I don't like general terms like "infrastructure." You hear that word a lot when the subject turns to Asian economies. They need "infrastructure," we're told, so we should buy commodities.
Nothing is ever that simple, but I'm starting to figure out what "infrastructure" means here in India. For example, folks here generally don't use toilet paper (don't ask). Could you imagine what it would do to the plumbing under the city of Chennai – a city of 8 million – if everyone suddenly started flushing all that paper down the pipes?
"Infrastructure" is the reason they're building out the city of Chennai horizontally, not vertically. The population swells by millions every day, as people come to work. Nobody starts work until later – 10 a.m. in many cases – because it's too hard to get here before that time. These already jam-packed roads cannot stand a higher population density.
Chennai's population density, at more than 37,000 people per square mile, is more than double that of Tokyo and triple that of New York City. A tour guide told us today the Chennai gold and silver market we visited Tuesday is the busiest place on Earth, according to satellite pictures. More than 1 million people move through it every day! Many years ago, during my bohemian phase, I waited tables in Baltimore's Inner Harbor area. At that time, I was told half a million people visited the Inner Harbor – every year.
I'm not sure I believe a million people move through there in a day, but I can assure you it's a massive, swarming horde of humanity. We tried to wait outside a shop for our ride, but we had to keep moving because we were constantly in everyone's way. We wound up half a block away by the time the van arrived to get us.
People in Chennai are working to create better lives for themselves. They need stuff they don't have, important stuff like plumbing, electricity, roads... you name it. That's what everyone means when they talk about infrastructure in India and Asia in general.
Yesterday, we visited the enormous new seaport being built in the little coastal town of Krishnapatnam, about a three-hour drive north of Chennai. The Krishnapatnam Port has an exclusive 50-year concession on 12.5 kilometers (about 7.76 miles) of beachfront. That's a valuable asset in a place where you're not allowed to build anything within 500 meters (about 1,600 feet) of the high-tide line.
The Krishnapatnam Port has five berths (places for ships to dock and offload cargo) in operation today. Right now, the port only handles bulk cargos like iron ore and coal. Plans include full container-handling capacity. Once construction is done, it'll have 42 berths, making it one of the biggest container ports in Asia. Mundra Port, on the other side of the country, is built out at 28 berths. Singapore has 26 berths.
Yesterday, I stood right on a berth, a few feet from the water, a giant Chinese ship obscuring my view to the right, another ship right in front of us, turning 180 degrees in the port's huge 500-meter turning area.
We asked if we could come back to see the progress in a year. The port's customer service manager said we should come back in two months because it's being built out so fast. Two years ago, nothing was here. In another couple of years, I'm sure I'll barely recognize the place.
The new port is like the rest of the country. It's in a big hurry to get where it wants to go. I don't think it's a bubble or a mania, though. It's just a bustling, growing economy.
On either side of Krishnapatnam Port, a total of 11,000 megawatts of power generation is set to come online over the next few years. The port will handle all the coal. I know they need the power generation. The lights at the hotel went out three or four times over the past few days. The demand for more power is there, but the supply needs to catch up. We can pick nits about the power plants being in the neighboring state of Andhra Pradesh, not Tamil Nadu, where my hotel is, but the situation is the same all over India. The economy is growing rapidly, and that means roads, water systems, the power grid, and other so-called "infrastructure" components are strained and inadequate.
It ain't all roses here. We drove by a train station in Chennai today. It's a gigantic structure the size of a large department store or a big hotel... which has been abandoned. The building is enormous because it was intended to house a large shopping center as well. Nobody ever used the station... maybe because it's located a few hundred feet from another big station. The abandoned station is a huge eyesore in Chennai, a testament to the kind of corruption you often hear associated with India.
You hear a lot about "low-level corruption" in India. I'm not sure how bad that is, though... Think about it. You're driving. You're late for work. You go through a stoplight. A cop stops you. The fine is $20, but he says pay him $5 and he'll forget he saw you. You're not rich, so you pay, consider yourself lucky, and go on your way. I don't like it at all. It's not how I would choose it to be. But I wonder how harmful it really is.
There's a very good check on government corruption here, the best one I know of: A growing, thriving, totally free press. India has more newspapers than most countries. It has six national business papers, all profitable. There are also dozens and dozens of TV stations.
And the press here is independent. You can say whatever you want. You can say, "The prime minister is a moron," and you're fine. Try that in China, and your family might never see you again.
And try owning land in China. You can't. The government owns it, and the best you can hope for is a 99-year lease. India has a long, strong tradition of individuals owning land. The country has a fully developed, well-enforced legal system for land entitlement. When you drive the highway between Chennai and the port at Krishnapatnam, like I did on Wednesday, you see thousands of small land plots staked out with stones... miles and miles of them. People here like to own land, and banks won't lend money for it, so it's a 100% cash market. No bubbles in this property market.
I don't want you to think the comparisons between India and China are really necessary. But I've read things that suggest China is a wonderful place to invest, and India is terrible. That's way too simplified a viewpoint. It shortchanges India and overstates the case for China.
India's got plenty going for it. Aside from a free press, India is a more entrepreneurial culture than China... or anywhere else. Plus, the whole country speaks English. Not so in China. Jim Rogers says learn Mandarin. I say English is the global language of business now and for a long time to come. The folks in India speak it as well as any country in the world.
And the people seem to value education highly. People will tell you an Indian parent will do whatever it takes to get his children educated. He'll eat one meal a day... whatever it takes. They're fanatical about it here.
One thing I don't sense here in India: A pervasive, gloomy feeling that the country is going to hell in a handbasket, like in the United States. I feel an underlying sense of joy in living, even among the plainest, poorest people. It may take some weird forms, like partnership agreements that make gods partners in a business. (If you're in business with a god, how can you lose?) But these people seem too happy to waste resources trying to rule the world, like the U.S. and others. India seems to want to get where it's going, do what it needs to do, find a shortcut, get a better job... improve itself.
The darkest feeling I got about India was when I saw the abject poverty in some places, whether in rural areas or in the city. I won't go into detail, but I witnessed some heartbreaking scenes. But I rarely got the feeling you couldn't work like the dickens to get yourself out of poverty. There's social mobility here.
I'm high on India right now. We'll see how I feel about it a year from now, after I've learned more and maybe been back once or twice.
Gold shot up from $1,108.25 an ounce on February 26 to nearly $1,140 an ounce today. The precious metal hit a six-week high in dollar terms and all-time highs against both the euro and the pound. Much of that movement was likely due to a flight to safety from Greek's foundering economy and euro fears. But you can also credit some of the metal's rise to Eric Sprott, the Canadian, commodity-focused hedge-fund manager.
Sprott publicly listed his Sprott Physical Gold Trust (PHYS) last Friday, claiming only 13,686 ounces of gold owned and a market value of around $15 million. The fund now claims 286,870 ounces of gold, with a market value of $327 million. So in the past three days, Sprott added more than 270,000 ounces of gold bullion.
For the past two years, businesses have been mercilessly cutting costs, trying to bolster their balance sheets in case the economy kept declining. Now, the market is way up, everyone feels better and is sitting on loads of cash. The 382 nonfinancial firms in the S&P 500 were holding $932 billion in cash and short-term securities at the close of 2009.
Most managers don't like sitting on too much cash. Sitting on cash gives the impression a manager has nothing better to do with the money. And that's not the image a manager wants to portray to his shareholders, partners, or board. So firms are starting to spend their cash any which way they can.
Companies announced 62 share buybacks worth $40.1 billion in February, the biggest month since September 2008 (just before the market fell off a cliff). Buybacks rose 37% in the fourth quarter from the third quarter. And companies have made 79 dividend increases and only two reductions, compared with 58 increases and 41 reductions during the same period a year ago.
But the largest use of cash has been mergers. Year to date, there have been 1,619 announced deals valued at $184.84 billion (the average takeover premium is 47%). Of that, 55% of the consideration for those deals has been cash. That's up from 40% in 2009. The highest cash consideration in the past decade was 57% in 2007.
All this merger and buyback activity is strange. For months, the folks at TrimTabs, which tracks equity market money flows, have been bearish. They haven't seen much money going into equities. Now, they've noticed the uptick in what they call corporate buying (takeovers and buybacks), so their indicators are more bullish.
The way I see it, though, the overall U.S. market is trading close to 30 times earnings. I'm not really sure it's worth that much in the aggregate, though I admit the intrinsic value of some World Dominating franchises like Coca-Cola is easily 30 times earnings. If I were a smart soft drink mogul with an extra $100 billion or so lying around, I might try to take Coke private. Otherwise, as a small investor, I'd steer clear unless it got super cheap... and I'm having a hard time finding anything that's super cheap. I don't care about money flows. It certainly doesn't make me more bullish knowing more money is flowing into an already overvalued market.
New highs: Berkshire Hathaway (BRK-A/B), Powershares Dynamic Biotech Fund (PBE), Prestige Brands (PBH), Akamai (AKAM), Carpenter Technology (CRS), A. Schulman (SHLM), Northern Dynasty (NAK), Jinshan (JIN.TO), Rowan Drilling (RDC), Westmoreland Coal (WLB).
We were overwhelmed with the number of support letters we received regarding Porter's SEC case. We've chosen a few of the best to publish below. If you haven't already, be sure to read Porter's essay from yesterday. And you can send your comments to feedback@stansberryresearch.com. Please put "SEC" as the subject line.
"I was appalled to read the details of your litigation with the SEC. I am a graduate of Stanford law school. While I am not a securities lawyer, what you relate does not comport with what I know of securities law, nor do I see how the actions of the SEC that you have described serve one iota to protect or advance the interests of investors like me. Your publications, on the other hand, do protect and advance those interests.
"I am probably one of your earliest Alliance members. As such, I have read all of your company's research for many years and have regularly profited from the insights provided by same. I am a partner in a boutique law firm principally focused on matters relating to real estate. I initially became an Alliance member because of the work in your Extreme Value newsletter on companies with large holdings of land that were being undervalued by the public markets. Given what I do for a living, I understood the value of that research, invested accordingly, and sold when I started to see real estate deals getting stupid (i.e., underwritten not on the now, but on the expectation of ever increasing prices in the future with ever more exotic financing/leverage being used to target same). I profited handsomely from having done so.
"I have an undergraduate degree in economics and am a business lawyer. As such I regularly review and advise clients regarding private placements, joint ventures, acquisitions, dispositions and, in the old days pre-crash, development deals. I know what due diligence and thoughtful analysis are. Your publications all have them and have them in spades. I have, over the years, paid for other lifetime subscriber deals similar to the Alliance that have been offered by other publishing groups. While I have gotten value from all of them, I can safely say that the newsletters written by your stable of analysts have provided me with the best research of all of the newsletters that I read. There is no cheerleading, no momentum-based gee whiz, no ridiculous pie-in-the-sky me-too comparisons, etc. in your newsletters or research reports. Though I have never written in before, I am a huge fan. I would unhesitatingly recommend your publications to others and have done so.
"I would be personally harmed in my efforts to be an informed investor and to provide for my family by seeking to invest my savings wisely if I did not have the benefit each month of what you and your stable of analysts write. Please keep up your good work. It is a privilege for me to be a part of it. I would be happy to speak with anyone regarding how I feel about you and the business that you have built." – Paid-up subscriber Nick
"It is amazing what can happen when you don't have the right 'government' connections. I work for a relatively small broker/dealer. In 2004, we were sued by the [National Association of Securities Dealers] for selling our clients Enron bonds several months before the collapse. We did not have independent fixed-income research and all bonds were required to have an investment-grade rating to be recommended to clients (which was the case when the Enron bonds were sold). In other words we relied solely on the rating agencies.
"Did anyone go after the multibillion-dollar rating agencies who dropped the ball on their Enron analysis (and who subsequently went on to be one of the major factors in the real estate crisis)? No... They went after a small company they felt could be intimidated and chalk up an easy win. Luckily, we were purchased by a larger company, fought the charges, and won.
"Good luck with your case, I support you 100%. In our situation, we had customers who unfortunately experienced losses. I'm not sure who the SEC is trying to protect in your case. I've been a subscriber for a few years now and have been in the financial services industry for more than 15 years. Your research is among the best I've seen in my career. By the way... the person spearheading the campaign against us was Mary Schapiro (then vice chairman of the NASD). Who is John Galt?" – Paid-up subscriber Steve
"I am an investment professional of some 20 years market experience. I have traded for Hull Trading (bought by Goldman Sachs), Morgan Stanley, was a UBS O'Connor hedge fund manager, and most recently work for BBVA as a sales professional. I find Porter’s research to be excellent, well-reasoned and above all truthful. It is a pleasure to receive his golden grains of gumption where so much research these days is chaff. I look forward to many years of a business with this man through my subscriptions to Stansberry & Associates newsletters." – Paid-up subscriber Andrew Wilkins
Ferris comment: I'm proud to work for a guy who will not only take on the SEC, but tell the world what that agency is doing to innocent, law-abiding people, instead of enforcing the securities laws. Anybody who thinks the SEC protects investors needs to read what Porter wrote and consider the Madoff case. Madoff was one of the biggest frauds ever. And his fraud was delivered to the SEC's hands several times by a professional forensic accountant. So whom did the SEC choose to take on? One of history's biggest frauds? Nope. It went after Porter, who had neither bought nor sold securities.
Regards,
Dan Ferris and Sean Goldsmith
Chennai, India and Baltimore, Maryland
March 4, 2010