It was like something out of a movie. From the broad porch of a New England-style, shingled, beachfront mansion, you could look right or left down the beach as far as you could see. There are no other houses, just an immaculate green lawn, snow-white sand dunes, and a seemingly endless coastline. I had no idea any place like this existed in America – and much less only a few miles from Charleston, South Carolina. Except for the cloudless sky and warm temperatures, the landscape reminded me of Ireland, which has many vast seaside golf courses and very few seaside homes. And in fact, the Ocean Course at Kiawah was inspired by the Irish links courses.
I was there last weekend with my dad and brother for a brief grudge match. (I beat them on the Ocean Course, but the old man beat both his sons the next day on the Osprey Course... by several strokes.) If you're in the market for a golf vacation this year, Kiawah is, hands down, the best golf resort I've ever seen – and I've been to most of them. The hotel there, The Sanctuary, is likewise one of the great hotels in the world. If you go, I promise Kiawah will exceed your expectations. Make sure you take the time to play bocce on the hotel's lawn. It'll give you a chance to avenge any loss on the links. Unfortunately, the old man beat me there, too...
Take note... On the way home late last night from National Airport, my driver, whose car service I've used for years, asked me an investment question for the first time ever. He knows my business well, as he ferries most of us to the local airports when we travel and brings in people for interviews. What did he want to know? How to buy gold bullion.
It's one of life's real paradoxes. Back when gold was trading for $250 an ounce, we couldn't even write about it without subscribers calling us quacks and "gold bugs." Now, with gold near $1,000 an ounce, my driver tells me all of the talk radio personalities are recommending gold. Everyone wants it, apparently. Meanwhile, stocks have fallen about 50% from their highs. Many companies are now, for the first time in decades, trading for less than book value. But nobody wants to buy stocks. Nobody. Mmmn...
When the facts change, we change our minds. Three years ago, we thought small community newspapers might be a good investment. We assumed lots of the large regional papers would go bust, as competition from the Internet stole advertisers and subscribers. But we thought the smaller community papers would survive, if only because they have a monopoly on local news.
Wrong. We recommended Journal Register Co., publisher of the New Haven Daily and 19 other community newspapers, in May 2005. About a year later, it was clear our hypothesis was wrong: Newspapers weren't going to survive. We took a 25% loss. Nobody likes taking a loss. But a 25% loss sure beats a complete wipeout. Journal Register filed for bankruptcy today, along with Philadelphia Newspapers – publisher of Philly's two largest papers.
We learned our lesson, slowly, and made up for our loss by selling short Gannett (GCI), publisher of USA Today. We booked a 60% gain in PSIA on Gannett last year. Remember: The downside from here is still 100%. It's almost never too late to sell short, if you can find shares to borrow.
Gannett will go bankrupt, too. There's no question about it. Like Journal Register and Philadelphia Newspapers, Gannett was involved in highly leveraged takeovers near the top of the market in the mid-2000s.
In the case of Philadelphia Newspapers, Brian Tierney – a local PR exec – led a group of mostly local investors to buy the Philadelphia Inquirer and Philadelphia Daily News in 2006 for $515 million. The deal relied heavily on debt. Journal Register bought more than 300 newspapers in the 1990s and early 2000s and ended its buying binge with a debt-laden $415 million deal to buy a chain of Michigan newspapers in 2004.
This is a theme I'm following in my Put Strategy Report... Companies that borrowed a lot of money to buy assets in 2005 and 2006 have seen the value of those assets plummet, and the returns from those assets disappear. Meanwhile, they still owe billions from the acquisitions and can't afford to pay the interest on their debts. It is impossible for these companies to refinance now – they're trapped. It's the corporate version of people taking out huge mortgages they can't really afford to buy McMansions. There's no better trade in 2009 than short-selling companies that cannot afford their interest payments.
Many of you had questions about last Friday's Digest... in particular, Doc Eifrig's mention of an interview with an ophthalmologist for those considering cataract surgery. That information is only available to Retirement Millionaire subscribers. And we'll publish the interview later this week. If you'd like to sign up, click here...
New highs: none.
In the mailbag... two excellent questions and a detailed discussion of Annaly. Send your questions... and your best golf story... here: feedback@stansberryresearch.com.
"I have been watching Citigroup shares fall from $50 in late 2007 to under $2 today, and I am curious why no one in the Stansberry camp is commenting on whether this is a good stock to buy. Citigroup was the biggest bank in the world a year ago, and it seems very doubtful that it will go under. It seems to be first in line for Federal Reserve bailout money, and some would argue that it actually controls part of the Federal Reserve (reference: Jekyll Island 1910). With the stock so severely devalued, this seems like a future 10 bagger or more. I'm obviously no expert, which is why I am a subscriber, so someone please tell me why I am wrong." – Paid-up subscriber Darren Nelson
Porter comment: Citigroup is at the epicenter of the financial earthquake that began in early 2007 as the default rate on mortgage securities began soarin
g. Without the Fed propping up the bank, it would have gone under a long time ago (and in my opinion, should have gone into receivership long ago).
But your point about it being too big to fail is certainly true. One of the main reasons the government must put forth programs like the TARP, etc. is because the FDIC is woefully underfunded. Without these kinds of bailouts, a national run on the banks would be a real possibility – which explains why the price of gold has gone up. But just because the banking operations of Citigroup cannot be allowed to reach insolvency doesn't mean the common stock is worth anything. Likewise with General Motors, Fannie Mae, Freddie Mac, etc., the government might have a vested interest in these corporate institutions, but all of them belong to their bondholders, not their shareholders. The shareholders were wiped out a long time ago. They just don't know it yet.
One more thing... If your expectation is that we'll find investments that make 10 times your money (10-baggers) with any regularity, you should ask for a refund right now. There are great opportunities both long and short stocks today. But with incredibly rare exceptions, I don't expect any of my recommended investments to do better than 50% annually. If you're looking for better than that, you're probably not going to get what you expect...
"Although your service is really good at telling a positive story about the stocks you are touting, one thing it is missing. You don't (or rarely) explain the potential risks. Take NLY for example. This company is very complicated for most investors to understand. Although you explain it well, you don't talk about the potential risks. If it is as great as you say (which I don't disagree with), then the stock would be trading at 2-3x book instead of 1-1.2. If mortgage rates get pushed too low (deliberately by our witless government), this will cause refinancing at lower rates reducing spread and thus the dividend. I am curious of your thoughts on the risks in the 'virtual banks.'" – Paid-up subscriber Kirk
Porter comment: I didn't discuss the risks of owning Annaly because, at the time of my recommendation, Annaly was trading around $13 – which was below book value. As I explained:
Annaly owns one core asset: $58 billion worth of government-guaranteed mortgages, all of which could easily be liquidated at any time. Almost all of these mortgage securities have maturities of less than five years, sharply limiting any interest-rate risk Annaly faces. These assets are among the safest in the entire world.
I think it's quite fair to say if you have the opportunity to buy Annaly for less than the value of its government-guaranteed assets, you're not taking on any risk, which I define as the permanent impairment of intrinsic value.
Secondly, I'd argue with you about whether or not Annaly is complicated. Quite the contrary, actually. Annaly's operations are centered completely on owning government-protected mortgage securities that have almost no interest-rate sensitivity (which is further reduced with hedging). And Annaly has the best disclosure of any financial company in the United States. Read its most recent press release – it's a study in transparency. It tells you exactly what's going on in the business, in clear language.
And I think you've got one other thing completely wrong, too – fair value for Annaly's stock. You said the shares ought to be worth two to three times book. Annaly's stock has never, not once, traded for more than 1.7 times book. The stock doesn't trade at a big multiple of book value because: 1) Its assets are extremely liquid and easy to price, so there's no debate about the true value, and 2) government-backed bonds don't offer much capital appreciation. The book-value multiple is low because Annaly isn't a growth company. The size of its portfolio isn't likely to expand rapidly.
Now... we got lots of questions about Annaly this week because the stock is down from a recent high of $16. Undoubtedly, many people ignored my recommendation, which was not to pay more than $14.
What you suggest – that falling mortgage rates will cause Annaly to make less money – is true. Likewise, if its borrowing costs rise, it might also make less money. But these factors are only truly a risk if you paid too much for your stock.
Annaly's interest-rate spread (the difference between what the company pays to borrow money versus what it earns holding mortgages) peaked in the third quarter of 2008 around 2%. That's much higher than average, thanks to the collapse of interest rates associated with the Fed's actions to prop up the banks. Mortgage rates have come down a bit since then, and Annaly's funding costs have gone up a bit. But the spread remains very good at 1.71% – better than twice last year's 0.88%. As long as you didn't pay too much for Annaly, you'll be fine.
"Trying to run down the Sjug interview a few weeks ago w/ the gold coin guru who made a few recommendations. Can't seem to run it down from the website. Help please." – Paid-up subscriber Mike Shippee
Porter comment: The interview you're referring to was actually from The Daily Crux. And it was an interview with gold coin expert Van Simmons. The only way to read this is to sign up for Daily Crux Home Delivery, which will send the day's best financial information directly to your e-mail inbox. It's completely free, and I believe it's an invaluable service. You can read more, and sign up, here...
"I just have to say that the trade I am most impressed with this year is Porter's MGM short. Porter was long MGM, but when the facts changed, so did he, and we all made money. An impressive display of flexibility and open-mindedness! Thanks and keep the recommendations coming." – Paid-up subscriber Rich Gustafson
Porter comment: Yes, that was a great trade. When you're leveraged 13-to-1, when you can't afford your interest payments, and when the value of your asset base has fallen by at least 50%, you've got big problems... problems that tend to be very expensive for common shareholders.
"Being an old Nam veteran, Sir Porter, I was told more than once, VC looked the other way when offered gold for passage out of country. Gold is light, portable and leaves no audit trail. In my opinion (which is worth very little) individuals in expensive-looking homes, cars, trucks will become targets for the newly have-nots. I drive an old van (2000 model) with door locks taped on with duct tape. While out the other day, an unsavory looking character with few teeth, a young wife and child in tow, stopped me to supposedly tell me that my van with no side windows looked real nice. I was kind of nervous, and I think my wife was too. This individual became friendlier when he noticed my Air Force cap and asked if I was Nam veteran? Of course, I replied, yes, Camn Ranh was a beautiful seas side resort with the VC all around protecting their real estate. I was glad to accept his compliments and I excused myself and crawled in my van and felt kind of safe. I would have felt safer if I had possessed a 357 magnum, which I did not. Therefore: may I remind you Sir Porter that having all of those digital
numbers in various accounts will mean zero if you are not here to enjoy... Remember in this day and age, what used to be a sin is now considered ok. Sir Porter, we are living in the last days. And as always, and I do mean it, may God bless you, your wife, son and mom and may he keep all of you safe in the palm of his hand." – Paid-up subscriber Bernie
Regards,
Porter Stansberry
Baltimore, Maryland
February 23, 2009