Before getting into the absurdities of the investment world today, I hope you won't mind one last story from the Atlas 400 trip into the wilds of Africa…
The last site we visited in Botswana was called Jack's Camp. Jack Bousfield founded the camp in the 1960s, during a trapping expedition in the Makgadikgadi Pans. Among the largest salt flats in the world, the Makgadikgadi Pans is the remains of a super lake that dried up thousands of years ago. Jack thought the barren, desert landscape was the most beautiful he'd seen.
Jack's son Ralph now runs the camp. The guy is like a rock star of the Kalahari. He sports long, curly hair. He wears African bangles up to the elbow on his right arm and a Rolex Submariner on his left. He's always in a custom-tailored safari shirt (with brass, English military buttons from his family) and aviator sunglasses. The guy knows everything about desert wildlife.
I'm getting a drink with Ralph this week in New York. We'll see if he changes out of his bush uniform.
Our first day at the camp, we ripped into the middle of the Makgadikgadi on ATVs. We sped for miles, going deeper and deeper into the heart of the pan. The area is just flat sand as far as you can see – one of the largest expanses of nothingness in the world.
And the night sky is one of the most beautiful in the world. There is zero light pollution. And until you've lain on your back in a place like the Kalahari, you haven't experienced silence.
After making several stops on our journey, we returned to camp and I noticed I had lost my iPhone. I told Ralph, half expecting him to chastise me for even having electronics at his camp. He sent a guide to retrace our ATV trip. The guide came back empty. I never expected to see my phone again.
The next day, he sent another guide, Super, to look for my phone. Super is a 6'4" African. And he's a tracker. Still, I had little faith. Hours later, Super came back with my iPhone.
Despite baking in the 110-degree sun for more than a day, the phone worked. And while it was lost in the middle of one of the largest expanses of nothingness in the world, it managed to receive a text message (there is ZERO cell signal out there). How's that for an Apple commercial?
After giving him a bear hug, I asked, "How did you find it?"
"I looked at your shoes, then I tracked you through the desert," he said.
An article in the Wall Street Journal today discussed state pension funds considering lowering return targets – historically around 8% – in the face of a slack market. Warren Buffett expects the market to return around 5% a year for the foreseeable future. Assuming he's correct (we think he's close), that extra 3% would be a huge achievement. Especially when you understand the type of people who run pensions...
|
Pension funds wait until everybody else is in and the committees that run them can prove by looking at magazine covers they're right... THEN they buy. They're morons. They're among the worst investors on the planet. – Dan Ferris, May 5, 2011 Digest |
"After 10 years of listening to the experts be wrong on the downside more than half the time, I would like to be more cautious," said James Dalton, chairman of the Oregon Public Employees Retirement System. Never mind the irony that a man in charge of a $60 billion investment fund relies on the opinion of "experts."
Since the financial crisis, some 19 state and local pension funds have reduced return targets. More than 100 held steady. As Porter pointed out in last Friday's Digest, the risk spread (the spread between high-yield bonds and Treasurys) is widening. In other words, people are demanding more yield from riskier assets. Where do you think pension funds will turn?
"To target 8% means some aggressive trading," said Jeffrey Friedman, a senior market strategist at MF Global. "Ten-year Treasurys are yielding around 2%, economists say we are headed for a double-dip, and house prices aren't getting back to 2007 levels for the next decade, maybe... Good luck to them."
We saw how this played out leading up to the 2008 financial crisis. Thirsting for yield, pension funds (among other unsophisticated investors) piled into subprime debt. It was triple-A-rated, what could go wrong? Only this time, states are broke (especially California and Illinois)... which will only compound the problem.
One of the many pension-fund follies is allocating capital to the latest "hot thing" – be it a security or an investment fund. When a hedge fund has a couple blockbuster years, everyone wants to invest. In most cases, these funds' assets explode. And outperformance gets more and more difficult.
In the midst of the financial crisis, no fund was hotter than Paulson & Co., run by billionaire John Paulson. He loaded up on subprime-mortgage credit default swaps, insurance contracts that paid huge sums when subprime mortgage pools collapsed. His investors made around $20 billion in profits.
Then, Paulson correctly bet on a recovery, piling into financials and other troubled assets. His funds more than doubled again. Forbes estimates his net worth at $15.5 billion (prior to the recent selloff).
Now, all of Paulson's funds, even the gold fund, are getting whacked. Paulson's gold fund fell 16.4% in September (more than the 11% drop in gold prices). It's up barely more than 1% in 2011 through September, compared to a 16% year-to-date gain in the precious metal. It makes paying someone a huge fee to buy gold for you seem silly...
Paulson's recovery fund, which invests in assets that will do well as the U.S. recovers, was down 13% in September and 31% through 2011. And the flagship Paulson Advantage Fund dropped 12.1% in September... down more than 32% this year. The Paulson Advantage Plus, which uses leverage, is down 47% this year. Paulson's assets under management have fallen from $38 billion to an estimated $30 billion... And investors have until October 31 to ask for their money back.
In the September 2011 issue of Stansberry's Investment Advisory, Porter wrote...
|
The only option to prevent a true global banking collapse is for the European Union to undertake an immense recapitalization of both its banking system and sovereign debts. I doubt this can happen as long as Germany remains in the euro... but it's not impossible, given the risks to Germany's banks... |
|
The world's largest economic area – the euro zone – is in the midst of a serious sovereign debt and banking crisis. I believe these problems will, eventually, be tackled by the equivalent of a massive devaluation. The size of the euro float will expand dramatically in support of a huge euro-bond issue to restructure Europe's sovereign debts and prevent a full scale European banking panic. This, too, is massively inflationary... And I can't imagine how it's avoided. |
Yesterday, French President Nicholas Sarkozy announced in Berlin, "We will recapitalize the banks." He said this would come in the form of an agreement with Germany because "the economy needs it to assure growth and financing." The EU will release a blueprint for the bank rescue this month.
Also today, Belgium bought the consumer-lending division of Dexia for $5.4 billion. Together, Belgium, France, and Luxembourg will guarantee as much as 90 billion euros of interbank and bond funding for 10 years. Belgium will provide 61% of the funding, or approximately 15% of its GDP.
Last week, Apple unveiled its newest phone, the iPhone 4S. Consumers, who were expecting the iPhone 5, were "allegedly" disappointed with the minimal upgrades. I say "allegedly" because today, Apple announced 1 million customers in seven countries pre-ordered the new phone in the first day – a new record. Only 600,000 customers pre-ordered the iPhone 4 last year.
|
New 52-week highs (as of 10/7/11): None.
We received loads of feedback about the Digest Porter wrote last Friday. If you haven't read it, I encourage you to do so. Send your comments and suggestions to feedback@stansberryresearch.com.
"Well, you did it. Your Friday newsletter created an epiphany for me! I have been staring at this logic for much of my life and use the same algorithmic thinking for determining my real estate investment direction. It was a tremendous BFO (brilliant flash of the obvious) for me to see you connect this with stock investments. You are a better teacher than you think! Thank you!" – Paid-up subscriber Lew Matt
"Thanks for the lucid, direct and concise explanation regarding capital efficiency. The light bulb glows brightly. I look forward to your weekly effort. I've rejected your offer to subscribe in recent years as just another tout, and just a few weeks ago after reading John Mauldin's letter referencing you I decided to subscribe. I am kicking myself for not subscribing years ago. Thank you very much for sharing your knowledge. In my 67 years I have not met or experienced anyone who so openly shares his knowledge as you. Keep up the great work." – Paid-up subscriber Joe Volpicelli
"Don't stop! I honestly look forward to reading them and I can honestly say I'm learning from them. I never really paid attention to economics and political influences and history. I just let my advisor do everything. After losing a pile of money gambling on penny stocks, buying junk that my advisor was told he had to sell to all his clients, etc., I decided that I wouldn't buy any stock unless it paid a dividend and experienced the amazing results of compounding dividends. I took the responsibility of making my money work for me. If that's one thing your readers take away from yesterdays digest, buy stock from solid businesses, reinvest dividends and let it be, that's good advice. Please don't stop the Friday digests! Thanks!" Paid-up subscriber Nicole Graham
"Keep it up, Sweet P. You earned your $99 clams on about day two with me. You, Doug Casey, Rick Rule, Eric Sprott... poetry in motion." – Anonymous
Porter comment: I can't recall ever being called "Sweet P" by another man before. Makes me a bit uncomfortable. But I certainly appreciate being mentioned in that company – Casey. Rule. Sprott.
"I like your informative essays. But I find it annoying to be constantly referred in an endless examples of past successes and sales pitches to subscribe to an another service for promised valuable information. I subscribed to Stansberry to get this information. It's no wonder that people cancel." – Paid-up subscriber John
Porter comment: Well... that's also how we stay in business... by making correct predictions/recommendations and asking folks to subscribe.
Regards,
Sean Goldsmith
New York, New York
October 10, 2011
A new commercial for Apple?... 'Good luck' to pension funds... Paulson's bloodbath... Another record for Apple... Domestic battery soon to be legal in Kansas... 'Sweet P' in the mailbag...