A red flag went off when I landed in Denver. I spoke with an Enterprise representative to rent a car. I never arrange for rentals beforehand. I like to haggle with the employees in person. I first asked if they had any BMWs or Mercedes... You can usually negotiate an upgrade for a nominal fee. They didn't, so I ordered an average domestic sedan (I think a Ford Focus). She prepared my quote, and I prepared to haggle. She quoted me $11 a day. You can't haggle that down. I'll bet these cars depreciate more than $11 a day.
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An Enterprise employee walked me to my car. He introduced himself as "Sean." Of course, we have the same name. He was excited about this. I said, "Since we have the same name, you're going to give me an upgrade, right?" He did. I left the lot in a new Ford Escape (a small SUV). I checked the Enterprise website for Ford Escape rates. It's almost $70 a day. I paid $11. As an investor, this made me think car rental companies are in trouble.
Enterprise is a private company, so you can't view its financials. Hertz, Enterprise's closest competitor, is a $4.7 billion, publicly traded firm (the company also leases construction equipment, which is probably a worse business than car rentals). Hertz's main asset is its fleet (worth more than $11 billion on its balance sheet). But the cars are commodities... almost 100% domestic, low-end vehicles. And they depreciate faster than privately owned vehicles, which already plunge in value the day they're purchased. I don't know how Hertz accounts for these assets, but I'd bet the accountants are being generous.
And the company has $10.3 billion in short-term debt (due in a year or less). This was all long-term debt in 2008. It pays nearly $700 million a year on that debt. It only makes $1.7 billion in operating cash flow (depreciation is more than $2 billion a year). And capital expenditures (money spent to upgrade the fleet) were a huge $7.6 billion last year, $10.2 billion in 2008, and $11.5 billion in 2007. The company has lost $1.7 billion since 2008. I don't know much about the rental business, but I know I wouldn't want to own it. Fairholme Fund, Bruce Berkowitz's value-focused mutual fund, is the second-largest shareholder in Hertz. He's recently started dumping his position. If you are in the rental car business, we'd love to hear from you. How's business? Write us at feedback@stansberryresearch.com.
Investors have tons of personal indicators they use to time the market. Jeff Clark uses shares of Merrill Lynch as one of his many indicators. Some people gauge public sentiment by questions their mothers-in-law ask. Other folks short stocks of companies that pay to put their names on sports stadiums – the "stadium indicator." You would have made a fortune following this indicator when Citi paid $400 million in 2006 to slap its name on the Mets' new stadium.
Probably the best-known indicator is the "magazine cover" indicator. The mainstream media are usually the last to catch a trend, so when Newsweek or Time makes a bold proclamation on its cover, you can bet the trend is over. Our friend Doug Casey says he'll know it's time to sell gold when he sees "a golden bull tearing through the New York Stock Exchange on the cover of Newsweek." While Barron's is more respected than Newsweek, its latest cover sends a strong message...
Under the headline "Bye-Bye, Bear," it depicts a bear about to skateboard off a cliff, while a smiling bull looks on. You can see it here.
In last Thursday's Digest, we mentioned the major breakdown in rare earth elements. Rare earth elements are metals used in car batteries, wind turbines, and electronics. The stocks plummeted because China, which controls 95% of the world's supply, loosened its export restrictions.
Brian Hunt, our editor in chief, warned readers of the coming breakdown the day before it happened. The rare earth sector is having another bad day. The two bellwethers, Molycorp (MCP) and Rare Element Resources (REE), are down 5.5% and 10.5% today, respectively. (But these stocks have much farther to fall.) They've experienced a spectacular rally... Rare Element jumped from less than $0.50 to $14 (a 2,700% return).
More kudos to Jeff Clark are in order. Several Stansberry editors have been calling for a huge drop in U.S. Treasurys. Porter calls it "the only trend that matters for the next decade." So far, the trade has moved against us... Massive government stimulus pushed Treasury yields to record lows. But Jeff timed his trade perfectly. Two weeks ago, Jeff sent this update to S&A Short Report readers...
Bond investors are sailing into the perfect storm. They've been lulled into a sense of complacency by the Fed's promise of quantitative easing. After all, with the Fed using principal payments from its mortgage-backed securities to buy up Treasury bonds, there's a constant bid in the market... To put it another way... the 30-year bull market in bonds is ending. The Fed's 0% short-term interest rate policy and quantitative easing have suckered everybody into the long end of the yield curve – just in time for the trade to capsize. Bond prices are headed lower, and we need to get in on that trade.
Last week, Jeff closed part of his "short the long bond" trade for nearly 50%. And interest rates are up again today. (Remember... bond prices move inverse to yields. Increasing rates means lower prices.) This is the latest in a string of incredible trades for Jeff. He made 100% shorting gold stocks, 50% going long Intel, and more than 100% shorting the euro... The list goes on.
Jeff is on a hot streak. And his readers are making a fortune. To learn more about S&A Short Report and access Jeff's latest trade, click here...
New highs: Esperanza Resources (EPZ.V), Imperial Metals (III.TO), Mag Silver (MVG), Silver Wheaton (SLW), AuEx Ventures (XAU.TO), Penn Virginia Resources Partners (PVR), iShares Silver (SLV), Enterprise Products (EPD), Altria (MO).
Porter's in rare form in today's mailbag. Don't miss it. And send us your thoughts at feedback@stansberryresearch.com
"I'm libertarian so I don't support taxes. However from what I've read I liked ME Reese's comment about sending the estate tax money to those who have less money for education but the real problem is still the same. When the government collects money, they don't use it very efficiently. We already gave the government social security money to keep safe and they spent it someplace else without asking. Why should we keep giving good money to a black hole? Give the money to anyone but the government and it will be spent just as well." – Paid-up subscriber TM
"RE: porters comment on 'fair' share of taxes. Porter's metaphor for progressive taxation, 'No one would join a club where drinks for some members were $1.11, while other members had to pay $2.22.' The way our hypothetical club would actually price it's drinks (progressively) would not be based on the member, it would be based on the number of drinks purchased, the fist drink is $1.11, the second is $2.22. Seems fair to me.” – Paid-up subscriber Tim Sager
Porter comment: Not only are you wrong on the facts, more importantly you're completely ignorant of the economics. The worst thing you can do for a club (or any other business) or for a country is to punish your best customers (or your best citizens).
"In response to Mary Ellen, I am a retired private school teacher. For years we have watched our government throw more and more money at our public schools as achievement scores have fallen across the board. The fault lies chiefly in two areas: first with parents who don't know how to parent and couldn't care less about what their kids are doing in school, as long as they are kept safe and out of their way for several hours a day, and second with teachers unions who protect incompetent teachers and compensate both superior and awful teachers based on time spent teaching.
"One way to begin solving this problem would be to attach the education dollars to the child and let parents send their kids wherever they want, using the free market competition to improve schools. Bravo to you and your wife for providing your kids with the best education you can!" – Paid-up subscriber Nancy
Porter comment: Another way to solve this problem is to simply close the public schools... and fire all of the teachers. My wager is the cost of education would fall immediately and the quality would soar as teachers would suddenly have to prove their worth and sell the same in the free market. Competing against smart parents and YouTube will be disastrous.
"Do you really think its in the best interest of the country for the wealthiest 10% to own 90% of the assets?" – Paid-up subscriber Chris
Porter comment: Your question is illogical...
How could "the country" have an "interest"?
Our country is an inanimate place, linked together with civic organizations, shared cultural norms, and a government. The people who live in our country all have competing interests.
Why should I... or you... or anyone else be allowed to determine what is best for anyone else, let alone everyone who lives in the country?
"I received your so-called 'October' letter on October 30 in Santa Fe, NM. Mail delivery here is normally rather good. It seems to me that you are misleading your subscribers when you do not get your newsletter to us on time. Worse yet, in this case, of the 5 recommended best buys, only 1 could be bought at the recommended price by the time I got your letter. Please explain what you intend to do about this problem.
"Otherwise, I would say that you are running a scam with this arrangement of waiting till your recommendations seem to be especially good but in fact are not available for purchase by your subscribers." – Paid-up subscriber Everet Beckner
Porter comment: I don't know what letter you refer to... as you didn't bother to mention it. Therefore, I don't know when it was published or when it should have been delivered. I suspect you might have included just a few facts in your letter before you called our service a "scam."
Also, clearly you've heard of e-mail. Have you also heard of the Internet? Perhaps you'll visit our website (www.stansberryresearch.com).
If so, you'll discover we e-mail all of our issues and post them to our website immediately after they're written and before they're sent to the printer.
What... I wonder... would you have me do besides this?
Regards,
Sean Goldsmith and Porter Stansberry
Denver, Colorado and Baltimore, Maryland
November 1, 2010