Underwear is not a weapon
Ferris comment: Sean and Porter are traveling today, so The Digest is all my fault.
I was amused by the number of yesterday's Digest readers who think it's perfectly OK for the TSA to molest me merely because I was wearing "something around my waist," a phrase which describes virtually every airline passenger in the world (it's called underwear) at any given moment.
Well... I'm a radical thinker. To me, underwear is underwear. I don't think underwear is a weapon, though I understand those of you with infants at home will argue the point convincingly.
I'm going to take the violent unlawful search of my person and the bizarre reaction to it as signs of the times. My wife Lori found an even more perfect sign-of-the-times soundbite this morning...
So they just passed a health care plan written by a committee whose chairman says he didn't understand it, passed by a Congress that exempts themselves from it, signed by a president who smokes, with funding administered by a treasury chief who didn't pay his taxes, all to be overseen by a surgeon general who is obese... and better yet it is to be financed by a country that's broke? – Anonymous Facebook poster
Komrade Obama is creating a new program to reduce mortgage loan balances on loans that are 115% or more of current value. Lenders will get a federal subsidy of $0.10 to $0.21 on each dollar of loan principal reduced. Banks holding second-lien mortgages more than six months past due will get $0.06 on the dollar for writing them off.
Lori and I are getting ready to sell our house, taking advantage of cheap money and low housing prices. The carpet cleaner showed up yesterday. He told me about a friend of his who has lived in his house for a year and half without making a mortgage payment. He's simply waiting to be thrown out. Our realtor came yesterday too so we could sign listing papers. She told me about a client of hers who bought a $1.5 million house now in the short-sale process. It looks to her as though the buyer never made a single mortgage payment. She also told me about an executive from a big financial company who is not making payments on her house... who is renting out her guest house for $800 a month.
I'm sure you have stories like these, too. Fact is, the number of troubled mortgages continues to rise... yet fewer are winding up in foreclosure. The Wall Street Journal published a graph today showing there are 7.1 seriously delinquent mortgages for every new foreclosure taking place. This number is on the rise, up from four a year ago.
The massive increase in distressed mortgages is one big reason we're expecting hundreds of new bank failures in the next couple years. The damage will likely be among institutions with less than $1 billion in assets. This sets us up for a pretty good long-term investment opportunity, one I mentioned briefly yesterday...
Sy Jacobs of Jacobs Asset Management, mentioned in yesterday's Digest, put up an interesting chart at the Grant's conference in New York on Tuesday. It showed the eight U.S. states with the most bank failures since 2008. In order from most failures they are: Georgia, Florida, Illinois, Minnesota, California, Michigan, Washington, and Missouri. These states are also where you can expect the most bank failures in the next couple of years.
Jacobs' strategy is to invest in well-managed banks with enough capital to buy FDIC-supported assets of failed banks. Jacobs also has a fund for buying failed banks. He's buying one stock that's got great management, and which didn't participate in the bubble. I'm going to research that one for Extreme Value. But Jacobs also provided us with a couple of distressed bank ideas...
One of these was Banco Popular, the Puerto Rican bank. Jacobs says Popular is a "one-eyed king in the land of the blind." That means the bank didn't exactly do a great job of avoiding bad loans, but it did well enough. Popular is the largest bank on an island with 11 banks, four of which he expects to fail this year.
Jacobs also pointed out Citizens Republic Bancorp (CRBC) as another one-eyed king in the land of the blind. It's the largest bank headquartered in Michigan. Jacobs told us, "Several large institutions [in Michigan] are likely to fail with limited interest from bidders, given Michigan's economy is under severe stress (over 14% unemployment)." You can't say the guy isn't a contrarian. Anybody who buys in Michigan definitely qualifies.
Citizens is the logical acquirer of FDIC-backed banks and their assets and deposits, because it's better capitalized than its peers. Citizens is highly levered and trades for around $1 a share. It's clearly one of the more speculative names on Jacobs' list. But you could argue that, if things just get a little bit less horrible, the stock could double or triple.
At the opposite end from speculative bets lie the World Dominator stocks I've been touting for the last couple of years. I spoke briefly with Markel's Tom Gayner at Grant's after the event was over Tuesday afternoon.
I mentioned ExxonMobil, which got lots of criticism for not building reserves while the bull market took oil from near $10 in late 1999 to almost $150 in 2008. ExxonMobil minted money during that time and spent much of it buying back stock and paying higher dividends. Gayner quickly retorted, correctly, that buying back stock builds reserves per share, but that's not the real point I want you to get here.
ExxonMobil took cash out of the market and returned it to shareholders during the raging energy bull market. Then – AFTER the crash of 2008 – it went shopping, eventually deciding on the recent deal to purchase XTO Energy, which owns huge domestic natural gas assets. So in addition to increasing reserves per share by buying back stock, ExxonMobil has kept its reputation as a brilliant contrarian.
Speaking with Gayner, I mentioned most of the Extreme Value World Dominator picks I've made. Gayner nodded his head. He's bought them all. (To get access to Extreme Value, click here.)
During his talk on Tuesday, Gayner pointed out an important attribute that makes stocks a better long-term bet than bonds. He said bonds are like jars full of dollars. They're fixed. They can't move or change with the times. He quoted General George Patton, who said, "Fixed fortifications are monuments to man's stupidity."
But stocks can move and change and adapt. They're not static securities. They're pieces of businesses. If you pick the right business, like the few I've admitted to my World Dominator portfolio, you're buying the best of the best, the ones that have proven over a century or more that they know how to survive and even thrive in difficult times.
Tom Dyson recently published an impressive quotation by the late, great John Templeton on the subject of tough times and great companies. I've been banging the drum for buying and holding World Dominators for a couple of years, but it looks like Templeton beat me to it, when he said the following in 2005:
Not yet have I found any better method to prosper during the future financial chaos which is likely to last many years... than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations.
Tom went on to mention a whole slew of stocks that fit Templeton's criteria, many of which I've recommended in Extreme Value. To read Tom's full essay, click here.
New Highs: Fairholme Fund (FAIRX), Washington REIT (WRE), Financial SPDR ETF (XLF), Altria (MO).
Some interesting discussion in today's mailbag. Surely, you can't all be tired of us "ripping on America." Join in here: feedback@stansberryresearch.com.
"Dan, Ref your S&A Digest 3/25/10 – Gary Shilling is predicting we'll see 3% long term Treasuries again this year. It's in his 2010 prediction list. Like Tom Dyson, he believes there is too much supply of everything, that we're continuing to deleverage, housing will drop again substantially, etc. Then Porter is short treasuries and long gold. Steve has a Japan trade last month. With the Euro faltering, wouldn't US Treasuries be a favored place? Russell mentioned this today also. Dyson also loves Markel. I took Extreme Value recommendation for Berkshire B just before it went up and happy I did." – Paid-up subscriber Tom Lowe
Ferris comment: As you'll see in a reader message below, most people have their belief in America confused with their belief in America's government and its ability to inflate its way out of problems. The full faith and credit of the United States still means something to many people all over the world. They prove this by holding massive amounts of Treasury debt and purchasing Treasuries instead of gold when they get scared. I don't buy Treasuries, and I don't buy extra gold when I get scared. I keep plenty of cash in my account, and I buy gold every month as a form of savings. I recommend most people do the same.
"You guys are getting hysterical. Is it really warranted?" – Paid-up subscriber George Oram
Ferris comment: Read Human Smoke: The Beginnings of World War II, The End of Civilization, by Nicholson Baker. Then, come back and tell me if it's warranted or not.
"I pay taxes, and I believe in America. It boggles the mind that people want to complain about us becoming more of a socialist society. Every time you drive on a road, stop at a traffic signal, pay a parking meter, vote for a candidate, send a child to public school, praise our military who guard our freedom, etc. etc., you benefit from our socialist programs. Police, firefighters, public parks, bridges, the best highway system in the world... it just goes on and on. I am amazed that people think these things just fall from the sky.
"Now, we will work towards fixing a health care problem that private enterprise would never fix. Period. Why? There's no profit in fixing the problems in our health care system. My oldest son is an ER doctor, and he sees the steady stream of 'customers' who cannot pay for their care. Each customer who cannot pay increases the expense for those of us who can. Why would a pharmaceutical company ever stop advertising on TV, in magazines, on the net, for their new drug? Why would they ever stop paying for lavish promotional dinners for doctors and other medical professionals, to promote their new drugs? They know they can keep charging whatever is necessary to cover these expenses. There is no profit in lowering the amounts charged for care, for insurance, for any part of the health care cost structure as it stands.
"Just as there is no profit for the oil companies to find solutions for using their oil. Unless government gets involved, the problems continue. Same with the banks, and our financial crisis. Banks were making money hand over fist – and without government stepping in to pull the reigns in on things, it will never stop. There's no profit in it. We need government – we need socialist programs – in order to remain civilized.
"And finally, your constant ripping on America has worn me out. I fully agree with many of your investment ideas, but I just can't take the negativity anymore. You should hurry up and leave the country if you think it's so bad here. I have traveled the world for the last 15 years, and every time I return I kiss the ground. This is, by far, the greatest nation on the planet. I have paid six figures in taxes, and I have not regretted one cent. It's a privilege to live here, work here, and endeavor to make our country a better place. I am cheering for Obama to have success, even though I did not vote for him. Why? Because he was voted in by a majority, and I respect that process. If he succeeds the country succeeds. I called today to have everything canceled – which is no big deal for you, I know. I just felt like you should know why." – former paid-up subscriber Donald Gibbons
Ferris comment: Private enterprise didn't break the health care system or the energy industry or any other business in America, though failure and the ability to learn from it is a part of any business.
The government you worship broke the energy and health care and other industries. That's the scam. Government gets involved, ruins everything, claims the free market is at fault, and steps in to "fix the problem." And the problem is always that individuals have too much wealth and freedom. Then, people like you fall for it and proclaim you pay taxes and believe in America.
The U.S. financial services industry is the most highly regulated industry in the world. Without the government creating oligopolies like ratings agencies and money-center banks, no one knows for certain whether we'd have the problems we have today. It's a reasonable bet we wouldn't. There are banks in the country that didn't participate in government's largesse, and they're still well capitalized today. They said "no, thanks" to your beloved government's interference. (Tom Dyson found one of these banks recently and wrote about it in his 12% Letter.)
Nor can anyone suggest the Fed's low interest rate policy wasn't a primary cause of the great bubble. That's government intervention. Government is the one that isn't fixing and can't fix anything.
It's the essential nature of private enterprise to fix problems. Government's nature is to interfere and destroy what private enterprise alone can create. You have it exactly, perfectly backward. You have drunk the Kool-Aid.
For the record, no one believes in the idea of America more than I do. I continue to spend hours studying the lives of those who founded and built our country. But mine is the old idea of America, the one based on the ideals of self-reliance, Yankee ingenuity, and free exchange of ideas, goods, and services. That's what America is, or at least what it's supposed to be. That's what built all the roads you think are so great. That's what works, not top-down, central planners seizing control of the auto, mortgage, financial, and now health care industries.
"Ferris: I'm sure you've gotten free advice on back pain before but mine may really be beneficial. I too have back pain, so I really feel for you. About 9 months ago I found a book entitled Seven Steps to a Pain Free Life by McKenzie. It has helped me tremendously. It's inexpensive and a fast read. The risk vs gain ratio is fantastic so don't let the opportunity get away! (where have I heard that before?). His system is taught to Physical Therapists around the world including nearby to you, who could give you one on one help if you decide to give it a try. Again, I know some thing about what you are going through. I wish you all the best." – Paid-up subscriber Angelo DiPietro
Ferris comment: Thanks so much. I went straight to Amazon and bought it on Kindle.
Regards,
Dan Ferris
Medford, Oregon
March 26, 2010