At the Value Investing Congress... A new way to make money from a deteriorating currency... Greenblatt on Lewis... A warning from an industrial bellwether... Huge news for shale gas... Our current deficit... Porter's mailbag slam...
Editor's note: Friday's End of America Watch box about an asset-protection conference in Belize included an error. Porter will not be attending the conference… But he will present via teleconference. Apologies for any inconvenience this may have caused you.
Today's Digest – and likely tomorrow's – will be brief. Dan Ferris and I are attending the seventh annual Value Investing Congress in New York. We'll update you from the conference in these pages. The speakers this year, per usual, are excellent.
Today, we heard from hedge-fund manager and author Joel Greenblatt, David Einhorn (famous for his short Lehman trade), and short-selling billionaire Jim Chanos (whose speech is titled "Beware the Global Value Trap")… among others.
The highlights for tomorrow are Leon Cooperman of Omega Advisors and Bill Ackman, who heads Pershing Square Capital Management.
Kyle Bass, a hedge-fund manager from Dallas, was one of the few financial professionals to foresee the mortgage collapse. And like John Paulson, he made a fortune on credit default swaps (CDSs) when subprime paper imploded. Bass was prominently featured in The Big Short, written by our favorite financial journalist Michael Lewis. Lewis again features Bass in his latest book, Boomerang. And according to those pages, Bass is still bearish. In fact, he's preparing for the worst…
Bass owns a huge piece of property in Texas with an "arsenal of automatic weapons and sniper rifles and small explosives to equip a battalion."
The following excerpt (which we borrowed from Zero Hedge) outlines another, lesser-known hedge against a deteriorating currency. An asset manager presented the idea to Bass (told from Bass' perspective)...
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"The value of the metal in a nickel is worth six point eight cents," he said. "Did you know that?" |
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I didn't. |
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"I just bought a million dollars' worth of them," he said, and then (perhaps sensing I couldn't do the math) added, "20 million nickels." |
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"You bought 20 million nickels?" |
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"Uh-huh." |
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"How do you buy 20 million nickels?" |
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"Actually, it's very difficult," he said. He then explained that he had to call his bank and talk them into ordering him 20 million nickels. The bank had finally done it, but the Federal Reserve had its own questions. "The Fed apparently called my guy at the bank," he says. "They asked him, 'Why do you want all these nickels?' So he called me and asked, 'Why do you want all these nickels?' And I said, 'I just like nickels.'" |
Joel Greenblatt, the opening presenter at today's Value Investing Congress, was also featured in Lewis' book... but not in a good light. Greenblatt gave Michael Burry, a doctor turned value investor, $1 million to buy one-quarter of his fund. Over time, he added to his stake in Burry's fund, ultimately investing a total of $100 million.
Then, Burry started buying illiquid CDSs. His fund lost 18% in 2006. According to Lewis, "Immediately... Gotham [Greenblatt's fund] threatened to sue him." Greenblatt flew from New York to San Francisco and "tried to bully" Burry into returning his $100 million.
During Greenblatt's Q&A session at the Congress, someone asked him to comment on the Burry situation. "I appreciate that question," Greenblatt replied to chuckles from the audience. He said a source at the Wall Street Journal confirmed that "[Lewis] never lets the facts get in the way of a good story."
Greenblatt said Lewis came to visit him and assured him, "You won't mind what I wrote... In fact, I know you won't."
"That was his research on that issue," Greenblatt said.
On the topic of the market, Greenblatt said he's optimistic about the upcoming year. His investment style is unusual for a value investor... Based on quantitative analysis, he produces a portfolio of companies that are cheap and have strong returns on tangible assets. When he ran his fund, he produced 40% a year using a similar strategy – though he focused more on fundamental, single-stock analysis.
As the world is getting more and more institutionalized, one would expect the excess returns value investing produces to wane, Greenblatt said near the end of his speech. But it hasn't. In fact, it's getting stronger. Perhaps because value investors can take advantage of the market volatility brought about from high-frequency traders.
And today, he said, you don't have to look hard for the best values... They're the large, blue-chip companies – what we call World Dominators. Greenblatt produced a list of companies that fit his criteria today. Those include Microsoft, Dell, Merck, Wells Fargo, and General Dynamics.
In January, Tom Linebarger will take over as CEO of Cummins, one of the biggest engine-makers in the world and a bellwether of global industrial activity. And in an interview with the Financial Times, he's already issuing warnings about the world economy... "Europe could drive another global recession pretty easily," he said. "Some of the countries in Europe are already in a second recession or will be shortly. That could get a lot worse."
"The U.S. is much in the same spot," Linebarger added. "We'll find out in three or four months if we're already in recession. But it wouldn't surprise me to find out that the U.S. is already in negative growth, once all the figures are adjusted, or we're very close to that. I'm very concerned about that."
While business in Europe is down, Linebarger's biggest worry is the effect the current European crisis will have on the world... In particular, he thinks it will further damage the U.S. economy (especially if the Fed prints money to bail Europe out, as we discussed Friday).
Even business in "Chindia" is slowing... "In China and India, their economies are doing well, but inflation rates are high… So they're cutting back on demand and raising interest rates to get inflation under control, which is hurting our markets," he said. "All those things are near-term concerns of mine."
Yet another bullish development for shale gas in the U.S... Kinder Morgan, a U.S. pipeline company, announced a $38 billion deal to buy fellow pipeline operator El Paso Corp. The deal would create the fourth-largest energy company in North America by enterprise value at $94 billion. (Enterprise value is a company's market cap plus debt minus cash.)
By purchasing El Paso, Kinder is placing a huge bet on the future of U.S. shale gas. Currently, Kinder's pipelines carry oil. El Paso – which has 43,000 miles of pipelines – runs the largest gas network in the country.
Longtime readers know we've been following the shale gas plays in the U.S. for years now (thanks to our friend, the consummate oilman Cactus Schroeder). Cactus recently sold his Texas Eagle Ford shale properties – Enduring Resources – to Norway's Statoil for more than $1 billion. The majors are buying every shale property they can. They're just as bullish as we are on the future of natural gas in the U.S.
Dan Ferris recently wrote about one of our favorite shale gas plays in the country... It owns 2.2 million acres of land in one of the most gas-rich areas in the world. The company is the lowest-cost producer in the region... But it's still increasing production. As Dan wrote in his Extreme Value advisory, "It's grown production every quarter for the last 32 quarters in a row. That's eight years of relentless production growth. Production per share grew 12% last year."
Dan thinks this stock could increase by 300%, safely, in the next five to seven years. To learn more about Extreme Value, click here...
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New 52-week highs (as of 10/14/11): V.F. Corp (VFC), Hershey (HSY).
There are some misunderstandings in today's mailbag... misunderstandings Porter clears up. Send your feedback to feedback@stansberryresearch.com.
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"What a perverted sense of humor: To label paid subscribers who laud your efforts as drunks. Amazing." – Paid-up subscriber Terry Moore
Porter comment: No, Terry... you misunderstood...
It's human nature to write a letter when you have a complaint to make. Thus, when we receive e-mails complaining about something in our letters, we aren't surprised. We publish almost every critical e-mail we receive because we believe doing so encourages our readers to send us more negative feedback, which helps us improve our business.
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It's a way of saying we deeply appreciate the notes that come in to support our efforts. I'm sorry if you thought we were insulting you.
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Regards,
Sean Goldsmith
New York, New York
October 17, 2011