The theme of my newsletters this month is obsolescence. You see, I'm convinced when the Fed stops buying long-dated credit securities (Treasuries and mortgages) in March, interest rates are going to rise, causing stocks to fall. I don't think 2010 is going to be a great year for stocks. And if stocks aren't going to go up, then it's probably a good idea to position our portfolio to make money as stocks fall.
There are three categories of stocks you should always short. First – frauds. It's a no-brainer. The problem is, frauds don't happen all that often, and they're often very hard to discover. Second – overly indebted firms. I've already explained why I expect GE to go bankrupt. It simply owes far too much money to ever be solvent again. That's why I shorted GM, too. These stories are pretty easy to find... and they all go to zero, so they're great bets.
Third – obsolescence. I don't care if you're the best buggy-whip maker in the world, once Henry Ford started selling cars people could afford, your fate was sealed. This last category is difficult to execute well because lots of these buggy-whip stocks have good balance sheets and talented managers. So sometimes the stock takes longer to roll over than you expect. But... they can be spectacular long-term trades and give you plenty of protection against bear markets. I first shorted Kodak in 1998, when I bought my first digital camera, and rode it down for years.
I've found three companies whose products are completely useless and whose businesses are facing a permanent reduction in intrinsic value – all the way to zero. We'll use these stocks to hedge our exposure to the market this year by short-selling them. The details will be in my next newsletter, which will be out next week – I promise.
I know some readers will be disappointed, because they simply won't short a stock, no matter what. That's a big mistake. If you're an investor in U.S. stocks, you'd better get comfortable with shorting. You're missing half the opportunities if you don't. Refusing to sell stocks short is like trying to play a round of golf without a putter. You might make a good score... but you're making it a lot harder than it ought to be.
I've already got three stocks picked out for my letter. But... if you were going to recommend selling short three stocks based on technological obsolescence, which three would they be? Let me know: feedback@stansberryresearch.com.
Another major real estate player is re-entering the market... The Brookfield Real Estate Opportunity Fund, owned by the Canadian value investors at Brookfield Asset Management, just bought 16 properties covering 2.9 million square feet from JPMorgan Chase for $200 million. The properties include buildings in Dallas, Tampa, Columbus, and Houston. JPMorgan will lease back about 60% of the space. Brookfield has a longstanding relationship with JPMorgan, having bought some 100 properties from the bank in the past four years.
China took steps to cool the bubble Jim Chanos and many other investors see forming in the country. The People's Bank of China raised reserve requirements by an additional 50 basis points, the second increase in a month. The increase is effective February 25. The move should ease foreign speculation, which has led to record GDP growth and soaring property prices. But without China's soaring market, who is left to buy goods from the rest of the world? Commodities across the board fell today on the news, led by a 2.3% drop in copper (a commodity closely tied to construction and economic growth).
So where do you invest if the world's largest economy stops driving the markets? Of course, there's gold. Or you could side with Marc Faber. In a Bloomberg interview, Faber said a China crash would be "disastrous" for raw materials used in industrial production. Instead, he favors agricultural commodities, which haven't yet soared... "It may take time until they start to go up substantially but if you have time, you should be long wheat, corn, soya beans or own a farm, which is one way to participate in future food price increases."
New highs: Berkshire Hathaway (BRK-A/B), Markel Corp 7.5% Senior Debentures (MKV), Steak 'n Shake (SNS).
In the mailbag... Fox News viewers, us? You must be kidding. From time to time, we watch Jon Stewart (who skewers both sides of the aisle) and the two sports guys on ESPN's Pardon the Interruption. Otherwise, our TV stays off. What do you think is worth watching? Let us know: feedback@stansberryresearch.com.
"Your comments about our President are extremely offensive to me. Please stop. And while you're at it, you might try and change the TV channel from Fox News to a legitimate news source." – Paid-up subscriber Karen
Porter comment: We reserve the right to speak honestly about the poor character, poor judgment, vanity, ignorance, rapacity, and avarice of professional politicians. As for your implied allegation that we are in some way more partial to one brand of scum over the other... you must be a new subscriber. We despise the entire political class equally.
And for good reason: There isn't any real opposition to the state, only a choice in the particular packaging. The only president we can recall having any fondness for at all was Bill Clinton. We say so not because he had any special ability, but simply because no one in modern times did more to reveal the government for what it really is – the last refuge of complete scoundrels. (On the other hand, if Bill had been something relatively harmless, like my gardener, I think I would have found his complete lack of character amusing. The poor guy always seemed like he couldn't help himself...)
On a more serious note... Both parties are equally culpable for driving the greatest and most powerful nation in the history of mankind into bankruptcy in just 30 years. There's hardly a bad idea our leaders haven't fallen for. It boggles my mind there's a citizen left in America who still doesn't realize what Congress has done to us and our children... and their children. When the average guy on the street realizes what has been done, watch out. He'll be very angry. And the odds that he'll direct that anger in a useful way aren't good.
"I just wanted to reply about my investment in Steak N Shake based on one of your editors recommendation. I have been quite pleased with this investment. I don't normally read annual reports very thoroughly but I thought I would take a quick look at it. It was one of the best reports I have ever read. It seemed clear, concise and was written in a style I could relate to. Hopefully this investment will continue to do well as I like their current Chairman of the Board, though I only know him through this report. And what a great surprise that I now have another perk through this investment, 3 Free Milk Shakes. Hey, does life get any better than this?" – Paid-up subscriber Peter
Porter comment: I would urge investors to read the annual reports of every company they buy – before they invest. If you don't have the time to read an annual report, you don't have the time to be an investor.
"Your 'front row seats' do look nice but they look like they are on the goal line? I would think a highly connected guy like you would get closer to the fifty!" – Paid-up subscriber Jim Andrews
Porter comment: So says the man who didn't go to the game...
Regards,
Porter Stansberry and Sean Goldsmith
Miami Beach, Florida
February 12, 2010