Jeff Clark on S&A Radio... Fitch (NOT) ahead of the curve... World Dominators bailing out euro banks... Euro banks don't trust each other... Soros speaks...
Last week, Stansberry Radio listeners had a chance to hear S&A's own Jeff Clark join Porter to discuss his secrets to options trading and share his views (and potential favorite trades) for 2012. Jeff also offered some insight into how he was able to rack up an incredible 1,200% annualized rate of return on gold and silver trades last year. Due to overwhelming feedback, we've made Jeff's interview available as a standalone segment, which you can listen to here.
From its perch on the leading edge of financial thought, Fitch Ratings (one of the "Big Three" ratings agencies along with Moody's and Standard & Poor's) said it believes Italy is the biggest threat to the euro. Fitch cited the nation's unsustainable debt load, high borrowing costs, and the European Union's lack of a plan to keep Italy's crisis from spreading.
We would add to that near-double-digit unemployment (the government reports 8.6%... we bet it's much higher) and no growth prospects – unless you count Italian Prime Minister Mario Monti's "magic jobs." Oh, and the country's largest bank, UniCredit, is insolvent. All of this leads David Riley, Fitch's head of global sovereign ratings, to say his company will likely downgrade Italy by the end of January.
Fitch currently rates Italy an A-plus. So according to the ratings agency, an A-plus credit rating entails no possible way of repaying your debt, 7.13% borrowing costs, and the plan to sell another 440 billion euro in government bonds in 2012 – just to survive. An A-plus credit rating, in Fitch's mind, also exists solely on central bank subsidies (via direct sovereign purchases and loans to banks).
It's this last reason – European governments not bailing Italy out hard enough – that really scares Fitch. The lack of a "credible firewall" to keep Italy's contagion from spreading is "one of the reasons why we have Italy on watch negative, it's one of the reasons why when we conclude that review, there is a significant chance [Italy's] rating will fall," Riley said.
Sooner or later, assets wind up in the hands of those who know how to hang onto them. Banks are having trouble with that lately, so another richer and smarter group of organizations has begun to step in...
I (Dan Ferris) have been covering a select group of companies since late 2006: the World Dominators. These are companies – like Wal-Mart, ExxonMobil, Intel, Microsoft, and others – that dominate their industries, earn consistent profits, gush billions of dollars in cash flow every year, return billions of dollars to shareholders via dividends and share repurchases... and often have balance sheets loaded with excess cash.
A recent Reuters story says European banks are now borrowing from World Dominating companies, like Johnson & Johnson and Pfizer… These and other large companies have huge cash hoards and massive, steady cash flows. So even though they're not banks, they're able to lend into the repo market.
After touting the World Dominators for more than five years, I'm not at all surprised to find them bailing out troubled banks. I've pointed out again and again how many of these companies have huge amounts of excess cash, which makes them among the safest investments in the world. If I were suddenly thrust into a position of responsibility in a big troubled bank, I'd get on the phone to the most cash-flush World Dominators immediately.
Overnight deposits at the European Central Bank (ECB) hit another all-time high today of 481.93 billion euro ($613.4 billion)... That beats yesterday's previous record of 463.56 euro. European banks choose to deposit their money with the ECB overnight. As we explained in the January 4 Digest…
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Banks are constantly lending money to each other for short, set periods of time (most often, overnight). Banks are required to hold a certain amount of liquid assets at all times to insure against losses. At the end of the day, if a bank is short of funds, it will borrow that money overnight from another bank. On the flip side, some banks have excess liquidity (which is the case with some European banks following the ECB bailout), so they will lend that money overnight to the banks in need. |
Deposits hit a record high of 453 billion euro ($591 billion) today. This means banks are choosing the security of overnight deposits at the ECB (which pays 0.25% interest) over lending their cash on interbank markets (which pays 0.396%). In other words, banks don't trust each other...
If there's anything you hate more than bearish European commentary, it's bearish European commentary from billionaire investor George Soros. Allow me to catch our new subscribers up on our "Soros dilemma"…
In addition to our own market commentary, we also feature opinions from the world's greatest investors, like Bill Gross, Jim Rogers, Jim Chanos... and George Soros, who is one of the wealthiest investors in the world. However, whenever we feature commentary from Soros, our inbox is flooded with hate mail and claims that we're sympathizing with a liberal psychopath... We're not. We just think he's a smart investor. Whatever you think of his political pontifications (and we don't care much about them one way or the other)… he knows the markets and how to make money in them. With that being said...
Soros told an audience in Bangalore, India today, "The crisis in Europe is more serious than the crash of 2008." He believes the world faces the possibility of a "vicious circle" of deflation.
And how is Soros protecting himself? By buying gold. According to Securities and Exchange Commission filings, Soros Fund Management sold almost all its shares in SPDR Gold Trust (GLD) and iShares Gold Trust (IAU) in the first quarter of 2011. His timing was solid, as gold dropped from its highs and the dollar rallied. But Soros started buying again in late 2011, according to financial news site Emerging Money.
Soros seems to be anticipating that a spasm of global deflation will send the central bankers running for the printing press… sending more money to "solve" the problem. So perhaps he's betting on another round of quantitative easing. We are...
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New 52-week highs (as of 1/9 /11): Invesco Insured Municipal Income Trust (IIM), Pretium Resources (PVG.TO), Monsanto (MON).
If you hate George Soros and want to accuse us of being just like him (even though we resemble him in no way, shape, or form), we can't wait another minute to hear about it. Write us at feedback@stansberryreseach.com.
"I'm really new to your publications (I'm subscribing to a few of them) and reading everything – really trying to learn about investing, the markets, and all. I'm almost embarrassed to ask the following question, but something just isn't getting through my thick skull... How can Germany auction off bills at a NEGATIVE yield?? Is this fact not publicized? or do people not know? or am I really dense??? Why would someone buy something that's guaranteed to lose money? Please explain how a negative yield is a financial benefit for anybody (except the seller)." – Paid-up subscriber Evan Seelye
Goldsmith comment: In times of crisis, money flows to safety and liquidity. The market perceives U.S. Treasurys and German government debt as the two safest assets in the world. Therefore, when a bank or other large investor wants to "go to cash," it buys these assets. Unlike us, it can't simply stuff cash in the mattress – it has trillions of dollars. In severe cases, these investors are willing to pay a small percentage for the safety of holding these assets. In other words, they'd rather have a tiny, guaranteed loss, than the possible losses in every other asset in the world.
Ferris comment: Negative yields only benefit the seller. That's the point. When people are terrified, they buy in a frenzy, driving yields into negative territory. It's a pristine moment of extreme pessimism. The fact that anyone believes he's doing the right thing buying bills at negative yields is incredible.
"Frank Beckmann did a great service to his listeners in the interview with Steven 'Rat-fink' Rattner. I only wish that he was deposing him as a hostile witness in court for the horrid job he did trying to 'run' General Motors. I know his predecessors like Roger Smith and Rick Waggoner were accused of incompetence, but this knave was far worse; he aided and abetted a criminal act involving the bankruptcy of GM and Chrysler.
"Steve Rattner's next job should also involve the auto industry, but in a different capacity. He should be making license plates. Until then, he serves the same purpose as a horse's a**." – Paid-up subscriber Kevin Beck
"Male model BLOWOUT!!! Yes I have been drinking. A lot!!!! GOOGLE ME. I been modeling 12 years!!!!! I have never heard anyone as smart as Porter S. BOOOOOOOM.
"I am sooo tired of the public and all the stupid people believing all the nonsense of the Gov't scams and all the pumps. I can't wait for the truth to all come out and prove all these crooks wrong.
I have been trading for years and I really appreciate your newsletters and insight of your amazing team. Thanks and I hope to meet you one day Porter. I know miami better than you!!!! Hahha. BOOOOOOOOOOOOM." – Paid-up subscriber BK
Ferris comment: Cheers, BK.
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
January 10, 2012