I'm off to New York again tonight for the Grant's Interest Rate Observer investing conference. The highlight this year is undoubtedly famed short-seller Jim Chanos. He's kicking the conference off tomorrow with a speech titled, "A Walk on the Asian Wild Side." I expect Chanos will speak about his short-China thesis. He believes China is overbuilt, and he's shorting the trend via U.S. infrastructure stocks.
While he's been burned so far on the China short, Chanos has made a fortune shorting the for-profit educators. Critics say these schools prey on low-income students, then leave them with heavy debt burdens and meager job prospects. The government is ramping up regulation on the industry. Last week, Apollo Group, a bellwether for the for-profit education industry, said enrollment and net income will fall as the company tightens admissions practices. Shares plunged...
While Grant's conference will be excellent, we doubt any speech will get as much press as David Einhorn's St. Joe presentation last week...
One of the first questions David Einhorn faced after his much-discussed St. Joe presentation was if he had contacted Bruce Berkowitz, St. Joe's largest shareholder. Berkowitz, founder of The Fairholme Funds, was an outspoken long with a 25% position in the company. Einhorn said he sent Berkowitz a letter saying he was happy to discuss the position. But Berkowitz never responded... until last week.
First, Berkowitz increased his position to 26.9 million shares, or 29% of the company. When asked why he never responded to Einhorn's letter, he said, "Why would I want to talk to him? If someone wants to lower the price of a product I'm buying, I'm OK with that. We're long-term investors here." In fact, Berkowitz was grateful for the Einhorn-induced plunge in stock price. At less than a $2 billion market cap, Berkowitz says he would "buy the whole company." He plans on opening discussions with St. Joe about the possibility.
He also poked Einhorn a bit... "I want to send [Einhorn] a box of chocolates. This is the kind of advertising you just can't buy. The company should hold a David Einhorn memorial investment week."
Following its two-day, post-Einhorn fall, St. Joe is up nearly 5%. Investors respect Berkowitz's opinion just as much as Einhorn's. In fact, Morningstar named Berkowitz its fund manager of the decade. If he says he'd consider buying the company at a $2 billion market cap, that puts a good floor under the stock.
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South Korea, holder of the world's fifth-largest foreign exchange reserve, is considering buying more gold. Currently, South Korea owns 14 tonnes of gold – 0.2% of its $290 billion in reserves. The world average is 10% of reserves, according to the World Gold Council. The U.S., Germany, and France hold more than 50% of reserves in the precious metal. And South Korea isn't the only major nation that's underweight in gold. Brazil has only 0.5% of its reserves in gold. Japan has 2.7%. And China has a paltry 1.5%. If China even glances in gold's direction, as it did last week, the metal will soar.
According to Dennis Gartman, who writes the well-regarded newsletter The Gartman Letter, central banks' holding of gold equaled 60% of total reserves in 1980. But as interest rates boomed, central banks abandoned their gold for foreign exchange. Gold's position dropped from 60% to just a little more than 35% in 1990. By 2000, gold holdings fell to less than 15% of total reserves – foreign exchange totaled almost 80%. Central banks abandoned hard money for the allure of paper.
Now, as Gartman puts it, "the tectonic plates" are shifting. Central banks are slowly adding to their gold reserves. The last time central banks were net buyers of gold (other than this year) was in 1989. The total value of the world's gold supply is only around $6.5 trillion (U.S. equity markets are around 10 times larger)... When these central banks start buying, gold will soar.
New highs: PowerShares Dynamic Biotech & Genome (PBE), Claymore/AlphaShares China Real Estate (TAO), Forest Labs (FRX), Prestige Brands (PBH), Enterprise Products (EPD), Kinder Morgan Energy Partners (KMP), ConocoPhillips (COP), Dorchester Minerals (DMLP), McDonald's (MCD), Altria Group (MO), Philip Morris (PM).
In today's mailbag... One subscriber explains his strategy for using advice from several of our editors... and a second asks about buying gold. Send your messages to feedback@stansberryresearch.com.
"I never bet against Ferris and Sjuggerud. On the other hand I do sell covered calls against their investment advice while I am waiting for Mr. market to catch up with their prescient advice. In this case I had sold October 16th covered calls against my shares at $25.00 for $0.75 per share (that's six bits here in St. Louis) and was worrying about having to roll the position forward when your report on Einhorn put the call in a safe leeward position. Thank you Dan Ferris and Steve Sjuggerud and...
"THANK YOU VERY MUCH , JEFF CLARK!!! And finally, now we get to decide whether this temporary set back presents a better PUT opportunity or Covered Call opportunity going forward. It was so much fun, we piled into the '96 Jag convertible and treated my wife to a frozen custard at Ted Drewes'" – Paid-up subscriber R.W. Kent
"I am one month new to your S&A Alliance service, and trying to get my head around all of the advisory letters I am receiving. But one theme that is pervasive throughout many of the newsletters is the goal of protecting one's family from future fiat currency crisis through buying gold. Not being anxious to troll through the myriad internet offerings of gold 'sellers', and in short get scammed, how do you suggest I best do such a thing – smartly? What are the mechanics and whom to approach?
"I am aware of your pending Zurich conference, but will not be able to attend; and trust you can point me in the right direction prior to that conference. I'm willing to start within the range of $25K to $50K of purchases? I'm not wanting to go the gold stock route, but rather the ownership of high quality gold with zero to minimal fillers in it. Taking personal possession is my initial preference. I await your guidance." – Paid-up subscriber Rob
Goldsmith comment: We recommend using Van Simmons of David Hall Rare Coins (800-759-7575) and Rich Checkan of Asset Strategies International (800-831-0007) for buying physical gold. We receive no fee for referring clients to these dealers. We simply know they have taken great care of our subscribers.
Regards,
Sean Goldsmith
Baltimore, Maryland
October 18, 2010