The front page of today's Wall Street Journal contains an article that essentially says the FDIC is turning to private capital sources to bail it out.
The FDIC has loosened up the rules for private-equity buyers to take over failed banks. The new rules still favor banks as buyers of their failed peers, but they're an improvement over previous guidelines.
The FDIC is getting desperate because its deposit insurance fund has reached a new low of $10.4 billion, down 77% the past year, from $45.2 billion.
FDIC chief Sheila Bair smiled, nodded, and lied about the fund's dismal state, essentially saying yes, it is possible to insure more than $4.5 trillion in deposits with a $10.4 billion reserve: "No matter how challenging the environment, the FDIC has ample resources to continue protecting depositors as we have for the last 75 years."
The FDIC's alleged protection essentially tells banks it's OK to lever up and take huge risks. Without government backing, all financial-services companies would have little choice but to be honest, competent, and conservative if they wanted to stay in business for any length of time. With government backing, they can get away with murder, selling their investors and their customers down the river.
And if the FDIC had "ample resources," it wouldn't be contemplating another seizure of bank capital to try to recapitalize itself.
The FDIC turns the banking system into a car with every possible safety mechanism... giving the driver zero incentive to exercise caution. Human nature practically requires we remain exposed to certain big risks, so we'll learn not to take them.
If bankers were honest, they'd march on Washington and demand the immediate abolition of the Federal Reserve, the OCC, and the FDIC. They'd demand government withdrawal of all support from the financial-services industry. But too many U.S. bankers are not honest. They're larcenous and petty and greedy and scared. The government tells them how it's going to be, and they roll over and wet themselves.
If you think the mortgage crisis is over, you're not even close. It's plumbing new depths...
Loans at least 90 days past due rose for the 13th quarter in a row. The percentage of 90-day delinquencies rose to 4.35%, the highest level recorded since the FDIC started tracking the data 26 years ago.
America is going broke right before our eyes, and Mr. Market thinks U.S. stocks are worth 22 times earnings. He also thinks a 2% dividend yield is attractive (as measured by the Wilshire 5000, an index of the entire U.S. equity market).
And yet... despite Mr. Market's drunken binge, there are still pockets of value. As Jeremy Grantham and I have both pointed out several times the last couple years, high-quality, World Dominating franchises like Coca-Cola and Procter & Gamble have been left behind by the rally.
Another pocket of value is shaping up, too. S&A editors have been sending ideas about natural gas drillers back and forth the past several days. Natural gas prices have wallowed around $3 for some time now. Some gas drillers are trading for pennies on the dollar.
I've been following two North American gas drillers for two years. One of them is already in the pages of Extreme Value and the other might just find its way in next month.
Value investor Marty Whitman built his firm, Third Avenue Funds, on the principle of buying "safe and cheap" stocks. While 2008 was a rough year for the firm – and for nearly all value investors – over the long-term, Third Avenue has produced outstanding results. The flagship Third Avenue Value Fund (TAVFX) has returned, on average, 12% a year since its 1986 inception.
In his latest letter to investors, Whitman reminds us stocks need to be more than just cheap...
For Third Avenue cheap never was, nor ever will be, a sufficient condition for investing in equities. Cheap, for Fund purposes, has to be combined with credit-worthiness if a common stock is to be viewed as an attractive investment.
Whitman also says not to invest in the common stocks of companies that need continual access to credit markets and not to borrow money to buy common stocks or mezzanine securities – prices in markets populated by "Outside Passive Minority Investors" are too volatile. If you're going to take on leverage, you need to be involved in the investment.
Third Avenue Value Fund only added to one position this quarter: It bought an additional 2.4 million shares of real estate company Forest City Enterprises.
Porter did it again...
[W]ith the feds standing behind nearly every loan and printing money like there's no tomorrow, I believe it's time to get long financials. The biggest and most troubled bank – Citigroup – offers us the best put premiums. – Porter Stansberry, August 18, 2009, Put Strategy Report
Porter recommended selling puts on Citigroup, and Put Strategy readers are already up 31% (on margin) on the trade. As was the case with Porter's Budweiser recommendation, his short of Fannie and Freddie, and his recommendation on gold... John Paulson also joined this trade.
The New York Post today reported Paulson – the hedge-fund manager famous for calling the subprime crisis – has quietly been building a 2% stake in Citigroup over the past few weeks. To invest with Paulson, you're paying – at the very least – 20% of any profits plus a 2% management fee. You can invest with Porter for as little as $99 a year. To learn more, click here.
We wrote it, did you buy it?
Ultimately, owners of Sino Gold will probably become Eldorado shareholders in an acquisition, whether it's this year or three years down the road, we can't know. Regardless of the outcome, Sino Gold is an excellent company and worth the investment. – "Government-Backed Gold and Silver," S&A Resource Report, July 2009
Yesterday, Eldorado Gold, an international gold miner, offered 0.55 shares per share of Sino Gold, the most successful publicly traded gold miner in China. As of closing prices last night, that's a 20% premium for Sino shareholders. Resource Report readers are up 30% in about six weeks.
The Chinese government has become a rabid gold bug in recent years. From 2003 to April 2009, China quietly increased its gold reserves by more than 75%. Today, it's the fifth-largest sovereign gold holder at nearly 34 million ounces. But the Chinese aren't just buying bullion. The government has also partnered with an elite group of precious-metals miners. Sino Gold was one of the "chosen," and its longtime shareholders made more than five times their money.
A handful of other China miners are set to see similar gains. Matt put together a report on the ones to buy – and the ones to avoid – for his Resource Report readers. To get the details, click here.
New highs: Sino Gold (SGX.AX), Novavax (NVAX).
In the mailbag… the best places to hide gold. Keep 'em coming here: feedback@stansberryresearch.com.
"Burglars don't like attics. They are not easy to escape from. If you have an unfinished attic, put your gold/silver between the ceiling joists under the insulation. That blown-in crap is nasty. I don't even like to go looking through the stuff; and it's my own gold! Nevermind when I'm looking for yours! Just kidding. I sure hope the real bastards aren't reading this..." – Anonymous
"We have well over Ten Trillion AU not to mention PGM's, all safely secured and all under private control! All owned by off shore ops around the globe!" – Anonymous
"FROM MY PROPANE TANK TO THE HOUSE, THE BURIED SUPPLY LINE IS WRAPPED WITH A SPECIAL TAPE SO ANYONE IN THE FUTURE COULD FIND THE LINE AND NOT DIG IT UP. I CAREFULLY DUG UNDER THE LINE AND BURIED MY PVC PIPE FULL OF GOLD UNDER IT. WHEN I CHECKED WITH MY METAL DETECTOR, IT JUST SHOWED THE BURIED GAS LINE." – Anonymous
"I hid it now I can't find it. At my age the first thing to go was my hiding place. Someday someone will get rich tearing down my house and finding those nice shiny coins." – Anonymous
Ferris comment: Yesterday, I made my monthly trip to the coin shop. Somehow, I never noticed it before... but there it sat, on top of an old metal filing cabinet at arm's length from the salesman: a Smith & Wesson revolver with a long, black barrel. The thought of having it pointed at me was chilling.
The coin shop guys seem pretty laid back with that S&W sitting there, even though they are virtually surrounded by cash, coins, jewelry, and collectibles. I realize they're selling gold, not storing it, but still, that gun made me think...
If they come for my gold and I'm home, maybe I'll just shoot them. But come to think of it, that would just give me a much bigger item to bury in the backyard.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon, and Baltimore, Maryland
August 27, 2009