GM has until June 1 to provide a viable business plan or declare bankruptcy. Today, CEO Fritz Henderson said "it is probable" GM will choose the latter option. Earlier this week, several GM executives dumped all their GM stock – more than 200,000 shares total – for around $1 a share. Like rats fleeing a sinking ship.
About three years ago, I said you could hand GM's financial statements to a college finance student and within minutes he'd know it was a bankruptcy.
Up until this point, General Motors has been a bailout darling... accepting nearly $30 billion in taxpayer funds for survival. But it may soon get the full brunt of Obama's socialist agenda after reports leaked saying GM will start importing more vehicles made abroad.
The United Auto Workers union last week said over the next five years, GM plans to nearly double the number of vehicles it imports to the U.S. from Mexico, South Korea, Japan, and China. Of course, Washington is livid...
"GM is getting funding from U.S. taxpayers to help save the company," Senator Sherrod Brown (D-Ohio) said. "Taxpayers deserve more than Chinese imports in return. Taxpayer funds should be used to build the next generation of fuel-efficient vehicles in the U.S., not abroad. This is about creating jobs and rebuilding our economy."
"GM should not be taking taxpayers' money simply to finance the outsourcing of jobs to other countries," Alan Reuther, the union's Washington lobbyist, wrote in a letter to U.S. lawmakers.
The government gave GM the bailout cash and told the company to find a viable business model. Well guess what... this is it. GM simply cannot compete with foreign carmakers when it comes to production costs.
Maybe Washington will finally realize pumping billions of dollars into a failed business isn't the road to success... It was that failed business' flawed operations that got it into trouble in the first place. Cash infusions don't solve the fundamental problem.
Through it all, a lone voice has cried in the wilderness. David Cole, chairman of the Center for Automotive Research, knows it makes "business sense" for GM to move some production abroad...
"What's more important, some jobs in a particular factory somewhere or the overall success of the company?" Cole asked. "That is really far more important."
Of course, these days in the People's Republik of Amerika, the saner heads don't prevail. My biggest worry now is that banking and automobile manufacturing won't prove massive exceptions to the general rule that government ought to keep out of private business.
If the government steps into just one more industry... I can't see how it won't drastically impair business values nationwide. That'll be horrendous for stocks. If you want to know why we're spending so much time writing about the government lately, that right there is it, pilgrim.
The government is using its power, and that power is a danger to your stock portfolio.
My Extreme Value MetLife short looked wrong when the stock surged to $35 a share in the recent rally (now all but dead). Then, the CFO came out yesterday and told the world it's going to take a long time for MetLife's earnings power to return. He said something else that really scared investors: The company's earnings power depends on the values of its assets, since they affect the amount of capital it has. The stock broke down below $30. Now, as I write this, it's back above $30.
That's how it happens. First, you get ratcheted down on bad news. Then, you recover as the market pulls the suckers back in. Then, more bad news, another painful ratchet downward. That's what's happening to MetLife... and many other stocks.
MetLife has $32 billion of commercial real estate exposure versus $18 billion of tangible equity. Think of all those office buildings and shopping centers that are reporting record vacancies. I don't understand how MetLife can report these loans at more than 99% of cost. It ought to be more like 80% or even 70% of cost... And before it's all over, I think that's exactly what will happen.
The largest bank closure of the year is fast approaching, as condo lender Corus Bancshares has until mid-June to sell itself or raise at least $390 million. Corus is the poster boy for the overgrown condo market. Seventy-five percent of the bank's commercial real estate loans are for condos... and those are highly concentrated in the troubled areas of Florida and California.
From the Journal:
Some 41 of the bank's 85 condo-construction loans were in default at the end of 2008, and an additional 23 condo loans were considered "potential problem loans" at risk of default. In Florida, all but three of 20 condo loans were in nonaccrual, the company said last month.
PSIA subscribers should re-read the January 2008 issue for a great explanation of Corus' business. To gain access to PSIA, click here...
We wrote it, and it's happening...
I can tell you judging from history and the recent experiences of several different countries, when society expects 40% of the tax burden to be carried by only 1% of the population, bad things happen. The masses always demand too many services from the government – because they're not paying for them. And, eventually, the 1% that's paying leaves, quits working, or hides their income. – Porter Stansberry in the May 8, 2009, S&A Digest
One year after Maryland – Stansberry & Associates' home base – became one of the first states to create a higher tax bracket for millionaires, the millionaires are disappearing. Taxes collected from those in the top bracket fell by about $100 million. The number of Marylanders with more than $1 million in taxable income who filed by the end of April fell by one-third to around 2,000... a "substantial decline" according to the state's comptroller.
The article says the recession is one obvious reason for the decline in taxable income. But it also acknowledges what we've been saying for months... you can't levy absurd taxes upon the rich because they will get fed up and leave.
New highs: none.
In the mailbag: Yes, Paulson is a billionaire and a genius. So what? He should be riding my coattails this time. Let us know whose coattails you're riding here: feedback@stansberryresearch.com.
Of course, if you're riding anyone's coattails, you're making a big mistake... There is no substitute for know
ing what you're doing. Even if I get an idea from another investor, I always start over from scratch and do my own work from the bottom up. The only way to succeed over time as an investor is to take 100% responsibility for what you do with every penny you invest. You either do the work, or you lose. Period.
"Until John Paulson sells, gold and gold miners are a strong buy. No other hedge fund manager has been well out in front of all of the major market dislocations. Paulson has made many billions while almost everyone else has been a pathetic loser. Maybe this time a few people/funds are wising up, and riding Paulson's coattails? When Paulson sells, I'll sell." – Paid-up subscriber B Fromme
Ferris comment: If you're following Paulson's advice, you should read Extreme Value. I was recommending gold bullion months before and recommending gold and natural resource stocks weeks before he bought Anglogold.
I'll stack my three natural resource picks up against Paulson's or anyone else's. My picks are a lot safer and have a lot more upside than his. I bought them cheaper and I'll likely sell them dearer. I don't believe Paulson can be great at mortgages AND gold stocks. It doesn't work that way. Anglogold will probably turn out well, but I bet my natural resource picks turn out much, much better.
Anglogold Ashanti consumes more cash than it generates, trades at 39 times EBITDA (earnings before interest, taxes, depreciation, and amortization), and has $2 billion of debt. One of my debt-free natural resource picks is so cheap, and has so much cash flow, it would only take about a third of its cash flow to finance enough debt to buy all of its outstanding shares at current prices.
I bet you're lucky if you get a double out of Paulson's advice. I think I'm looking at an easy three- to five-bagger... and I've got two others that have just as much upside and just as much downside protection. One of them is the same business model as another company that became a 50-bagger.
I expect my three gold recommendations to be among the highest-returning stocks any Stansberry analyst recommends this year. If you like the idea of owning gold, you should, without a doubt, own these three stocks. They're going to trounce the performance of bullion this year. To learn more about Extreme Value and gain access to my three gold recommendations, which are included in my February issue, click here...
"While I agree that the size of our government is obscene, and I agree with your prescription for change, I have a much easier (and more flexible) solution than a constitutional amendment. It's very difficult to amend the constitution (for some very good reasons). It would be much easier to do the following. First, change election day to be April 16th. Right now, election day is about as far away from the day people's taxes are due as is reasonably possible, and the American electorate has a short memory. Second, stop forcing companies to be tax collectors for the government.
"Money you never receive is not perceived as belonging to you, if you have to write a check, you know it's your money the government is confiscating. These two changes, which can be implemented by law instead of amendment, would shrink the size of government, a balanced budget amendment may just increase the tax burden instead." – Paid-up subscriber John J. Genzano
"I still say the government has said all along that if enough people break the law the law is no good. Hence the problem we are facing with illegals in this country. Dear Pelosi says since there is over 14 million illegals in this country, not paying taxes, breaking our schools, breaking our hospitals, which they use the emergency room for a family doctor and don't pay. The word from Washington is with so many people breaking the law we should not enforce it. So we need to organise at least 20 million people who normally pay taxes, to stop paying. Since the precedent is when 14 million break the law we should not enforce the law." – Paid-up subscriber JPW
Ferris comment: A little civil disobedience could do us a tremendous amount of good.
Regards,
Dan Ferris
Medford, Oregon
May 14, 2009