Private equity is a fantastic business. And I think private-equity firms are undervalued, given the conditions we have today... When you can borrow money for free, you can make almost any acquisition profitable. If I were a private-equity guy looking for a new acquisition, I would go about it the same way I choose equities for my newsletter. I would look to buy companies that have tremendous amounts of economic goodwill. I'd be looking to buy companies with more assets on their balance sheet than their entire market cap. That's how you spot a company with high brand value. I'd also look for value in the technology sector. A lot of high-quality technology firms are undervalued relative to earnings right now. It would be a huge deal to take a large technology company private. But given the state of the capital markets (seemingly limitless access to cheap capital), you could probably close the deal. But it's bad for society as a whole... It doesn't make sense that so many smart and talented people are working to flip paper. Why have so much of the economy and so many of the bright people in your country dedicated to shifting paper from one group of people and putting it into the hands of another?
The European Union (EU) and Cyprus reached a bailout deal late last night. And there's one major difference between the new deal and the initial proposal.
Under terms of the new deal, deposit accounts of less than 100,000 euros won't be taxed. Previously, smaller depositors would have paid a 6.8% levy.
However, wealthier savers face big losses…
Laiki Bank, Cyprus' second-largest bank, will close. It has 4.2 billion euros in deposit accounts larger than 100,000 euros… Those assets will be placed in a "bad bank" – a financial entity created to hold nonperforming assets. The funds could be confiscated entirely – a total wipeout for those depositors. Bondholders are also losing everything.
Laiki's smaller deposits will transfer to Bank of Cyprus, the nation's largest bank. The government will then restructure the bank and decide how much to tax large depositors in order to boost the bank's capital ratios. (The tax won't exceed 40% – a reassuring claim for the large depositors, we're sure.)
In return for robbing its depositors, Cyprus will receive a 10 billion-euro bailout from the EU. But none of that money will be used to recapitalize Bank of Cyprus.
Jeroen Dijsselbloem – the Dutch finance minister and president of the EU finance ministers' committee, known as the Eurogroup – said this Cyprus bailout could become the template for future EU bank failures: Bondholders and depositors would be responsible for the loss of their bank, not governments.
Speaking to Reuters and Financial Times, Dijsselbloem said…
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What we've done last night is what I call pushing back the risks… If there is a risk in a bank, our first question should be "OK, what are you in the bank going to do about that? What can you do to recapitalize yourself?" If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary, the uninsured deposit holders…
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Now, we're going down the bail-in track, and I'm pretty confident that the markets will see this as a sensible, very concentrated and direct approach instead of a more general approach… It will force all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realize that it may also hurt them. The risks might come towards them.
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All this talk of risk and who's responsible for it… you'd think Dijsselbloem had been reading the Digest…
As we discussed in the March 19 Digest Premium, the Cyprus crisis is just the latest manifestation of socialist banking guarantees... Whether a bank held its deposits conservatively or squandered them on risky loans makes no difference to depositors. The government guarantee protects their capital in either case. So the banking system is free to act recklessly… From Digest Premium:
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But realize something... If we were truly living in a capitalist world, who you choose to bank with (where you choose to place your cash) would become an important decision. You would want to bank with people who make wise lending decisions. Today, you don't have to think about your bank because your money is always guaranteed... There's no consumer preference for well-run banks. And if there's no preference for well-run banks, you'll get a bunch of crappy banks, which is what we have... And crappy banks make crappy loans.
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Should the EU adopt the "bail in" for its banks – where depositors and bondholders pay for the recapitalization – the weaker banks will see a massive flight of capital.
Mind you, smaller depositors are still insured. But pushing a significant degree of responsibility and risk back where it belongs… on the banks, their depositors, and bondholders… is an encouraging move. It will force the weaker banks to close. The financially sound banks will collect more deposits and boost reserves.
For several years, we've cited the troubled Italian bank UniCredit as the poster child for the European financial crisis… This policy would be bad news for that bank and its investors…
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Of course... never count the socialists out. As we went to publish, it was reported that Dijsselbloem's office had "clarified" his position and that he now views Cyprus as a "special case." Apparently, someone must have explained to him there's no place for responsibility and "holding people accountable" in a sophisticated, modern economy...
In today's DailyWealth, Steve Sjuggerud again urged readers to buy a home…
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"This market is going crazy," a realtor friend just told me…
"Just this week, I got a beach condo under contract… and I got four more offers within 36 hours."
For years, I have urged you to BUY housing in Florida. I've told you housing here is attractively priced. And it will rise in price faster than just about anyone expects over the next decade.
Now, it's happening. Have you missed it? Absolutely not. Home prices in Florida – and in the nation – can and should go much higher from here…
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And the New York Times recently wrote an article about our nation's dwindling home supply…
"In my 27 years, I've never seen inventories this low," Kurt Colgan, a broker with Lyon Real Estate in Sacramento, told the Times. "I've also never seen a market turn so quickly."
Nationwide, the number of homes for sale is at its lowest level since 1999, according to the National Association of Realtors. In Sacramento, home listings were down 60% in January from a year ago. Inventory for the rest of the country is down 23%.
The national median home price for existing homes was $173,600 in February – the 12th month in a row it has increased. And that's up 11.6% from February 2012.
The article reported some realtors who are knocking on doors of homes that aren't for sale and making above-market, unsolicited bids for their clients.
While you can usually count on real estate brokers for positive comments on the state of the housing market… many institutional investors on Wall Street are seeing a similar opportunity.
The world's largest private-equity firm, Blackstone Group, is spending $100 million a month on single-family homes. It's spent $3.5 billion to date. You can read more about what Blackstone is doing here. And it is one of many deep-pocketed entrants into the space – investment bank JPMorgan is also buying single-family homes, for example.
These firms are betting their access to cheap capital and a strong rental market will provide outsized returns. And these institutional investors are better equipped to handle a financial downturn than the average, mom-and-pop real estate investor.
As long as these players are still plowing cash into the housing market, you can expect prices to rise.
"It's a very attractive time to buy a home if you can," Justin Chang, president of Colony American Homes, a subsidiary of Colony Capital – one of the major housing investors in the U.S – told the Wall Street Journal. That has created "a big opportunity to rent homes to people who for whatever reason have chosen not to buy or can't buy."
To date, Colony has spent more than $1 billion on 8,000 homes in seven states. And Chang says it's still buying… "In each of the markets we're in, we think we can go deeper."
For more on the continuing recovery in real estate, you can re-read the March 20 and February 26 Digests.
"I can't tell you exactly what will happen in the next 10 years. But whatever happens, I'm sure it will happen with a lot of volatility. And that's good for us."
This morning, we were discussing the future of the market with Tom Dyson, the publisher of the The Palm Beach Letter and Palm Beach Current Income. Longtime readers remember Tom used to be the editor of our popular 12% Letter advisory before he moved on to his current position. Tom believes the coming years will be good for traders who know how to handle volatility… the kind sovereign-debt crises produce.
Tom was writing The 12% Letter during the last crisis of 2008-2009. Back then, he recommended subscribers buy McDonald's (now up 173%), Altria (up 154%), and Coca-Cola (up 127%). All three positions remain in The 12% Letter model portfolio… and are among the 10 highest-returning positions currently in any S&A model portfolio. (We list the "Top 10 Open Recommendations" at the end of each Digest… You can see Tom's recommendations there).
12% Letter readers who took advantage earned triple-digit share-price gains and more than 20% in income by following Tom's strategy...
Since then… Tom has devised, for his Palm Beach Current Income subscribers, a conservative strategy for generating rich income safely during periods of high volatility… when shares of typical dividend-paying stocks can take a hit.
"When things get chaotic and volatile… you have the opportunity to make tons of income on great stocks," Tom said. "It's a pity so few investors know how to set this up, because it's the perfect crisis income strategy."
As he said, most investors have no idea how powerful this income technique is… let alone how to use it. That's why, for the last year, Tom has been showing folks exactly how to use this strategy effectively.
Tom has produced some spectacular gains using this strategy... He made 26% in one month with exploration company Yamana Gold. He made 48% in one month with gold producer Barrick Gold. And his strategy yielded a 32% gain in less than three weeks on sportswear giant Nike. And that's just a few of the winners... So far, he's opened 41 positions and closed 40 for a profit.
Every income investor needs to know about this strategy, especially in today's market. If you're interested in learning how to use it yourself, Tom will show you everything you need to know. You can learn more about Tom's strategy here.
New 52-week highs (as of 3/22/13): WisdomTree Japan SmallCap Dividend Fund (DFJ), SPDR International Health Care Fund (IRY), Targa Resources (TRGP), W.R. Berkley (WRB), Anheuser-Busch InBev (BUD), Pepsico (PEP), Johnson & Johnson (JNJ), Eli Lilly (LLY), Prestige Brands Holdings (PBH), 3M (MMM), Consolidated Tomoka (CTO), Chubb (CB), Texas Pacific Land Trust (TPL), Enterprise Products Partners (EPD), Chevron (CVX), CVS Caremark (CVS), Walgreens (WAG), and Sysco (SYY).
In today's mailbag, a history lesson in currencies. Send your questions and comments to feedback@stansberryresearch.com.
"'The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance.' – Cicero, 55 BC
"Evidently, we have learnt absolutely nothing over the past 2,068 years." – Paid-up subscriber G.B. Dawson
Goldsmith comment: While we can't confirm that quote is actually from Cicero, no, we haven't learned much… The history of paper money is untarnished by success. And the U.S. dollar will be no different.
"Incredible Story today about the exploding population of able Americans (and children!) on Disability. Another Perfect 'End of America' Data Point. You can listen to it on This American Life." – Paid-up subscriber Matt Moses
Regards,
Sean Goldsmith
Miami Beach, Florida
March 25, 2013