Homebuilder sentiment is the highest it's been since 2007... Doug Casey's take on Ron Paul... Another giant hedge-fund blowup... Three stocks that could plummet in the next year…
For the past few weeks, we've discussed Steve Sjuggerud's bullish stance on housing. And news continues to come out in his favor...
Yesterday, the National Association of Home Builders/Wells Fargo said its builder sentiment index rose for the fifth-straight month, from 25 in January to 29 in February. The index is up 15 points since September and is currently at its highest point since May 2007.
Everyone's a genius in a bull market. But as Warren Buffett says, "When the tide goes out, you learn who's been swimming naked." Billionaire Phil Falcone, founder of hedge fund Harbinger Capital Partners, is definitely swimming naked...
Falcone doubled his investors' money betting against subprime mortgages. In 2007, as the mortgage market began crumbling, Falcone managed $26 billion – making him one of the largest hedge-fund managers in the world. After a home run, it's difficult for some hedge-fund guys to operate normally... How do you go from returning hundreds of percent one year to a "mere" 15%-20% the next?
Falcone, as other hedge-fund managers in his position sometimes do, ratcheted up risk and increased his position concentration. He invested $3 billion in LightSquared, a company with plans to build a high-speed broadband network to serve some 260 million Americans. He got crushed... Then, things got weird.
In 2009, Falcone borrowed $113 million from his Special Situations Fund to pay his personal income taxes. The Securities and Exchange Commission is now investigating this move.
Last year, his flagship fund fell 47% as he wrote down his LightSquared position from $3 billion to $1.5 billion. And last month, his main fund borrowed $190 million from investment bank Jeffries Group to help pay off a $400 million loan from UBS that came due at the end of January. He's paying 24% interest on that loan.
What kind of returns is Falcone expecting to be able to repay a 24% loan?
On February 14, the Federal Communications Commission (FCC) said it wouldn't let LightSquared operate because its signals interfere with global-positioning system (GPS) devices. This is after the FCC granted a preliminary approval last year for the company to build a high-speed network. So Falcone must take another write-down on his largest position.
Now, Falcone is trying to sell LightSquared's broadband spectrum to the Department of Defense... or anyone else who will take it. It's not worth much if the government won't let the company operate its business.
Bloomberg analysts estimate the spectrum is only worth $500 million ($1 billion less than its current market value) – that's the book value former owner SkyTerra Communications used when it was originally licensed... At the time, the spectrum could only be used by satellites (not land-based cell towers, which was Falcone's plan).
As of the end of January, Harbinger Capital Partners has only $4 billion under management. And $2.8 billion of that is in three positions. There's the $1.5 billion (at Falcone's valuation) in LightSquared. Harbinger also owns $648 million in Brazilian iron-ore producer Ferrous Resources. It's trying to sell its Ferrous stake to repay the loan from Jeffries.
The hedge fund also owns $645 million in Harbinger Group, a publicly traded company controlled by Falcone. Harbinger Group currently owns an insurer and Spectrum Brands, a consumer-product conglomerate that includes brands like Black & Decker power tools, Nature's Miracle pet food, and George Foreman grills. Falcone has said he wants to use Harbinger Group to make Buffett-type investments. Heads up, Phil... Buffett wouldn't buy LightSquared.
As the 2012 election nears, many of our readers who lean toward small government ask, "Does Ron Paul have a chance to win?"
Ron Paul, as you probably know, is a libertarian in the Republican Party. He's the only high-profile politician who is consistently against "big government" ideas like huge welfare programs, endless foreign wars, and deficit spending.
While we'd love to see Paul in the Oval Office, we know he has no chance. In a country where nearly half of the tax filers receive more in government benefits than they pay in taxes... the only way to get elected to the highest office these days is to promise these "tax takers" the wallet of their neighbor.
We agree with our friend and colleague Doug Casey's outlook for Ron Paul's candidacy. Here's what Doug said in the latest edition of "Conversations with Casey," his weekly interview series...
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It's a pity, because he's the only real antiwar candidate consistently polling at significant numbers – 15%-20%. He's also the only real voice for fiscal sanity, rolling back the police state, deregulating the economy, and many other positive things. But he's got no chance. He speaks fairly well for the libertarian minority in the U.S., but certainly not for the entitlement-mentality majority, and not even for the majority of Republican voters. |
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The Republicans have become the warfare party, and Dr. Paul doesn't fit in. The Democrats have long been the welfare party, so he doesn't fit in there either. It's just not going to happen for Ron – not because of any fault with him, but because the whole system is so corrupt and the electorate is so degraded. |
You can read the rest of Doug's interview (highly recommended) and learn how to sign up for a free subscription to Conversations with Casey here.
Another idea worth your time today... which comes from one of the smartest investors you've never heard of, Vitaliy Katsenelson.
Katsenelson is a contrarian, value-focused money manager and author of The Little Book of Sideways Markets… a book our own Dan Ferris has referenced several times in his advisories.
Yahoo Finance just interviewed Katsenelson on the topic of "cyclical" heavy-equipment stocks. Cyclical stocks are typically low-margin companies that boom when the economy is doing well and bust when the economy is not doing so well. Manufacturers of heavy equipment, airlines, and steelmakers are in this group. (An example of a "noncyclical" stock is Johnson & Johnson, which enjoys steady demand for its basic products like mouthwash, cough medicine, and Tylenol.)
Katsenelson is bearish on heavy equipment stocks like Caterpillar, Deere & Co, and mining-equipment giant Joy Global. These stocks have soared off their 2009 lows. Caterpillar, for example, is up more than 400% from its 2009 low.
And although these companies are growing earnings and appear relatively cheap (trading for around 12-15 times earnings), Katsenelson warns they could get crushed if austerity measures are taken in Europe and the Chinese economy slows. These companies could get hit with a double whammy of declining margins (which are high right now) and declining earnings.
Katsenelson is a smart guy. These stocks are soaring right now. But should the global economy experience a slowdown, they are vulnerable. You can watch the full interview here. (As an aside, Katsenelson is bullish on Microsoft.)
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New 52-week highs (as of 2/15/12): Enterprise Products (EPD).
In today's mailbag... Kudos from a subscriber. We're pretty sure no one here is related to Art, so you know what that probably means... Send your e-mail to feedback@stansberryresearch.com.
"I just wanted to say thanks to Dan Ferris for recommending the book F Wall Street by Joe Ponzio. I bought it right away and not only is it a quick read, but it's by far the best investing book I've ever read (book, not newsletter). Since subscribing to S&A, I've had the best year of returns of my life... thanks and keep up the good work!" – Paid-up subscriber Art
Goldsmith comment: Thanks for the kind words, Art. And just a reminder... anyone who wants an education on how to identify and value great businesses could do a lot worse than starting with F Wall Street.
Regards,
Sean Goldsmith
New York, New York
February 16, 2012