I've been showing 12% Letter readers since September how to take advantage of one of the biggest wealth-creation trends to land on American soil in the last 50 years. I'm talking about the big economic boom created by massive shale gas exploitation taking place right now all over the U.S.
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I've already found two ways to earn a rising income from this trend, including the No. 1 blue-chip pipeline stock in the country, which owns the most valuable pipeline in the country. And my research partner, Mike Barrett, and I are looking into another promising opportunity to earn a safe, growing income from the boom in natural gas, oil, and other valuable liquids found in the country's massive shale resources.
In fact, this company will likely become the last stop for a huge amount of the wealth now being created at one of the biggest natural gas finds in U.S. history. I'll be writing more about this in The 12% Letter.
I've been telling my two stepsons, 19 and 20, about the huge oil boom going on in North Dakota. Everybody's working. Unemployment in Williams County, North Dakota is less than 1%. There's a labor shortage. You can make $25 an hour as a waitress and $15 an hour working at Wendy's. There's a housing shortage. New oilfield workers are sleeping in their cars. In addition to housing shortages, it's cold up there... below 20 degrees at night.
I tell the boys... that is what opportunity looks like. It doesn't send you an engraved invitation and pick you up in a horse-drawn carriage. It comes to you unexpectedly, in news stories about a place where you can literally get off the bus and find a great-paying job within a few hours... But maybe you have to get creative about finding a place to live. Opportunity isn't a wrapped gift. It's a pesky problem. It's not given. It must be seized.
I don't know if North Dakota is the right place for these guys. Their father has told them what to do all their lives. But they both have dreams, and if they're serious about making money to pay for those dreams, I know at least one place where making money requires only that you show up and work hard every day. Sure, one day, the boom will bust, as all booms do. But until then, time's a-wastin'.
"It was our only option," said Jimmie Stephens, a county commissioner in Jefferson County, Alabama. "The citizens are demanding a resolution."
And with that, we have our third (and largest) municipal bankruptcy. With more than $4 billion in total debt, Jefferson County is the largest municipal bankruptcy in U.S. history – eclipsing Orange County's 1994 filing.
Harrisburg, Pennsylvania went bankrupt after it refused to pay $3.29 million it owed as part of the $288 million it borrowed for an incinerator. You can read the full details here. At the time, we predicted Harrisburg's bankruptcy would set a precedent for many more...
The deathblow for Jefferson County was the more than $3 billion it borrowed to revamp its sewer system. Oh... and a Financial Times article about the bankruptcy also said the county's "complex mix of debt and aggressive use of derivatives blew up during the financial crisis when bond insurers, who had guaranteed the deals, collapsed over risky mortgage debt they had also backed."
Why an Alabama county is aggressively playing with derivatives is a question we'll leave to you... And of course, there's a sprinkling of government corruption and bribery involved.
JPMorgan and Bayerische Landesbank are Jefferson County's largest creditors – both are owed $52 million in general obligation debt. Memories of the "stupid Germans" from Michael Lewis' The Big Short abound. JPMorgan is also a large creditor in the sewer debt.
You may recall the essay Porter wrote last month on capital efficiency. Capital-efficient businesses maintain unusually high returns on net tangible capital. And they are able to return capital to investors at rapidly compounding rates because they don't require much tangible capital. Porter used Coca-Cola as an example:
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Coke owns around $15 billion in property, plant, and equipment. It has $8 billion in long-term investments and more than $21 billion in cash and working capital. Altogether, that's about $45 billion in capital. |
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Against these assets, it can borrow roughly $42 billion – that's long-term debt, receivables, etc. This is capital it doesn't have to keep in the business because it has such a strong business and reputation, it can borrow at cheap rates. That's been true, by the way, irrespective of the nominal level of interest rates. Coke's real (that is, after tax and after inflation) cost of borrowing is extremely low. On a net basis, Coke runs its entire operation on only $3 billion in capital. And on this $3 billion in net capital... it produces annual cash flows in excess of $9.5 billion. That's a return of 216% on net tangible capital. |
Now, let's take the opposite of capital efficiency. What if, instead of rewarding shareholders, a company took the majority of its revenues and paid its executives and employees? You'd have investment banks. Investment banks are notorious for lavish employee compensation, often allocating 50% of revenues to compensation. Some banks set aside even more. UBS, which recently suffered an unauthorized $2.3 billion trading loss, will set aside nearly 90% of its investment banking revenue (revenue, not earnings) for compensation – 90% of revenues...
That's what investment banking is about. It's a compensation scheme. It's like the hedge-fund industry in that way. The entire industry is based not on what service the business can offer, but on how efficiently it can pay itself. Nice work if you can get it, I suppose. But you'd have to be certifiably insane to put your money into the shares of an investment bank. There is no way anyone outside the company can hope to get paid a reasonable share of the profits. It's as though these companies are still partnerships, but they figured they could raise some money by going public, knowing shareholders will never get much.
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New 52-week highs (as of 11/9/11): None.
If you're an investment banker, please write in and tell us we're all wrong, that you're the salt of the earth, that the world can't live without you, and you deserve to get a bonus for showing up and answering the phone. Write us here.
"First, let me say I have been a Subscriber to various of your Newsletters for numerous years now. I believe your interview with Dan, that I have just read, is so right on, and makes so much sense in every respect. I really enjoy your 'messages,' always. You are an excellent writer and thinker, in my opinion. I will look forward to your next 'prophesies.'
"My question... Please pretend I am your Mom... I am on a fixed income... living off of my Social Security and a monthly draw from my investments... I am heavily invested in rather risky stocks, ETFs, several REITs and a few Preferred. My bills run from $4,000 to $5,000 monthly. I have no savings other than my investment accounts, which presently generate me enough interest to meet my monthly obligations...
"But I realize that my situation is 'risky'... I have been wondering if an investment in Mike Williams 'suggestions' would be less risky for me... I don't enjoy not having any savings for emergencies and cutting it real close every month to pay my bills, but that is the way it is, for now... I would have to sell something to purchase his Newsletter, but I am considering it, and would very much appreciate your input as to my situation... I am approaching 80... and I do believe we are in a very tedious time for the future... I need the interest... What to do?... What to do?" – Paid-up subscriber Barbara
Porter comment: I'm not allowed (due to Securities & Exchange Commission rules) to offer you any individual guidance. But I didn't want to simply ignore your letter, which struck me as sincere.
One thing is certain – with the policies of the federal government attempting to drive interest rates to zero, while increasing the rate of inflation, millions of Americans are in your shoes.
It's extremely unfortunate and unfair.
"Over on the Silver Doctor site it was revealed that MF Global very likely took possession of physical precious metal assets held on behalf of clients. These assets, worth about $80 million, were pledged by Corzine and used to secure a short term capital infusion of about $400,000,000 to tide MF over until a suitor could complete the purchase. Purportedly the loan would be repaid and the Phyzz would be returned.
"In the intervening days, MF spiraled out of control, losing far more than the stop gap liquidity. These physical assets belonging to the clients were immediately removed by the lender, who is still unnamed. The customers are out those assets and considerably more. Last minute bonuses were paid to UK staff, hours before the BK was filed.
"As much as another $650,000,000 is still unaccounted for at this moment.
"This noted, plans that include a fiduciary to hold physical precious metals is or might now be a questionable tactic. Even when the threat of government redistribution of private IRAs looms large, one may have to be extremely careful about trusting a fiduciary to act as your agent in holding real gold or silver, even as it is now allowed by law
"This is all very recent but the word on the street is that MF Global broke this trust. All clients should take possession of their metals on a personal basis if possible. I have done that for years and am quite comfortable with that system. My father in law did for so over 40 years. What are your thoughts on this?
"On another matter, I don't see why people complain about your marketing of other services along with the no-cost ones. Why is everyone so afraid of selling? I've been a professional salesman for 36 years and am proud of this self applied label. It gave me prosperity and a great business.
"If it was not for salesmen, we would still be living in caves eating our bronto burgers with stone knives and bear claws. Fire, the wheel, houses, the written word and agriculture were all revolutions that took some selling before the average person adopted those products.
"If you don't like being sold, click over to the next post. Don't waste your time belly aching about it. My ONLY complaint about salesmen is that someone convinced the world that Brussels Sprouts were food. Other than that I am very comfortable with the sales process. Sell on." – Paid-up subscriber Craig Francis
"It's hilarious to see how hard it is for people to reflect on themselves and their actions their whole life. Some readers write to you to tell you they are going to cancel because of something you wrote that strikes too close to the heart. I can't help but read everything as if it's a book on the future.
"I've been a subscriber since March of this year. I made my first couple of trades following your notes closely. Then I went rouge, I made a lot of stupid bets thinking 'I get it now,' and lost 2.5 times my initial gains. After licking my wounds, I decided to follow your notes to the letter, and I have more than regained my losses and I'm actually ahead again.
"Your Friday Digest about the 'Ideas that could kill you' and several prior to that made me feel as though you saw every stupid transaction I made and were writing about me personally. All I can say is, keep doing what you're doing, stay every bit as consistent as you have been, and keep looking for those great money generating ideas. It's working and we are listening!" – Paid-up subscriber Brian Soldani
Ferris comment: It's nice that you believe our work is good. But let me caution you… Investing is not about following a guru. If we wanted you to think we were gurus, we wouldn't tell you things you don't want to hear. People resent those who tell useful but uncomfortable truths, and worship those who make them feel warm and fuzzy. Komrade Obama's election on his silly platform of "hope and change" is evidence of the latter, while the insults Porter gets for criticizing Social Security is an example of the former.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
November 10, 2011
The next big income play... The U.S. Oil Boom... Biggest muni bankruptcy in history... Capital efficiency... How investment-banks work (not for you)...