It was about 10 years ago. I was traveling in China with Doug Casey and a handful of other very wealthy folks. We were discussing tech stocks – stocks that were booming at the time. I was talking about Qualcomm's technology or JDS Uniphase's lasers or something, when Doug interrupted me. "Oh, I never buy stocks on the open market. I'm not interested in a fair deal. I only put my money into situations that are distinctly unfair – unfair for the other guy…"
It was a valuable lesson. Rich people don't invest like you and me. They don't buy mutual funds, that's for certain. They don't buy stocks either (at least not on the open market), which might surprise you. So what do they buy?
Let's look at the recent deal to save CIT. Six wealthy bondholders of CIT, including PIMCO and hedge fund Baupost Group, put up $2 billion in financing to save the company this week. What did they get? Not merely shares. CIT agreed to pay a 5% upfront fee – that's $100 million profit overnight – and annual interest of at least 13%. In addition, the company pledged assets worth more than five times the amount of the loan as collateral. As Doug taught me: Why take a risk when you don't have to?
Can you find deals like this? Yes. From time to time, there are ways for small investors to get the same kinds of terms. In 2002, the entire high-yield corporate debt market was trading at a huge discount to par. You could have bought the bonds without taking any risk at all and made about 20% annually. The same situation occurred again – but at an even bigger discount – last fall. Several of our analysts pointed it out.
You can look for closed-end funds (stocks), too. From time to time, they trade at ridiculous discounts to net asset value and sometimes pay hefty yields. But… keep this in mind: You can only take advantage of these kinds of "unfair" deals if you happen to have a lot of cash available at exactly the right time. And that's nearly impossible to do unless you're exceptionally well disciplined.
Speaking of being disciplined… Here's a market to avoid: China. After an 80% rise this year in the Shanghai stock market, Jim Rogers is staying away. The long-time China bull – he started buying China in 1988 – says the market "has gotten ahead of itself." Rogers hasn't purchased any Chinese stocks since last October.
However, Rogers is buying commodities (of course), Japanese yen, and Swiss francs… "If the world economies revive, commodities will be the strongest," Rogers said. "If economies do not revive, commodities are still the best place to be due to supply shortages." Of the commodities, Rogers bets natural gas will be the strongest performer in the energy sector "just because it's been beaten down so much now."
Natural gas futures, the world's worst-performing major commodity this year, have declined 41% since January 1. (By the way, Rogers isn't buying nat gas yet…)
Wells Fargo and Morgan Stanley both announced earnings today. While the results were vastly different, both stocks plunged…
Wells Fargo announced record earnings of $3.17 billion for the quarter. Revenues nearly doubled to $22.5 billion… Both metrics shattered analysts' forecasts, but shares slumped around 4% today. While earnings were great on the surface, the bank's loan book is still rapidly deteriorating, permeating the market with fears about the financial firms' future solvency.
Wells Fargo's noninterest-collecting assets jumped 45% to $18.3 billion. Net loan charge-offs hit 2.11% compared to 1.54% in the first quarter. Commercial real estate (CRE) charge-offs increased to 1.35% from 0.8%. The bank added $700 million to its credit reserves to account for future losses.
Morgan Stanley – which we yesterday pointed out has massive CRE liabilities – announced a larger-than-expected quarterly loss of $159 million, compared to a $689 million gain a year earlier. Most of the losses came from one-time charges related to repaying TARP and restructuring the firm's debt.
While its competitors – namely Goldman – ratcheted up risk this quarter, Morgan Stanley pared down its principal investing and proprietary trading, so revenues couldn't keep pace with the massive write-offs. This news is especially troubling for Morgan Stanley, considering its competitors have all been announcing huge earnings. Shares fell as much as 6%.
New highs: Hatteras (HTS), AmeriGas Partners (APU).
In the mailbag… A quick discussion of oil prices and then a subscriber whose American history is a bit distorted. Plus, a few subscribers who aren't willing to work for the benefit of their neighbors (the selfish bastards). If you have a hard time discerning satire, the 'bag today might prove challenging. Send us your thoughts: feedback@stansberryresearch.com.
"Porter, in the S&A Digest you say when you see oil and NG storage's filling up and drilling rigs shutting down (52.3% since last year) and media is reporting that the world is drowning in these commodities it is time to buy. I agree with you with the Natural Gas. This huge stock pile of NG in the ground or stored in facilities combined with the large reduction in demand for the commodity has driven the price of NG down to it's all time lows, as it should. Time to buy NG I agree. But Oil has the same factors driving it pretty much world wide from what I read. It is even being said by some that we have the largest ever inventory of Oil. Why is the price then still up in the $60's and not falling into the $40's or even $30's again as in the past? Supply and demand used to regulate these things. I agree with you that when these factors are in line it is time to buy but I don't think I want to be buying yet at the prices of crude today. I think I should be waiting for the fall back to the $40 and $30's. Where am I going wrong in my thinking?" – Paid-up subscriber Pete
Porter comment: You're forgetting about China. The price of natural gas is determined by the Henry Hub in the United States, where supplies of natural gas are close to record levels. China doesn't import much natural gas. But China does import lots
of oil and lots of copper. Look at the price of copper… it's up 70% this year.
"Porter… On July 20, you wrote: The idea, at the core, was very simple: Take care of yourself and demand that your neighbors leave you alone, as long as whatever you're doing doesn't infringe on their right to be left alone, too.
"I don't know what universe you grew up in, but that was NEVER the idea at the core of the United States. The Revolution alone proves the absurdity of your idea. Remember, the motto was, We must all hang together else we will surely all hang separately. And the tradition of neighbor helping neighbor was part of the American scene long before 1776. It's only in periods of economic stress that many citizens forget this basic principle and start worrying about saving their own butts whether their neighbors need help or not and whether they can 'afford' it or not.
"I'm no fan of paying higher taxes, but I'm willing to pay what it takes for the privilege of living in this country. I never believed the Reagan jibes about 'welfare queens' and I know several people who were on welfare and worked their tails off to get off it. I'm old enough to remember the Depression, and I know that if FDR's programs hadn't been implemented we would be a smaller and poorer country today – assuming we didn't go the way of Germany during those same years.
"I agree that the government, probably at all levels, does bonehead things, mostly because of lobbying and payoffs by 'vested interests', and I recognize that many people vote without thinking or checking on the qualifications of those they vote for, and these symptoms sap the strength of our democracy. I don't know how to change that. But, I'm reasonably sure that bitching about 'confiscatory taxes' isn't going to solve any problems.
"The 1st Tradition of all 12 Step programs is: Our common welfare should come first; personal progress for the greatest number depends upon unity. This principle has allowed millions of people all over the world from different backgrounds to come together to help one another overcome addictions and other problems that they were incapable of overcoming along. It works for countries, too." – Paid-up subscriber Mitchell Krasny
Porter comment: That's right, Mitchell. Strength through Unity. Unity through Faith. Yes, Patrick Henry had it all wrong, didn't he? So did the 56 signers of the Declaration of Independence. Those ideas might have worked well back in the 1700s, but today's world is far too complicated for any of those silly romantic ideas like liberty or the God-given sovereignty of an individual. (As Republicans like to say, those Libertarians need to grow up.) What we need in this country are more presidents like FDR, presidents who understand that seizing all of the privately owned gold in the country is sometimes necessary to protect freedom. Politicians are the real heroes of America!
"In the 1992 I earned $850K in a single year. When I looked at all the taxes I had to pay, they added up to 70% of my income. I was in the top tax bracket, and as I recall I had to pay another tax on top of that (It might have been the alternative minimum tax?). I had to pay in Social Security, Unemployment, Property, Sales, and corporate taxes – all in all in added up to 70%... I thought, here I am paying the government 70% of my earnings and what do I get for it? The answer was not very much! If I were on welfare, I could get food stamps, free dental care, free medical care, free medications, and a free education to qualify for some kind of work. If I worked as a government employee, I could get a paid 4 week vacation, a retirement plan, hospitalization insurance, and a lot of other perks, for doing a little bit of work…
"I was so disgusted that I moved out of the U.S. and lived abroad for 9 years. During that time I lived income-tax free under the Foreign Income Exclusion. I had little or no paperwork to bog me down. No employees to worry about, hit the beach every day, ate well, exercised, had a great year-round tan, and a wonderful carefree social life. When my daughter-in-law got pregnant we moved back to the U.S. and it wasn't long before we began to feel depressed. What has happened to our wonderful U.S.A? So, even though I will miss seeing my granddaughter as often as before, we are heading out of the U.S. once again: This time maybe forever. We found out one thing for certain. The U.S. has become the land of the fee and the home of the (tax) slave. There are truly much better places to live and not have to pay any income tax to the U.S. if you do it all legally.
"At what point would I rather do nothing than pay taxes? I'm there now. I think anything over 20% income tax is too darn much. If we had a 15% flat tax and put the Congress on Social Security, we would all do a lot better." – Paid-up subscriber JR
Porter comment: You're a traitor to your nation and a disgraceful human being. How can you live with yourself knowing hundreds of your fellow Americans need your contribution to maintain their lifestyle?
Don't you know their children need health care? Don't you think everyone deserves a retirement free from worry? Don't you care about your obligation to help support our troops, now stationed in 120 countries, to protect your freedom? What kind of example are you setting for your grandchildren? Do you really think it's OK for you to decide what your obligation to society is? Do you really think you should be able to live wherever you want? Are you kidding?
Do you know what would happen to our country if everyone were as selfish as you are? People like you are the real problem with America. If everyone would simply do whatever OBAMA! says, then all our problems would disappear and America could be great again. I, for one, can't wait to pay for my neighbor's health care. In fact, I'm asking my wife to pick up his Viagra pills today for him and put the bill directly on our Amex card. It's only fair. I think OBAMA! would be proud of me.
"Truthfully, just the threat of taxes being higher than they already are has caused me to totally stop working on developing new markets for my business, ignoring obvious opportunities. My attitude used to be keep improving as you will have the extra income for year after year, now I think so what, I will eventually keep almost none of it." – Paid-up subscriber Peter Wagner
Porter comment: You owe your best efforts to this country. Your neighbors are counting on you. We're all going broke… and if you quit on us, how will we survive?
Regards,
Porter Stansberry
Baltimore, Maryland
July 22, 2009