Trade and capital flows are transferring most of the inflation the Fed is creating to the Chinese economy. U.S. politicians continue to stimulate consumption in the U.S., while most of the production to meet this demand comes from China. We borrow and spend. They produce and profit. Hopefully, you understand simply printing more money and buying government bonds won't change this dynamic – It simply results in still more money being sent to China. What will China do with the flood of capital? Lots of things. But one thing it will certainly do is build more coal-fired power plants. Coal-fired plants produce 80% of the electricity in China and demand for electricity is growing roughly 9% a year. – Porter Stansberry and Braden Copeland, October 2010, Stansberry's Investment Advisory
As we saw yesterday with Chinese state-controlled CNOOC's purchase of Chesapeake Energy's shale assets, China is scrambling to secure more energy assets. While it's boosting its natural gas exposure, coal will remain the largest source of energy for "Chindia."
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Porter and Braden recommended Arch Coal to profit from China's booming energy demand. The stock jumped nearly 6% yesterday on news that Alpha Natural Resources, a Virginia-based coal producer, bought Massey Energy – another coal company. The stock's up another 2.2% today, bringing Stansberry's Investment Advisory readers a nearly 35% gain since October.
With Brent Crude prices topping $100 yesterday, World Dominator pick ExxonMobil reported a 53% increase in its 2010 fourth-quarter earnings over the same quarter in 2009. ExxonMobil has paid a dividend every year for more than 100 years and raised its dividend every year for 27 years. The stock soared 3.5% to new 52-week highs today.
Another Extreme Value pick, BP, is pushing toward $48 per share today. In the December Extreme Value, I wrote...
Odds are BP will reinstate some level of dividend payment in the first quarter of 2011. It's one of the most widely held stocks in the U.K. It's the ultimate widows-and-orphans, annuity-like income stock. BP must reinstate the dividend. There'd be an investor revolt if it didn't. Assuming it reinstates the dividend at half its previous level, it'll wind up with a yield of about 4% early next year.
Today, BP CEO Bob Dudley said the company will resume the dividend at half its former rate, providing a yield of about 3.5%. That's double the overall market's yield (1.7%), as represented by the Wilshire 5000. BP reported its first annual loss since 1992 and said it would sell half its U.S. refinery capacity. The stock is up 12% since my December recommendation.
I've got another stock in Extreme Value that trades for less than $2 and should resume dividend payments sometime this year. But this little stock is bound to rise a lot more than 12% leading up to and beyond the dividend reinstatement. Lately, it's been trading right around my maximum buy price. It's safer than other small-cap natural resource stocks because it makes well-secured loans to small natural resources companies. The No. 1 small-cap natural resources investment firm on the planet runs it. It's a great safe speculation on natural resources prices, as well as a burgeoning income play.
It's the perfect time to own such a stock. The commodity rally might be due for a breather. As this unknown little company ramps up its investment income and starts a dividend, investors will support the stock as other commodity names weaken.
When I say "ramp up," I'm not kidding... These guys look at three to five deals a day. If you're a small natural resources company that needs money (and trust me, they all need money), this is your first stop. This little finance operation has the deepest bench of talent anywhere in natural resources investing. No question, this company will soon produce a healthy and growing stream of income. To access Extreme Value and find out more about this stock, click here.
Michigan Governor Rick Snyder published a 20-page report today explaining his state's budget problems in layman's terms. Michigan faces a $1.5 billion deficit for 2011. Total government debt is more than $70 billion and unfunded costs for pension and retiree health care adds another $55 billion.
What does Governor Snyder blame for Michigan's fiscal crisis? It's not that the rich aren't paying enough in taxes...
It's public sector wages and benefits. Snyder's report shows the average state employee's wages increased 19% over the past decade while private sector wages fell 13%. Meanwhile, its workforce is aging, debt is increasing, and spending regularly exceeds income. It's a scary picture. And Digest readers know Michigan isn't the only state facing these problems.
It's no secret that Michigan is a lousy place to live. After four years of being the No. 1 state to get the hell out of as fast as you can, United Van Lines' annual migration study showed Michigan dropping to No. 2, with 62% of all moves leaving the state. New Jersey became No. 1, with 62.5% of all moves leaving the state.
And where is everyone moving to in the U.S.? Well, who's taking all our money? Who provides less than anyone and takes more? That's right. The District of Columbia had the highest inbound moving traffic for the third year in a row.
A recent Bloomberg article says analyst Meredith Whitney's massive municipal-bond report doesn't predict quite the gloom and doom she spouted on 60 Minutes several weeks ago. Bloomberg notes that page 42 of the 43-page report says, "We are not calling for any specific defaults within the scope of this report."
On 60 Minutes, Whitney said, "You could see 50 sizable defaults, 50-100 sizable defaults, more... This will amount to hundreds of billions of dollars worth of defaults."
So which is it? Is it "50-100 sizable defaults" amounting to "hundreds of billions of dollars"? Or are you not calling for "any specific defaults"?
If you accept that Whitney is onto something and not merely grandstanding (she's a Wall Streeter, after all), there are reasons why her official report would be short on specifics. Shorting muni bonds is difficult. So I figure the primary use of Whitney's report is a "what to sell, what to avoid" tool. Her clients would benefit most from her research if she kept mum about specific bonds until they've sold.
Otherwise, Whitney sounds a bit like the girl who cried wolf. Remember... she's famous for one good call – to sell Citigroup prior to the financial crisis. It's typical for the media to fawn over her since everyone reading the news manages his money by looking in the rearview mirror.
But there's another side to this story... As a consequence of all the fear surrounding muni bonds – to which I've contributed my fair share – the funds that hold them have become forced sellers. A market controlled by forced sellers could be a good buy. Once the selling ends, the market snaps back... And those who got long in the midst of the panic make a bundle.
Is it time to buy muni bonds? I don't know... But I do have a question for Whitney. She's admitted transparency in municipal financial reporting is "the worst [she's] ever seen." If that's true and we can't really know what the books look like, how can we be certain there'll be so many defaults?
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New highs: Atlantic Power (AT), Cenovus Energy (CVE), Denison Mines (DNN), Suncor (SU), CARBO Ceramics (CRR), ConocoPhillips (COP), ExxonMobil (XOM).
In today's mailbag, praise for Porter's Digest on trailing stops... And Porter weighs in on the Monsanto issue. Send your feedback to feedback@stansberryresearch.com.
"I just wanted to send you a quick note of thanks for your tutorial on the use of trailing stops. Before I subscribed to your service I thought that choosing which stocks to buy was the most critical skill to master. But now that I've actually made some profitable trades (thanks to your advice) I realize that knowing when to sell is just as important. Having a plan in place to preserve my gains or cut my losses gives me confidence in my very new abilities as an investor. Your products are well worth their cost. Thanks for all you do." – Paid-up subscriber Suzanne Patterson
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"I can see advertizing with Human Events. But Stansberry Associates has hit a new low, with ads for S&S Investment Advisory on the Washington Post Web Page. A low that will be difficult to exceed, I might add." – Paid-up subscriber HE
Porter comment: Thanks, HE... We take subscribers in all of their great unwashed forms.
"Just read your note. For what it's worth, just a couple more negative comments. The argument about Monsanto staving off world hunger does not fit with the research. There are many reports that organic farming when done right can far out produce GMO products and go a long way toward reducing hunger.
"Also if our government was not in bed with Monsanto producing GMO corn for gasoline which uses about two thirds of our farm land I'm guessing we'd do a lot better job at feeding the world. Instead we are deluged with GE corn and soy which is found in about 80% of the products on our store shelves causing a complete nutritional breakdown of our kids and going a long way toward the obesity in America.
"Now they are going after sugar beets and alfalfa. It is all about control and greed and money. Control the water and the food and you control the masses.
"You could take up the banner to help put these evil folks down. Their legal staff just spends their days eating up the little guy by suing them for using their product when they had nothing to do with it. Mother nature blew the GMO onto their land but the little guy can't fight the legal staff of the monster.
"There is much documented about all this and more. Your audience could become a valuable tool in helping control this Monster." – Paid-up subscriber John O'Neil
Porter comment: So organic farming outproduces and is more effective at addressing world hunger? Says who? Under what conditions? Please show me the research.
I agree with you about ethanol. But so what? That doesn't mean Monsanto doesn't make better corn. And as far as obesity goes... again, show me the data. Show me that kids who don't exercise and sit around playing Xbox 360 video games all day eating Monsanto corn are really worse off than kids doing the same eating "organic" corn. And if control is what you're worried about... Ask who controls the media, the religion, money, and weapons. They control the people. People can always grow their own food. That's not a big deal.
If it's so easy to prove GMO is so insidious, why did Europe spend 20 years and $500 million to end up with nothing?
But again... just send me proof.
Regards, Dan Ferris, Sean Goldsmith, and Porter Stansberry
Medford, Oregon, Baltimore, Maryland, and Delray Beach, Florida
February 1, 2011