Almost exactly two years ago (December 10, 2007), we first warned about a looming financial disaster. The so-called "sovereign wealth funds" – the investment arms of the world's central banks – were fleeing U.S. Treasuries. But they didn't buy gold, the traditional reserve asset of the world's banks. Instead, they followed the crowd into trophy real estate and hedge funds of various stripes, including highly leveraged investment "banks." (Highly leveraged, limited-liability investment companies that depend on investors, not depositors, probably shouldn't be called a "bank" of any kind.)
To us, this situation was an amazing spectacle...
And while we have no doubt that sovereign wealth funds will be great for Wall Street, we wonder how well they will do for their ultimate owners – the citizens of [foreign countries]. It has long been our experience that the farther a dollar travels from the pocket of the man who earned it, the more likely that dollar will be lost, stolen, or bled dry by fees.
The idea of a sovereign wealth fund is an investment banker's dream: These are dollars won through trade, deposited into central banks (in exchange for local currency), and left for the government to manage. This isn't merely "other people's money." This is money that never belonged to anyone in the first place. This is money that ought to disappear into the endless hole of human perfidy. We bet it does... and faster than most people expect.
Were we to cast a movie about the "endless hole of human perfidy," we could never have found a better leading man than David Jackson. A former senior vice president of Lehman (where he put the bank into the real estate deals that later bankrupted it), he became the investment guru and then the CEO of Istithmar, part of the sovereign wealth fund of Dubai. You don't have to take my word for Jackson's obvious lack of savvy. You are welcome to judge for yourself. A speech he gave to the Yale School of Management in 2007 – about the risks of a banking crisis – is posted on the Internet.
During the years 2005-2008, when every thinking person on this planet was aware of the global real estate bubble, when cap rates on commercial real estate deals were negative, and when the greatest real estate investor of this generation (Sam Zell) was selling, David Jackson decided to put $4 billion into the most expensive real estate he could find – highly leveraged hotels in New York City. Only someone with an economics degree from Princeton and an MBA from Yale would have ever dreamed of doing such a thing... and only while using other people's money. Jackson's deals are literally among the stupidest I have ever seen. How I wish he'd been buying publishing companies instead of hotels...
One of the hotels he bought, the W Hotel Union Square, cost $282 million in October 2006. There are 261 rooms in that hotel, spread across 33 floors. So try to imagine how you're going to break even after paying more than $1 million for a hotel room? Today, the hotel is estimated to be worth $137.5 million. And that's just the beginning of David Jackson's problems. He paid 100% too much for everything he bought, including the Mandarin Oriental Hotel and Barney's. What a disaster...
There's even more irony to this situation... Dubai itself is bankrupt, too. It never occurred to the banks that lent Dubai $800 billion over the last 10 years the city-state doesn't really have any oil. (Oil makes up less than 5% of Dubai's revenues.) Of course, who would have ever thought constructing the word's largest building, the world's largest shopping mall, the world's largest island, etc. in a repressive theocracy in the Middle Eastern desert might not work out?
Our bet is even governments can learn from their mistakes... if they're big enough and obvious enough. Over the last 35 years, capital has flowed out of the United States, via our massive trade deficits. These enormous capital flows have been coming back to America in the form of Treasury investments and sovereign wealth funds.
Both are going to result in enormous losses for our trading partners. Eventually, they will wise up. Eventually, they will buy gold instead of overpriced U.S. assets. Some – Russia and India – have begun. The big buyers will be Asian countries (and Brazil) who hold almost zero gold today.
Today, Penny Stock Specialist editor Frank Curzio is meeting with the CEO of a little-known oil and gas company in Florida. He's trying to discover exactly how much upside this tiny company has. Only folks who tuned in to our November 30 Off the Record conference call have heard about this stock. It's not in Frank's regular portfolio.
The stock is up since the call, but Frank says it could easily triple from here. It's trading for less than $2 per share. The company has a rock-solid balance sheet. Insiders are loading up. The company just entered the U.S. oil market for the first time in its 50-year history. And it recently sold millions of dollars in noncore assets to raise cash. It will likely use the money to purchase another U.S. oil and gas project.
Again, this stock recommendation is only available to Off the Record subscribers. Frank will update listeners on his meeting when he returns. To learn how you can sign up for Off the Record and listen to the first conference call for free, click here...
We are closing enrollment for the S&A Alliance tonight at midnight. It's also your last chance to take advantage of our quarterly billing option for Alliance. We likely won't make this offer again for six months.
As an Alliance member, you will receive everything we publish for life (except for our exclusive research service, Phase 1 Investor). That's currently 14 investment advisories, including Jeff Clark's Short Report and Dan Ferris' Extreme Value. Plus, if you enroll today, you will be the first to receive our five new services. These include our Off the Record conference call service and Frank Curzio's Penny Stock Specialist, mentioned above.
Frank is also publishing an exclusive advisory for only the most sophisticated investors. It's tentatively called the Penny Stock Speculator. In it, Frank will only recommended micro-cap stocks with enormous upside potential. We're talking 500%-1,000% returns.
Doc Eifrig is also starting a newsletter called Retirement Trader. In his new service, Doc is only recommending super safe trades with little downside and at least a 50% upside potential.
Finally, we're taking the best daily e-letter in the business, Steve Sjuggerud's DailyWealth, and making it better. It's called DailyWealth Premium. In DWP, Steve will share specific recommendations and insider knowledge regular DailyWealth readers don't receive.
To learn more about the S&A Alliance, click here...
New highs: Verizon (VZ), iShares High Yield Bond Fund (HYG), Burlington Northern Santa Fe (BNI), AmeriGas Partners (APU), Enterprise Partners (EPD), Markel Corp 7.5% Senior Debentures (MKV), Tejon Ranch (TRC).
In the mailbag... notes from new friends and old... send your e-mail to: feedback@stansberryresearch.com.
"Todd is right folks. I have been a subscriber since the beginning, learning and profiting. I have benefited from a pile of first rate research all these year's. I became a Alliance member 1-1/2 years ago, since then two of the letters have paid for the Alliance over three time's. Since I'm retired I've focused more on income with Mike W. True Income bonds. Paid for Alliance several times with it. Over all each writer has done a super job, I love the special report's and all the communications I receive. 'Tis a bargain for sure." – Paid-up subscriber Don
Porter comment: I'm sure it seems like we must write these letters ourselves... but we don't. We have hundreds of letters from satisfied Alliance members. For most of our Alliance members, joining was the best financial decision they ever made – they've earned multiples of their investment with us by following our recommendations. If you're considering joining, now is the time. The price will continue to go up as our business grows.
"It doesn't get a mention often, but Mike Williams True Income recommendation for First Industrial – Pref. J has really been haulin' ass! Shot up over 4% on Monday, fell back a little today. The trade puts me up 36% in 3 months time, and I still get a juicy dividend on the 31st." – Paid-up subscriber R.D.
Porter comment: Yes, that's true. Over the last year, I'd bet Mike Williams has the best track record in our group – in bonds! That's incredible. I hope you all realize what a great accomplishment that is... His latest is out today. Click here to find out more.
"Hi Porter. Still pissing people off? retired from [FBI] consulting a little over 2 years ago, and am now a full-time welfare rat. I get annuities from the Navy, Social Security, OPM, HP, and a couple more. Keep paying your taxes, I enjoy living off you. I see where you now have a former dentist working for you. His retirement book is a riot. Nothing new in it for anyone who can do a little research on their own. I'm sure he'll do we'll. I have to applaud you on the GM bankruptcy. I didn't think the Gov't would bail them out, but I really didn't realize how much GS was imbedded in the power structure.
"I'm sure you've howled long & hard how your tax dollars are keeping these and other crooks afloat. And their bonuses: you must be having a cow! So, you & and your family have a Merry Xmas, and keep pumping those newsletters. Life's great! p.s., please keep having your marketing dep't sending me all those subscription come-on mailers: I use them as fire-starters... p.p.s., it looks like my negative-am daughter will get well thanks to your tax dollars. She says thanks, too. o, life keeps getting sweeter..." – Former paid-up subscriber Steve Dansker
Porter comment: Longtime subscribers will recognize the name "Dansker." This was the subscriber who threatened me through his FBI connections. As I recall, he was upset with me for warning about GM's bankruptcy and said I should be arrested. When you're thinking about the merits of democracy... just keep in mind, guys like Dansker are the kind of people who vote. And they will vote themselves your checkbook every chance they get. When you complain, they'll send the FBI after you.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
December 9, 2009