Yesterday, I went up the street and paid the monthly rent on our storage unit. (It's filling up fast with all the books I won't get rid of... the ones my wife is tired of looking at.)
The guy who owns the place – call him Bob – is having a bad year. He runs a residential and commercial construction business out of an office on the storage property. At the height of the bubble, Bob had 12 construction workers and three trucks out working nonstop every day, with more jobs coming in than he could bid on. "We were slammed," he told me. Then, about two and half years ago, the business started falling off. Last year was bad but tolerable: In 2008, Bob still made a $30,000 profit building and remodeling homes and businesses.
Now, he says, homeowners and business owners are canceling more contracts than he's bidding. So far in 2009, he's $7,000 in the hole. He's down to three guys and one truck. "Well, four guys, including me," he says. The overhead on the construction business is $19,000 to $20,000 per month, most of it wages. The mortgage on the storage facility is another $3,500 a month. He's got about 100 units. Last month, he had eight vacancies. Now he's got 27 empty units.
Bob is paying a loan on his truck and his Harley-Davidson. And he has two credit cards, one with a $20,000 balance and another with $7,000... which came as a result of his recent divorce. Bob patted a small packet of paperwork and told me it was his home mortgage with SunTrust, which he's trying to get reduced, "just for a few years, until all this crap is over with." He said "this crap" with a wave of his hand, referring to the economy.
Bob weighed in on the inflation/deflation question we asked last week, too. He told me the costs of doing business are not falling. He said, "There's no deflation. They've inflated it all right up my ass!" He did admit, though, that lumber is reasonably priced... if only someone could afford to build something with it.
As I left, Bob was going to get on the phone and see if he could apply for unemployment, since he's a W-2 wage earner in the construction business.
Bob's businesses are real-estate based. And they're blowing up. That's how real estate is. Stocks can crash in an hour. Real estate takes longer. And there are good reasons to expect more pain to come in the mortgage market...
While the bubble was inflating, mortgage loans were often set up with no escrow account for property taxes and homeowners insurance, two items which have traditionally been collected monthly by the loan servicer along with principal and interest. It makes mortgages look more affordable to borrowers when you take taxes and insurance out of the monthly total. But you end up hitting mortgage debtors with huge annual or semiannual property-tax bills.
Now, legions of subprime borrowers are trying to get their loans modified so they don't default. But servicers usually require an escrow account before rewriting loan terms. This is one reason why modified loans are defaulting at exorbitant rates.
Jeremy Grantham, chief investment strategist at the legendary Grantham Mayo Van Otterloo (GMO), is still beating the drum for high-quality, blue-chip stocks. Grantham has been talking about these stocks for over a year. Now he says they've been treated unfairly, as the big rally favored lower-quality stocks.
"The easy winner of the cheapest equity subcategory contest is still high-quality U.S. blue chips," Grantham wrote in his quarterly letter. "They were really trashed on a relative basis by the second-quarter rally in junk."
I've been banging the high-quality, blue-chip drum as long as Grantham. I call them World Dominator stocks, because they dominate their industry worldwide. My most recent World Dominator pick is up 23% in just four months. The one before that rose 53% in six months before we sold it. On page 8 of the current issue of Extreme Value, I have listed the five best World Dominating blue-chip stocks to buy right now. To get access, click here.
GMO is also studying China to see how it will affect other emerging-market stocks. The Chinese market has doubled from its 2008 lows, increasing the risks of a crash. Grantham wrote that Edward Chancellor, a member of GMO's asset-allocation team, "strongly suspects that the Chinese economy is dangerously unbalanced and very likely to come unhinged in the next few quarters, surprising the pants off investors."
This morning, I spoke with a friend of mine, author/investor Vitaliy Katsenelson. He's about to publish some new research on China and wanted to give me a heads-up. Vitaliy figures the nonexport Chinese economy grew roughly 23% in the month of June, an astronomical, off-the-charts number, which Vitaliy says he found using "fifth-grade math."
That 23% is the difference between the contraction in exports and the reported GDP growth of 8%. From this crazy number, Vitaliy draws two possible conclusions: Either the monetary base has expanded dramatically and the quality of growth is very poor or the Chinese are lying through their teeth. Vitaliy says, "Only time will tell what is actually going on in China."
Vitaliy published his first piece warning investors about China on the first day of the Beijing Olympics.
Jim Rogers has been investing in China since 1988. He isn't selling China, but he's not buying it anymore, either, because it's overvalued.
Rogers says the best China play now is commodities. The country is starting to spend its massive currency reserves on infrastructure improvements. Rogers says, "China has to buy commodities. They have no choice. They cannot cheat you. They will pay you on time. They will take you to dinner. They will do everything, because they have to buy commodities."
Rogers says he owns all of the commodities and would currently buy every commodity, "especially the grains."
More great timing from Steve Sjuggerud...
Russian stocks have been obliterated... just left for dead. The Templeton Russia Fund lost 80% of its value since the beginning of last year. Russian stocks are ridiculously cheap.
Russia is as cheap as any market in the world. (And through shares of CEE, we can even get an 18% discount off the already cheap price.) The market is absolutely hated and ignored by investors. And it is in a rip-roaring uptrend. We've got to get in. We have no choice! – May 2009
issue of True Wealth
Steve got in early on Russia's uptrend, and the Central Europe and Russia Fund (CEE) is up over 40% since his April recommendation... Russia is one of the best-performing markets in the world this year.
With Russia being a lousy place to do business but a wonderful place to speculate now and again, we wonder when Steve plans to take his profit on this highly successful trade in a risky country... True Wealth readers will find out first. To get access to Dr. Steve Sjuggerud's True Wealth, click here.
Bank of America CEO Ken Lewis said he is planning to reduce the company's 6,100 branches by around 10% – finally pulling back after two decades of massive expansion. Liam McGee, president of Bank of America's consumer and small-business bank, said more and more customers are using mobile and online banking for basic transactions. But I think it's more likely folks just don't have as much money and they're not taking out as many loans, making some branches unnecessary.
If Bank of America is doing it, you can bet the other mega-banks are at least thinking about it. Wells Fargo has 6,668 branches in 39 states. JPMorgan has around 5,100 U.S. branches... That's a lot more potentially vacant real estate and lost jobs.
UBS told its customers they can no longer buy leveraged or inverse ETFs. They can only place orders to sell them. That's one more huge short seller to exit the market. ZeroHedge recently told the world short interest in the stock market has fallen 72% the past two months. That's enormous. This rally was ruled by junky companies and has now pushed short sellers into capitulation.
New highs: Hatteras (HTS), AmeriGas Partners (APU), Crucell (CRXL).
Now... just because we haven't angered you recently, there's no reason to tone down your criticism of our work, our stock picks, our brains, or our character. We miss the accusations and condemnations. Send all of your best derogatory remarks here: feedback@stansberryresearch.com.
"Personally I would not own a Credit Card... They just turn you into a slave. My lady has a couple, Has never missed a payment. Within the last year BofA has raised her rate for no reason by $100.00 a month. I think she started out at 10% and now its up over 18%. Concidering Bof A gets money for free from the Feds 0% rate there is no reason for them to raise rates like that in this economy. If they did that to me you can bet your ass they be eating the balance. The greedy phucks. Personaly I think every man and woman that has a Credit card or loan from a zombi bank should hold back their payments for a couple months till they go under." – Anonymous
Ferris comment: Not owning a credit card seems like a good idea. But if you want to do any traveling, it's hard to live without one. As far as your suggestion about borrowers from zombie banks, it's very, very, very hard to think of any circumstance under which that obligation would no longer be valid.
There are two rules I follow: Don't infringe upon another's person or property. Do what you promised to do.
"I would suggest Mr. RT Cossey to try Cuba. Comrades Fidel & Raul Castro will welcome him with open arms. He might not need another stamp on his crowded passport. Just mention that you are an Obama supporter, and the gates of HEAVEN will be open to you. You may want to bring your entire family, as Health Care is free (Just make sure you take some roach killer and soap when you visit any hospital, as well as aspirin). Your younger generation can get free education. Havana University is a very good place to start.
"I would go for a Medical Doctor degree, as you will be able to make up to $100 per month or perhaps selected to do 'Volunteered' work for Comrade Hugo Chavez in Venezuela, allowing you to see how the rest of the world lives in Chavez's paradise. There are no check-points in Cuba, except for citizens who need special permits to travel in the Island. But, as an American, you will be able to shop at special stores (Off limit to locals) where your top Comrade officials shop.
"I'm not making this up. I was born there and I was part of the 'Elite' that rules the country. However, Chavez has warned Fidel Castro that he has to move faster on his quest for Communism as Barack Hussein Obama may beat them to it. Thus, you may find 'Paradise' right here pretty soon." – Paid-up subscriber Fred Pombroll
Ferris comment: Thanks, Fred. Any S&A reader who has run a third-world dictatorship is invited to drop us a line.
Regards,
Dan Ferris
Medford, Oregon
July 28, 2009