I really wish I weren't right about this one, but all my worst fears are coming true before our eyes...
In the current issue of Extreme Value, I said life insurance companies would have serious problems. Corporate-bond downgrades are hitting their investments and stock market losses are damaging variable annuity products. Today, the Wall Street Journal says life insurance companies are suffering due to "weakness in their portfolios of bonds and turmoil in their variable-annuity products – retirement investment products that become more costly for companies that sell them when stocks fall sharply."
The Journal article discusses a number of companies, all of which are on my list of 13 imperiled life insurers that ran on p. 7 of this month's Extreme Value.
Barclay's analyst Eric Berg said, "If the market takes another steep decline, many of these companies would have little to no excess capital," confirming the view I've previously stated.
Extreme Value warned readers it would be difficult for these companies to raise capital, since their stocks and bonds have fallen in value. The Journal said Lincoln National has $1 billion of debt coming due this year, and its stock fell 38% after it withdrew an application to sell debt under an FDIC program. Both Lincoln and Hartford have suffered ratings downgrades and have annuities exposure. Downgrading Hartford, Moody's cited investment losses and exposure to variable annuities.
The Journal pointed out something else Extreme Value readers already knew: Life insurer problems haven't made big headlines yet because life insurance company losses have been accounted for as temporary impairments, not permanent writedowns. As these enormous temporary impairments become permanent, capital is destroyed. MetLife, for example, has nearly $30 billion of losses that could become permanent. Its tangible equity is less than $19 billion.
Finally, the Journal refers to another of my previous warnings: Commercial real estate losses will hit life insurers hard. About 10% of the industry's investments are in direct commercial real estate commitments. With office buildings, shopping centers, and other tenants going out of business, many commercial real estate deals are at risk. As I pointed out last week, a 30% hit to MetLife's commercial real estate exposure would obliterate 57% of its tangible equity. This is a real problem, and it's a huge problem. I believe a major North American life insurance company will fail within a year.
Click here for more information on Extreme Value and my take on a huge "distortion" in the gold markets.
One commercial real estate situation we've been watching is mall giant General Growth Properties (GGP), which barely avoided bankruptcy Monday, after it was unable to strike a deal with its creditors. Insiders say no bankruptcy filing is imminent. Under normal circumstances, a company with more than $4 billion of past-due debt ($27 billion in total debt) would seek bankruptcy protection. But creditors are forgiving debt deadlines and avoiding bankruptcy at all costs because they believe they'll recover more money outside of bankruptcy court.
We're not sure how long GGP's creditors will attempt to delay the inevitable. But the company is unlikely to sell enough assets to cover its past-due debt. Another $3 billion comes due in June.
Last month, Bloomberg estimated the total bill for the U.S. bailout at $9.7 trillion. In just one month, that number has ballooned to $12.8 trillion, which is close to the size of our entire economy. Put another way, the government is spending everything both it and private businesses combined spent last year to correct the problems with our nation.
Clusterstock says it differently: $1 trillion is about what the U.S. collects in taxes in a year. So to pay for this recovery, the government would have to raise our taxes nearly 13x. Either that or pass it onto future generations.
Byron Trott, a Goldman Sachs veteran and longtime friend of Warren Buffett, is leaving Goldman to start his own company, BDT Capital Partners. The company will invest in and advise family-run and other entrepreneurial businesses. Extreme Value pick Berkshire Hathaway will hold a "modest partnership interest," according to the Financial Times. Trott has brought three acquisitions to Berkshire Hathaway and was the one who called Buffett with the deal to buy $5 billion worth of Goldman Sachs preferred stock last September.
Yesterday, we mentioned Whitney Tilson was tip-toeing back into financial stocks. He's followed and studied the mortgage crisis from the very beginning, and has created a great presentation on the housing/credit crisis and some of the values that are rising from the ashes. You can view it here.
Tilson was kind enough to offer a $900 discount to any Stansberry and Associates readers who would like to attend his Value Investing Congress in Pasadena, California. There are some great speakers this year, including Carlo Cannell and John Burbank. The Value Investing Congress is the one investment conference we hit every year… The stock picks and investment knowledge you'll gain is well worth the price of admission.
We haven't found a real estate bottom yet... Home prices in 20 U.S. cities fell a record 19% in January from a year earlier... more than forecast and more than the 18.6% drop in December. All 20 cities showed year-over-year declines, led by a 35% drop in Phoenix and a 32.5% decline in Las Vegas.
The S&P 500 has taken a beating this year... But our veteran trader, Jeff Clark, thinks we're in the middle of a huge intermediate-term uptrend. It could last anywhere from a few weeks to a month... plenty of time to add thousands to your trading account. To take advantage of this situation, Jeff recently recommended a trade that could return 50% by July. We're currently offering Jeff's service, Advanced Income, at a large discount. To learn more, click here...
New highs: none.
In the mailbag... GM, Wal-Mart, Tilson... lots of good stuff. Add to it here: feedback@stansberryresearch.com.
"While I know that the GM chairman has been ineffective and you have been pointing this out for a while, I am concerned that the givmint is the one forcing him out. Don't you think this is some thing that the shareholders should do? What happens when Obama decides he doesn't like you heading up your company?" – Paid-up subscriber Jim Smith
Ferris comment: I agree. No matter how poor a job Wagoner was doing, the government should not be involved in GM. The board of directors should have been all over this a long time ago.
"Re your recommendation of WMT, I had read, and noted on my WMT chart, the following: 1/13/9: German store chain Aldi is so cheap that Wal-Mart Stores Inc. closed its discount outlets in Germany two years ago partly because shoppers found the U.S. giant too expensive in comparison. The discount chain will open at least 75 U.S. stores this year, well above its typical pace, including its first Aldi store in New York City. Also, if you look at WMT around that date, it dropped about 7% on the above information. So, do you (and others) still feel it is that safe an investment for the future?" – Paid-up subscriber R.S.
Ferris comment: Wal-Mart has about 4,000 stores in the U.S, and more than 7,500 worldwide. I think a 7% drop in its market cap is a huge overreaction to the possibility a competitor might open 75 stores in the U.S.
"In [yesterday's] Digest you mention what Whitney Tilson thinks of Wells Fargo. Below is one small section of what was on The Digest, 'In regards to Wells, he believes the bank will "have losses of $8 billion a quarter for many quarters to come but they're making $8 billion-$10 billion of profit per quarter.'" How can a bank or any company for that matter have losses of $8 billion per quarter and at the same time make profits of $8 billion to $10 billion per quarter? Does this guy mean Wells Fargo will either break even every quarter or make $2 billion dollars profit per quarter? If so, it's an odd way of saying it." – Paid-up subscriber L.A.
Ferris comment: I can't speak for Whitney, but I would guess the losses referred to here are investment losses and the profits are operating profits. In other words, the company generates at least as much capital as it might be (temporarily) losing right now. It's doubtful this rate of losses will last for long or the overwhelming majority of them won't be temporary. And it's probable it'll remain a profitable company over the long term.
Regards,
Dan Ferris
Medford, Oregon
March 31, 2009