The Wall Street Journal spoke with two of the world's best hedge-fund managers – George Soros and John Paulson – about their views on the current markets. Both are generally bearish, but see "pockets of opportunity" in certain sectors.
Paulson thinks the risk of default in the credit markets is overblown, and his fund has shifted from a short bias in 2006 to one that is "aggressively long." Paulson is buying all different types of top-rated financial assets: residential mortgage-backed bonds, commercial mortgage-backed securities, distressed debt, leveraged loans... He's also buying shares in banks and financial institutions like JPMorgan and Capital One.
Soros says we're in the middle of a "trading market" and investors should take profits when stocks surge, even if the long-term prospects are attractive. He's bullish on Brazil, India, and China. In particular, he likes Brazilian oil giant Petrobras.
While we greatly respect Soros' opinion on the markets, we think the biggest money to be made in oil this year is in our two small-cap Iraqi oil stocks. As Iraq continues to open its massive oil reserves (an estimated 215 billion barrels), our two recommendations will reap windfall profits.
Unfortunately for Soros, his $14 billion hedge fund is too large to invest in these stocks – a several-hundred percent return on a company of such a small size would be meaningless to his bottom line. But smaller investors can easily add tens of thousands of dollars to their brokerage accounts.
Because these stocks are so small, we're only sending them to subscribers of Phase 1 Investor – our highest-end, conference-call service. To get the details on a Phase 1 subscription, click here...
In an interview with CNBC, Bryan Marsal, CEO of Lehman Brothers Holdings, which is unwinding the failed bank, presented a great point on why we're far from the bottom of this mess...
One of my partners said yesterday that we are going to call this phase the "extend and pretend" phase in our economy. Which is you extend someone's maturity – because they are going to default – and you pretend that business will come back or that leverage factor is going to come back.
Then we'll enter phase two, which he said is the request to extend or "amend."
Then "send." In other words, send the keys.
Those are the phases we are in right now. Everyone is trying to buy time, as opposed to dealing with the leverage, they are trying to buy time. Whether you are a banker or a company, they are all trying to buy time. I don't see the leverage coming back, and I don't see the consumption of goods and services coming back.
You can only buy time for so long. Eventually, the world will have to endure some real pain from this recession... And the sooner we realize this, the better. You can watch the full interview here.
John Meriwether, founder of failed hedge fund Long-Term Capital Management (LTCM), is officially blowing up for the second time. His new firm, JWM Partners, is closing its flagship Relative Value Opportunity II fund after losing 44% from September 2007 to February 2009. The Connecticut-based firm managed around $1 billion.
As we pointed out in April 2008, when Meriwether told JWM investors they could pull money early because of poor returns, "leveraged traders always blow up." LTCM's average leverage in 1998, the year it collapsed, was 28 to 1. Meriwether's new venture was borrowing $15 for every dollar of net assets. While more conservative than LTCM, a 6.7% decline would wipe out the fund's equity.
Alice Schroeder, author of the Warren Buffett biography Snowball, recently did a book tour in China, where she received the "rock-star" treatment promoting the Oracle of Omaha. Only, Buffett isn't known as the Oracle in China. He is the "GOD OF STOCKS" – Schroeder says the Chinese usually translate it this way, in uppercase.
She also says Buffett is probably the most famous American after Obama. Ironic, considering Buffett preaches a long-term buy and hold philosophy, and China is the land of "get rich quick." And Obama isn't famous for his politics, but for his ability to create wealth. So much so that one Chinese author wrote a book – probably a very short one – titled Get Rich With Barack Obama's Change We Can Believe In Principle.
A few live ones in the mailbag today. What else have we missed? Point it out here: feedback@stansberryresearch.com.
"Guys, you missed an easy one! 'The mobsters in Casino were mostly from Chicago. The ones trying to bury us alive today are from Washington, DC...' You could have said, 'The mobsters in Casino were mostly from Chicago. The ones trying to bury us alive today are in Washington, DC... and from Chicago!' Good enough for a free Alliance membership? Probably not. But being sales oriented, It never hurt to ask (for the order). When flying commercially, I always ask if I can get a free upgrade to First Class. You laugh. but I have gotten 'upped to First Class' a lot more than you might guess!" – Paid-up subscriber Warren
"Dear DickHead, Oh, that is not your title? Sorry. Very disrespectful. I should be able to disagree with you or not WItHOUT calling you names. So should you. I know you disagree with The President of the US. But show a little class – or not. It is your choice. But I assure you, how you write says more about you than MR Obama." – Paid-up subscriber John Henely
"Remember what libertarian writer Harry Browne told his daughter: 'Nobody owes you a thing' Just reminded me of something my dad always used to say – 'Nobody is in business to make your life better. They are in it for their own good. Never forget that.' Thought Id share that with you." – Paid-up subscriber Manu
"Went to my credit union to withdraw $1,400.00 dollars in CASH for vacation week. Since I am well known there as I keep my office and personal accounts there, I was 'permitted' to withdraw the CASH. But I was informed that I must 'NOTIFY IN ADVANCE' any request to withdraw more than $1,000.00 in cash. A measly one thousand dollars! How do you spell Amerika??? The 'Land of the Free' is absolute HISTORY. Men and Women of America – you have been enslaved for decades. The shackles are just getting tighter and tighter. You are just starting to FEEL them." – Paid-up subscriber DB
Regards,
Sean Goldsmith
Baltimore, Maryland
July 8, 2009