Long or short BP?... 'It's just too cheap'... Rattner in the WSJ... The best book for gold investing... More on the Prechter interview...
Markets hate uncertainty. And you can make a fortune trading off that uncertainty (take John Paulson and David Tepper making billions buying beaten-down financials as a recent example).
Today, no company's future is more uncertain than BP. The company's oil spill is ravaging the U.S. coastline. Wildlife, fishermen, and the tourism industry are suffering as a result. Goldman Sachs estimates the total cost of the cleanup (including reimbursements to damaged businesses) at $33 billion. The stock is down from $60 a share to under $33 in less than two months. Credit default swaps (insurance against default) are up 120 basis points to 380 today – that's up from 45 basis points in April.
Will BP recover from this catastrophe or will the liabilities prove too much for the English oil giant?
Energy investment banker Matt Simmons thinks the cost of the cleanup will sink BP. Yesterday, he told CNBC, "I don't think BP is going to last – at least not for more than a matter of months." Simmons is well respected by Wall Street. But he has a penchant for sensationalism (he says the best way to plug the spill is nuclear explosives). He also claimed Saudi oil production had peaked two years ago.
Other BP bears say the company will be forced to suspend its dividend, which costs $11 billion a year. The stock was down more than 15% today on fear of a suspension.
On the bull side, you've got fund manager Whitney Tilson saying BP is "just too cheap." Tilson is taking the classic contrarian stance that things can't get any worse for BP... Everyone is panicking, analysts are downgrading the stock, and the headlines are awful.
Tilson notes the company consistently earns more than $20 billion in annual profits. And the damages will be paid in pre-tax dollars. Adjusting BP's annual earnings for taxes, the company earns roughly $30 billion a year – enough to cover the estimated cleanup costs. The company also has more than $8 billion in cash. Plus, efforts to maintain the leak are starting to work.
Tilson also believes BP will maintain its dividend (now at a juicy 11%). He says the company is one of the most widely held stocks in Britain, particularly among "widows and orphans." Suspending the dividend would harm these people (and we know the government isn't in the business of making the "common" man suffer).
How should you play BP? The truth is, we don't know. But we do know that if BP survives, it will be trading at much higher levels in the next few years. And the dividend, assuming it's maintained, is a great bonus.
Porter's buddy, former Car Czar Steve Rattner, wrote an op-ed for the Wall Street Journal today. He talks about his speech at the Ira Sohn Investment Conference last month and the mysterious heckler in the crowd. Digest readers know the "booer" was our own Porter Stansberry, and we're damn proud (though it was embarrassing for me, sitting next to Porter, when the bellowing boo actually erupted).
In the article, Rattner says he wasn't sure if the clapping that followed Porter's outburst was for him or Porter... We assure you, Steve, it was for Porter.
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New highs: Hershey (HSY), San Juan Basin (SJT).
We're trying to persuade Porter to write a response to Rattner, taking credit for his outburst. You can send any letters of support – or goading – to feedback@stansberryresearch.com.
"For a year now i have been reading the debates on inflation vs deflation. I told my sister my gut says Prechter is right. Doesn't Dyson hold on deflation as well? However Prechter and Porter are saying great inflation down the road and any body foolish enough to think Porter Stansberry won't have my money right where it should be when the usa debt goes down the tubes hasn't read him for very long. I have part of my port folio positioned for down the road and part for more deflationary right now. No matter I'm covered thanks to you guys!" – Paid-up subscriber JR
"I missed [the Robert Prechter interview]. Where can I get it?" – Paid-up subscriber Brian Lund
Goldsmith comment: Brian, you can view the Prechter interview here. Be sure to read it before Friday, when Porter will make his rebuttal in the Digest.
Regards,
Sean Goldsmith
Baltimore, Maryland
June 9, 2010