In the November 10 Digest, Dan discussed the oil boom happening in North Dakota (and how he explained the opportunity to his stepsons)... He told us oilfield workers are making six figures, and waiters earn $25 an hour. There's a housing shortage, and unemployment is less than 1%. "That is what opportunity looks like," Dan said.
Well, North Dakota isn't the only place a hard-working chap can earn a huge paycheck these days. According to Sigurd Mareels, director of global mining for McKinsey & Co., there's a "historical shortage" of mine workers around the world. Australia, the world's largest source of iron ore and the second-largest gold producer, needs an additional 86,000 workers by 2020, according to the Minerals Council of Australia. That's on top of the current work force of 216,000. Miners in Australia – some of whom commute from the Philippines and New Zealand – make between $100,000 and $200,000 a year.
"It's a tight labor market and difficult cost environment," said Ian Ashby, president of the iron-ore division at BHP Billiton, the world's largest miner. To attract workers, BHP and other miners are building recreation centers, sports facilities, and art galleries in mining towns. Costs to attract and pay new talent decreased earnings by $1.2 billion in the first half of 2011. (BHP Billiton still earned $11.2 billion over that period.)
The nouveau riche Aussie miners even have a term for themselves... cubs, short for "cashed-up bogans." (Bogan is Australian slang for an uneducated, blue-collar worker.)
But Australia isn't the only place lacking skilled labor. Canada foresees a shortfall of 60,000-90,000 workers by 2017. Peru needs 40,000 new workers by the end of the decade. "Inflationary pressures are driving up costs and wages at mining hot spots like western Australia, Chile, and Africa," said Tom Albanese, CEO of Rio Tinto, the world's third-largest miner by sales. "You're seeing double-digit wage growth in a lot of regions."
To Dan's sons... Perhaps you'd prefer Australia to North Dakota? Of course, with demand in China (the world's largest commodities consumer) waning, you'd better move quick.
What would a Digest be these days without an update on Europe? Luckily, the "content gods" have smiled upon us. As sovereign yields are rising daily, expert after expert is declaring this a systemic problem. Europe's largest banks are teetering on collapse, and the "print, print, print" we've been expecting is nigh.
Josef Ackermann has been the CEO of Deutsche Bank, Europe's leading bank, for the last nine years. He's one of the most powerful and important financiers in the world. And in September, at a meeting of leading European bankers, he expressed his concern for Europe's crisis... "It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels..." He said the Greek situation could cause a "type of meltdown."
In an op-ed for the Financial Times, Bond King Bill Gross expressed similar concerns about Europe…
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What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge. |
Gross' outlook is bleak…
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As a result, deleveraging, fiscal tightening and potential defaults are on the economic and investment horizon. Investors should be in a "risk off" mode. |
Yesterday, Ackermann abandoned his plans to become the bank's supervisory board chairman in 2012. He was set to replace Clemens Boersig as chairman in May. According to those close to Ackermann, he made the decision a few weeks ago after talks with investors showed he may not have their support, due to governance concerns. (A 2009 German rule calls for a two-year grace period before a CEO can accept the role as chairman.)
Could something else have motivated his decision? Perhaps Ackermann realizes the debt-fueled boom that propelled him to banking greatness is over. He's trying to exit gracefully... while leaving the mess for someone else.
The same day Ackermann stepped down, Deutsche Bank approached the European Central Bank (ECB) with a presentation titled "The Tipping Point – Time To Call the ECB." You can find a copy of the presentation here (thanks to the financial blog Zero Hedge).
In short, Deutsche Bank is asking the ECB to monetize everything – or "print, print, print." It says Italy is the "tipping point" of the crisis. Specific mentions of Deutsche's need for capital – the bank's assets equal 84% of German GDP – are absent. Rest assured, without massive government intervention, Deutsche, like most other European banks, will suffer.
While Deutsche Bank may be too proud to directly ask the ECB for support… Italian bank UniCredit is not. According to Reuters, UniCredit will ask the ECB today to increase access to its borrowing for Italian banks.
UniCredit CEO Federico Ghizzoni told Corriere della Sera – an Italian newspaper – that he would ask the ECB, also on behalf of the smaller banks, "to extend the access to ECB liquidity by widening the type of collateral offered." ECB funding for Italian banks rose to 111.3 billion euros in October, according to the latest Bank of Italy data. That's up from 41.3 billion euros in June.
In unrelated news, oil is up more than 2% to $101.60 a barrel – the first time it crossed $100 since July. And gold is holding steady at $1,770.
You may notice a recent trend in the "new highs" list we publish everyday in the Digest... The safest, blue-chip stocks with healthy balance sheets and dividends are dominating the list. Yesterday, we discussed McDonald's and Abbott Laboratories. Today, we'll discuss Intel (which you'll see made the new highs list)...
While Intel appears in many S&A portfolios, Dan Ferris first recommended the stock in his April 2009 Extreme Value at $15.27. Today, his readers are up 77%, including dividends. Dan's comments on Intel…
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Intel has 80% of the global market for microprocessors. It earns super thick 60% gross margins and 24% net profit margins. It gushes free cash flow, to the tune of about $10 billion per year these days. Thick margins and rivers of free cash flow don't happen year after year like clockwork unless you're doing something the world is simply crazy about. |
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Anyone who says the company isn't doing wonderfully is simply refusing to acknowledge reality. It just logged the single best quarter ever in its entire history. It earned $3.47 billion in net income on $14.2 billion in sales. It's like Microsoft. Everyone says it's doomed, yet it keeps growing, earning thick margins and gushing cash flow. Like Microsoft, Intel's balance sheet is a financial fortress. Intel has over $15 billion in cash and short-term investments, versus about $7 billion in total debt. |
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Even though the total return for Extreme Value readers is 77% since my first recommendation, the stock is still pretty cheap at 11 times earnings, and probably less than 10 times what it'll earn next year. |
Intel is one of Dan's World Dominator stocks. But for the moment, it's out of buying range.
However, Dan has identified another company that looks a lot like Intel, and is within its buying range. It is universally believed to be a weaker business than it really is. But it has a history of huge dividend growth, gushes free cash flow, maintains a financial fortress of a balance sheet, and has an even larger market share than Intel.
Dan's list of World Dominators also includes three other stocks that are dirt-cheap and well within buying range right now. For more information about Extreme Value and to access his list of World Dominators, click here.
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New 52-week highs (as of 11/15/11): Fairfax Financial Holdings (FFH.TO), Intel (INTC).
In today's mailbag… we discuss the bad loans on European banks' balance sheets... What question can we answer for you? Ask us anything at feedback@stansberryresearch.com.
"Ok this is probably a stupid question. But we have been talking about the debt in Europe and the US. Aren't these loans from banks backed with assets, such as a house or property? Wouldn't liquidating these assets, granted at a discount, but still wouldn't that raise capital? I'm am recently new to a lot of what you have been saying and I thank you for teaching me." – Paid-up subscriber Virginia Schug
Goldsmith comment: In Europe, the loans in question are from European countries… so-called sovereign debt. These loans are backed only by the country's ability to tax its citizens. The ability to tax is a powerful asset... especially if managed correctly. But Europe is broke, and it can't raise taxes. The other option is austerity – cutting costs. This will eventually happen, though every call for austerity to date has been met with outrage and, in some cases, riots.
As for liquidating loans backed by real estate... Yes, banks could liquidate these loans at a loss. But they'd have to realize that loss on their balance sheets. (By holding a loan, the bank can assign a value higher than market.) And liquidating these loans would destroy a bank's equity... in many cases, leaving them insolvent.
Regards,
Sean Goldsmith
Baltimore, Maryland
November 16, 2011
Where to make $200,000 a year... Ackermann steps down at Deutsche Bank... Europe's 'Tipping Point'... Bill Gross on Europe... UniCredit needs money... Why Intel is still cheap...