Editor's note: It's a short Digest today. We're heading to Maryland's Eastern Shore for our annual Spring Editors Conference. We expect to publish the Digest as usual. We'll let you know if there are any changes.
Senate Banking Chairman Chris Dodd and Senate Agriculture Chairwoman Blanche Lincoln are working to push a derivatives reform bill through Congress. The bill would potentially force most banks to spin off their derivative trading operations to be eligible for assistance from the Federal Reserve and the Federal Deposit Insurance Corp. The bill would also increase the amount of money companies with derivatives on the books must keep in reserves. Warren Buffett lobbied to exclude existing derivatives from this regulation. His firm, Berkshire Hathaway, has some $63 billion of derivatives contracts. And reworking those contracts would be a nightmare (not to mention the extra billions of dollars Berkshire would have to keep in reserves). Congress struck his exemption from the bill.
We're usually not for government regulation, but we agree some oversight is needed in the derivatives world... Just not the sweeping reforms Congress is promoting. Banks shouldn't be forced to ditch their derivative operations. They use derivatives to hedge against interest-rate risk. Airlines use derivatives to hedge against fuel cost. Hershey uses them to hedge its exposure to cocoa. There are positive and responsible ways to use derivatives. These should be allowed.
On the other hand, there are derivatives like synthetic CDOs. These are created out of thin air. They track the movement of an underlying pool of mortgages. But a CDO includes zero tangible assets. These synthetic CDOs are just a way for a buyer and a seller to increase their exposure to a certain market. They serve no purpose other than creating fees for Wall Street – $20 billion in 2009, to be exact. Left unchecked, they can be dangerous... Loose regulation allowed Wall Street to create trillions of dollars of these derivatives. But there wasn't enough money to cover the losses.
True Wealth subscribers are still making money on Steve's short euro trade. Greek bonds plunged today (yields soared) on concern Germany wouldn't agree to a $60 billion bailout. German Chancellor Angela Merkel said Germany wouldn't get involved unless Greece agrees to take "tough" measures over the next few years to solve its debt crisis. The 10-year Greek bond yield jumped to 9.6%. The two-year yield increased 300 basis points to 13.94%. It jumped as high as 14.66%. Yields won't come down until Greece's bailout money is on the table. Even then, we think the euro will fail.
New highs: Fairholme Fund (FAIRX), Washington REIT (WRE), WisdomTree Japan (DFJ), Hershey (HSY), ConocoPhillips (COP), Visa (V), San Juan Basin (SJT), Amerigas Partners (APU), McDonald's (MCD), Kinder Morgan Energy Partners (KMP), Enterprise Partners (EPD), Keyera Facilities (KEY-UN.TO), St. Joe Company (JOE), Longleaf Partners (LLPFX), WR Berkley (WRB), Sequoia Fund (SEQUX), Prestige Brands (PBH), Automatic Data Processing (ADP), Portfolio Recovery Associates (PRAA), Brady Corp. (BRC), Dana Holding (DAN), Carpenter Technology (CRS), Shaw Group (SHAW), American Axle (AXL), DirecTV (DTV), Entegris (ENTG), HMS Holdings (HMSY), Northern Dynasty (NAK), Silver Wheaton (SLW), Jinshan (JIN.TO), Rowan Drilling (RDC), Carbo Ceramics (CRR), United American Indemnity (INDM), Mueller Water (MWA).
Just a quick note of thanks in today's mailbag. What investment mysteries can we unravel for you? Let us know... feedback@stansberryresearch.com.
"A moment here to say thank you so much for cutting through the fine print and giving us the guts in an enjoyable manner. You manage to access us to a wealth of information and resources that most of would never find even if we knew what to ask. Your first foray into carry trades is a classic slap on the head moment – ‘why did I not think of that?’ – Sure beats the never ending 0% offers for six months from the credit card companies that I keep on shredding. Have a great break at Chesapeake Bay." – Paid-up subscriber Helen McLaughlin
Sean Goldsmith
Baltimore, Maryland
April 26, 2010