What do you think it means for the future of a business when the founder, chairman, and former CEO sells 95% of his shares in about a week, taking almost $150 million off the table? And what if you knew the current CEO was selling all he could, too – more than $13 million worth of stock? What if you knew the company would announce losses of $30 million in the most recent quarter and project revenues falling by more than 50%. It doesn't look good, does it? And there's more...
The stock in question is a homebuilder. Its revenues are down 50% year over year. But incredibly, this company remains the only major homebuilder whose stock trades at a significant premium to book value (about 1.5 times book value).
Centex trades at 0.67 of book. Lennar trades at 0.45 of book. We believe the founders and the leaders of the company know a huge consolidation phase is about to begin in the homebuilder space. The stocks trading for well below book value are going to be bought. And the stocks trading for well above book value are going to fall as investors begin to understand how low the price must fall to clear the market.
We discovered this situation in a simple way – by watching the actions of corporate insiders. We admit, most of the time, these actions aren't important. Most of the time, insiders buy and sell according to their financial needs, not the impending collapse of their company's stock. But when you see groups of prominent executives selling nearly all of their shares at the same time in a company that's highly vulnerable? In those situations, watching the action of insiders is like getting to see someone's hand in a poker match. What comes next is inevitable.
One quick example. Look at Munawar Hidayatallah, the CEO of oilfield service company Allis-Chalmers. From October 2008 through February 2009, he bailed out of the company's stock, selling more than 1 million shares – nearly all of his holdings.
Allis-Chalmers, like all of the oil-patch service companies, is deeply cyclical. When oil prices are high, business is great. When oil prices collapse, like they did in the second half of 2008, business disappears. Did Hidayatallah sell simply because he knew his business would seriously decline in 2009? No, I don't think so. He bailed because he knew he'd steered the company on an extremely risky course, beginning in 2005 and 2006. He borrowed hundreds of millions of dollars and began buying up half a dozen competitors, adding assets to his balance sheet, and increasing interest expenses. I believe Hidayatallah knew in October there was a tremendous risk his company would go bankrupt if oil prices fell. Was he right?
We know from experience something financial textbooks ignore – that sometimes the actions of corporate insiders are extremely meaningful. On the short side, you're looking for overwhelming insider selling of a company whose business is highly leveraged and deeply cyclical. Shorting these companies can be the easiest money you'll ever make. And that's what we're doing right now in our Inside Strategist newsletter.
By the way, for the next few weeks or months, I'll be writing Inside Strategist personally. I'm doing so because we decided to part ways with the former editor (we're looking for someone, if you know anybody good) and because I know watching insiders can be particularly rewarding at market extremes. When a stock is down 80% and all the insiders start buying, it tells you a bit more than it normally might. And likewise when a stock is already down 80% and the insiders suddenly cash out. If you haven't been reading Inside Strategist, now is the time to start paying attention. (If you're not a subscriber, sign up here.)
In a February 22 conference call, Bruce Berkowitz of the Fairholme Fund outlined where he's invested now... and he defended some of his underwater holdings. The fund fell 30% in 2008, versus a 37% dip in the S&P. Berkowitz says 50% of his fund is invested in pharmaceuticals, HMOs, aerospace, and defense. Some specific holdings include Pfizer (PFE), WellPoint (WLP), and General Dynamics (GD). His reason for buying is "Uncle Sam is by far their biggest customer, a customer that pays."
Companies in these sectors also produce lots of free cash flow, an important metric for Berkowitz... "It's all about the amount of cash a company generates that can be passed to its owners in relationship to the price that you have to pay for a share of their company." He believes the market will eventually properly value those cash flows.
Berkowitz also defended his position in Sears Holdings (SHLD), which is controlled by billionaire Eddie Lampert. Sears, which is usually classified as a real estate value play, is down some 66% from last year. But at these values, Berkowitz says, Sears' inventory alone is worth more than the stock... and that does not include its massive real estate portfolio.
Of course, trying to value real estate right now is like trying to value mark-to-model mortgage debt last year... There's little value if there's no bid.
We wrote it, did you short it?
While I don't know (and can't know) how long the current solar mania will last, I am convinced with oil selling for less than $50 a barrel again and with the economics of solar energy more and more apparent, the end of this latest outbreak is near. I am also convinced First Solar is one of the most overvalued equities in the entire world. I believe its intrinsic value is less than 5% of its current stock price. Being short this business is one of the few sure bets in the world right now... – Put Strategy Report, January 13, 2009
Today, First Solar announced a dim outlook due to fierce competition and weak demand. Shares dropped nearly 20%. The June 2009 $170 calls I recommended selling for $21 are now trading for less than $4. Assuming investors put up the required margin ($42.50) they're now up 41% in a matter of weeks by selling a far-out-of-the-money call option. There is no better way or safer way to make money during a bear market than selling call options on vastly overpriced stocks.
According to real estate firm Green Street advisors, buying a home is starting to make more sense than renting. From the Wall Street Journal:
Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, accord
ing to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001.
If mortgage rates fall to 4.5%, mortgage payments would average 14% more than rent payments, the cheapest since 1998.
New highs: None.
In the mailbag... A real golf story and cries of woe, pain and anguish over missing out on Jeff Clark's last trade. Whatever your complaint, send it directly to me, here: feedback@stansberryresearch.com.
"Porter, I got my chance to play the Ocean Course Xmas before last. My wife and I slipped away and spent the week between Xmas and New Years on Kiawah. It was last minute decision. We didn't stay at the Sanctuary though, we rented a 3500 sq home right on Cougar Point golf course and a small lake behind the house. We found it on VRBO, the only way to travel. I took a fly rod with me, but had no luck. We did have dinner at the Sanctuary and also enjoyed a few glasses of fine burgundy in front of the fire there. Truly, as you say, a marvelous hotel.
"Anyway, back to the Ocean Course. I called and asked if they could squeeze me in as a single, and they said they'd put me in on the last tee time of the day, 12:30p, with a father-son team. Long story short, they bailed so I took their suggestion to go with a caddie. Best advice I ever received. Ended up shooting a very respectable 84. Enjoyed the best round of my life because I had a caddy that knew the course like the back of his hand. He saved me at least 10 strokes. He was funny, too, and had caddied for some of the most interesting people in the world. Celebs, pro golfers, and the man himself, Pete Dye. Man I want to go back. If you host a conference there, now that I'm an Alliance member, I'll be there." – Paid-up subscriber John A. Jones
Porter comment: If you shot 84 on the Ocean Course, you might not enjoy playing a round with me. I rarely break 100. Breaking 90 on the Ocean Course is a terrific score.
"So once again Jeff Clark puts out an options recommendation and by the time it is emailed the price is higher than the maximum recommended. In this case it was AEM puts. When and what are you people going to do about this. This happens with annoying regularity. And as always someone has received the recommendation before you email it to your subscribers. Just look at the volume. This is frontrunning in its most simple form and illegal. I wonder what the SEC would say about this, Porter. Any thoughts? – Better yet, fix this situation. And do me a favor this time, respond to me." – Paid-up subscriber Ted Melhado
Porter comment: Jeez, with someone alleging we're committing a crime and threatening to tell the principal, I can't imagine why I didn't pull myself away from the dinner table with my wife and respond to your e-mail immediately...
First, nobody here knows in advance what Jeff is going to recommend. He sends it to his editor here. She proofreads it and then immediately sends it out to you, usually within a few minutes. Nobody else sees it. And she does this in the middle of our group editorial office on the fourth floor. If she were doing any trading, we'd all see it. So you can forget the whole conspiracy-theory angle. Nobody here wants to lose his job, lose his friends, and go to jail.
So what accounts for the volume spikes? E-mail isn't delivered to everyone at the same time. We sent it as fast as we can (and we just upgraded our server, so now it's even faster), but we cannot ensure everyone gets the e-mail at precisely the same moment. That accounts for the volume you see around the time you get our e-mail. (And no, there are no "favored" subscribers. We send it to the whole list at the same time.)
Finally... and this is the most important part... if you have followed Jeff for any length of time, you know he updates you all about the status of the market and his recommendations constantly, both via e-mail and through his Direct Line. I think it's fair to say no other newsletter writer anywhere takes more time showing his subscribers exactly how to trade the advice he offers. And nine times out of 10, when a position spikes up out of range, it falls back in a few days and patient subscribers have another chance to get it at a good price.
"This is a lie, From Daily Wealth 2/18: 'So the Fed has aimed its printing press directly at the real estate market. It will buy $500 billion of mortgages using freshly created dollars.' The Fed does not freshly create dollars... it borrows them, or collects them from people like you. You really need to fix this kind of rhetoric." – Paid-up subscriber Richard
Porter comment: You have no idea how the Fed works.
OBAMA! to the 'Rescue'
By Porter Stansberry
At the beginning of OBAMA!'s speech... dare I say it... it sounded like he knew what the real problem was with our economy:
We still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before. In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election.
That's right! The only real and lasting path to prosperity is shedding our debt-centric economy and growing our domestic savings. And the only way to do that is to remind people they have to be responsible for themselves and they can't continue to live at the expense of their neighbors. Let's get rid of Social Security and stop government support of the FDIC and the banking industry. Stop printing money and taking on still more debts to save bankrupt companies. After all, how could we solve a debt crisis by simply spending more money that we don't have?
But then... only a minute or two into his speech... OBAMA! began to promise all of the things every politician promises, namely benefits without any costs. You know the drill: something for nothing. And most importantly, more debt!
The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins. You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.
Wait a minute. While I have borrowed money to buy a house, I have never borrowed money to buy anything else. That's the
way I was raised. My parents taught me what their parents taught them: If you want something you have to work hard and save your money to buy it. Isn't that what Americans have done for generations? Isn't that what the hard-working people of Asia are doing right now? And isn't that the real problem? We've spent the last 30 years borrowing money from around the world, to buy things we were too lazy to work for and to save to buy.
OBAMA! went on to repeat the old saw about our dependence on foreign oil. But that's not the real problem: The real problem is our utter dependence on foreign credit. Without all the money we've borrowed from the Japanese and the Chinese, we wouldn't have any cash to buy oil from the Middle East.
And then... at the end of the speech, my favorite part...
How will we pay for all of the spending the government is now promising? The truth is, of course, we won't pay for it at all. We will continue to borrow still more money from foreigners because as a nation we've lost the moral and ethical standards that made us a free people. We tolerate our leaders spinning lies and burdening our children and grandchildren with unpayable obligations. We tolerate our neighbors walking away from their obligations. We allow our government to use the threat of imprisonment to collect tax and then use our capital to support corporations whose managers and owners have acted irresponsibly for decades.
But rather than making decisions based on the sound principles of economics or in the spirit of the American tradition of small government, personal liberty, and personal responsibility, we now have a government that constantly seeks public acclaim and the contributions of special interests. And what does the public clamor for? OBAMA! knows all too well.
In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2% of Americans...
We will eat the rich!
Keep in mind, America doesn't currently impose a wealth tax. So... it's not clear what OBAMA! means. But if you want to see an exodus of capital from the United States, try taxing people's net worths. On the other hand, if OBAMA! was speaking of people's incomes (which is much different than their wealth), the highest 2% of American wage earners already contribute about 35% of the government's expenditures. How much more blood can you wring from those stones?
And keep this in mind. OBAMA! is promising to reduce his first year's estimated $1.8 trillion deficit by 50% over the course of his four years in office. But he makes no promise to actually reduce the total outstanding debt, which this year will grow by more than the total government debt in 1982.
Our debts are piling up now at a pace that will leave us insolvent within a generation. We will not cure this problem by taking still more money from the highest wage earners in the country. The more OBAMA! promises, the more money he'll have to print or borrow. (And incidentally, the price of gold will go higher, too – it's already gone from $800 an ounce to $1,000 since the election.)
America is going bankrupt.
Regards,
Porter Stansberry
Baltimore, Maryland
February 25, 2009