Destruction benign and malignant... R.I.P. Borders... Goldman misses earnings... Backward-looking fund managers... Greece's 'disorderly' default... The government-talk indicator flashes... Wynn blames Obama... Dalio on the destruction of paper money...
Last week, I looked around and saw paper flying everywhere.
This week, a look at the world's financial news reveals all manner of financial and economic destruction, some of it benign, some of it malignant...
In the benign camp, we find the latest victim of the creative destruction of capitalism: Borders Group, the bookstore chain founded in 1971. Nobody wants to buy the company. Nobody wants to invest in turning around a bookstore chain. So Borders is liquidating.
Borders says it could start liquidating its remaining 399 stores as early as this Friday. It's expected to be gone by September.
Borders President Mike Edwards cited the headwinds his company has faced for years: the rapidly changing book industry, the advent of electronic readers, and a turbulent economy.
The number of bookstores in the U.S. is shrinking. Membership in the American Booksellers Association, an organization catering to independent booksellers, has fallen from more than 4,000 in 1996 to around 1,600 today.
Meanwhile, Amazon is the world's biggest bookstore now... And its only storefront is its website. Amazon's No. 1-selling product is its e-reader, the Kindle, which has become the iPod of books. Everybody who listens to music must have an iPod. Everybody who reads must have a Kindle. Borders didn't stand a chance.
I can't imagine life will be much better for Barnes & Noble, and I love wandering around that place. There's no substitute for the magic feeling of being surrounded by all those books...
Except maybe for the magic feeling of being able to search them all online and read huge sections of them for free without leaving my house. Other than that, the bookstore is pure magic.
Now I ask you, would you buy Barnes & Noble at any price? Sure, it's rallying today because one of its competitors just took its last breath. But I doubt being long B&N shares will ever again be a valid long-term investment. A short-term speculation, maybe.
Forgive us if our schadenfreude is showing. But the destruction of the paper money system appears to be working its magic, even on the indestructible Goldman Sachs...
Goldman's second-quarter profit of $1.05 billion was considerably below analyst expectations and only the fifth time it's missed estimates in its 12 years as a publicly traded company. Goldman's revenue sank in its fixed-income, currency, and commodity trading (normally the bank's outperformer) divisions. The reason, according to CEO Lloyd Blankfein: "Certain of our businesses had disappointing results as we reduced our market risk in response to attempting to manage fluctuations in prices and market liquidity."
That's obviously pure B.S. But I think it means something like, "We tried to lever up during the quarter and then lever back down in time to report big profits and a lighter balance sheet in our SEC filings, the same scam we've been running since we went public. But this time it just didn't work. We're not sure why, but our government spies aren't answering their phones as quickly as they once did."
Like Blankfein, George Soros is playing the risk-reduction card, too. According to Bloomberg, Soros' flagship Quantum Fund is 75% in cash ($19.1 billion). The fund's manager, Keith Anderson, told portfolio managers to rein in risk as the fund was down 6% in mid-June. This is a good example of how professional money managers are as focused on the rearview mirror as the rest of the thundering herd. Everybody looks backward and assumes that what happened yesterday morning will happen tomorrow morning... even though it rarely works out that way.
Louis Bacon of the macro-focused hedge fund Moore Capital is also looking in the rearview mirror. Bacon cut risk exposures after his fund dropped 6% through June 30.
Fund managers are as human and delusional as most other market participants. Rather than admit they get scared and sell when prices fall, it sounds much more sophisticated for a guy like Soros to pretend his crystal ball is just a little cloudy right now...
"I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis," Soros said in April at a conference at Bretton Woods, organized by his Institute for New Economic Thinking. "The markets are inherently unstable. There is no immediate collapse, nor no immediate solution."
Soros is not lamenting his inability to predict the future. He's never had it. He's really saying it's hard to pretend you're smart if you can't pick up easy money front-running the U.S. government.
Yes, making a living front-running the U.S. government is one of the blessed, long-awaited casualties of the current crisis, a trade whose destruction we welcome. With the end of the most recent round of quantitative easing, it's harder for traders to lever up and follow the government's huge capital flows.
Perhaps Soros is waiting for the total destruction of Greece, a default, before deploying capital. In a recent Financial Times piece, Soros shared his dour views on the chaotic self-destruction spreading throughout the European economy…
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Greece is heading towards disorderly default and/or devaluation, with incalculable consequences. If this seemingly inexorable process is to be arrested and reversed, both Greece and the eurozone must urgently adopt a plan B. A Greek default may be inevitable, but it need not be disorderly. |
The market still agrees Europe's woes are far from over... Greek two-year bond yields jumped more than 300 basis points today to an all-time high 39.09%. How can a broke nation afford these interest rates? It can't. The day of destruction and default is near.
Speaking of the destruction of the euro, our "government plain talk" indicator just confirmed it... Digest readers know we don't trust politicians. And whenever a politician makes a beyond-all-doubt declaration, the lie is confirmed. Today, Ewald Nowotny, one of the governors of the European Central Bank (ECB), told CNBC…
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The euro as such is fulfilling its role and I do not see any doubt about the existence and the strong future of the euro. I am always very unhappy about political statements that dramatize the situation by bringing in the existence of the euro. |
As our friend Doug Casey says, the dollar is an "I owe you nothing," while the euro is a "who owes you nothing." That's becoming clearer every day.
The Leviathan at the heart of the destructive forces roiling the global economy is government. Propping up markets eases pain in the short-term. That feels good, but virtually guarantees a more devastating degree of economic destruction for the next generation.
It's not just the market manipulation, either. Government is making it increasingly difficult for business owners to operate and plan for the future. Business owners are loath to commit capital when future regulations, health care costs, and the like are unknown.
Listen to billionaire casino mogul Steve Wynn. In his company's quarterly conference call, Wynn slammed Obama and the current administration, saying he and his compadres are "frightened"… (For the full transcript, click here.)
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I believe in Las Vegas. I think its best days are ahead of it. But I'm afraid to do anything in the current political environment in the United States. You watch television and see what's going on [with] this debt ceiling issue. |
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And I'm saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime. |
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… until we change the tempo and the conversation from Washington, it's not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the president. And a lot of people don't want to say that. They'll say, 'God, don't be attacking Obama.' Well, this is Obama's deal, and it's Obama [who's] responsible for this fear in America. |
Komrade Obama and all the other fools in government are like the school boys in Lord of the Flies. They've crashed on an island and taken it over. Now, they're running amok for lack of adult supervision.
If you missed out on Jeff Clark's recent string of huge winners (120% shorting China, 80% in one day on Gold Fields, 95% on GDX, and 75% on Kinross to name a few), you have another chance today…
Jeff sent an update to S&A Short Report readers with a trade he believes will return 300%. The stock in question has been getting hammered. It's currently trading more than 25% below its 200-day moving average. That means the stock is oversold. In fact, the last time the stock traded this low, in September 2010, it rebounded 38% in just six weeks.
Markets tend to revert to the mean... And that's what Jeff is betting on with his latest S&A Short Report trade. The recommended options are still well below Jeff's buy-up-to price. To receive the S&A Short Report and learn how to make 300% on this single trade, click here...
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New 52-week highs (as of 7/18/11): Royal Gold (RGLD), SPDR Gold Trust (GLD), EV Energy Partners (EVEP).
"I lost my job due to Obomanomics and was able to take control of my 401K. I turned in into a Gold and Silver IRA. I checked yesterday and found my 133K was now worth 208K. I know you say Gold and Silver isn't a way to get rich, but it just might make your retirement a little easier to handle!
"My portfolio best as of yesterday: Royal Gold , Wal-Mart , Chesapeake Energy , Exelon , and Monsanto! Keep up the good work Porter and Dr. Steve! Thanks For all you Do!" – Paid-up subscriber D. Lane
"I'm a new subscriber to some of the letters I can afford at this time, being recently retired and on a fixed income for the first time in my whole life.
"one thing that really bothers me is the ending of the digest. It seems that there's always the past performance, which is kind of a pat on your own back and I don't begrudge you that but what I signed up for was to hopefully gain a little more insight to some current investments that I can get in on some of the triple digit trades and then maybe I could afford $3500–$5000-plus for a news letter. Its nice all the past performance from 2002 but how about something for us little guys that we can use real time?
"I'll be patient, for now, and try to glean the little I learn from the little I get and hopefully I will do better than had I not subscribed" – Paid-up subscriber Charles Drewe
Goldsmith comment: We post our Hall of Fame and Top Ten at the end of each Digest simply to highlight stellar performance from our analysts... and encourage them to continue their top-notch work. And to answer a question you didn't ask (though people often do)... No, the stocks listed at the bottom of the S&A Digest are not necessarily recommended buys. They should not be viewed as such.
To your personal situation, Charles, the S&A Digest is a free daily e-letter you receive with your paid subscription to one of our newsletters. The actionable investment advice you seek will be in that other newsletter (though we do share gems from time to time in these pages).
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
July 19, 2011