In the heart of the Ukraine crisis...
In the heart of the Ukraine crisis... What Kim Iskyan saw made him sick to his stomach...
Editor's note: The Digest team is in New York City for the Grant's Interest Rate Observer Conference. It's one of our favorite events of the year. We'll update you on the conference as soon as we're able.
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We sent our editor into the heart of the Ukraine crisis...
S&A Global Contrarian editor Kim Iskyan spent a week on the ground in Ukraine. He returned home safely over the weekend.
Consider the risk Kim took visiting the country, which is still very much in the middle of (escalating) chaos.
Just yesterday, a Russian soldier reportedly shot and killed a Ukrainian soldier in Crimea. And pro-Russian forces stormed government buildings in eastern Ukraine, despite Putin saying he would stop at Crimea.
The news sent Russian stocks tumbling nearly 3% yesterday.
We recommended Russian stocks last year because they were some of the cheapest in the world, with a price-to-earnings ratio of 5.6 (compared with around 17 for the U.S.). After the Russia/Ukraine controversy erupted, Russian stocks started tanking. We stopped out of our positions.
The market fell further after the U.S. government ordered sanctions against wealthy Russian business owners... And then fell further after yesterday's news. The lesson is a familiar one for regular Digest readers: cheap can always get cheaper. It's dangerous to try to catch a falling knife, especially in an emerging market in the midst of civil unrest.
That reminds me of an old investment joke our friend and fund manager Meb Faber told me. "How did that investment decline by 90%?" he said. "It went down by 80%, then got cut in half."
Without further ado, Kim's notes from Ukraine...
Last week, I (Kim) visited Mezhyhirya (pronounced mezh-ee-ghee-ree-ya), the 340-acre leisure compound that belongs to Viktor Yanukovych, the ex-president of Ukraine who fled the country in late February. This property doesn't belong to the state. It belongs solely to Yanukovych. I've heard a lot about how corruption has been the cancer that has weakened Ukraine to the point where the Russian army could waltz in and take Crimea like it was a penny on the sidewalk.
I didn't truly understand it until I visited Mezhyhirya and its palatial main house, helicopter pad, floating-pirate-ship dining hall, and million-dollar greenhouse. More than $30 million was spent on renovations from 2006 to 2009...
Let me put it this way... this is a place that Donald Trump would find over the top. I'm no bleeding heart. I respect the profit motive as much as the next guy. But wandering around this monument to excess, greed, and graft made me sick to my stomach. Remember, this is in a country where the average person earns a bit less than $300 per month. Twenty minutes outside of Kiev, the country's capital, people live in shacks. And then there's the president, leading by example...
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So it isn't just him... the culture of corruption is going to destroy the country. I lost count of all the luxury-car dealerships I saw in Kiev – Bentley, Aston Martin, Mercedes, Range Rover, and Lexus. Although I couldn't confirm it, one person in a position to know told me that more Porsches are sold in Kiev than in any other city in the world.
In Ukraine, it's not high-flying lawyers or doctors or small business owners who have some kind of luxury-vehicle fetish. Doctors make such little money here that you need to pay them quiet cash to get any care at all. (To be fair, this is true in a lot of other countries in the former Soviet Union.)
Government officials own the Audis and Range Rovers that fly through crosswalks in Kiev. The minister of education doesn't go anywhere without a stream of black Range Rovers. One person told me that in recent years, half of Ukraine's GDP has been stolen by a group of five people... And if people at the top do it, you can bet that anyone else who can, will, too.
It has gone too far. Gross incompetence and massive corruption have left Ukraine without a legitimate military. Most people here think it's a question of when – not if – Russian President Vladimir Putin will make a play for another chunk of Ukraine. "They could reach Kiev [125 miles from the Russian border] and take it without firing a shot," one guy told me.
The country is on the edge of bankruptcy... and no one knows how it will pay its gas bill to Russia. The currency has devalued 36% since the beginning of the year. The most recent head of Ukraine's tax ministry fled the country when the president left... He was only able to get into Russia after a shootout with Ukrainian border police.
Could it get any worse for Ukraine? It can always get worse... it has only gotten worse ever since the country's independence from the Soviet Union 23 years ago. The revolution in 2004 didn't change much of anything.
This time, it might be different. Those are famous last words, but Ukraine may finally be close to rock bottom. At an investment conference in Kiev last week, I saw the leading presidential candidate, the prime minister, the finance minister, and a few deputy ministers in the tax ministry speak... And even though the bar is pretty low, I was impressed.
The International Monetary Fund is likely going to release funding for the country. The European Union may understand it's time to step up to help. One of the largest Ukrainian investors told me he thinks there's a very good chance that a few years from now, we'll look back to these days in Ukraine as a major turning point. Of course, he's talking his own book... and there are a lot of things that could go terribly wrong. But I think he's right... it's worth keeping a close eye on Ukraine.
New 52-week highs (as of 4/7/14): Vocus (VOCS).
In today's mailbag, two subscribers jump to our defense amidst accusations that we "front run" our own recommendations... Send your thoughts to feedback@stansberryresearch.com.
"I'm sure Mr. Feinerman's accusation will generate a significant amount of negative feedback towards him, so I'll add my thoughts. In short, if all he does is read the recommendations and act on them when he receives them, he has not learned to look for the opportunities in the market. If Mr. Feinerman thinks that S&A analysts are the only individuals watching the trades and investments they recommend, he has not read the materials on how to assess companies or structure trades for himself. I doubt he thought to sell the March $37 KO put options on 18 February 2014. Although that wasn't a specific S&A recommendation, I would have been happy to see that recommendation or one similar to it as it would have validated that I'm learning to think about what I do in trading and investing." – Anonymous
"I would like to respond to Michael Feinerman's comment and accusation by saying that I rarely am unable to buy into your stock recommendations, and I always buy well below your 'buy up to' price. Sometimes it takes a few days or weeks, but I can almost always get into a stock I really want to own. Sure, occasionally one gets away from us, but there are many trains leaving the station and as Doug Casey likes to say, 'You can't dance with all the girls.' Option prices can move up quickly due to a burst of open interest resulting from a reco, but it is almost always possible to find a suitable alternative contract at a slightly different strike price or expiration date. Again, I rarely have trouble getting into a trade I really want in on.
"The accusation about 'front-running' is ridiculous. If you were buying shares ahead of us, first of all you would buy your shares in the days or weeks before publishing the recommendation – before the price went up – not after the reco. Further, the 'front-running' activity would result in a one-time spike in volume and price that settles back in a day or two since there would be no sustained buying. What we usually see on thinly traded shares is that your recommendation moves the price up sharply the next day, with sustained buying from your large subscriber base for two or three days maintaining price pressure. But absent external price movers, eventually the shares drift back and we can buy at more attractive prices.
"The services Stansberry provides are of such significant value, and offered with such a high degree of professional ethics, that it is hard for me to understand the negative comments and accusations you get. It seems some people are never satisfied. For my part, I have the utmost respect for your entire team, and thank you for truly trying to help us become better investors." – Paid-up subscriber Paul Hoffman
Regards,
Sean Goldsmith and Kim Iskyan
New York, New York and Fairfax, Virginia
April 8, 2014
New York, New York and Fairfax, Virginia
April 8, 2014
How private-equity firms choose what houses to buy...
Yesterday, we featured insight explaining how private-equity companies first got into the housing trade.
We continue today's Digest Premium with a step-by-step discussion of the single family home buying process from a "big money" perspective...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
How private-equity firms choose what houses to buy...
Editor's note: Yesterday, we featured insight from George Huang, a former S&A colleague who now works as a founding partner at Bridge Tower Partners, a private-equity firm focused on single-family housing. George discussed how his company first got into housing... and explained why Dallas was such an attractive real estate market. Today, he explains the process from an institutional perspective...
My firm is on all of the bank's lists for foreclosures.
We get e-mails every day about auctions or foreclosed portfolios. We typically start the process by screening those homes. We screen about 50 to 100 homes a week. We look at replacement costs and rent yield in the comparable areas. Then we narrow that list down to usually around 10%-20% of the homes that we screen a week.
From there, someone at our firm or our realtors will physically walk through the property. We estimate necessary repairs and place our bids. We're currently bidding on about five homes a week and purchasing one to three homes per week.
Once we go under contract, we send our inspector for a detailed inspection. It only costs us $200 per house because we do it in bulk. But it saves a lot of money on the back end if there are costly repairs we didn't see on our walkthrough.
Our typical house is listed for around $150,000. We try to purchase the home for no more than $110,000. We're able to get these prices because these homes have significant cosmetic issues. They're usually dirty and could have dead animals inside. That scares retail buyers away. Also, typically in the South – and especially in Texas, because of the clay soils – a lot of these homes have significant foundation issues, so the house actually moves... So we see lots of tilted houses or cracks in the ceilings and the moldings.
While these issues are ghastly to look at, they're easy to fix. We spend no more than $15,000 on the property. So we will buy a $150,000 home for $110,000 and spend $10,000-$15,000, and sometimes a lot less, to fix it up. Overall costs average around $120,000 per property.
It takes us about 10 days to close and about two weeks to fix it up... It's about four weeks until we list the property. And the average time it takes us to rent one of our properties is about 17 days. So our turnaround is pretty quick. So from the day we bid until the day we get our first rent check is typically just under eight weeks.
A couple realtors get the bulk of our business. We have a realtor in every suburb of Dallas who does our renting for us. And they get paid a percentage of the monthly rent. We incentivize some for finding renters quicker.
So for our homes (a $150,000 property we're purchasing for $120,000), we can typically get a monthly rent of $1,400-$1,450. That's an excellent return for our cash. And we are still able to find those deals today.
– George Huang
How private-equity firms choose what houses to buy...
Yesterday, we featured insight explaining how private-equity companies first got into the housing trade.
We continue today's Digest Premium with a step-by-step discussion of the single family home buying process from a "big money" perspective...
To continue reading, scroll down or click here.
Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)
As of 04/07/2014
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Prestige Brands | PBH | 05/13/09 | 327.3% | Extreme Value | Ferris |
| Constellation Brands | STZ | 06/02/11 | 280.4% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 278.5% | The 12% Letter | Dyson |
| Ultra Health Care | RXL | 03/17/11 | 225.0% | True Wealth | Sjuggerud |
| Ultra Health Care | RXL | 01/04/12 | 183.9% | True Wealth Sys | Sjuggerud |
| Altria | MO | 11/19/08 | 180.9% | The 12% Letter | Dyson |
| Hershey | HSY | 12/06/07 | 176.0% | SIA | Stansberry |
| McDonald's | MCD | 11/28/06 | 174.8% | The 12% Letter | Dyson |
| Blackstone Group | BX | 11/15/12 | 143.6% | True Wealth | Sjuggerud |
| Automatic Data Proc | ADP | 10/09/08 | 140.4% | Extreme Value | Ferris |
Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals |
| 3 | Extreme Value | Ferris |
| 3 | The 12% Letter | Dyson |
| 2 | True Wealth | Sjuggerud |
| 1 | True Wealth Sys | Sjuggerud |
| 1 | SIA | Stansberry |
Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)
| Investment | Sym | Holding Period | Gain | Publication | Editor |
| Seabridge Gold | SA | 4 years, 73 days | 995% | Sjug Conf. | Sjuggerud |
| Rite Aid 8.5% bond | 4 years, 356 days | 773% | True Income | Williams | |
| ATAC Resources | ATC | 313 days | 597% | Phase 1 | Badiali |
| JDS Uniphase | JDSU | 1 year, 266 days | 592% | SIA | Stansberry |
| Silver Wheaton | SLW | 1 year, 185 days | 345% | Resource Rpt | Badiali |
| Jinshan Gold Mines | JIN | 290 days | 339% | Resource Rpt | Badiali |
| Medis Tech | MDTL | 4 years, 110 days | 333% | Diligence | Ferris |
| ID Biomedical | IDBE | 5 years, 38 days | 331% | Diligence | Lashmet |
| Northern Dynasty | NAK | 1 year, 343 days | 322% | Resource Rpt | Badiali |
| Texas Instr. | TXN | 270 days | 301% | SIA | Stansberry |