"There was no one else there... except the old people, doing their walks. It was sad. And all of the sales people were incredibly pushy, like they were desperate."
That's how my wife described the scene yesterday at the local Towson Town Center mall. The now-in-default REIT, General Growth Properties, owns the suburban Maryland mall and hundreds of others around the country. While the big rally in stocks yesterday moved the banks and the homebuilders, deeply indebted commercial property stocks (Macerich, for example) and newspaper stocks (Gannett) barely budged. And they were down again today... We call stocks like these road-kill. They may not be all the way dead yet, but someone should do them a favor and put them out of their misery.
A cautionary tale... One of the most difficult aspects of a successful speculation is knowing when to get out. Trailing stops can help. But paying attention to the crowd is even more important. I vividly recall having dinner with Jim Rogers and Steve Sjuggerud in 1998 at the Windsor Court Hotel in New Orleans. Jim had just launched his commodity index fund, and commodities were breaking through to new lows, day after day, as the Russian default had sent the value of the U.S. dollar soaring. (The market for commodities had been bad for so long, Merrill Lynch had recently fired its entire commodity trading and banking team.) I asked Jim when he would cut his losses...
"Oh, I never use stops," he told me. Why not, I asked. How will you know you're wrong? Jim replied with a smile and his best southern charm, "I never take any chances. I never invest unless I know I'm right. And I'm never wrong, so I don't use stops."
A few years later I ran into Jim at another conference. Commodities were soaring, and everyone wanted to know if Jim was still recommending them. Yes, he told the audience. Later, at a cocktail party, I asked him when he would sell. "Oh that's easy. I'll sell when Merrill Lynch gets back into the commodities business."
In late 2005, Merrill Lynch launched a series of exchange-traded commodity funds. In 2006, it added a fund designed to mimic the Rogers International Commodity Index. Unfortunately for Jim, he didn't take his own advice and sell...
Warren Buffett hates airline stocks. He bought a preferred stock issue from U.S. Air in 1989. By 1995, the company had lost $3 billion, and Buffett's preferred dividend was suspended. Since then, he has been very vocal about his feelings toward the aviation industry.
The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at Kitty Hawk and shot him down, he would have done us a huge favor... The worst sort of business is one that grows rapidly, requires significant capital to engender growth, and then earns little or no money. Think airlines.
But... knowing the airline industry has always been a loser for investors makes airline stocks very easy (and safe) to sell short. In fact, right now, you can easily find a half-dozen airlines that cannot afford the interest on their debts, suffer from plummeting revenues, and face huge losses related to commodity hedging. (Need help finding one? See my latest issue of Porter Stansberry's Investment Advisory.)
Former Fed Chairman Alan Greenspan defended his "easy money" policies today in the Wall Street Journal, saying they did not cause the housing bubble. He placed the blame on the extreme growth in China and other emerging markets, which led to an excess of savings that pushed global long-term interest rates down between 2000 and 2005. Before this phenomenon, Greenspan argues, mortgage rates and the benchmark fed-funds rate moved "in lockstep."
Greenspan can say what he wants. But when the government guarantees the balance sheets of Fannie and Freddie (not to mention every other large bank in the country)... when it encourages the creation of an enormous amount of credit by lowering short-term interest rates to 1%... and when Congress insists on providing loans with no down payments to low-income and first-time homebuyers, you will eventually have a disaster.
There was either no risk, or very little risk, to home speculators. Banks didn't rein in lending because depositors don't care how risky a bank's loan book becomes – their deposits are guaranteed. Fannie and Freddie could buy an unlimited amount of subprime debt (with almost no loss reserves) because they had a line of credit with the Treasury. Greenspan didn't worry about the credit bubble because the market is efficient. Everyone acted like a fool because no one was going to be responsible for his actions.
Parsing the blame accurately is probably impossible, but one thing should be obvious to all of us: Greenspan had a hell of a lot more to do with it than 99% of his fellow Americans, who are now left with a multitrillion-dollar bill to clean up the mess.
With nearly the whole world realizing that selling U.S. Treasury bonds is a one-way trade, shouldn't the market reverse at some point and try to shake us all out? That's certainly what you'd normally expect to see. But with the huge increase in Treasury note issuance, I don't think any buyer is big enough to move the market against us.
New highs: none.
In the mailbag... what happens when the government allows a major bank to fail? That's an easy one. Send us something hard: feedback@stansberryresearch.com.
"Could you please explain the uptick rule and how it would affect us in one of your next Digests?" – Paid-up subscriber Skip Russell
Porter comment: The uptick rule is one of the many absurd "protections" against short sellers. Anytime stocks go down, the government needs someone to blame. Since the government can't blame the real culprits (foolish investors who own businesses they don't understand at prices that don't make any sense), short sellers make a convenient target.
If you're unfamiliar with the art, short sellers borrow shares of a stock from a broker and then sell the shares on the market. They hope to buy the same shares back later at a lower price, earning a profit on the difference. Short sellers increase the amount of liquidity in the market substantially and also enable much of the convertible bond financing that used to be available.
When the government makes it harder (or impossible) to borrow stock to sell short, the market tanks – every time. Why? Because liquidity falls drama
tically. When institutional investors no longer have the ability to hedge their positions, they abandon the stock market. They refuse to provide convertible bond financing, which was destroyed last fall when the government forbade short selling in nearly 1,000 different stocks.
The uptick rule is one way to limit short selling and manipulate stock prices higher. It requires short sells occur only after a stock has "ticked" higher. The rule doesn't affect small investors at all, but it can make it much more difficult to get reasonable fills for large institutions (trading 100,000-share blocks). People fear short sellers only because they don't understand how markets work. Short selling doesn't harm any real business in the world. Likewise, no real investor in the world could be harmed by increased transactions in stocks.
Fraudulent businesses or companies without real business prospects are certainly harmed by short selling... but that's the whole point of the market, isn't it? To discover accurate prices?
"I was reading the Inside Strategist and noticed Porter's name at the bottom, reason for the change in editors?" – Paid-up subscriber Bill Moss
Porter comment: The prior editor, Brian Heyliger, resigned from our company for personal reasons. That's not a euphemism. Brian did a great job for his readers, and we were sorry to see him leave us. But he has other priorities right now in his life. We wish him the very best.
Additionally... we're looking for a full-time replacement. While I enjoy researching stocks with insider activity, and I think I can do a credible job, my plate is too full. Our subscribers (and my family) deserve another full-time analyst. If you have experience as a securities analyst or many years experience as an investor and you're interested in the job, let us hear from you: feedback@stansberryresearch.com.
"I am a novice in financial matters but am learning thanks to your services. Can you explain in simple terms what would happen if the government would allow a major bank to fail?" – Paid-up subscriber Bill C.
Porter comment: This is what happens...
What would happen if a major commercial bank failed (like Citigroup or Bank of America)? The FDIC would be required to pay off the bank's depositors, up to $250,000 per account. The government doesn't want to see that happen for two major reasons...
First, the FDIC doesn't have nearly enough resources to cover the possible losses at any of the largest 19 banks in the country. The failure of the FDIC would reveal it for what it really is: a total fraud. Congress would have to provide billions in additional funding (and will probably be forced to do so anyway, even if none of the largest banks fail). Second, the bank's assets would have to be auctioned off, which would provide real prices again (instead of merely estimated prices) for much of the toxic assets on most banks' balance sheets. This would make it harder for them to avoid taking even larger write-downs and would reveal most of them to be insolvent.
Thanks to our constantly debased currency, these debt crises will happen every 15 to 20 years and result in huge waves of new inflation, with each inflationary period becoming substantially larger than the previous period, until eventually people lose total confidence in paper money. This happened once before in American history (from about 1600 through about 1750). And it will certainly happen again. No system of paper money has ever lasted.
You can only protect yourself by understanding that eventually the paper money will completely fail... But from time to time, the addition of huge new volumes of money will produce periods of euphoria and confidence. These speculative periods will cause asset prices to soar and the value of our dollar to rise – often substantially. Sadly, this forces every citizen to become a speculator. A sound currency would hold a far more steady value and could simply be saved.
Regards,
Porter Stansberry
Baltimore, Maryland
March 11, 2009