Breaking news... UniCredit's huge loss... Italy's savior?... Buffett's new purchase... China slams the U.S…. Occupy North Dakota...
This just in: CBS News reports (via 60 Minutes) that Washington D.C. is full of self-serving, corrupt members of Congress, who frequently use their power to enrich themselves at the expense of the public.
In 2008, for example, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke held a closed-door meeting warning politicians that a global financial meltdown could occur within a few days, giving them enough time to get their money out of the market ahead of the general public.Congressman Spencer Bachus (R-Alabama), for one, shorted General Electric four times in early September 2008. Between July 2008 and November 2008, he made 40 options trades on GE, in one case nearly doubling his money in two days.
In other news, CBS has also recently discovered that presidents lie, that the U.S. has been borrowing money for 40 years, and that Elvis is actually dead.
UniCredit, Italy's largest bank and our favorite bellwether of the deteriorating Italian economy, can't avoid trouble. In 2008, the bank's shares crashed after investors realized it was one of the largest European owners of subprime mortgages. When it was forced to raise capital, it didn't turn to European governments. Instead, it raised $1 billion (offering 3.6% of the firm) from Libya's Muammar Gaddafi.
Then, in January 2009, the New York Times reported one of UniCredit's largest subsidiaries, Bank Medici, lost over $2 billion investing with Bernie Madoff.
Days later, the bank raised 4 billion euros from public investors at a 29% discount to market. In the March 2010 issue of Stansberry's Investment Advisory – which details UniCredit's long history – Porter wrote:
|
The bank... like its predecessor Kredit-Anstalt... is hanging on, having been left deeply wounded by the initial crisis. Will it survive? |
|
I don't think it's possible. |
It's no surprise UniCredit was at the epicenter of the European sovereign debt crisis. Today, the bank confirmed our worries with a 10.4 billion euro loss for the quarter (analysts estimated the bank would earn 7.4 million euros). The bank wrote down 10.2 billion euros' worth of assets. It says 9.8 billion euros of writedowns will have no impact on cash. But UniCredit still wants to raise 7.5 billion euros in a rights offering (over half its current market cap).
UniCredit also said it won't pay a dividend for 2011. It's firing 5,200 employees, around 12% of its workforce. And in a final, desperate move, the UniCredit board proposed a 10-for-one reverse stock split, where current shareholders would receive one new share for 10 current shares. The goal is to create "a more efficient and liquid market for the rights during the trading period," the bank said.
Or it could be to hide the fact that shares now trade at 0.77 euros. This attempt at financial cosmetics reminds us of the old saying, "You can paint a turd gold, but it's still a turd."
Silvio Berlusconi, who resisted tightening Italy's belt, is out as the country's prime minister. That should be bullish for Italy... That is, unless his replacement is a hopeless bureaucrat who was responsible for creating the sovereign debt crisis. Unfortunately, Berlusconi's replacement, Mario Monti, is just that. Monti was a member of the European Commission, the group responsible for both the euro and this crisis. Why the European Union believes this man can solve Italy's problems, we don't know.
Despite Italy's irreversible economic problems, the market is still buying the country's debt... Italy sold 3 billion euros – the maximum amount – of five-year bonds. The bonds yield 6.29%, the highest since 1997 and up from 5.32% at the last auction on October 13.
In an interview with CNBC this morning, Warren Buffett said he wasn't buying any European banks. He said he needs to understand European banks better before investing in them. Buffett does understand European banks... They operate like any other bank. What he really meant is that he wants to know the banks have an implicit government backing before investing.
Buffett invested $5 billion in Goldman Sachs and Bank of America after the Fed started bailing banks out. That was his margin of safety...
While he's not buying Europe, Buffett is buying IBM... big. This morning, Buffett announced a $10.7 billion position (5.4% of the company) in the technology giant. Buffett has traditionally shunned tech stocks – because they're difficult to understand... nd because it is difficult for technology stocks to be capital-efficient. They're always spending money on research and development.
"I don't know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM," Buffett told CNBC. He also added, "They treat their stock with reverence."
I asked Dan Ferris, our resident value guru, to comment on the purchase:
|
It's fairly straightforward. He's attracted to it because "nobody ever got fired" for recommending doing business with IBM. The company attracts and keeps customers due to the power of the brand. |
|
It's a similar rationale to buying banks. The relationship is said to be "sticky," which gives earnings some amount of predictability. It's like Gillette. Men don't change their brand of razor. They find what works and stick to it. The switching cost is too high for the customer. Some medical products are like that, too. If a surgeon uses a particular type of hip replacement, he doesn't want to change just because somebody is offering a similar product at a lower price. |
|
Buffett understands this "stickiness" better than anyone. He's confident with it. With IBM – like many other companies in Buffett's portfolio (Coke, for example) – there's something other than price that he deems at least as important as price. |
|
New 52-week highs (as of 11/11/11): Keyera Corp (KEY.TO), Abbott Laboratories (ABT), McDonald's (MCD).
In today's mailbag, a subscriber's son "occupies" North Dakota, and where you'll find our specific stock recommendations (hint, not in the Digest). Send your feedback here.
"My older son has always been a hard worker; he had a paper route when he was 8. But in the work world, he has always struggled to support his family. He favors rural areas to bring up his children and the pay just hasn't been there for him no matter how hard he worked, either for himself or for others.
"Twenty months ago he left his family behind in Northern Minnesota and went to Williston ND to drive a fracturing truck. He told me that last year he made more than twice as much as he had ever made in his life. This year he bought a new house and moved his family there.
"Just wanted you to know that not all of his generation are occupying instead of working. Perhaps the discipline of going to a parochial school and having young parents not prone to coddling helped him do whatever is necessary to provide for his family. Thanks for everything you do to bring us enlightenment (and entertainment—you are a great writer)." – Paid-up subscriber Gary Hauck
"Just printed out and gave your Friday missive to two of my children and my wife to read. It made a fantastic read – especially when combined with the one from (I think) two weeks ago. I joined in April and have been busy incorporating world dominators, Doody, and now Eifrig's Retirement Trader (still learning on that one and figuring out how to incorporate it where I'm using about 60% of the portfolio to cover my puts). Now I need to do my homework on the corporate bonds. Your newsletters throw a ton of good ideas at us – so many that I sometimes feel like an investor suffering from ADHD. More ideas than available money. What I have lacked is a structure to allocate within. This essay gives me, in a cogent yet simple fashion, a strategy to follow. I think it will take me about a year to get into the kind of balance Porter recommends in his essay (using new money to achieve balance). By the way, since joining in April, I am up 18% and 16% in two of the three accounts in my portfolio. The third has been in cash as I tried to figure out what to do." – Paid-up subscriber Carl Cockrum
"I have yet too see any of your weekly letter/reports not bragging about your past records along-with a very tempting advice to subscribe to your other expensive publications. Your writing is very general without any specific advise about WHAT to buy and/or sell. Your past record about your successful specific advice go back 2-5 years. Where is performance record of your recent transactions?
"I have been subscriber for about a year and have not seen a suggestion for buying a certain security. I have not realized any profit by subscribing your publication. I hope you will provide a straight forward response." – Paid-up subscriber Dinkar Gangwal
Goldsmith comment: Dinkar, it sounds like you're confusing the S&A Digest, what you're currently reading, with your paid subscriptions.
We give everyone a free subscription to the Digest with their paid subscription. If you log onto our website, on the left side under "Your Subscriptions," you'll see which newsletters you have purchased. In those newsletters, you will see our specific recommendations. If you're still having issues, please contact our customer service department at info@stansberryresearch.com or 1-888-261-2693.
Regards,
Sean Goldsmith
New York, New York
November 14, 2011