Hedge-fund manager John Paulson, known for his prescient short of the mortgage market, bought 300 million shares of Citigroup – debatably the weakest of all the large U.S. banks – in the last quarter. Meanwhile, he dumped his entire stake in Goldman Sachs and sold 2 million shares of JPMorgan Chase (bringing his holdings to 5 million shares). Goldman and JPMorgan are two of the strongest banks in the world.
Paulson is no doubt betting the current interest-rate environment (free money for banks) will help Citi earn itself out of the hole. Paulson is an arbitrageur, and this trade is a bet Goldman and JPMorgan's overperformance relative to Citi over the past few years will end (see the five-year chart below).
If you'll look at Goldman and JPMorgan's two-year charts, you'll see their recoveries formed perfect V's. In contrast, Citi's chart shows the bank is still trading toward the bottom of its range. Shares are already up more than 4% on the news of Paulson's buy.
Lots of people realize the government is propping up the banks with their repeated bailouts. But most folks don't understand the real way the government is saving the banks. It's not the shares the feds bought (and paid too much for). It's the whole system of paper money.
The government is deliberately keeping short-term interest rates super low, so the banks' funding costs almost disappear. Then, by running a huge budget deficit and spending record amounts of money on domestic programs, the government insures inflation (and longer-term rates) will remain high. The banks make money on the spread between short-term rates and long-term rates.
And just to make sure nothing goes wrong, the Fed has promised to buy $1.75 trillion (yes, that's trillion) worth of mortgages, many of which come directly from troubled banks like Citigroup. In short, there's no way these banks can lose.
And here's the best part... According to the Congressional Budget Office, this secret plan to save the banks is free. No line item anywhere in the budget accounts for interest-rate manipulation or the Fed's mortgage buying. It's all "free."
But of course, there is a real cost. The value of our currency goes down with every new dollar the Fed prints and with every dollar of new deficit spending. But the politicians can all pretend inflation doesn't exist. When it shows up in our economy, they can lay the blame with "speculators" and oil companies...
The government can manipulate the dollar like this because it's not backed by gold. President Nixon "temporarily" cut the tie between the dollar and gold in August 1971. You can see the video here. In it, Nixon promises the dollar won't be devalued – "your dollar will be worth just as much tomorrow as today"...
At the time, $35 would buy an ounce of gold. Today, it takes more than $1,100. That's a 97% decline in purchasing power. It's fascinating how many people believe this won't happen again... despite the fact that we've got runaway deficits, we're trying to fight two overseas wars, we're about to pass the largest new entitlement program in history... and we're propping up every major bank in the United States. I'm not surprised gold is trading at $1,100. I'm surprised it's not trading for more than $5,000.
"It's quickly becoming the perfect setup," Jeff Clark recently wrote us. Jeff has developed a trading strategy based around a simple occurrence in the markets – earnings announcements.
Last year, U.S.-listed companies made 35,168 total earnings announcements, but 16 of them could have made you rich... in a matter of days. Jeff has several indicators in place to identify these "special earnings announcements," or SEAs, as he calls them... The last SEA was on August 27, 2009, when Dell announced third-quarter earnings. Trading this SEA would have made you 263% in three days. The next SEA happens tomorrow after market close. And it could be even more profitable than the Dell SEA...
Jeff has recommended a trade that will return multiples of your initial investment in just a few days. His three triggers have all fallen into place, and he told Short Report readers exactly how to play this SEA. To learn more about SEAs and immediately receive Jeff's recommendation, click here...
On November 12 at Columbia University, Warren Buffett and Bill Gates spent the evening answering questions. In addition to the typical "What should I do to make $40 billion" and "What should we buy now" questions, Buffett shared some more insight into his Burlington Northern Santa Fe investment, confirming our thesis... He views BNSF's rails as an irreplaceable asset that will perform well during inflation. He also explained his other reasons:
The railroads are tied to the future prosperity of this country. You can't move a railroad to China or India or any place else. We start out with the premise – and I can't think of a more sound premise – that there will be more people in this country, 10, 20, 30 years from now. They will be moving more and more goods back and forth to each other. And you have the most environmentally friendly and the most cost-efficient way of doing that on the railroads...
The Burlington Northern last year moved... on average, it moved a ton of freight 470 miles on one gallon of diesel. That is far, far more efficient than what takes place over the highways. You have the situation where overall they use one-third less fuel, they put far fewer pollutants into the atmosphere than trucks will. One train will supplant 280 trucks or so on the road. So the rails are in tune with the future.
I like the West. I like the 30-some-thousand miles of roadway that Burlington has. And you know, if this country has a poor future, the rails have a poor future. I'm willing to bet a lot of money, 34 billion to be specific, on the fact that 10 years from now, 20 years from now, 50 years from now, there will be more and more goods being moved by rail and better for the country and it will be better for the shareholders of the Burlington Northern.
You can read the full transcript here.
At our Alliance Conference last week, Penny Stock Specialist editor Frank Curzio said telecom company Sprint was a steal at less than $3. He said expectations are low (few analysts rate it a "buy") and the stock is cheap based on cash flow and book value.
Mr. Market agrees... Sprint rose more than 11% today after Credit Suisse upgraded the telecom company to "buy" from "hold." Credit Suisse believes shares could go as high as $6 in 12 months based on valuation and positive subscriber trends in 2010... or about 100% higher than the current price.
When Sprint reported third-quarter earnings two weeks ago, most headlines focused on subscriber losses. Curzio says the headlines were misleading. Yes, Sprint lost a net 135,000 subscribers last quarter, but the telecom company posted its best net subscriber results in two years. In other words, subscriber trends are positive. Curzio says it's not too late to buy Sprint, which currently trades for less than $4. He believes the stock will trade up to its book value of $6.40 in less than 18 months.
Penny Stock Specialist is still in "beta mode" and only available to Alliance members, who can access the research here. We'll continually update Digest readers on its progress and alert you when Frank's research is available to the public.
New highs: McDonald's (MCD), Kinder Morgan Energy Partners (KMP), Keyera Facilities (KEY-UN.TO), Coca-Cola (KO), Altria (MO), Microsoft (MSFT), Automatic Data Processing (ADP), IMS Health (RX), Akamai (AKAM), Sino Gold (SGX.AX).
In the mailbag... The teachers protest. What did your teachers teach you, dear subscribers? Let us know: feedback@stansberryresearch.com.
"Your response to Ann Campbell giving direction to an 18 year old was quite good, but it contained one statement which was obviously not well thought out. 'And remember: The folks teaching college typically aren't very talented. If they were, they wouldn't be teaching.' Of course, you may have a different definition of 'talent' than those of us who are college teachers. After spending more than 40 years in a University environment, my assessment is just the opposite – these are some of the most talented people in the world. I could give you a basket full of examples to make my point, but the real point you are making is not about 'talent,' but 'money.' As Alex Greene reminds us in Shelter Island, money does not bring happiness. We teach because we love to share our talents with young people. No amount of money could buy the happiness I have experienced during a life time of developing talented young people." – Paid-up subscriber Larry Lemon
Porter comment: I can count on one hand the number of teachers I had in high school and college who were worth their salaries. Most of them – the overwhelming majority – were the worst sort of union-member, check-collecting, statist zombies.
"I'm 22 years old, i'm a student and i've been a suscriber to the Private Wealth Alliance for about a year now. I'm a Singaporean and i've come to notice that Singapore is often mentioned in the articles written by S&A or Doug Casey or Bill Bonner in a very favorable way. However, as a Singaporean, i can't seem to find much evidence to support that... I don't intend to remain in Singapore any longer than i have to.
"What do you think, Porter? What advice do you have for someone who wants to be a citizen of the world? I maybe ignorant or have my facts wrong, but currently i only get my daily dose of news from S&A, Casey's Daily Dispatch, ETR, Simon Black, and other newsletters. Mainstream media, especially in Singapore, disgusts me with their 'polically correctness.'" – Paid-up subscriber Yanlin
Porter comment: Singapore has economic policies that we find attractive. It has a sound currency, for example. It has very low taxes and doesn't tax foreign income. It has a long history of respect for private property. On the flipside, it tends to be tyrannical about personal freedom... but we'd never actually live there.
In a perfect world, you'd have citizenship in a place like Switzerland or Canada, whose passports are respected almost everywhere (including lots of places Americans can't go easily) and whose government doesn't tax global income. Then, you'd have a residency in a place where you want to live that's tax-friendly to visitors (like Argentina, for example). Finally, you'd keep your savings in a place like Singapore, which has good banking laws and offers a long history of respect for private property. Lots of people set their affairs up this way. It just takes a little bit of money to make it worthwhile.
"HI, I love your work and opinions, but I have one question. Do your editors keep track of each other. A couple of times, I have been short on something Jeff has recommended, only to lose on that bet and find it on the New Highs list in the Digest a few days later. The most recent example is Akamai (AKAM). I know you could make a case for both sides of many different investments, but I'm surprised you don't have a company policy against contradictions like this. Thanks for the work and prices regular folks can afford." – Paid-up subscriber Jason
Porter comment: Well... I disagree with you. Completely. I've got two reasons. First, it's simply not practical to tell folks what they can and can't write about. With maybe one or two exceptions, the folks who work here as analysts do so only because they want to. They don't need the money. And they could certainly earn a lot more working for hedge funds or investment banks. If I tried telling them what to write or what to think, they'd quit. Now, if you want me to hire a bunch of hacks who are simply grateful to have a job, then I suppose I could implement as many "policies" as you'd like. Except then I wouldn't work here anymore because I can't stand being around a bunch of sheep. So as long as this place carries my name on it, we're not going to be in the business of telling our analysts what to write about. That kind of culture attracts the wrong kind of people.
My second reason is, it's possible both analysts are right. Jeff, for example, is frequently looking for trends that will last a matter of days – at most. So Jeff might think XYZ stock looks "toppy" and will have to pull back for a breather. Another analyst might think it's a great long-term buy. It's not unusual for them both to be right, given their relative timeframes.
Now... I have a third thought. This might hurt your feelings, but I think it's very important to point this out. Investors who don't really know what they're doing tend to be very concerned about opposing opinions. On the other hand, people like me and my analysts don't care how many people oppose our view.
Do you know how many people – thousands – told me I was crazy to write GM would go bankrupt? Do you know how many people canceled my newsletter and demanded a refund, saying I was anti-American to bash such an important business?
I reach investment conclusions when I have enough reliable information to make good risk-to-reward decisions. Once I've made a decision, I'm interested in reading as many contrary opinions as possible because I'm looking for real data that would change my mind. I suggest you read our analysts' views in the same way.
"Curzios' new letter needs to consider that a lot of us subscribers want to invest in companies that are high in morals. Making money is not the most important thing when it comes to helping a company to succeed like his most recent recommendation in the gambling industry." – Paid-up subscriber Lee Brown
Porter comment: We're well aware we're in a dirty business – the money business. But that's our beat. It's all we know. We don't have any experience in passing moral judgment. We certainly aren't qualified to do so... We've seen far too many "first stones" tossed in our general direction.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
November 16, 2009