The next victim of a European crash... Italy gets desperate... Is China still supporting Europe?... Curzio's natural gas win... Schwarzman on the U.S...
Editor's note: Today's Digest will be brief, as Sean Goldsmith is traveling and Dan Ferris is on vacation.
Yesterday, we dedicated these pages to the mounting problems in Europe. The markets now believe Greece has a 98% chance of default. (Add 200 basis points, and you'll have what we think is the real number.) Borrowing costs – which the "PIIGS" (Portugal, Italy, Ireland, Greece, and Spain) already can't afford – are rising. And the euro is tumbling. This is bad news for any company holding loads of European sovereigns.
The European banks, which we're short in Stansberry's Investment Advisory, are getting crushed. But you may not realize the problem also hits much closer to home. We believe one of America's most iconic companies could collapse... We shorted this company leading into the 2008 financial crisis – in the face of much heckling from our "patriotic" subscribers. And it would have defaulted if it weren't for government bailouts. And this June, we shorted it again...
General Electric owes its creditors $600 billion. That huge amount of debt is offset by $468 billion of investments and cash. However, much of those investments are credit-card receivables and Eastern European mortgages. The business, which no longer focuses on manufacturing, is dependent on credit markets.
Again, GE would have collapsed if it didn't get a government bailout. (The U.S. government guaranteed all of GE's debts through 2012 for free.) It can't afford its debt at current, manipulated interest rates... much less at the rates the company would pay without a government guarantee…
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Right now, if GE put 100% of its cash from operations into debt repayment every year and its earnings stayed at 2010 levels, it would take 16 years to pay off its debts. It would take at least a decade to pay down its debts to a more manageable level. No question, if GE were being managed prudently, that's what it would do. |
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GE holds about $40 billion in tangible equity. I believe its European mortgage losses are likely to be at least this large over the next five years, which means, at some point soon, GE could be going to the market for new equity. If that happens, the company's share price will probably fall in half. |
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Why run the company this way? Because the managers know GE is too big to fail. They're not running the company as though they actually own it. They're simply running it to maximize their own compensation. If it fails, it fails. The stockholders will get wiped out and the government will bail out the creditors. In the meantime, GE's managers are trying to get rich. They want to keep the company as leveraged as possible. They don't want to repay debts. They want to maximize the company's ability to borrow. – Porter Stansberry, June 2011, Stansberry's Investment Advisory |
General Electric closed at a 52-week low of $15.01 yesterday. We are up 18% on the short.
One day after Italy's borrowing costs soared (Italian 10-year debt yields hit 5.571%), the nation auctioned off as much as $10 billion in bonds. Italy is raising money in the midst of a European panic. It's desperate... The country has 14.5 billion euros of debt due September 15. The only problem... Who would lend Italy money for 10 years at less than 6%? According to the Financial Times, which released the report one day before the auction, "unidentified Italian officials" say the Chinese will buy debt.
Meanwhile, Italian economic minister Giulio Tremonti – in a moment of honesty uncharacteristic of any politician – said the Chinese are hesitant to buy Italian debt because the European Central Bank isn't buying. Who would you believe?
We wrote it... did you buy it?
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Westport Innovations (Nasdaq: WPRT) is a tiny, Vancouver-based company with a $600 million market cap. Yet it has alliances with global giants including Weichai Power, a $90 billion engine maker based in Hong Kong. Westport is also teaming up with U.S.-based Cummins ($22 billion) and the European giant Volvo ($35 billion). |
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Westport is literally trying to build a new industry of engines that run on natural gas instead of gasoline. The company doesn't own factories. It's the first company to focus solely on designing natural gas engines. Westport already has more than 200 patents issued worldwide, along with more than 120 pending applications... Based on risk/reward, shares are a steal at current levels. If the U.S. forces large trucks to convert to LNG, shares could skyrocket from these levels. In fact, I wouldn't be surprised if Cummins offers to buy Westport at a huge premium. – Frank Curzio, February 2011, Penny Stock Specialist |
Last week, Westport announced a partnership with oil and gas giant Shell to help push this budding industry along. The key is Shell's commitment to expanding the infrastructure needed to distribute liquefied natural gas (LNG) in North America. Trucking companies don't want to spend money converting their fleets to LNG unless they're sure there will be fueling stations on major routes.
Shell's involvement means the LNG-based transportation industry will develop much faster than previously imagined. Westport has a huge head start on other engine makers. That could mean billions of dollars in long-term sales as this new industry ramps up.
Penny Stock Specialist investors are up about 90% on Westport since editor Frank Curzio made his recommendation.
Frank sees this deal as one chapter in the long, ongoing story of the new U.S. natural gas boom... and how it will create incredible amounts of wealth. It should also lead to an "unconventional" energy boom all over the world. You can learn more about Penny Stock Specialist – and access Frank's research on the situation – here.
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New 52-week highs (as of 9/12/11): short position in General Electric (GE) and short position in Deutsche Bank (DB).
Despite what you may believe, we're not trying to "pull any fast ones." And if you do find an error in our work, there's no need to challenge our integrity... It's probably an honest mistake. Send your feedback to feedback@stansberryresearch.com.
"In the S&A Digest dated September 12, 2011 there is a discrepancy in the commentary…
"In one sentence there is a statement that 'While we can't short UniCredit, we can – and did – short Deutsche Bank and Royal Bank of Scotland. Since shorting both stocks in mid-July, Investment Advisory readers are up 44% and 55%, respectively.' This is followed a few paragraphs later by 'New 52-week highs (as of 9/9/11): General Electric (GE) and Deutsche Bank (DB).' Now, my broker has tried to pull a fast one before by charging margin on both sides of a trade (essentially saying that a stock could be two places at the same time) but this comment is equally as close.
"We are watching." – Paid-up subscriber JB
Goldsmith comment: Well, we're short both General Electric and Deutsche Bank. When those stocks hit a new low, our short position hits a new high... Both stocks hit 52-week lows last Friday (and yesterday, which is why you see them both listed as "highs" again today).
"Anyone who spends several thousands of dollars on a bottle of wine is a complete a**hole." – Paid-up subscriber Tom O'Meara [who added ;) after signing his name]
Regards,
Sean Goldsmith
New York, New York
September 13, 2011