Betting on science over politics... The next great solar energy debacle...
Bernanke stops twisting, starts spurring... Mr. Gold doesn't believe Ben can win the race... Berkshire raises the bid... China's buying spree is still alive...
Federal Reserve Chairman Ben Bernanke probably hates the holiday season. Imagine all those people running around worrying what to buy their spouses, kids, parents, aunts, uncles, and everybody else for Christmas... and paying hardly any attention to the man trying to save the free world from itself by printing money and buying U.S. Treasury debt with it.
Yesterday, Bernanke announced his latest round of stimulus... The Fed will continue purchasing $40 billion a month in mortgage-backed securities. It will also continue with its $45 billion-a-month purchases of long-term Treasurys.
Previously, the Fed was purchasing $45 billion a month as part of "Operation Twist." And it was selling $45 billion a month of short-term Treasurys to fund those purchases. The idea was to push down longer-term rates and increase short-term rates ("twisting" the yield curve).
But now the Fed is running out of short-term securities. So Bernanke will continue with the long-dated Treasury purchases without selling any bonds to offset them.
The move – essentially a fourth round of quantitative easing (QE4) – will increase the Fed's balance sheet to $4 trillion in one year (adding more than $1 trillion in assets).
The Fed also said it would keep interest rates near zero and maintain its purchases until unemployment falls below 6.5%. It's currently 7.7%.
This is the first time a major central bank has tied its monetary policy directly to an economic indicator. But it's certainly not the first time a central bank has misbehaved on a grand scale. In fact, "grand-scale misbehavior" is perhaps the most concise description of a central bank's purpose we can offer at the moment. ("Larceny" feels a little too blunt and far less poetic.)
It's funny how nobody ever talks about the move Bernanke could make that would truly improve the outlook for the U.S. economy: Resign and put a sign on the front door that says, "Closed forever."
Before packing up and leaving the office with a box full of taxpayer-owned office supplies, Bernanke could just cancel all the Treasury debt owned by the Fed. So what if the Fed's "investments" are canceled and pronounced worthless? It bought them with printed money. If you bought everything you own with counterfeit money, lighting it on fire isn't really very destructive at all.
That's the opposite of "broken window" economics. Abolishing the Fed and zeroing its Treasury holdings would be a massive "window repair" operation.
Most folks don't think like this. They love it when the government gets involved… At the PowerGen electric power industry conference in Orlando, Florida earlier this week, I (Dan Ferris) sat in on several presentations by power-industry executives. A couple of them said the U.S. government lacks a comprehensive energy policy… as if that's a bad thing. They seem to have missed the fact that everything the government touches turns to excrement.
That's typical of American businessmen today. They all take it for granted that the government needs to be involved. Of course, the real reason for this is that they love it when government makes competition illegal… as it's done in the utility industry.
It's hard to believe the word "self-reliance" was once a fair description of an American attitude toward life. Today, it seems the attitude has done a 180-degree turn and is "reliance on anything but oneself."
Gold doesn't like Bernanke's plans. The precious metal fell more than 1% to less than $1,700 an ounce... And 10-year Treasury yields rose to 1.73%, suggesting the market doesn't have faith in the Fed's ability to spur the economy.
"Spur" is a good poetic word here. I'm no veterinarian, but I don't think you can make a horse stronger, increase his stamina, or ramp his nutritional intake by jamming metal spurs into his sides. Yes, he might run faster for a little while, but he'll become exhausted sooner, too. Spur him hard enough, and you'll kill him trying to get more out of him than he's capable of giving. (Horse aficionados are invited to critique this analysis. But I've seen it in the movies, so it must be true.)
Also, traders – many of whom won't be in the market a year from now – were likely "selling the news," as this Fed move was expected.
I'm not naïve enough to suggest the initial reaction of a herd of over-reactive headline readers is any indication of what's coming in the future. But I do wonder about the whole spurring thing. If all you had to do to create prosperity was print money and buy bonds, we'd all be Warren Buffett. Speaking of "The Sage of Omaha," he just spent a cool $1 billion on his own company's stock...
While the market didn't react to Bernanke's announcement, it was excited by Buffett's latest actions...
Buffett announced he purchased $1.2 billion of Berkshire Hathaway stock from an unnamed shareholder. Berkshire's board OK'd the purchase of 9,200 Berkshire "A" shares at $131,000 apiece.
The buy is above the maximum price Buffett said he was willing to pay for Berkshire stock – 10% above book value. The company said yesterday it would now pay up to 20% above book value – $134,000, based on the September 30 book value calculation of $111,718.
The announcement pushed Berkshire shares up 2.4% yesterday. The "A" shares currently sit at a little more than $134,000... And up 17% for the year.
Much of corporate America does a good job operating its businesses. But almost all corporate managers stink at allocating capital, which includes making acquisitions and repurchasing their own shares. Most of them are like the average member of the great thundering herd. They buy more of their own stock when it rises and less when it falls – the exact opposite of what's required to create shareholder value.
Berkshire is an anomaly. It's a U.S. corporation that is good at making large acquisitions. Its track record isn't perfect, but it's been good enough to keep pretax earnings per share growing at better than 20% a year over the past four decades. That's an impressive record. Berkshire is that rare company that we'd rather see retaining its earnings than distributing them via dividends... or even share repurchases.
But Berkshire's share repurchase program is a model all corporations should follow. Instead of basing the program on an amount to be spent or a number of shares to be bought back, Berkshire bases its repurchase program on the price of the stock. It refuses to overpay.
The deal strikes me as a very Buffett-type move: Raising the buyback target so he could take out shareholders – whom he views as partners – at a higher valuation... knowing full well Berkshire is worth quite a bit more, so remaining shareholders will benefit, too.
Buffett obviously believes the stock is a steal at 120% of book value. He'd never buy at that price if he didn't think the company's intrinsic value wasn't much higher. I'd be willing to bet Berkshire is worth around two times book value. That's based on valuations I've done of other well-run insurance companies that do a great job at writing insurance risk and investing the premiums (or "float") they receive.
This essentially puts a floor under the stock at $134,000. In Extreme Value, I have been recommending investors put 5% of their money into Berkshire Hathaway (anytime it was cheap enough) since 2005. At the time I started recommending Berkshire Hathaway, its "A" shares traded for $84,900… Subscribers who followed my recommendation at the time are up 58% today.
China continues its buying spree for international energy assets...
Chinese oil giant PetroChina agreed to pay Australian resource behemoth BHP Billiton $1.63 billion for its stake in a liquefied natural gas project being built by Australia's Woodside Petroleum. The deal gives PetroChina a slice of the Australian venture, which Deutsche Bank estimates could cost $46 billion to develop.
China's oil and gas acquisitions have reached a record this year. Already this week, Chinese oil company CNOOC received approval from Canada's prime minister for its $15.1 billion offer for energy company Nexen.
Chinese appetite for oil and gas assets is growing at double last year's world average of 2.5%. Gordon Kwan, head of energy research at Mirae Asset Securities in Hong Kong, says we can "expect more such deals, and they will gain speedy regulatory approvals as they are minority stakes."
PetroChina has projected spending at least $60 billion to acquire global oil and gas assets this decade.
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New 52-week highs (as of 12/12/12): Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), iShares Australia Fund (EWA), iShares Germany Fund (EWG), iShares Singapore Fund (EWS), SPDR Barclays High Yield Bond Fund (JNK), Sequoia Fund (SEQUX), Hershey (HSY), Procter & Gamble (PG), and Sysco (SYY).
The mailbag is decidedly on the light side once again. Tell us what's on your mind. Do you change your investment activities based on Federal Reserve announcements? Tell us about it. Write us at feedback@stansberryresearch.com.
"I too am a full alliance member for life. I do not see a Stansberry Alpha or S&A Beta option anywhere that I can choose. Please tell me how to get this." – Paid-up subscriber Rob M.
Goldsmith comment: If you're an Alliance member, you will see an "S&A Alliance BETA" header on the left side of the screen when you log onto the S&A website. (The "BETA" is in red, making it stand out.) You'll see Stansberry Alpha listed below that header. Click on the "Stansberry Alpha" link to see a list of the beta issues.
Also, Rob, please check your e-mail. We e-mailed the most recent version on December 7. If you're not getting our e-mails, you can contact customer service (at 888-261-2693) to make sure they have your correct e-mail address… although if you're getting the Digest, that shouldn't be a problem.
Right now, because it's in the beta test stage, only Alliance members have access to Porter's new trading service…
Alliance members receive everything we publish for life (save Phase 1 Investor). Plus, they receive every new product we develop. And in many cases, you'll receive early access to our newest products (like Stansberry Alpha).
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Rancho Santana, Nicaragua
December 13, 2012
Digest readers know we're bearish on solar power... This energy boondoggle contradicts the laws of thermodynamics. And in a fight between political promises and the laws of physics... our bet is on science.
The Second Law of Thermodynamics states the usefulness of energy (its ability to do work) decreases over time and space. So for example, as sunlight travels toward the Earth's surface, it loses much of its useful energy. Most techniques to aggregate that energy into some form capable of doing work require additional energy – lots of it.
In addition... one of the more common solar energy technologies – photovoltaic (PV) power generation – can't withstand heat. It's true... As PV solar cells are exposed to temperatures above room temperature, their efficiency plummets. And most of the best locations for solar panels (like the roofs of buildings in warm climates) have high ambient temperatures.
For the full essay on why we believe solar energy is a farce, you can re-read the September 23 Digest.
Solar energy has been good for one thing – short-selling. Twice in Stansberry's Investment Advisory, we recommended subscribers short the bellwether solar stock, First Solar (FSLR).
We first shorted First Solar in January 2008... when the stock traded at an astronomical $225.97 a share. That trade stopped out a month later at a modest 4% gain.
Then, in October 2011, we urged subscribers to again short the stock, when it was trading at $56.85 a share. Folks who heeded that call could have closed out a 31.9% winner three months later.
As you can see, shares have soared this year... But they're still not as attractive a short as another company in the field.
Shares of solar-panel installer SolarCity debuted trading today. And the stock is up more than 52% above its initial public offering price to $12 per share. It values the company around $1 billion.
The company was founded by PayPal and Tesla Motors founder Elon Musk in 2006.
The company has provided systems or services for more than 45,000 buildings. And it's more than doubled its revenue during the first nine months of the year. But it's still losing money... The company lost $78 million in the first three quarters of the year (compared with a $57 million loss during the same period in 2011).
SolarCity offers homeowners a "solar lease," which allows them to pay for the panels and electricity over time. It also installs the panels. And the low prices of solar panels (which have been crushed because the market realizes they're uneconomical) has helped the company.
How much would you pay for a solar company that loses money every year (and that's spiked due to the glamour associated with its founder)? If you're looking for a good short in a fundamentally flawed industry, SolarCity is a good option...
Betting on science over politics... The next great solar energy debacle...
Solar energy bellwether First Solar has been a reliable short-sale candidate for the past three years. Its fall was inevitable given that solar energy simply doesn't work... But political boondoggles die hard. And in today's Digest Premium, we'll show you another highflying solar stock that's going to disappoint lots of investors.
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