One of the most disastrous mergers of all time is coming to an end. Time-Warner will spin off AOL later this year. At the time of the merger, the deal valued Time-Warner at $164 billion. Today, Time-Warner's enterprise value less than $38 billion.
I wonder if AOL has a viable business at all? At its peak of popularity, AOL had more than 30 million subscribers worldwide. Today, it has only 8.7 million paying customers. How many will it have in five years, I wonder. What exactly do they get from AOL that they can't get elsewhere for free? The business was obviously a disaster for Time-Warner. Maybe it'll be a nice, shortable disaster for us once it's spun off.
I know, I know... I'm all gushy and hopeful. I can't help it. I'm a softy.
Wow! Banks raised more capital last quarter – $82 billion – than in any quarter since 1994. And the industry returned to profitability, earning $7.6 billion...
And yet, things are worse than ever in the banking industry.
Nearly 4% of all loans were noncurrent as of March 31, the highest level since the savings-and-loan crisis. The chargeoff rate, too – at 1.94% – was close to a record high.
Banks are in worse shape than ever to absorb new losses. The FDIC reports the ratio of loan-loss reserves to delinquent loans fell for the 12th quarter in a row to 66.5%, its lowest level since 1992.
The FDIC's loss-absorbing ability is also at its lowest level since the savings-and-loan crisis of the late 1980s/early 1990s. The FDIC's $13 billion reserve is just 0.27% of insured deposits. But that doesn't allow for a new law that insures depositors up to $250,000 through 2013. The FDIC's reserve is just 0.24% if you take the new law into account.
The Mortgage Bankers Association reports 12% of first-lien U.S. home mortgages were overdue or in foreclosure at the end of March, up from 8.1% a year ago. I wonder how this will look when unemployment hits 10%? Better? Worse?
Stocks aren't as cheap as they were for a fleeting moment in early March, but there are still a few cheap stocks out there. I recently found one that owns 15 major consumer brands. Though I doubt you've ever heard of the company, I bet you have at least one of its products in your home right now. The company cranks out free cash flow like crazy. It's paying down debt and building up cash.
I can't make promises about share price movements. But it's dirt-cheap at less than five times free cash flow. I'm confident it's worth at least double what it sells for today. It's in the latest issue of Extreme Value. Click here to get access.
At the 2002 Ira Sohn Research Conference in New York, Greenlight Capital head David Einhorn presented his infamous short thesis on the business development company Allied Capital. The company makes risky loans to private companies in return for unrated, first-loss traunches of commercial mortgage-backed securities... And Allied didn't have to set up loan-loss reserves. Einhorn argued the firm was exaggerating the value of its loans and would eventually realize massive losses.
The market was already closed when Einhorn presented, but word of his speech spread quickly – and shares of Allied didn't open the next morning. The ensuing legal battle surrounding the stock, which is down some 90% since Einhorn's speech, is the basis for the book, Fooling Some of the People All of the Time – definitely worth reading if you haven't done so already.
At last year's conference, Einhorn told the audience why Lehman Brothers was going bankrupt (though he originally presented the idea at Grant's Investment Conference). We all know how that one turned out. At this year's conference, held Wednesday, Einhorn announced a new short... the credit rating agency Moody's (MCO).
Einhorn explained that a triple-A credit rating is actually a curse, as it leads companies to recklessly borrow themselves into disaster. And Moody's is the leading issuer of triple-A ratings, so Einhorn is selling it short. Moody's business model has always been inherently compromised – it is paid by the companies it rates. Einhorn argued a triple-A rating has lost all meaning, and the best investors, including Warren Buffett, pay no attention to them when making investment decisions. Shares of Moody's are down around 8% at the time of this writing.
Short-selling whiz Jim Chanos, head of Kynikos Associates, also attended the conference. Chanos is apparently a man after our own heart. He's shorting any company involved with the government – including for-profit education, health care, defense, and government contractors. He believes these traditionally high-margin businesses will fall because Obama's value-destroying regime won't allow such profitability.
GM reached a new deal with bondholders today, offering 10% of the new equity with the option to buy 15% more in exchange for the $27.2 billion of outstanding bonds. Shares are up nearly 16% on the news. The deal probably won't save GM from bankruptcy. If anything, it may speed the process up. After the bankruptcy, the U.S. Treasury will own 72.5% of the company. A trust affiliated with the United Auto Workers will own 17.5%. And why anyone would want to go near that other 10% in equity with partners like the U.S. Treasury and the UAW is beyond me.
The best trades usually start out in your favor, and that's definitely the case with Jeff Clark's most recent recommendation... Jeff noticed a bullish pattern forming for natural gas last week, and he told S&A Short Report readers to go long this Tuesday...
He recommended an options trade that could return 450% without much risk. On cue, natural gas spiked 8.5% today on some bullish inventory data, and the options Jeff recommended soared over 30%. Readers are up 41% in just two days, but Jeff thinks bigger gains are on the way.
If the United States Natural Gas Fund (UNG) crosses its resistance level at $18 (it's currently under $15), Jeff said i
t will probably run much higher... and Short Report readers will be sitting on a gain of several hundred percent... In addition to the many 50%, 60%, even 90% gains Jeff's readers have banked so far this year. To learn more about Short Report, click here...
New highs: none.
Just because global warming's an utter scam doesn't mean we shouldn't fix it, right? Send your bright ideas to feedback@stansberryresearch.com.
"Chu's idea may not be loony at all; what wrong with a practical way to solve a supposed warming problem? Changing the color of roofs and pavement, when refinishing is required, is an interesting idea. And yes I know the whole Global Warming Idea is just a major scam to raise massive amounts of tax." – Paid-up subscriber Dave
Ferris comment: Did you just say global warming can be both a real problem and a scam at the same time? Whatever you're smoking must be some serious high-grade stuff.
"Got a great laugh out of the Dr.s report and recommendation. Might help a little during the summer, but would probably keep winters' snow on the roads and roofs until June! Ah Stupidity!" – Paid-up subscriber Joe
"When I first moved to Vietnam I simply asked my South Carolina bank to wire funds from my checking account to my bank account in Vietnam, a total of $400,000+. No problem, no delay. I shouldn't expect that wiring money to Panama would be any different." – Paid-up subscriber David
"Even though my name is also Fred, I am not that Fred and since I live in Panama, I can possibly answer some of his question. First off, do not try to bring 150 or so down in cash as you will end up in adjoining cells with Noriega. However, if you move down, open an account in a bank, then write yourself a $150K check and deposit it in the Panamanian account, it will clear in a few days and the funds will be here in Panama. All banks that I know of will not accept more than $2K cash as a deposit unless you can show them a copy of the check where you received the funds.
Do NOT, I repeat Do NOT try to bring more than $10,000 in cash into Panama. You will find that the Panamanian jails are nowhere as nice as the USA. Also, the US Immigrations will frown on it if you try to leave with more than $10K between all family members. There are numerous brokerage firms here as well as world banks that can assist you." – Paid-up subscriber Fred Fleming
Ferris comment: OK, so you can wire money to an account in another country. I doubt you can just wire your wealth away from the U.S. government's prying eyes and grasping, thieving hands.
Regards,
Dan Ferris
Medford, Oregon
May 28, 2009