millgate is a long/short value equity fund. We don't see any need for a new strategy... Perhaps he's just looking to raise a fresh pile of cash to invest after the correction.
Mortgage rates hit their lowest point since December 2010 today... The average rate on the 30-year loan fell to 4.63%. The average rate on a 15-year mortgage hit 3.82%. It makes this the fourth straight week of decline.
|
New 52-week highs (as of 5/11/11): BlackRock Corporate High Yield Fund (HYV), Invesco High Yield Investments Fund (MSY), Pepsi (PEP), Johnson & Johnson (JNJ).
In today's mailbag, some subscribers describe their success with our strategies, including the World Dominators I cover. Please write in and tell us if you've got World Dominators in your portfolio. Write us at feedback@stansberryresearch.com.
"Sad to say but I have been a beginner/novice investor for over 25 years, always chasing the next trend, always buying high and selling low, always hoping to hit it right some day. It's true, I have been lucky at times over the years, but until I stumbled onto the Stansberry Group I was in the dark, so to speak. I always considered myself to be a pretty savvy and informed investor til now too.
"The 12% Letter has opened my eyes. The World Dominators make total sense to me. The fact that I can receive great dividends with companies that are considered the best of the best, allowing me to sleep at night, allowing me to quit second guessing myself and every other opinion coming down the pike is a Godsend. The other 'easy' concept is to HOLD.
"Dan Ferris, when you say this is the secret to making money in the stock market, it sounds too simple, too pat. Why, oh why did I not figure this out sooner? I guess sometimes the simplest route is the finest route.
"THE END OF AMERICA video confirmed all my worst fears and lead me to join 2 newsletters within the group. I have not been disappointed. For those who feel cheated or scammed I say, look around, there are many other newsletters out there. Get your money back from Stansberry and move on and quit your bitching. However, when you discover that you cannot possibly glean the value any where else, you'll be back. I know, I've been there." – Paid-up subscriber Hilary Franey
"You wrote it and I bought it. On the occasion of Intel raising it's dividend for the second time in six months, I am so happy to have taken the advise of the 12% Letter back in 2008 when stocks like Intel and Altria were recommended. My yield on Intel is now 5.6% and the yield on Altria is now 9.4%. I very much appreciate that Dan Ferris has taken on the additional workload of the 12% Letter in addition to his other publication, Extreme Value. Each month, he continues the great investment analysis offered at that time by Tom Dyson.
"I am amazed by the assaults you receive from subscribers accusing your organization of being a scam, one by a woman who I believe was named Rachel? The truth is, millions of women could benefit greatly from some of your publications. I do not even know one other woman who has any interest in learning about investing, maybe because they fear being scammed. This is one reason that so many women end up living in poverty in their retirement years. In addition to your End of America campaign, you might consider developing an advertising campaign to appeal directly to women so that they would want to take control of their financial survival." – Paid-up subscriber Linda
Ferris comment: Those women you mention do themselves a disservice by not doing all they can as early in life as possible to learn how to take care of money. Later on, they become impoverished and all the more susceptible to con artists.
All the kind words in today's mailbag are humbling. I'm especially pleased to hear the World Dominating Dividend Grower strategy mentioned in the previous note. This is where the vast majority of investors ought to have their stock market investments right now. Most stocks are overvalued. But the world's greatest businesses haven't participated in the post March 2009 rally to the degree that mining and other speculative stocks have.
The other day, Morgan Stanley analysts said the 30 largest-cap stocks in the U.S. are the cheapest they've been in 25 years, relative to the overall market. That's the reason I'm pounding the table on them. Even World Dominators can be bad investments, if you pay too much (ask anyone who bought them back in 1999-2000). But right now, you're getting a once-in-an-eon opportunity to buy them at dirt-cheap prices. The opportunity couldn't have arrived at a better time, either, with stock and bond prices too high and commodity prices overdone.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
May 12, 2011
An offer we can't refuse... Yahoo: Another China scam... 'Goldman should be sold'... Lever Up, Part II... Bloomberg risk-off poll... Glencore IPO still on... Hedge funds closing...