'Most important country' attracting lenders... Knockin' on wood... Shorting Petrobras... Overnight 54% gains...
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The most important country in the world is back in the headlines. Yields on Spain's 10-year government bonds went up past 7% yesterday. That makes headlines because it's just about the level that scared the European Union into bailing out Greece, Ireland, and Portugal over the last two years. Spanish banks have already received a 100 billion-euro bailout... widely viewed as not nearly enough to get the job done. Maybe the 7% bond yields will scare up some more bailout money.
Then again, the bond market is more sanguine on Spain's prospects for debt repayment than I would have expected...
The Financial Times reports the Spanish treasury today sold 2.4 billion euros worth of 12-month debt and another 639 million euros of 18-month debt. Interest rates were high, greater than 5%. But there were 2.16 more bids than available debt for the 12-month notes... and 4.42 times more bids than bonds for the 18-month paper. The bids indicate a greater appetite for Spanish sovereign debt than in the last auction.
Who is buying this stuff? Whose appetite for Spanish government bonds has increased? Do they read the papers? Do they not know what's happening over there? It must be some other European government doing its duty, attempting to keep the ship afloat. It couldn't be anyone in the real world... could it?
Sometimes, when I'm reading about all these broke European countries getting loans and bailouts, it feels like I'm in a dream state... It's all just a little unreal.
If I were a bond investor or a banker, I wouldn't say, "Wow, let's bid on those 5% Spanish bonds. It's OK that Spain's flat-broke and has 25% unemployment and a typical, bloated European government. Gosh, they're paying 5%!!!" I'd be more likely to wonder how they can repay the debts they already have… let alone new ones.
You couldn't offer me 50% to lend to a borrower who has proven his inability to manage debt levels. What is motivating buyers of Spanish sovereign debt? Darned if I know...
Maybe they believe Spain will finally get a proper bailout when European finance ministers meet in Luxembourg on Thursday. That's what it looks like to me. It looks like somebody is gambling that a Spanish bailout is imminent... and that it'll actually work. If that's what Spanish debt buyers are thinking, they remind me of the song "Dear Abby" by John Prine, whose refrain counsels, "Stop wishin' for bad luck and knockin' on wood."
Yesterday, we discussed Porter's prediction that oil prices would fall (largely due to increasing supply from the oil shale formations). And when oil prices fall, oil stocks are punished.
One of our favorite ways to play falling oil prices is shorting shares of the Brazilian government-controlled oil giant, Petrobras.
We first learned of Petrobras as a top short opportunity from the master of short selling, Jim Chanos. While speaking at the Grant's Interest Rate Observer conference in Manhattan this spring, the Kynikos Associates founder laid out his case... Chanos said the Brazilian government's mismanagement was running Petrobras into the ground. And the company has huge capital expenditures (or "capex")... Last year's capex totaled $40 billion. For 2011-2015, its capex is expected to be $225 billion. Petrobras is a $120 billion company.
Since Chanos' speech, Petrobras has fallen from around $25 per share to $19. That's $40 billion in market capitalization… vanished. The stock had already fallen more than 50% from its 2009 peak.
Co-editors Amber Lee Mason and Brian Hunt recommended the Petrobras short in our newest trading service, DailyWealth Trader...
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Chanos is bearish overall on state-owned oil companies. These types of companies are not the traditional "purely" shareholder-owned firms like ExxonMobil or Chevron. "State owned" oil companies are controlled by national governments... and thus, are often poorly managed and wasteful. According to Chanos, Petrobras is one such company. |
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Over the past decade, Petrobras has discovered several huge oilfields off the Brazilian coast. But these fields are located in deep water. They require enormous amounts of capital to develop. Petrobras is poised to spend hundreds of billions of dollars over the next four years or so to develop those fields. |
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According to Chanos, such high levels of capital expenditures mean shareholders are unlikely to benefit, even with oil over $100 a barrel. Also, the Brazilian government imposes fuel price caps and forces Petrobras to hire locally. Chanos argues the interference has hamstrung the company. |
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At just 7.6 times forward earnings, this $150 billion company might look cheap. But Chanos is calling it a "value trap." – DailyWealth Trader, May 1 |
Subscribers who shorted Petrobas on DailyWealth Trader's recommendation are up about 19% in 48 days (as of yesterday's close).
DailyWealth Trader has also made our readers money on the long side... Amber and Brian have expertly traded volatile gold stocks over the past month. For example… They recommended the Market Vectors Gold Miners exchange-traded fund (GDX) – which holds a basket of major gold-producer stocks – days after its short-term bottom in May. Readers are up 11% in less than a month.
Learn more about DailyWealth Trader and its unique approach to the markets by watching a very popular video we've produced. Click here to see what all the positive feedback is about.
Investors in one small gold mining company just made a big overnight gain... Yesterday, Yamana Gold, Canada's third-largest gold miner, announced it would buy Extorre Gold Mines for C$365 million. On a per-share basis, the offer represented a 54% premium to Extorre's average share price over the last 20 days.
Yamana isn't the only major gold company looking to expand its production through acquisitions. It is faster and cheaper for the big gold miners to buy proven small-cap companies than to do new exploration on their own. So far this year, there have been $2 billion in buyouts of miners worth $100 million or more. The average premium for shares of the junior company in the deals is 41%. And we think we've discovered the next buyout candidate...
As Digest readers know... One of Phase 1 Investor editor Frank Curzio's contacts – one of the most successful insiders in the gold market – recently told him about a junior miner that has rich deposits and is, in our opinion, on the verge of being taken over by a larger competitor. Frank's contact is more bullish on this company "than on any single gold mining company" in the world.
In Phase 1, Frank takes a "venture capital" approach to investing… focusing on small, early-stage companies that can make investors big gains, like the one we described above. And his track record with junior mining stocks has been excellent. For example, take a quick peek at the Top 10 list at the bottom of today's Digest. Based on yesterday's close, Frank's Gold Standard Ventures recommendation is the second-highest-returning open position among all our services... having made subscribers more than 250% in less than six months.
When Frank's most recent junior mining recommendation gets bought out... we expect the premium could be more than double the current share price. To learn more about Phase 1 Investor – and read the full details on this situation (without watching a video) – click here.
New 52-week highs (as of 6/18/12): Eli Lilly (LLY), Dominion Resources (D), Integrys Energy Group (TEG), Hershey (HSY), Union Pacific (UNP), and Altria Group (MO).
In today's mailbag, several subscribers confirm our thoughts on GM... We love to hear subscribers' firsthand experiences. Send your e-mail to feedback@stansberryresearch.com.
"I've been an Adjunct professor of Business at Community Colleges for over 35 years. Add in dozens of years each at a large international bank (BofA) and a technology (Intel) firm, plus several start-ups and currently two small businesses. Business has been my life. But that aside, I'm happy to finally see an honest assessment of GM vs government. None of this will you see elsewhere. You are spot on!
"On another note, I derive great joy from watching the faces of my students as they eventually 'see the light' on current business conditions in Amerika. Be advised your GM review and 'This is Why There Are No Jobs in America' articles have hereby become required reading in all my business and accounting classes. Also, great fun explaining at the beginning of every semester why I'm a 'learning facilitator' and not a teacher." – Paid-up subscriber Robert French
"My husband works for GM. He doesn't get paid $56 an hour, though. He makes about $28, which is a great blessing. He works delivering parts to the line.
"Most of the people there work diligently and do a decent job, but some, inexplicably, wander around all day doing next to nothing. Steve has worked at three GM plants over the course of 25 years.
"One of the things that we have noticed is that GM makes foolish decisions about most everything. It gets to be a joke. 'Well, this is GM... ' The management will make rules that render the manufacturing process less productive for no good reason.
"When the government took over GM, the decisions became really weird. Some noticed that the dealerships and plants closed were in Republican counties. Our plant in Tennessee was almost totally shut down, although they had just spent millions on a retooling, and the plant was one of the best they had in the world. These kind of decisions boggle the mind.
"GM is so poorly run, it really does deserve to fail." – Paid-up subscriber Tammy Craft
"Your analysis is fair and accurate Chrysler senior debt holders got an even worse deal. Also, do not forget the usually overlooked fact that GM got a $16 billion tax-loss carry forward which would not be allowed in a regular bankruptcy, add that to the bail out. I am a former GM executive and the whole deal makes me sick." Paid-up subscriber Gary D Bello
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Milan, Italy
June 19, 2012