The old New York Times building is crumbling financially...
The property's owner, international investment group Africa-Israel, bought the building in 2007 at the height of the bubble for $525 million... then piled on $715 million in total debt.
Africa-Israel was planning to convert the building to first-class office space, but the bursting of the real estate bubble, with its decline in rents, put an end to that. The building is mostly empty today. Now, Africa-Israel will have to give up half its ownership in the building in exchange for wiping out more than $400 million of debt. After the debt is completely restructured, the property will wind up with $250 million of debt against it.
Tishman Speyer Properties bought the building from The New York Times in December 2004 for about $180 million and sold it to Africa-Israel for $525 million in 2007. Africa-Israel made other bubble-era investments, including several Miami condo and commercial projects in 2004.
The commercial real estate debacle is in full swing, and banks are feeling the pain...
Based on its huge and disastrous investments in commercial real estate, I recommended my Extreme Value subscribers sell short Zions Bancorporation earlier this year, when financial stocks were rallying strongly.
My second stab at the short sale is up 22% since July. Zions' stock hit $20 in the rally, and today sank to less than $13. I still fear that one of its eight western subsidiaries is going to be visited by the Night Stalkers, the FDIC workers who show up on Friday evenings to shut down insolvent banks.
The two other financial shorts I made earlier this year didn't work out the first time around. I was too early. But the underlying economic reality of the two companies is plain for all to see.
Smithtown Bancorp surged to more than $14 in April, but now trades for less than $8. Smithtown grew its loan book by more than 70% in 2008, a terrible year to make so many new loans. Unemployment and bad underwriting should continue to punish the stock.
MetLife, the biggest life insurer in the country, hit $41 in September, but has now backed off to the mid-$30s. MetLife owns about $46 billion of residential mortgage-backed securities. It says the fair value is $43.4 billion, merely 6% less than its cost. I bet it has another 20%-40% of value left to lose.
MetLife's commercial real estate loans don't have to be marked to market, but its residential mortgage-backed securities (RMBS) do. As foreclosures continue to rise and rise, RMBS portfolios, including MetLife's, will suffer steep, quick losses, similar to the way subprime mortgages caused collateralized debt obligations and other securities and derivatives to suffer huge losses.
My other short sale, Jack in the Box, is also performing well today. Shares of the fast-food chain are down 8.5% as I write this. About one-third of the company's operating income is from selling restaurants to franchisees, which are just individuals and small businesses. So a huge portion of Jack's earnings depends on the creditworthiness of the weakest credits in the world. Not good.
If you want access to the original reports I wrote on Jack in the Box, Zions, Smithtown, and MetLife, as well as a gold-oriented stock that's trading under my maximum $4 buy price, click here.
Continuing its assault on the financial services used by customers with little or no access to bank accounts, Wal-Mart is lowering its fees for money transfers in time for the holidays. Wal-Mart had charged fees of $9 for domestic transfers and $11 for international. But now, customers can send up to $200 anywhere in the U.S. or abroad for $7. It sounds expensive, but it's a lot less than the overdraft fees charged by banks, which hit lower-income customers hardest and most often.
"Foreclosures hitting more people with prime loans," said an Associated Press headline this morning. And yet, yesterday's Wall Street Journal seemed surprised when it said, "Housing prices fall unexpectedly."
Once again, the Journal treats evidence we're not in a recovery as unwelcome, instead of trying to get the story right. Who are these guys working for, anyway? Goldman Sachs? The Federal Reserve? The National Association of Homebuilders? They sure as heck aren't looking out for you and me.
I pick on the Journal because, lately, housing has been harder to get wrong than right...
In the United States, in the month of September, an average of about 1,500 homes sold each day. That same month, 2,000 homes began foreclosure proceedings each day – just in the state of California. Building a new house right now and expecting to sell it for more than it cost is like asking a hooker for a freebie. Anything is possible... but we all know which way the wind blows.
At the annual Stansberry Alliance Conference, held at the Sanctuary at Kiawah Island in South Carolina earlier this month, I told the audience the housing market doesn't need stimulus or loan modifications. It needs gasoline, blowtorches, and for half the publicly traded homebuilders to go bankrupt.
That Associated Press article I mentioned above says unemployment has taken over as the reason for rising foreclosures. If you want to see the growing unemployment situation with your own eyes, our friend Whitney Tilson at T2 Partners sent this interactive graphic yesterday, showing how unemployment has grown worse across the U.S. since 2007.
Notice how poorly the bubble states (especially California) are doing... and how well the area around Washington, D.C., is doing. Government is the only growth industry left anymore.
I start this month's issue with a warning: The Breakout is coming. And it's coming soon.
After 18 months of treading water... after a gut-wrenching decline of $275 per ounce... after the largest expansion of Federal Reserve credit in history... after a year of the bears declaring the seven-year bull market is over, I believe the Breakout is here.
The "Breakout" is the coming rise in the price of gold more than $1,000 an ounce. – Matt Badiali in the September 2009 S&A Resource Report
In that issue, Badiali detailed 10 precious-metals investments – six gold and four silver – he felt would benefit from gold's breakout. If you bought all 10, you're up 35% today... and still climbing. Meanwhile, gold is up 30% for the year.
In another recent report, Badiali outlined several gold and silver mining companies that will outperform gold by a much wider margin... thanks to the Chinese government. To get in on the action, click here.
The latest call for gold prices... $6,300 an ounce. And this prediction didn't come from a newsletter writer or a crazed libertarian pundit. It came from Dylan Grice, an analyst with the French investment bank, Societe Generale. Grice says, as we well know, investors are buying gold to protect themselves from a decline in the dollar because they don't trust the Federal Reserve... The U.S. government has already begun monetizing its debt and will likely keep rates near zero for years. And where does Grice get $6,300?
The U.S. owns nearly 263 million troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the U.S. dollar would be fully gold-backed is currently around $6,300. Gold is very cheap – at current prices, the USD is only 15 percent gold-backed.
It's like an old friend I haven't seen in years. I used to publish the same number every month in an old newsletter I wrote many years ago. I doubt gold and the dollar will ever line up in this fashion, but it's useful for gold speculators to know that, in order to make the dollar an honest currency, gold will have to soar.
Another way to get to around $6,000 an ounce is to look at the gold bull of the 1970s. Gold went from $35 to $850. That's 24.29 times your money.
A similar move off the 1999 lows ($252 an ounce) would take gold to more than $6,100 an ounce. If paper-dollar holders get more scared this time than last time around, who knows where gold will end up... or if it'll even matter, since the dollar, like all fiat currencies before it, is ultimately doomed.
Gold is up... and so are Facebook shares... which don't even trade on public stock exchanges. Trading on private stock exchanges, Facebook shares have risen from less than $15 in July to around $21 each today, valuing the company at just shy of $10 billion.
Russia's Digital Sky Technologies bought $200 million of preferred shares in May, valuing the company at $10 billion.
In 2007, Microsoft bought a 1.6% stake in Facebook that valued the entire company at $15 billion, which could very well wind up being less than the company could fetch in an IPO.
In September, Facebook said it has more than 300 million users and is now earning positive cash flow. Since then, rumors of a possible IPO have been swirling around.
If you want to participate in private stock exchanges such as SecondMarket or SharesPost, you have to have a net worth of $1 million or an income of $200,000 a year – that's what the SEC says, anyway.
New highs: Cresud (CRESY), Burlington Northern Santa Fe (BNI), iShares Silver (SLV), Kinder Morgan Energy Partners (KMP), Keyera Facilities (KEY-UN.TO), Microsoft (MSFT), IMS Health (RX), Royal Gold (RGLD), Silvercorp Metals (SVM).
In the mailbag... subscribers weigh in on Jerry's Kid's "thoughts." Send your e-mail to feedback@stansberryresearch.com.
"What an awesome feeling to own approximately 50% of the new high list!! I pay for your investment advice, and it is well worth it! It matter not whether I agree or disagree with your political, social or religious views. I read them all, use what I want and discard the rest. Truth is very exclusive even though everyone wants to act like there are shades of grey... there either is a God or their isn't... the FDIC is either bankrupt or it isn't... the Fed is either printing money or it isn't. In the same way, government actions are either hurting the people or helping... creating a bubble or not... weakening the dollar or strengthening. It is part of our personal responsibility to determine the truth and act accordingly." – Paid-up subscriber Dave M.
Ferris comment: I'm glad you're happy with our work and have profited from it. Just never forget – nobody is smart because the market is up... anymore than they're stupid when it falls. It's how you do over the long term that counts.
"The feedback from 'Jerry's kid' sounds a lot like what I hear come out of my own children's (one 16, one 18, and allegedly an adult) mouths. Profane, loud, random. When I hear it, it results in grounding them for 24 hours. That seems to help for a while. I believe that kids today talk this way to their peers. Why? I do not know. P.S. you have made me a lot of $. Thanks. So far, so good." – Paid-up subscriber Richard
"If 'Jerry's kid' is a product of the American educational system, we are all lost. Unless, of course, he is making a lame attempt at humor..." – Paid-up subscriber Martha
"I appreciate the work you do and the insights you give. I pity those people who still blame you for the BSX advice – they haven't yet learnt the first rule on investing, namely, to take responsibility for their own decisions. However, as a novice overseas investor, could I ask a simple question? If one has a standard online trading account with a brokerage firm such as Ameritrade, is there a simple method for shorting a stock listed on the NYSE?" – Paid-up subscriber John H.
Ferris comment: To sell short, you need to open a margin account. It sounds like you may have a cash account at present. Try clicking on the "Client Services" tab. You should be able to figure out how to upgrade to a margin account from there.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
November 19, 2009