If you want to know why we loathe government so much, one simple reason is we hate being lied to. Libertarian Walter Williams has some hard data on how Washington lied about Medicare, income tax, and Social Security.
"Loan shark rates." That's how ratings agency Egan-Jones characterized the 14% interest rate Beazer Homes has to pay to sell a new debt issue. Beazer's second-quarter sales were 50.7% below last year's second quarter. Egan-Jones rates the company 'D'... as in default. The stock is down 95% from its all-time high in early 2006.
It seems, for once, Goldman Sachs' extreme self-confidence didn't pay off... Despite emerging from the financial crisis largely unscathed – and with record profits – the bank lost $6 billion trading its own stock. From 2006 through early 2008, Goldman spent $18 billion buying 100 million shares of its own stock, paying an average $184 a share. When the financial crisis hit in September, Goldman had to replace the money, so it sold 94 million shares, raising nearly $12 billion (at $123 a share). Goldman thought it had enough capital to withstand the storm, but it was wrong, and the mistake cost the firm $6 billion.
Bank analysts and shareholders, drunk on Mr. Market's heavily spiked "Garbage Rally Punch," aren't satisfied with Goldman's "too big to fail" status, its obvious political connections, and its ability to commit fraud in broad daylight and get away with it. Now, they want to know when the bank will – we are not making this up – increase leverage to goose returns. Goldman's assets are currently 14 times its equity, down from a historical factor of 20 and a peak of 26.
Naturally, Goldman declined to comment on the leverage question in a recent BusinessWeek article.
The question is an odd one to ask today, just as Treasury Secretary Herr Geithner was expected to propose "too big to fail" banks be required to maintain larger capital cushions... which has the polar opposite effect of increasing leverage, reducing returns. Goldman must know something like this is coming.
If you ever wondered if Mr. Market is truly manic depressive, the call for higher leverage among large financial institutions at this particular moment in history must surely erase all doubts. Mr. Market had a knife at his wrists in March. Now he's aiming the champagne corks at the crystal chandelier, and banks want to party "like it's 1999," in the words of Swedish finance minister Anders Borg.
If you want to know how to think about the overall stock market instead of merely trusting the insane Mr. Market and "following the trend," you need to know about three numbers. To learn what they are, click here.
How have the mighty fallen... The secretive value investment group at Leucadia National (LUK) published its annual report in April, declaring 2008 an "annus horribilis." Latin was a good choice. "Most disastrous year of our lives times a hundred" is so plebien.
Leucadia lost more than $2.5 billion last year – $1.7 billion of which was a writedown to a previously booked $1.8 billion of tax-loss carryforward (future taxes it hoped not to pay after taking one of its holdings through Chapter 11).
In an unusually macro-oriented bet for a value investor, Leucadia has been buying assets "likely to increase in value as the underdeveloped world acquires the means to increase their standard of living" for the past few years. For example, Leucadia has investments in both an iron ore and copper mine in Australia and Spain, respectively. The firm expects both mines to profit from China's stockpiling of commodities and deployment of its cash hoard to fund other infrastructure projects.
All of Leucadia's businesses have slowed, including boutique investment bank Jeffries, Idaho Timber, an auto-financing company, and three wineries. Cash flows from the operating businesses no longer cover Leucadia's overhead and interest. It's cutting costs and will sell investments and other assets to raise cash.
Late to the party as it could be, Leucadia's new strategy is to become "Fortress Leucadia." (Somehow, this reminds me of "Mission Accomplished.") It will "not make any more investments, continue watching our expenses, keep only assets that are promising and slowly turn everything into cash which will be used first to retire or pay down debt, while always maintaining at least $500 million in cash or liquid assets."
Read the full report here.
Leucadia's Ian Cummings and Joe Steinberg have been viewed for many years as two of the shrewdest investors on the planet. Now they're holding a fire sale to pay their debts. I was shocked to learn they were among the investors who gave Bill Ackman $2 billion to buy one stock. Ackman picked Target, and the fund lost 90% of its value, though Target didn't fall nearly that far, all because he used... wait for it... wait for it... options, i.e., leverage.
You can't buy an interest in the dumbest hedge fund in the world and get blown up using leverage and stay on any reasonable list of conservative value investors. Leucadia is not on my list of "Professional Help" stocks, companies run by conservative investors who understand risk better than mere mortals.
Leucadia also said in its annual report it would avoid "financial bets," but that was all the way back in the dark ages of April. Word came yesterday that Leucadia's money is fairly burning a hole in its pocket, for it found a "financial bet" it couldn't resist. The firm teamed with Warren Buffett's Berkshire Hathaway and bid $490 million for Capmark Financial Group's loan-servicing and mortgage business... a bullish bet on U.S. real estate.
Capmark is one of the largest U.S. commercial real estate finance companies with more than $10 billion in originations. Capmark paid the new "Berkadia III" partnership $40 million to enter into the agreement. Capmark has the right to sell the assets to the venture at a later point, as it may file for bankruptcy.
Buffett has been increasing his bets on U.S. real estate this year through his purchases of Wells Fargo, the No. 1 U.S. mortgage lender. On Monday, Berkshire announced it bought a Chicago-based real estate brokerage.
Money flows to where it is treated best, and as world government's are quickly realizing, people with money flow there, too... The world's super-wealthy are fleeing to Switzerland to avoid oppressive tax regimes in their home countries.
"We're not talking about thousands of people because we're talking about people with a certain wealth, but it's significant," said Alexandre Zeller, CEO of HSBC's Swiss bank. "They come above all from countries which have substantially increased taxes." Exhibiting a firm grasp of the obvious, Zeller adds, "There's a direct correlation between taxes and the desire of a wealthy person to want to establish themselves elsewhere."
Switzerland is already home to many expat millionaires, including Formula 1 racer Michael Schumacher, Ikea founder Ingvar Kamprad, and pop singer Tina Turner. Wealthy residents who don't have Swiss income can negotiate tax deals with the country.
But it could already be too late for Americans... Wegelin & Co., the oldest Swiss bank, is asking its clients to sell all their U.S. investments or find another bank. Wegelin wants no exposure to arbitrary U.S. tax and regulatory policies. If tax-friendly countries and banks around the world don't all snub U.S. citizens first, our government is sure to make any relocation efforts illegal... or at least very difficult and costly. (You already have to give up half of your assets if you renounce your U.S. citizenship.)
The U.S. might still be the home of the brave, but it hasn't been the land of the free for a long, long time.
New highs: International Royalty (ROY), Goldcorp (GG).
Why am I in Oregon? Find out in the mailbag... Send any suggestions on where I should move here: feedback@stansberryresearch.com.
"If you have toothpaste in your list you should have salt. Salt will do as a toothpaste if there is nothing else." – Paid-up subscriber Ian Priestley
"You guys are great. I am confused as to why you still reside in Oregon and Maryland. Two of the most liberal states in the union. I grew up in suburban Baltimore and moved far away. You couldnt pay me enough to live there, well... maybe you could." – Paid-up subscriber CP
Ferris comment: The wealthiest people I know live in horrible tax jurisdictions, places like France, Canada, and California. I live in Oregon because my wife has three kids, who can't be uprooted.
My wife and I routinely discuss where we'll live when her youngest turns 18, and it's never anyplace inside the U.S.
"Many years ago, Don McAlvaney said in time of crisis people went to the four G's – God, Guns, Gold, and Groceries. The problem with cigarettes is they tend to dry out after a period of time. Check out the shelf life before buying a lot. Best buy is heirloom seeds. Pray for our country and the world." – Paid-up subscriber David Lee
Ferris comment: I spoke with a friend yesterday who says he bought a large quantity of rice and canned goods and was going to buy some water, too. After that, he said he was off to Wal-Mart to buy a shotgun for self-defense.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon, and Baltimore, Maryland
September 3, 2009