The S&A Digest: UBS's $2.6 trillion

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As of 06/17/2013

UBS's $2.6 trillion... Freddie Mac on timing... Bill Miller buys more Freddie... A bevy of new value bets... Wachovia... Two "can't miss" investment conferences... Gold miners are cheap...

If permabear Jeremy Grantham is right and the whole world is in one big bubble, how bad do you think life is for the world's biggest asset manager, UBS? It has $2.6 trillion of assets under management. UBS just reported another $5.5 billion in write-downs. That makes a total of $42.9 billion in write-downs over nine months. And that's just its own balance sheet. There can be little doubt its clients are feeling plenty of pain as well. It must be virtually impossible to add value as a manager of $2.6 trillion.

Not in the nick of time, but rather deep into its gaping evisceration, Freddie Mac will no longer buy subprime mortgages originated in New York state. It made its decision in response to new New York laws that create more risk for mortgage buyers. On Friday, Fannie Mae said it would slow down its purchasing of mortgage-backed securities.

With available lending capital shrinking, I've found a finance operation with an impenetrable fortress of a balance sheet. And it's already started making money as a lender to investment-grade credits. Details are in the August issue of Extreme Value, due out today after market close. For more on a risk-free trial subscription, click here...

Maybe Bill Miller is disillusioned after being fired by the Massachusetts Pension Fund. Or maybe his past 15 years of success have gone to his head... Whatever the reason, he's still buying Freddie Mac. Yesterday, Legg Mason disclosed it owns 79,880,998 shares of Freddie, a 12.4% stake, making it Freddie's largest shareholder. At the end of the first quarter, Legg owned 50,244,068.

Value investor Jeffrey Gendell of the Tontine Capital hedge fund, recently bought shares of Accuride, a company that makes parts for trucks and trailers, and YRC Worldwide, a $1 billion trucking company. And our old friend Arnold Van Den Berg at Century Management in Austin, Texas, also owns 5% of YRC Worldwide. Arnie, as his friends call him, is a deep value investor who often has a large percentage of his portfolio in cash. He still has a couple of my old e-mails in his online library.

With oil prices trending down and the U.S. dollar picking up, these transport stocks will probably be good investments in the coming years. S&A Dividend Grabber subscribers are up double digits on a trucking company Goldsmith recommended last year. To learn more about Dividend Grabber and access Goldsmith's trucking sector pick, click here...

One more value investor we greatly respect, Steve Mandel at Lone Pine Capital, bought 7.8% of Hansen Natural – the company that makes Monster energy drinks.

Almost 60% of U.S. and European institutional investors believe another large financial institution will fail in the next six months, according to Greenwich Associates. Another 15% think it will happen in six to 12 months. "Most institutions think we are currently in the most dangerous period for global financial services firms," said Frank Feenstra, a consultant at Greenwich Associates. "Perhaps if the markets can make it through the next six months, the level of pessimism may begin to subside."

Perhaps the large financial institution to fail will be Wachovia. The Charlotte, North Carolina-based bank announced an $8.9 billion loss, slashed its dividend, and said it would exit the wholesale mortgage market on July 22. Now the bank says it will cut 600 full-time positions. That's in addition to the 4,400 open positions and contract workers and 6,350 full-time workers Wachovia said it would fire in July. And the SEC is investigating Wachovia for fraud related to its municipal-debt auctions. Its latest 10-Q, which it snuck in minutes before the deadline yesterday, showed a laundry list of lawsuits and investigations. It also showed nonperforming assets more than doubling, from $5.4 billion in December to $12 billion today.

One of the next shoes to drop in the credit crisis is commercial and industrial lending, or C&I. C&I lending has been on an uninterrupted growth spurt for four straight years. A fifth year may be a stretch, as an American Banker graphic put it.

Wachovia grew its C&I business 30% last year. Various banks, like Wells Fargo, Bank of America, and U.S. Bank all reported higher C&I losses last quarter. We're talking about construction and small-business loans here. Growing most any type of lending operation over the past couple of years practically guarantees you were taking on more risk than you'll ever get paid for. It's hard to believe this business will avoid bigger losses throughout this year and next.

In this age of wanton speculation by the know-nothing masses, you can usually find a stock pick to go with every tiny shred of news or cultural fad. The Olympics shall not be spared. But the pick isn't Nike or Visa. It's clothing maker Warnaco Group (WGC), which trades under brands like Chap's, Calvin Klein, and most relevantly, Speedo.

Warnaco hit a 52-week high yesterday. It's up 30% the past month. It's been in the news with its new swimsuit, the LZR Racer. Swimming superstar Michael Phelps wears this full-body suit, which is shaking up the swimming world. According to Warnaco CEO Joseph Gromek, the suit is "uplifting. It does all these wonderful things. It was created in conjunction with NASA, the space agency, and it was actually tested in wind tunnels." Since Speedo released the suit in February, more than four dozen world records have been broken.

New highs: Health Care REIT (HCN), H&R Block (HRB), Heartland Express (HTLD), Johnson & Johnson (JNJ), McDonald's (MCD).

An unusual lull in the mailbag. Has Porter's absence stifled you? Entertain us... feedback@stansberryresearch.com.

"Last Tuesday Jeff had sent out a Short Report trade for the Q's. Because the price gapped up that morning most people missed out on the trade, I did my own analysis of it and for my risk reward objectives was able to get in on the trade for under $1 and I closed out of it 4 days later for a total gain of 230% not bad for 1 week. I followed Jeff's advice of having multiple contracts and selling half on the double, which happened on the second trading day. I let the rest ride and put in a limit order to lock in profits. I was also able to get in on the VLO trade, I'm up 54%. Keep sending out Reco's like that and you'll stay No. 1 in my book." – Paid-up subscriber PG

Ferris comment: Jeff is a great trader. No two ways about it. You can learn more about his options-trading service, the S&A Short Report, here.

"I'm looking to get more educated in investments and investment strategies. I know enough to feel comfortable discussing business with anyone, but I feel like there is a lot more out there, and I don't think one of those expensive pieces of paper (MBAs), is the way to learn it. Unfortunately, I will not be able to see and hear you in Hong Kong, but I wanted to know if you have any recommendations for other lectures or classes that would be worth my time. I live in the northeast and would be able to get to New York and Boston easily." – Paid-up subscriber Jeff

Ferris comment: Good for you, Jeff. As British magazine mogul and author Felix Dennis says, if you're not learning, you're dying. With investing, if you're not learning, you're losing.

Aside from the Alliance meeting, which you mentioned, I regularly attend two events:

If you're interested in insurance, David Schiff puts on a good event. I don't know when his next one will be. His new website starts up this Friday, August 15, at www.insuranceobserver.com.

The annual Agora Wealth Symposium in Vancouver was very good this year. It featured every small-cap mining company worth knowing. Mining guru Rick Rule spoke several times, and his presence alone was worth the trip. Jim Rogers spoke, as did Agora founder Bill Bonner, and Capital & Crisis editor Chris Mayer.

Regards,

Dan Ferris

Medford, Oregon

August 12, 2008

Get Ready to Buy Gold Stocks

By Ian Davis

On November 17, 2000, no one wanted to buy gold miners...

The price of gold was undergoing a correction. It slid lower all year long... And investors were fed up. By November, gold was down about 8.7%. But that decline did not even compare to the collapse in gold-mining stocks...

Gold miners got crushed. They fell 47.8% from the start of the year to November 17.

This set up an amazing opportunity for contrarian investors. Gold-mining stocks had become so hated they were now dirt-cheap in relation to the gold they produced.

Over the following six months, the Datastream gold miners index rallied by 68%.

Today, gold miners are almost as cheap as they were in November 2000. The following chart shows the relationship between gold-mining stocks and the price of gold.

Gold-Mining Stocks Are Cheap Versus Gold

As you can see, gold miners consistently move in lockstep with the price of gold. But over the last two years, gold miners have diverged from their underlying commodity.

In the last 35.6 years, gold miners have only been cheaper in relation to gold than they are right now 12% of the time.

In Quant Trader this week, I'll share with you additional research on the relationship between gold and the gold producers. I'll also share with you my favorite play in the beaten-up gold-mining sector.

Good investing,

Ian Davis

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