Iron ore producers are getting confident. They're now more willing to tie their fortunes to the spot market for iron ore.
For 40 years, iron ore has been priced based an annual contracts. That's all over now. Brazilian miner Vale and Anglo-Australian miner BHP Billiton have abandoned the annual benchmark system. Asian steel companies have signed shorter-term contracts with the big mining companies, with the pricing tied to spot market prices. Initial contract prices, at around $120 a ton, are about double the $60-a-ton contract prices in place for the past year.
I love this news. Higher iron ore prices will generate cash for the big miners. They'll use the cash to shop for new reserves... and do I ever have a slug of new reserves for them.
My No. 1 Extreme Value recommendation is a small company loaded with cash and securities and no debt, with the best management team in the industry... and which owns 46% of a huge iron ore deposit, one that's likely worth as much as $300 million. It'll also get a royalty once the deposit becomes a producing mine.
The whole company's market cap is less than $300 million today, and the iron ore is just one of a dozen different mining investments, any one of which could yield tens of millions of dollars or even $100 million. The company has nearly $11 a share of cash and investments and no debt. It's selling for less than $10 a share. Anybody who wants to own a great mining stock with massive upside potential that is also well-protected on the downside needs to learn about this stock right away. Click here to get access to the two full reports I've done on this stock over the past year, plus my detailed weekly updates.
My wife and I went out looking for a new house over the weekend. What I saw excited me.
The first house we looked at was high in the hills, in the best neighborhood in town. It was a split-level, 2,500-square-foot house on a one-acre lot with stunning views of the valley and surrounding mountains. The previous owners downsized and moved out... leaving a bunch of nice furniture behind, which comes with the house. There was a four-door Mercedes in the driveway, also included. Two or three years ago, you couldn't have bought this house empty for less than about $600,000, maybe more. Now you get it furnished plus a Mercedes. They're asking a little more than $300,000...
But just like every open house we went to, the realtors on duty at this place told us the asking price and immediately said, "But there's a lot of wiggle room in that." Wiggle room means if a house is offered at $350,000, you're not too embarrassed to offer $320,000 – and they're not embarrassed to seriously consider accepting it. The bid/ask spread is enormous, because the supply of homes is huge and growing. We drove up to one house and grabbed a flyer that said $408,000. In yesterday's paper, the same house was listed at $369,000.
The only problem with many homes here in southern Oregon is they're in short sale or foreclosure. Short sales take months to work out. There are auctions, too, but I don't have the big wad of cash you need to participate. We'll easily get more than I paid for our current house almost 10 years ago, and maybe rent for a little while, as we sort through the dozens and dozens of homes in our price range.
I'm seeing all these great deals because southern Oregon is one of the hardest-hit areas in the country. On Monday, Komrade Obama approved a $600 million "hardest hit" fund to try to stem the tide of foreclosures in Oregon, North Carolina, Ohio, Rhode Island, and South Carolina. Talk about closing the barn door after the horses got out...
The front page of the local Sunday paper said, "FORECLOSURE: The ongoing pain of those trapped by circumstance." Home prices in my little town of 17,000 have fallen 18% in the first quarter of 2010 versus the last quarter of 2009.
You can find distressed homeowner stories on every street around here, from comic to frustrating to tear-jerking. One guy hasn't made a mortgage payment in two years and is waiting to be thrown out. A stay-at-home mom and her three little kids had to move out because her husband just took off. We called up our insurance agent recently with a question about our coverage... to find that he'd recently committed suicide, overwhelmed by health concerns and financial difficulties. I don't know if his wife will have to move or not.
But my realtor expects our house to sell quickly. "Condition of the property means a lot these days," she told us. Many properties are in so-so condition or worse, because the owners were underwater, not making payments and essentially waiting to be thrown out.
So if your home is well cared for and in a decent neighborhood, you might actually sell your house in less than six months. Our house is perfect for a first-time buyer or an investor looking for a rental. And we'll have a huge down payment for our next place, plus interest rates are so low...
I spoke with a couple of local mortgage bankers recently. They said rates might come up after last week's jolt, but lately, it's been 4.875% on a 30-year, fixed-rate mortgage. I seriously doubt inflation won't beat the heck out of 4.875% over the next 30 years.
What a crazy system. Would you ever lend anyone money for 30 years at less than 5%? Or at any interest rate, for that matter?
I feel sorry for the folks who've suffered through little or no fault of their own, but I also feel more like a contrarian buying a house right now than I've felt in a long time.
And yet... I'm more worried than ever about remaining in the United States. I've complained about it a lot over the years: the taxes, the 10,000 laws and regulations, the overregulation and corruption that entrenches big corporations and crushes new competition, the violence against the citizens perpetrated by the FBI, ATF, and others...
But only recently, somewhat since 9/11 and much more since Komrade Obama took over, have I felt a constant worry the U.S. is rapidly approaching a tipping point, when it won't be able to get away with political, financial, legal, and literal murder anymore.
Our government has been way too fond of debts and deficits for most of my life. Our currency hasn't been on a meaningful hard money standard in my life (the gold exchange standard was too soft). Government has been way too fond of increasing taxation and regulation most of my life.
But I've never felt like I do now. Within months, Komrade Obama seized control of the auto, mortgage, and health care industries. He's promising to raise taxes on the most productive citizens. Most worrisome of all, capital controls may have been inserted into a recent stimulus bill.
It feels like the events I've read about in history books... events that led up to tragedies like WWII or the Russian Revolution. Maybe you can send me a calming note... or perhaps one that tells me I'm not alone at feedback@stansberryresearch.com.
Perhaps Steve Jobs will save us with his nifty mobile phone and Internet devices...
Mr. Market seems to think Apple is doing something right. Apple's stock hit an all-time high today of $237.48 – up more than 200% from its early 2009 lows. And the stock is up almost $40 since the January announcement of its iPad tablet, which debuts April 3. The $40 gain represents an additional $33 billion in market cap. I would never short Apple. You never know what they'll come up with next, and shorting the stock has been a losing proposition.
But an additional $33 billion of market cap for a product that's part iPod, part iPhone, part MacBook and costs nearly as much as a laptop seems rich. Morgan Stanley expects Apple to ship 2.5 million iPads in the first quarter and 6 million the first year. It expects Apple to make $0.25 on each unit sold. Assuming 6 million in the first year, that's $1.5 million in net income. Taking the $33 billion in additional market cap, that places a 22,000 multiple on those earnings. It's possible Apple's iPad will be a good investment for the next 22,000 years, but how do we test that thesis without divine intervention?
While the outlook is uncertain for the iPad, the move from desktop PCs to mobile devices of all kinds is unstoppable, and Apple's iPhone continues to dominate the mobile phone handset market. From the Wall Street Journal:
In 2009, iPhone sales globally rose 83% to 25.1 million, far outpacing the 20% to 25% growth in smart phones sales overall, according to Bernstein.
Also, news came out today that Apple may start producing an iPhone for phone carriers other than AT&T, which currently has the exclusive contract in the U.S. I don't know what kind of numbers that would mean for Apple. But as an AT&T customer (who switched from Verizon solely for the iPhone), I can say I will drop AT&T the minute the iPhone changes carriers. My service is terrible – I can rarely make calls inside my house – and my calls drop regularly. AT&T stock is down more than 1.5% today.
The World Gold Council (WGC) says it expects Chinese gold demand, for both retail and investment purposes, to double over the next decade – far outpacing China's gold production potential. A double in Chinese demand would equal about $29 billion annually at 2009 prices. Chinese gold consumption in 2009 was a little more than $14 billion last year, or 11% of global gold demand. Meanwhile, Chinese gold miners have already increased production by 84% over the last decade. But known reserves account for only 4% of total known global gold reserves. Given the huge demand and limited production capacity, the WGC predicts China will run out of gold in six years.
I love industry-marketing organizations like the World Gold Council. They often put out the most wonderful BS about future supply and demand. To give the WGC its due, a lot of people have made a lot of money with this sort of pitch. You can sell anything if you attach a number and a prediction to it. Makes it sound real and tangible and measurable.
But if I had a dime for every "we're going to run out of it in X years" story I ever heard that never came true, I'd have a lot of dimes. Whatever actually happens with China's gold demand, I promise it'll be different than the WGC's worthless 10-year forecast. If you're a trader, you'd probably be wise to take this as a minor bearish sign.
New highs: Fairholme Fund (FAIRX), Washington REIT (WRE), Financial SPDR ETF (XLF), Prestige Brands (PHB), Carpenter Technology (CRS), Rainey River (RR.V), Jinshan (JIN.TO).
Don't forget to send me a soothing letter – or an angry screed – here: feedback@stansberryresearch.com.
"After reading some of the responses to emails. I would comment to Mr. Morrison as follows. Part of what is wrong in America is people like you that roll over at the slightest contest of your ideals and ethics. Truth and facts are not negotiable, especially when it comes to the future of our country and all its people. If we all rollover at the behest of the opposition and supporting facts, we are writing our own epitaph. Mr. Morrison I suggest you rethink your comments and train of thought. Your position is part of the problem, not the solution. Please consider my points, and take no offense. I agree with Stansberry's position. It is one of ethics and moral fortitude, not pandering and weak minded acquiescence. Until we are united in this arena, we will be defeated! I do not agree with everything Porter writes or every part of their business methods. But, facts are simply that and the sooner we stand up for what we know is right, the sooner we have a chance against the onslaught of our way of life and economic system! Wake up before it is too late." – Paid-up subscriber Steve Baze
"You haven't let us down at all. This is in reply to Dolly and other drinkers of the fascist kool aid. Mr Obama certainly appears to be a fool who has no idea what he is doing, or the 'butterfly effect' of his & the demo stupidity. The unintended consequences include a crashed economy & a crashed currency. These people are insane, in my lay opinion. Their goal appears to be the deliberate destruction of this country so they can rebuilt a new workers soviet socialist state. it Did NOT work for the russians, and it won't work for them. Socialism has a very long murderous history and has NO business, on this continent. We may well end up in civil war, primarily because of fools like Dolly." – Paid-up subscriber Jim
Ferris comment: Yes, it does appear to be deliberate. I think Komrade Obama knows exactly what he's doing. I'm certain he sits around thinking about how to take over some other portion of the economy and how to sell it to us.
I've noticed that selling it to us has become less and less of a problem over the years. These days, the government does whatever it wants. Whether or not you like it is absolutely meaningless. You have zero redress. Your complaints and grievances have zero meaning to those who are alleged to represent you. We haven't had a representative government for a long, long time...
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
March 30, 2010Iron ore sea change... No. 1 Extreme Value stock... Home shopping in southern Oregon... "I feel like a contrarian"... A 4.875%, 30-year loan?!... Apple's new iPad at 22,000 times earnings... WGC's marketing in high gear...