Here's a conflict that will be interesting to follow...
Paul Krugman, the famed-economist, New York Times columnist, and government apologist, says we have nothing to fear from the Fed's massive inflation of its balance sheet. Krugman, who gets paid to write columns, is opposed in his position by an entire host of legendary speculators – men who get paid to make money in the markets. These real-life experts (Paulson, Einhorn, Rogers, and your humble editor) believe America has entered into a new period of rampant monetary inflation. Recently joining the ranks of the inflation camp: Nassim Taleb, the brilliant mathematician and author of Black Swan, whose $6 billion hedge fund is now primarily positioned to capture inflation-related gains, including shorting U.S. Treasury bonds. (We recommended the same trade to our subscribers last December... and we're up 21% already.) Who do you believe will be proven right, dear subscribers? The academic policy wonk who writes for the New York Times or the moneygrubbers?
As you know, GM officially declared bankruptcy today. Having written extensively about this topic for two and a half years, it's clear by now where we stand on the issue. As for the government's plan... look out below. Right now, GM is operating at a capacity utilization of 34%. The industry as a whole is operating at about 40% of capacity. Thus, even if half of the remaining factories closed, the industry as a whole would still struggle to break even. Meanwhile, even without its debt load, GM will not be competitive with nonunionized carmakers (Toyota, Honda). Having the government as a shareholder will certainly not help the company make rational economic decisions. I predict the new GM will be bankrupt (and liquidated) within 10 years.
The Dow Jones industrial average (DJIA) is dropping GM and adding Cisco Systems in its place. Dow Jones added Cisco "because its communications and computer-networking products are vital to an economy and culture still adapting to the Information Age – just as automobiles were essential to America in the 20th Century," according to Wall Street Journal Managing Editor Robert Thomson. Only General Electric has been a Dow Jones component longer than GM – it has been in the index since its inception in 1896.
Value investing legend Seth Klarman of hedge fund Baupost Group recently spoke at the annual Graham and Dodd Breakfast, saying long-term investors have lots of good opportunities. "When people start to give something away at a ridiculous price because they have to, not because they want to," Klarman said, "that's a good time to buy."
Klarman is buying distressed debt. He said there's currently a great deal of financial distress. But it's highly concentrated in the financial sector and just starting to creep into industrials. Meanwhile, the commercial real estate market is "completely frozen," but sellers aren't urgent because they're solely focused on residential real estate and have not been forced to realize commercial losses yet. (Dan Ferris has been saying much the same thing. See his research on MetLife in Extreme Value, for example.) You can read Klarman's complete commentary here...
This is the type of investing environment our bond analyst, Mike Williams, waits for. Mike, our most senior analyst, who also earned a CFA designation, exclusively recommends distressed bonds in his advisory service, True Income. Distressed bonds are the lowest grade of speculative-grade debt. The market views companies that issue these bonds as having a high risk of bankruptcy. But if you can accurately value the company's assets as more than its liabilities, you can collect 100% of your investment even in the case of bankruptcy. In a best-case scenario, you will collect double-digit yields and make hundreds of percent in capital gains when the bond matures.
Because the markets were so volatile this past year and no banks were issuing credit, investors expected distressed companies to default on their bonds... But fears were overblown, and now you can buy these bonds for pennies on the dollar and collect huge yields.
Among the bonds Mike has recommended this year, one is up 99% already. Others have posted healthy gains, too – up 19%, 8%, 17%, and 32%. And all of these bonds have years left until maturity – meaning there are years left of safe, double-digit yields and capital gains. An opportunity like this comes maybe once a decade. We urge you to take advantage. To learn more about our bond letter, True Income, click here...
Doc Eifrig came over to the house last night – it was a perfect spring evening. I'd picked up the first fresh sockeye salmon of the season. We tasted four different rosé wines Doc had gotten from his wine shop in Durham while we made grilled sweet pepper hash and a spinach salad with almonds, goat cheese, and Doc's secret apple butter vinaigrette. Then, under the stars, I grilled the salmon with a few apple cores and some wood chips. We sat down to eat with a delicious Italian chardonnay – Fontanelle made by Banfi. Less than $20 per bottle and better than anything made in Napa. The weather isn't usually perfect in Baltimore, but it certainly was last weekend. Hope you're enjoying your spring, too.
An update on The 400 Club in today's mailbag. We're not sick of idiotic responses. Send us one: feedback@stansberryresearch.com.
"I do laugh at the responses you generate with your points of view. But don't you get sick of the idiotic responses, or is it just that you hope some of us are paying attention...? It's no good yelling at Porter because he has a point of view. It is easy to say 'God... why can a guy as smart as Porter be such an absolute certified ass about energy, global warming and politics...,' maybe you should ask yourself, if a guy that smart has a problem with it, maybe I should figure out why. Any idiot can be a critic. Porter, why do you do it??? I know it's not just to make m
e giggle." – Paid-up subscriber Alan Scott
Porter comment: We publish almost all of the negative letters we receive because they're generally more entertaining (more colorful) and because we know transparency is a cornerstone of credibility. We don't have to hide from our critics. They make us think. (Sometimes they make us laugh.) It's the same principle that led us to publish complete track records each year in our Report Card.
"News on the 400 club would be appreciated... At this stage I'd just like to hear that 'yes' I'm on the list." – Paid-up subscriber Joshua Sharp
Porter comment: The 400 Club is still in the development stage. For those of you who've never heard us talking about it before, the idea is to create a global wealth club for very high net worth individuals. (Entry fee: $20,000.) The club would provide a network (via a private Facebook-like application) to facilitate member-to-member communication. The club's staff would gather information and resources on international asset protection, provide other member benefits, like luxury travel assistance, concierge services, food and wine referrals, host meetings, and sponsor luxury adventure travel. The staff would also facilitate member-to-member communication by publishing a monthly members' deal and activity book. The club will operate as a nonprofit entity, so the fees and dues will be used for the benefit of the members.
We are developing the club because it's something I personally want to join... and to my knowledge, nothing like it exists.
Over the last 10 years, I've built a pretty extensive personal network of contacts. In most major cities, I "know someone." That means I can find out where to stay, where to go, and I can generally get treated as a local – with the respect I'd normally receive at home. Whether you happen to travel a lot or not, knowing someone "in the deal" or having access to a wide network of interesting, qualified, likeminded people can be very satisfying. How many times in your life has knowing the right person led to an important achievement? For me, I can honestly say everything I've accomplished in my life came about because of a relationship I developed.
For the last six years, I've spent more than $100,000 each year hosting a private conference – probably close to $1 million in total. It's our Spring Editors' Conference, but I actually invite a handful of my best contacts. My business partners do the same. We introduce our friends to each other and spend three days just talking about our current business efforts, the books we've read, the places we've gone, and new friends we've met. Does spending this much money each year on a networking event make sense? Besides being the most enjoyable three days of the year for me, just one idea from this meeting in 2003 led to well more than $10 million in revenue for my company. I have certainly not been the only beneficiary either. I know other participants at this meeting have made millions from the ideas we've shared.
Most people don't understand how important developing these relationships can be. And that's why I'm so interested in building a larger, slightly more formal network of friends and contacts. So we're going to start the club by "stocking" it with most of my best contacts. And we've reached out to several people we know well who also have extensive, global business networks. By drawing all of these people together, we believe we can launch with 40-60 extremely wealthy, knowledgeable, and experienced people – all of whom would be worth getting to know individually.
You can think of it as a kind of virtual country club... except instead of meeting the local doctors, lawyers, accountants, and dentists, you'll be meeting people with a far more global perspective and with a definitive libertarian orientation. Whether that's interesting to you (or worth it to you), I can't say. But... for me, the creation of such a group is the most exciting thing I've considered in a long time.
As to whether or not you're "on the list," I don't know... there isn't such a list yet. We are collecting the names of people who may be interested in joining the club. (To put your name on the list, just send us an email: feedback@stansberryresearch.com.) At some point over the next few months, we'll launch the club and develop the criteria for membership.
"I agree with your bullish stance on gold, but only in the longer term. Short term, it is actually underperforming by a metric I will describe: If you compare the increase in gold price to the declining dollar, you will find that the dollar index is depreciating at a faster rate than gold is increasing, indicating an underlying decrease in momentum in gold. We cannot analyze and chart gold in a vacuum... it can only be evaluated by 'comparing' it to something else. Thus, I believe gold will fail at or near recent highs. This is for the short to intermediate term. Longer term, Washington DC is making it obvious that gold will be bullish." – Paid-up subscriber Robert Bloch
Porter comment: I've honestly never cared about the price of gold – as measured in dollars – nor have I ever been interested in trading gold. In fact, I've never sold a single ounce of gold, though I have given some away as a gift. Understanding gold has always been easy for me, intuitive even. It's the only sound, private, stable, and universally accepted form of money. An ounce of gold is no one else's liability. It's easy to hide, easy to transport, and easy to divide. It doesn't generate a yield, which means you don't have to report it to the U.S. Treasury (or anyone else), no matter where you decide to keep it. It will not tarnish. And the U.S. government can't print more of it... no matter how hard it tries.
In my mind, the battle between the value of the dollar and the value of gold is simple. Gold stands for honesty and permanence and has for all of recorded human history. It is the physical manifestation of truth. There has never been a single time in all of history where an ounce of gold failed anyone, ever. Paper money, on the other hand, stands for fraud and deceit. It is the physical manifestation of a lie. And it has been for all of recorded human history. There isn't a single historical example of a paper currency that didn't fail everyone who held it.
So why would you bother trying to figure out the relative value (the current price) between the two? That's like asking how many lies is the truth worth?
Regards,
Porter Stansberry
Baltimore, Maryland
June 1, 2009