Last week, I was guided through the caverns of Manhattan by a Himalayan mountain guide. I looked up at his license, and sure enough, his name was Sherpa. He said a few thousand of his people live in New York. Not only was he a safe driver, he also knew his way around the city (in my experience, a rarity among NYC cabbies).
The Sherpa told me New York City taxi medallions are in high demand, valued at more than $500,000. The city issues the medallions, which permit the holder to operate or lease a taxicab. The Sherpa said more people want to drive cabs now, having lost better jobs.
In the 1930s, before the medallion system, about 30,000 cabs cruised the streets of New York, far exceeding the demand. Drivers were on the road day and night to make up for their low hourly earnings. In 1937, the city created the medallion system to limit the supply of legally operating cabs to 16,900. There are about 13,000 of them today.
The Sherpa's taxi is on the road constantly. He drives for 12 hours, his partner for the other 12. He lives in a one-bedroom apartment in Queens, which costs $1,300 a month. He says it costs $1,300 a week just to keep the cab on the road.
I immediately made a mental note to glance at Medallion Financial (TAXI), the public company that finances taxi medallions and makes small business loans. I met the Sherpa on Wednesday, but I didn't get to a computer until Friday afternoon... just in time to watch Medallion Financial's stock fly up 24% in the final minutes of trading. It now trades at about 14 times trailing free cash flow, and it's up 142% since March 10.
Medallion is typical of what I find these days: Stocks that were dirt-cheap three months ago are now unattractively priced.
The S&P 500, by any reasonable measure, is fairly valued in the 900s. It's still about 37% above its March bottom, an enormous move in a very short time. When you combine a big move with fairly valued stocks, enormous government expansion, an already weak economy, and rising interest rates, that's a clear signal to sell fairly valued stocks, find some good short picks, and be careful.
Bernie Madoff was sentenced to 150 years in prison for bilking investors out of $60 billion. His returns sounded too good to be true... When returns sound too good to be true, it's just common sense to reduce your exposure. This isn't 1956, and there isn't another Warren Buffett just around the corner, ready to make you 2,000 times your money. Even if there were, it would take 40 years to do it, and nobody ever wants to wait that long.
Home prices appear to be improving slowly. In April, the S&P Case-Shiller home index fell 18% from April last year – a slight improvement from 19% in March. But prices have still declined 34% from the peak. The 10-city and 20-city indexes have both fallen every month since August 2006 – 33 months straight.
Only eight regions saw a price increase in April from a month earlier. Dallas led with a 1.75% gain, followed by Denver's 1.5%. Las Vegas was the worst performer this month, dropping another 3.5%. In total, Dallas is the best-performing city in the index, down only 9.6% from its June 2007 peak.
What's next for housing? Most people buy houses when the weather's better, so seasonal strength will make everyone think housing sales are improving. As option-ARM loans reset and blow up at a greater pace this year and next year, house prices will continue their descent. Prices are still north of the long-term trendline, and they're more likely to overshoot to the downside than simply return to trend. It'll be years, not months, until the market bottoms out and starts getting back on track.
That's one reason I'm looking for bank stocks to short. Though the valuations have been beaten down, many banks are destined for failure because they grew too fast and made too many risky loans.
If you want to know how to spot a likely bank failure, just ask Joshua Siegel, managing partner of StoneCastle Partners, LLC. StoneCastle has more than $3.1 billion invested in banks. Siegel told AmericanBanker recently that predictors of bank failures include "moving your loan book to high-risk loans without first increasing your capital, growing too quickly and especially growing into markets where the median home price to median income went out of whack with historical measures."
Any fast-growing bank is highly suspect. The one we're shorting in Extreme Value grew more than 70% last year, and 8% in the first quarter of 2008 (a 32% annualized rate). To get access to the full Extreme Value report on this and two other short-sale recommendations, click here.
Despite the 34% drop in real estate prices, our friends at Clusterstock present some convincing evidence the $1 million-plus housing market has much further to drop. The latest trend for those trying to sell seven-figure homes is to rent it for a year or two and "sell it when the market comes back."
We're not sure how realistic this is considering rates are increasing, lending is tighter, unemployment is up, wages are down, and society as a whole seems to have adopted a thriftier attitude.
Real estate analyst Mark Hanson points out:
Two years ago, a household income of $100k a year could legitimately buy an $800k home with almost nothing down and afford the payments using a Pay Option ARM. Now to buy the same house, you need $160k down and an income of $200k a year. The $800k home went from the majority being able to afford it, to only a few. Remember, in the upper price bands most have to sell a home for the down payment and debt-to-income ratios required for a new loan.
Clusterstock also quotes Jonathan Lansner, an Orange County real estate professional, who says it will take 13 months to clear the $1 million-plus home inventory versus 1.58 months for homes worth less than $500,000.
New highs: Hatteras (HTS), Crucell (CRXL).
Where do you get your investment ideas? Are you a smart and experienced investor? What's your investing style? Let us know here: feedback@stansberryresearch.com.
"I became a subscriber during the fall out of the crisis last year. Whilst i am still a novice I have learnt to have a lot more confidence than before. Financially, your various recommendations have helped me to a 28% return for the year so far - my best financial year ever. I have learnt t
he intricacies of bonds, the marvel of covered calls and the leverage of insight and experience that comes from you and your team.
"In the past, my sole source of information was the cr*p on CNBC and Bloomberg and I did not realise that what they do is entertainment. Your editors provide a real world education in what it takes to be successful. When i have saved up enough, you can look forward to me becoming a lifetime member. I know my kids will one day thank you for the difference you made to their inheritance." – Paid-up subscriber Chris W.
Ferris comment: I agree about CNBC, but I looove my new Bloomberg terminal.
The difference between a good source of information and a bad one isn't always the source. It's often the viewer/reader. A viewer who understands what businesses are doing and what they're worth will have far less trouble parsing sound bites and information from TV, Bloomberg, newspapers, magazines, or wherever. He'll be focused on what stocks are worth, not where they've been recently. All the good or bad news in the world won't change a smart, experienced investor's basic view of things. You seem to have gotten to this level, so congratulations.
Trouble is, most people aren't like you. They get their investment ideas from the headlines. If the headlines are good, they're long. If the headlines are bad, they're short. They'll always feel like their information sources are crap. But what's really crap is their skill level as an investor.
People think that because it's easy to open an account and get access to financials and other information, it's easy to make money. It's also easy to grab the keys to an Indy 500 race car (do they even have keys?), start it up, and step on the gas, but a beginner would probably be more likely to die in one than win a race.
As for your kudos to Stansberry & Associates, I'm sure all the editors who read this today will feel grateful to have you as a reader, as I do. Thanks again, from everyone here...
"I am probably one of your early Alliance members. I have almost never communicated with your group. As you are aware, one must pay for one's investing education. I am a physician and had had very little time to learn how to invest. I have spent 20 to 30 hours a week for the last 5 or 6 years learning about investing. I have found your service to be invaluable in my education. I have made, many times over, the initial fee for your research. Including the market drop in the 4th quarter, I was up 20% last year. I have been able to cover my monthly living expenses in the first half of 2009 with my investment gains." – Paid-up subscriber Frank Yarussi
"Porter, I believe I fit squarely in the definition of having made an investing 'turn around' thanks to what I have learned from the S&A Alliance. I am happy to be interviewed and to put together (with help from someone on your end) how this turn around was accomplished, both from an education stand point and from a numerical stand point (up 35% YTD).
"In particular, I have taken the Put Report as a basis and devised an investing regimen to make $100K annually, with $250K in my investing account, which means I have achieved "financial independence" (I easily ought to be able to live on that amout if I ever decide to quit working, and until then I keep growing my investing base). I have been meaning to write it up and send it in to show you what I am doing. I thought, if you agree, that it might make sense to share with other investors who used to 'flounder' like I did. Of course it is not fully tested yet and needs someone to critically review it for risks and other issues I may have overlooked." – Paid-up subscriber Jeff Persson
Ferris comment: Nobody knows how much he's going to make, not this year or any year. Be careful with your expectations with any strategy, though I'm sure Porter will be thrilled to hear of your success using the Put Strategy Report.
Sooner or later, every strategy gets found out, except one. The only strategy the market never seems to figure out is value investing. Mr. Market routinely drives stocks down to ridiculously low valuations, and then drives them up to absurdly high ones.
I'm glad so many people have benefited from our advice. That's why we're here, after all. And perhaps I've become too cynical... but all I hear these days are reports about how everyone's results are wonderful again and how it's easy to make money again.
There are far fewer bargains around today than there were a couple months ago. The world and business valuations haven't changed nearly as much as investor expectations.
In their new book, More Mortgage Meltdown, Whitney Tilson and Glenn Tongue counsel investors to avoid overconfidence and not follow the herd.
Be careful out there.
Regards,
Dan Ferris
Medford, Oregon
June 30, 2009