Today's mailbag features a detailed discussion on how the Troubled Assets Relief Program (TARP) really works. Don't miss it.
George Huang did it again... After market close on Monday, Endo Pharmaceuticals offered to acquire FDA Report pick Indevus Pharmaceuticals (IDEV) for $370 million in cash – a 45% premium to its closing price. FDA Report readers have locked in a 73% gain (some readers made as much as 200% on the stock). This is an amazing return, especially in these markets. In addition to huge gains with the Indevus trade, George has recommended winners returning 27.5%, 25.5%, and 67.9% in the past three months. He has definitely proven his FDA Report trading strategy is bulletproof, and he is giving super-trader Jeff Clark a good challenge. To learn more about the S&A FDA Report, click here...
The final beacon of real estate strength, Manhattan, is starting to crack. The average price of residential units that are under contract but haven't closed yet fell 20% since August 2008, according to Miller Samuel Real Estate Appraisers. Another report from real estate firm The Corcoran Group said transactions in the fourth quarter fell by as much as 53%. And to top it all off, the inventory of homes for sale increased 39% in the fourth quarter from a year ago... Looks like bigger declines are coming soon. Keep your eye on SL Green (SLG) – the largest commercial real estate landlord in Manhattan.
Automatic Data Processing (ADP), one of the largest payroll processors in the world, released its numbers for December job cuts. Once again, they were larger than anyone predicted. Private employers cut 693,000 jobs last month, up from 476,000 in November and far more than the estimated 473,000 cuts.
Alcoa (AA), the world's largest aluminum maker, said it will lay off up to 16,000 employees, around 15% of its workforce. It will also reduce capital expenditures by 50% and cut an additional 135,000 tons of smelting capacity – on top of the 615,000-ton reduction announced in October. The 750,000 total tons represents about 18% of the company's production.
Alcoa's move is similar to that of Freeport-McMoRan (FCX), the world's largest copper producer, when it cut production in December. While production cuts sound bad, it's actually a prudent move for the companies. Aluminum and copper are down around 50% and 60%, respectively, in one year. It doesn't make sense for Alcoa and Freeport to crank out maximum output at these depressed prices. Instead, they'll take supply off the market, wait until prices gradually rise, and then increase production again. Of course, it's a giant cycle, and we'll see the same crash in the future.
Some businesses are thriving in this recession... Family Dollar Stores (FDO) increased first-quarter net income 14% amid sales and margin gains. The company raised its annual earnings estimate to $1.81 from $1.63 a share. Family Dollar shares are up 72% in one year.
New highs: not today.
In the mailbag, a question about Miami condos, which led to a discussion of how the TARP really works. We'd love to know how you feel about your tax dollars being used to cover up the mistakes of crooked banks and developers. Let us know here: feedback@stansberryresearch.com.
"I spent New Years in South Miami and couldn't help but notice the skyline has drastically changed. I could only count ONE crane dotting the skyline. What will happen to all these condo projects that are not complete? A quick look at the listings in the front window of a real estate office had multiple photos of ocean front condos starting at $2million for 985 sq. ft. Is this wishful thinking or are there some bargains out there?" – Paid-up subscriber J. Moon
Porter comment: Yes, you can find great opportunities. Earlier this week, an investor group bought 60 condos at Marina Blue, a brand new luxury building in a prime downtown location across from the new arena. The investors paid $13 million, which works out to $200 per square foot. This is far below construction cost, which was around $400 per square foot, and suggests the developer, Jim Clark's Hyperion, was probably wiped out. Yes, that's the same Jim Clark that founded Silicon Graphics, Netscape, and Healtheon – all of which ended up being sold to the public at absurdly inflated prices, making Clark a billionaire and thousands of "investors" much poorer.
Clark seems to have a nose for bubbles, doesn't he? From tech-stock promoter to Miami condos, anyone who buys anything from Jim Clark is a fool. Lending him money seems an even bigger mistake...
And that's what Corus Bankshares did. Corus gave Clark's Hyperion something close to $1 billion to build this condo. It will get back around 50 cents on the dollar. Corus Bank
made the biggest, dumbest loans of any bank in the country during the real estate bubble: It put almost all of its assets into condo-development loans and concentrated its bet in the worst bubble markets, like Miami and Vegas. Taxpayers should pay attention to what Corus has done since the bubble burst.
First, in the middle of 2007, recognizing the game was over, Corus decided to pay a special dividend of $1 per share ($57 million). Why would a bank staring at huge losses choose to spend $57 million on a special dividend? Because Corus is controlled by the Glickman family, which owns more than 40% of the stock. In other words, seeing tough times ahead, the family pulled more than $20 million out of the bank.
Then, Corus took care of its employees. In late 2007, for the first time ever, Corus allowed its loan officers to receive bonuses for mortgages that had not yet been repaid. Thus, before the bank got its money back, its executives were paid their bonuses as if the loans had been repaid.
About a year later, Corus was "deferring" paying interest on its obligations – a move that should have sent the bank into the hands of the FDIC. But thanks to the government's TARP program (our tax dollars), Corus hasn't been liquidated, its depositors continue to collect among the highest savings-account yields in the country, and the Glickman family still controls the bank.
"What will be the impact when Japan, China, and the other BRIC countries stop buying all the U.S. dollars that the treasury created out of thin air?" – Paid-up subscriber Frank
Porter comment: It is impossible to accurately forecast the repercussions of a shift away from the dollar as the world's reserve currency. But... I'd suggest looking at what happened in countries like Argentina and Iceland when, suddenly, foreigners became unwilling to extend any additional credit. It's not pretty.
"With many commercial property REITs facing huge impending interest and principal payments from their borrowing of the last few years, is the ProShares UltraShort Real Estate ETF (SRS) a good way to take advantage? It seems like most real estate-related stocks and the REITs are already at rock bottom prices, and yet this index was over $200 a few months ago, but now trading in the $50's. I invest out of my IRA, so I can't (easily) short individual stocks or ETFs. What's the best way to take advantage if we believe your prediction that dozens of them will go belly-up throughout the coming year." – Paid-up subscriber Tim Hoffmann
Porter comment: The SRS ETF is based on the Dow Jones Real Estate Index, which contains some of the best-capitalized real estate companies. For example, Annaly Capital Management (NLY) makes up more than 5% of the index. Annaly is a great stock to own, as we've covered in our letters several times. There's no way I'd want to be short Annaly with mortgage spreads as wide as they are right now.
My point? There are huge discrepancies in the capital structures of different real estate firms. Some – for example General Growth Properties – cannot earn enough money in rents to even pay their interest expenses. Others, like Annaly, are making a killing right now thanks to the wide mortgage spreads. So when it comes to shorting real estate, I think it pays to be very selective and not rely on ETFs.
"How does buying precious metals help me? Jeff Clark says 99-cent stores will be 99-dollar stores overnight. So if I bought platinum for 99 cents before the change, will I be able to sell it for 99 dollars afterwards? If I have $100,000 in savings and need to draw out some each month because I'm retired and my pension doesn't cover my expenses, how does the platinum help me? How do I get at cash if my $100,000 is converted into platinum? And if Porter says to buy gold and hide it, how does it help me pay my mortgage or buy my groceries? I just don't understand the practical nature of using precious metals in commerce. [I DO understand that Iraqis thought gold was 'safe' until U.S. soldiers stole it from them. So how do I know precious metals won't be stolen from me also?]" – Paid-up subscriber James Wood
Porter comment: Well, how does owning stocks help you in commerce? The role of gold (and other precious metals) is as a store of value. Gold also happens to be particularly well suited as a medium of exchange – it's easily divisible and doesn't tarnish. You can exchange precious metals for cash at thousands of pawnshops or coin dealers in any major (or minor) city in the United States and around the world. You can also sell coins from almost any location around the world on eBay. If you're outside the U.S., you can exchange gold for currency (and vice versa) at major banks. (And I'd bet soon many U.S. banks will once again offer this service because it will become more and more in demand.)
I must say though... I feel very odd answering this question. Gold is the oldest form of currency known to man. I think most of our readers will be able to figure out how to use it. You wouldn't ask for directions on how to use a wheel, would you?
In regard to the government... look, those bastards already confiscate about 45% of my income (dollars), and they'll try to take half my estate when I die. I can't predict what they will try to take from me next. Gold is much easier to hide and a much better store of value than paper dollars. Just make sure you put it in a place where the jackboots aren't likely to find it.
Oh... one more thing... If you want to make it as easy as possible for the government to steal from you, just keep holding dollars or Treasury bonds.
Regards,
Porter Stansberry
Baltimore, Maryland
January 7, 2009