It's clear from recent events that the Securities and Exchange Commission (SEC) has it in for Steve Cohen, the owner of the SAC Capital Advisors investment firm. His lieutenants are being jailed and a SAC division was fined $14 million in a settlement last week following an insider-trading investigation.
This is something I just can't understand. From what I have read so far, it seems like a grave miscarriage of justice.
The traders at SAC are some of the most aggressive on Wall Street. They produce bigger gains than anybody else. And it appears that the government has decided – in retrospect – that some of their behavior was illegal, even though it wasn't at the time. That's wrong.
It's also incredibly wrong for insider-trading laws to be so convoluted that legitimate research and investigative work is called illegal. Insider trading should have a very narrow definition for the protection of investors. If you expand that definition to the point where anyone who knows anything is considered an insider, you make it impossible for the market to digest legitimately important information.
Someone is always going to have the scoop first. The question is how far and how wide you want that information to spread. The answer: as far and as wide – and as quickly – as possible. If you make it illegal for a company to tell a research analyst anything, you make it impossible for information to flow. I (Porter) say this as someone with experience in these matters.
The law was written to require a company's senior-most officials, as a fiduciary obligation, to protect its most sensitive information. That includes new products, patent applications, mergers and acquisitions, and so forth. However, none of the other employees were covered.
So say you were a sales rep for PC-maker Dell, and you saw a Wall Street analyst at a conference. You say, "Man, we're not selling any computers this quarter." That's not insider information because it's just one opinion. And it was never considered insider trading prior to the SAC case.
What happened is the government decided SAC's guys were too good at certain trades. It then went back to discover how they were able to make the trades. The government arrested SAC analysts and threatened to jail them if they didn't roll over on their superiors. That is just crazy.
Imagine you're talking to a friend from college. "My microchip firm is doing great. I got a raise last quarter because we sold so many chips," he says. You e-mail me and say, "Hey Porter, my buddy at XYZ Semiconductor says they're doing great. We should look into their stock."
We do a bunch of research and decide we like XYZ on its own merits, so we buy a big position. Suddenly, shares rise 50% and we sell. Great, right?
Wrong. The government thinks, "They're making outsize returns. They must've had inside information." So they figure out who at our firm covered XYZ Semiconductor, and they subpoena all our e-mails.
The SEC discovers you talked to your buddy at XYZ and that's when we started doing the research. They tell you they're going to arrest you and your friend... and that if you don't testify against me, everyone is going to jail. At that point, you say, "Yeah, he knew it was my buddy and he traded the stock." So they arrest me.
In short, they're threatening people who didn't commit a crime in the first place with serious consequences. They're getting away with it because the insider-trading laws are so nebulous. There's no definition anywhere in the case law about what constitutes insider trading. Insider trading is whatever the government says it is.
It makes me very fearful because there's nothing wrong with what we do. We do the hard work every investor ought to do before he invests. Trying to categorize what we do as insider trading is ridiculous.
As you may know, the SEC brought an insider-trading case against me a few years ago. When it couldn't make that stick, it switched its tune to securities fraud, even though I had never sold a security in my life and still haven't. (I even created an entire website to publicly state my case. You can see it here.)
The government targets these people because they don't want them in business. That's very dangerous because what's probably happening is that SAC's competitors – investment banks, mutual-fund managers, and other underperforming firms – are the guys making political donations and fostering these charges through the political process. That's not just reprehensible... that's fascism.
– Porter Stansberry with Sean Goldsmith
Stocks continue to hit new highs...
Today, the S&P 500 hit an all-time high on an intraday basis, besting the previous high of 1,576.09 set on October 11, 2007. The "Bernanke Asset Bubble" is in full swing. The government's money printing is floating nearly all asset classes, stocks, bonds, and real estate...
In yesterday's DailyWealth, Steve Sjuggerud noted the recent boom in real estate prices...
We've covered the bull market in real estate in detail... Today, we have limited housing supply because construction halted following the crisis. (Homebuilders are just beginning to build houses again.)
Meanwhile, mortgage rates are at record lows, making housing more affordable than ever. And the low prices we've seen in the past year (and subsequently high rental yields) have attracted billions of dollars from institutional investors – like private-equity firm Blackstone – in addition to individuals buying homes.
Today, the real estate market is frenzied... Homes are being purchased 24 hours after being listed... And multiple bidders are pushing asking prices higher. While real estate isn't the value it was two years ago, Steve still believes it's a terrific deal. As he wrote in DailyWealth...
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"Steve, I can't manage to buy a house," an attendee told me over the weekend in San Diego at Everbank's Global Currency Expo.
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"The last house I tried to buy had 65 offers on it and sold well above asking price."
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This guy was not alone...
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Conference attendees from Florida to Phoenix told me similar stories. "The deals are gone," they said. So they're giving up.
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But fear not, my friends! Market price – or even "above-market price" – on housing in America is still a fantastic deal today...
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And the big boom is happening right this second. We now have tons of buyers and not much supply. The downside of this situation is you're not going to find the same amazing deals you would have a year ago. The upside of this situation is Economics 101: With no supply and tons of demand, housing prices will continue to rocket higher.
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Two triple-digit winners in the Extreme Value portfolio made a key announcement last Friday.
World Dominating beermaker (and Extreme Value holding) Anheuser-Busch InBev reported its bid to acquire Mexican beer dominator Grupo Modelo passed a key regulatory hurdle. AB InBev already owned 50% of it. Now, it's buying the other half.
AB InBev made a deal with the U.S. Department of Justice (DoJ) which should allow its acquisition of Grupo Modelo to proceed. The agreement is scheduled for final settlement on April 23. The DoJ opposed the deal in January. In February, AB InBev proposed a solution that benefited fellow Extreme Value holding Constellation Brands, the World Dominator of premium wine brands (and a major beer player, too).
To gain regulatory acceptance, AB InBev will sell Constellation the U.S. rights to the Corona and Modelo beer brands for $2.9 billion. Grupo Modelo will also hand over the other 50% of Crown Imports, the importer for Modelo brands.
The upshot is a great new business for AB InBev and a great new business for Constellation Brands. Extreme Value readers are up 129% in less than two years on Constellation and 106% in less than three years on AB InBev.
Speaking of big acquisitions that promise to work out well...
I (Dan Ferris) am in New York this week for the Grant's Interest Rate Observer Conference. On my flight yesterday, I read a short book about "Internet plumbing" World Dominator Cisco.
The book – Making the Cisco Connection – was written in 2000 by David Bunnell. It's an old book, but it's worth reading if you're a Cisco shareholder. It reminded me what makes Cisco really good at acquiring other companies...
Cisco knows technology changes, so it's really buying the people behind the technology. When Cisco buys a company, it agrees to not fire anybody unless both companies' CEOs agree. It's also focused more on startups, helping to maintain a more entrepreneurial culture. Like all huge companies, Cisco has made mistakes. But it's still a great business, hitting record revenues of $46.1 billion last year and gushing $10.4 billion of free cash flow.
Several companies in the Extreme Value portfolio are much, much smaller than Cisco but are equally adept at buying other businesses. I call these companies "Undiscovered Gems." They're small companies with good downside protection and big upside.
A couple of them are small banks that have plenty of capital and have made acquisitions with the Federal Deposit Insurance Corporation (FDIC) covering 80% or more of future loan losses. Another is a small energy company run by an expert management team that recently made an excellent acquisition. One is a natural resources lending company loaded with cash. This company made nearly $70 million last year simply by acquiring 9% of another company and working to have it acquired by a larger competitor.
All these companies are trading below or near our maximum buy prices. All are very well-run companies with expert management teams. That's a rare skill. When you find a business that can do it, watch it carefully and buy it when it's cheap enough, as a couple of our Undiscovered Gems are now.
New 52-week highs (as of 4/9/13): W.R. Berkley (WRB), Abbott Laboratories (ABT), Calpine (CPN), Chubb (CB), Travelers (TRV), Texas Pacific Land Trust (TPL), DCP Midstream Partners (DPM), Wal-Mart (WMT), CVS Caremark (CVS), Walgreens (WAG), and Philip Morris International (PM).
A short (but positive) mailbag today... Send your notes to feedback@stansberryresearch.com.
"Just a quick note to say your Capital Efficiency profiles thrill my value-lovin' heart! This is a new, satisfying, analytical way into investing that has really grown on me." – Paid-up subscriber John Duggar
Goldsmith comment: We're glad you're enjoying Stansberry Data (which is available to lifetime, Capital-, and Advanced-level subscribers of my Investment Advisory newsletter)... Porter and his research team put a lot of effort into the Capital Efficiency Monitor... And that's in addition to the Trophy Asset Monitor, Insurance Value Monitor, and the Global Oil Value Monitor, which track the world's best insurance and oil companies. We agree... it's a valuable service.
Regards,
The knives are out for Steve Cohen...