What is the world coming to, dear subscribers?
In America – formerly the home of free enterprise – the government now owns the banking system, AIG, and General Motors. Next, Uncle Sam seems ready to take over health care and the market for electricity (cap and trade). At the same time, on the other side of the world, in Switzerland, private bankers can't keep their mouths shut anymore. Having already given up 250 clients to American prosecutors, UBS is now poised to give up 52,000 more names. The Swiss stood up to the Kaiser in World War I. They stood up to Hitler in World War II... But they can't stand up to OBAMA! No one can.
We're quite certain few of our readers feel any sympathy for Swiss account holders. Perhaps it's too contrary of us... but we admire them. They've at least gone to the trouble to resist the incredible and unrelenting encroachment of the federal government into the private lives of its citizens. Rather than bowing down to the feds and accepting a plea, we would encourage all 52,000 to stand in revolt. We wonder what would happen then? And we also would encourage all of our subscribers to move a significant amount of assets out of the U.S. before such transfers become illegal. (As they most certainly will...)
We don't think it's a positive sign for the future of humanity when the world's leading (and legendary) haven from plunder and violence – Switzerland – is finally forced to kneel before the incredible, global power of the United States government.
Switzerland, like America, once represented a very powerful idea – the idea that men could still escape to a place beyond the reach of coercion. Switzerland was, until this week, a place where civilized men could find refuge. And whether or not that matters to you personally, we all benefited from the existence of such a place. It was the last significant outpost of economic freedom.
In the June 26, 2009, Digest, we reminded you Continental Airlines is heading for bankruptcy...
The trigger for Continental's bankruptcy will be an obscure clause in its credit-card processing agreement with Chase Bank. The agreement requires Continental to maintain at least 25% of its current obligations in cash.
Next year (2010), the portion of its long-term debt that's due in 2011 will become "current" – due within the next 12 months. That will cause Continental's current obligations to soar to nearly $7 billion. At the same time, its cash reserves will be falling. The collapse of the current ratio will trigger a cascade of debt defaults, pushing the airline into bankruptcy.
Today, the Wall Street Journal reached the same conclusion, saying the major U.S. airlines may go bankrupt this winter. The second quarter usually shows high profitability and strong demand, but not this year. Only the four discount carriers – Southwest, AirTran, JetBlue, and Alaska Air – are expected to show a profit.
May passenger revenue was down 26% on 9.5% fewer passengers paying around 18% less per ticket than a year earlier. Continental's "unit revenue," the amount received for each seat flown one mile, fell 20% from a year ago. As MIT air transportation researcher Bill Swelbar told the WSJ, "It's hard to restructure zero demand." Shares fell around 2% today to less than $10.
Dan Ferris has been exhorting subscribers to short MetLife in Extreme Value for months now. The insurance giant – and major holder of commercial real estate (CRE) loans – will be forced to write down its loan portfolio, which will erase its equity. Ferris wrote in the July 9 Digest:
MetLife holds $36 billion worth of commercial real estate loans, carried at 98% of cost... even though the fair value of its commercial mortgage-backed bonds is reported at 20% below cost and commercial defaults across the country are soaring. With just $18 billion of tangible equity, I think MetLife will incur much higher losses than it's letting on. The company's chief investment officer recently told the world, "the worst is to come," something we've been telling you since March.
While MetLife has magically withstood any writedowns to its CRE portfolio, British banking giant Lloyds Banking Group hasn't been so lucky. A UBS analyst report said the bank will likely write off as much as $21 billion on its loans to commercial real estate, businesses, and mortgage holders. First-half results for the bank will come out in three weeks and should show losses are actually accelerating. Bad news for anyone holding commercial real estate loans...
John Paulson is arguably the best money manager of all time. His hedge fund, Paulson & Co., made roughly $20 billion in profit over the last three years alone. He was paid around $5 billion over the period.
I, on the other hand, am merely a dirty scribbler. I work far from the soaring towers of midtown Manhattan. I earn nothing like the wages of the financial titans of the hedge-fund world. But every now and then... I end up putting my readers into the same positions held by the world's best investors.
Last year, Paulson's two biggest trades were long the Anheuser-Busch/InBev merger and shorting Fannie Mae and Freddie Mac. As any reader of my newsletter knows, those were my two biggest bets last year, too. The trend doesn't stop last year, either...
John Paulson is now the largest investor in my latest PSIA recommendation. While I can't give this stock away in the Digest yet, I can tell you it's a classic special situation. Forced liquidation of the common stock pushed this company's shares to a ridiculously cheap level. I expect you can conservatively make between three and five times your investment in the next three years – with almost no downside risk.
As I told my readers last week, this is the best recommendation I've had in three years. And I'm advising my readers to put up to 25% of their investment assets into this one stock – something I haven't done since I first recommended Anheuser-Busch in 2006. Click here for more on how to access my latest recommendation.
In the mailbag... we were stunned last time we mentioned the third rail of financial newsletters – George Soros. Usually, when we mention his name, the mailbag lights up. This time, it took some prod
ding... but apparently our subscribers still believe Soros is the center of all evil and holds sole responsibility for the collapse of American values.
We have no opinion on Soros. We've never met the man. But we wonder about the stability and the utility of any political system that could be undermined by one man. Tell us how you really feel: feedback@stansberryresearch.com.
"'While we don't condone huge bonuses for executives who ran their company into the ground, the fact stands that AIG agreed in contract to pay its executives this amount. The government should not have the power to overturn existing contracts. This AIG bonus debacle could set a scary precedent.'
"Did you guys forget that if the company had not received the tarp funds these morons would be out of business and there would be no bonuses to hand out. Outside of a base salary every dollar earned needs to be applied to paying back the US tax payer not bonuses. One minute you guys are saying the government should not be bailing companies out the next your saying when they do they should not have the right to impose its will, WHAT?. How about you stick with your original thought (which was a good one) and stand firm that the government should not be bailing anyone out." – Paid-up subscriber Mike
Porter comment: We objected to the AIG bailout. In fact, we were the first journalists anywhere to explain why the bailout of AIG was really a bailout for Goldman. (See my October 2008 newsletter, The Secret of September.) On the other hand, we believe firmly in the rule of law and the sanctity of contracts. If you want to void the AIG contracts, then you have to go to bankruptcy court. We are appalled and terrified about the future of the country if the government is allowed, without sanction, to break contracts at will. You should be, too.
"Dan, you state George Soros' position is small in politicians. That's because he knows politicians are the cheapest whores in the world. A few strategically 'invested' dollars with the right politician will return of 1000s of percent on the investment. As an example just look at the gang from Golman Sachs that went into politics and how much money they have made for their investors." – Paid-up subscriber Gary S.
"Soros should be run out of the country, stripped of his citizenship and tarred and feathered." – Anonymous
Porter comment: I agree. Those who oppose us are terrorists. If you're not with us, you're against us. And all terrorists must die. Strength through Unity. Unity through Faith.
Regards,
Porter Stansberry
Baltimore, Maryland
July 13, 2009