Long-suffering readers of my newsletter, PSIA, have become so accustomed to my warnings about the coming inflation that when I type the word "inflation," I can almost hear them groaning, "not again"... Fortunately, the equities I've recommended because of these fears have performed excellently, with an average gain of more than 30% in only six months (including the big, gaudy 100%-plus return on Calpine)... So the boring macroeconomic analysis has paid off, at least for my subscribers.
Meanwhile, most mainstream economists have been strangely silent about the unprecedented increases to the monetary base. Finally, Arthur Laffer published a warning that's at least as dire as mine:
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10. It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless... It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5%...
Laffer's letter is the best analysis of the problem I've seen anywhere (including my own). He's created an amazing chart that shows what's happening in a visual everyone can understand. Please make sure you read Laffer's article.
The lawyer for Chrysler's secured bond owners yesterday saw the Supreme Court reject his petition for review. He posed an interesting question, wondering, "whether our judiciary is able to fulfill its constitutional mission to ensure that the rule of law prevails – particularly in the face of perceived crisis."
Judging by the Chrysler bankruptcy and the treatment (murder, torture, denial of habeas corpus) of the prisoners of our armed forces, it should be blindly apparent to everyone that the answer is no. Our government rarely lets any crisis go to waste, as ol' Rahm Emanuel so keenly quipped. That probably doesn't bother many of you. It scares me. (But you've probably never had all of your assets seized without a warrant or a hearing... I have.)
Update on Corus Bankshares... We warned our readers (PSIA, January 2008) about this bank, one of the leading financiers of Miami condos. And we've followed the story closely since. Even though it was clear to us as soon as late 2007 that Corus was likely to fail, the bank has remained open. It has been advertising extremely high rates on CDs in order to garner deposits – all of which are guaranteed by the FDIC.
Meanwhile, of the bank's 21 condo construction loans in Florida, only two remain current. Out of the bank's 76 outstanding condo construction loans, half are in default or foreclosure. The engineer of this insanity, Robert J. Glickman, who resigned as CEO last April, is now selling his remaining shares in the company. We pose a simple question: Where are the regulators? Corus remains open.
Why do I think the bear market in REITs is over? Because the floodgates of new capital have opened... Sentiment and access to capital play a huge role in real estate prices. The more capital that's available, the higher prices will move. The higher prices move, the more capital becomes available – because there's more collateral. Sentiment is incredibly important to these markets because it opens the flow of new capital.
And sentiment is now completely different than it was in March. Simon Property announced another equity offering [in addition to the $500 million it raised in March] – this time $800 million in new equity. The fact that REITs have this kind of access to capital tells me the yield spread has peaked and it's time to buy REITs. – Porter Stansberry's Investment Advisory, May 2009
Our corresponding recommendation to buy the closed-end Cohen & Steers REIT and Preferred Income Fund is now up more than 30% in about one month...
Billionaire hedge-fund manager John Paulson agrees with my newly bullish stance on real estate. Last month, Paulson began raising money for a new real estate private equity fund, the Paulson Real Estate Recovery Fund. He hired a former Lehman Brothers real estate banker and a former D.R. Horton executive to help manage the fund. Paulson made his second foray into the real estate market today after announcing his fund will buy $100 million of stock in commercial real estate firm CB Richard Ellis... the largest commercial real estate company in the country with a market cap of $2.4 billion. The company is selling $400 million in 10-year notes and $150 million in new stock to pay down old debt. CB Richard Ellis jumped more than 12% on the news...
Paulson, who made billions shorting the subprime market, also has a $4.3 billion position in gold and gold stocks – you can see a great breakdown of his holdings here. He's clearly positioning his fund to profit from massive inflation. Gold is a well-known hedge for inflation... And inflation is great for real estate prices. As I wrote in the excerpt above, as property prices rise, real estate companies will have access to more capital. And the more capital they raise, the more real estate prices rise.
Our group's best trader, Jeff Clark, is in an uncustomary funk. Every bearish indicator he knows is flashing "sell," yet the market keeps rallying. I've been working with Jeff for five years. I've seen him go through two or three periods like this, where the market wasn't doing what he expected. It typically lasts for a month or two... but the market always comes back to him. And he makes a killing when it does. If you're trading with him now, I'd urge patience. He sent us a note about a recent poker game he played with some fellow professional traders that shed more light on the situation...
I have many friends who trade for a living. Their livelihood and their families' wellbeing depend on their ability to be right. Several of us got together two nights ago for a monthly poker game. The mood wa
s as depressing as I've ever seen it. Every one of them was looking at the same indicators I follow and was heavily short the stock market. And every one of them was feeling the pressure of being on the wrong side and losing money while the rest of the world profits. These are guys that are used to being right. They're the best traders I know. And every one of them thinks there's monkey business going on in the pits (where the S&P futures trade).A little bit of money can go a long way in manipulating stock prices, if it's employed at the right time. I'm not a big fan of conspiracy theories. And if there's a conspiracy in the financial markets, then my job is to know it and play on the side of the conspirators.
But I've never known this group to be collectively wrong. We'll be on the wrong side for a little while as the market makes extreme moves (such as during the Internet rally in 1999 and the great decline earlier this year). Right now, every one of the best traders I know is massively short this market.
By the way, Jeff Clark is incredibly bearish on one stock in particular... And when his trade hits, the returns will be enormous. He thinks you can make 400%. To learn more about the S&A Short Report, Jeff Clark's option-trading service, and to access his favorite short-sell idea right now, click here...
Comrade OBAMA!'s latest stimulus plan is to use your hard-earned dollars to buy new cars for your neighbor. The U.S. House yesterday approved legislation that would give citizens up to $4,500 to turn in their old car and buy a new, more fuel-efficient model. The "cash-for-clunkers" proposal would replace 1 million older vehicles – for a grand total of 4.5 billion tax dollars down the drain.
New highs: Kudos to Tom Dyson and Brian Hunt on their new Penny Trends advisory service. Two of their recommendations, Caribou Coffee (CBOU) and Allied Nevada (ANV), are the only two stocks on the new highs list. The Penny Trends track record has nine open recommendations – and every one is up. The biggest gain is more than 160%. To learn more about the new service, click here...
In the mailbag... A reader sends us a picture of the new truck he bought with the profits from our Put Strategy Report. What have you bought with your profits, dear subscriber? Show us, here: feedback@stansberryresearch.com.
"I'm naming my new truck, see attached, 'The Naked Put.' Thank you for giving me the tools to pay for it!!!!" – Paid-up subscriber Bill
"Ammunition makes an excellent investment. Buy it at gun shows and at small town and country gun shops where demand is less than at big city stores and online vendors. Place your name on the waiting list at Cabelas, CheaperThanDirt.com, ableammo.com, and Gamaliel Shooting Supplies. Be patient. You will always get it if you are patient. It will be expensive but you can almost always sell it for a profit. Buy 22lr, 223, 9mm Luger, 45 ACP, 7.62x39, and 308. These are the calibers most in demand." – Paid-up subscriber Stuart Williams
"Back in the old west cowboys didn't have much cash, but they had bullets. Saloon keepers wise to the situation took a single bullet as payment for a drink, which is where the term 'shot' came from. The saloon keeper then turned the bullets into the hardware store for cash. I suspect once cash is devalued to a certain level, people will begin to barter and use whatever they have as currency. We're not there yet, but it's coming." – Paid-up subscriber Steve
"Why are you building your home in Grand Pacifica, instead of Rancho Santana?" – Paid-up subscriber BB Gregory
Porter comment: Two reasons. First, I was able to get a direct beachfront lot at a good price. I believe these lots will always trade at a premium. The direct beachfront lots at Rancho Santana are now asking $600,000 – they're very big lots. The direct beachfront lot next to mine is for sale right now at Grand Pacifica. I believe they're asking $350,000.
Second, I have a young son (Traveler, age two) and anticipate having more children. Thus, for at least the next 10 years, I'm likely to have small kids with me during the summers in Nicaragua. I believe the facilities at Grand Pacifica (paved streets, wide gentle beaches, golf course) and the much shorter distance to Managua will be better for my family at the present time. You also should remember that my business partners both have large homes at Rancho Santana. They're kind enough to let me use these properties frequently. So I don't really need my own house down there. Both Grand Pacifica and Rancho Santana have plusses and minuses... You should see both when you go down and decide which is better for you. They are clearly the two best developments in Nicaragua.
"There is a certain amount of humor and irony that a rich american who rails about communism in his own country is now building a luxury home in a known socialist country. I guess our own pathetic attempts at providing basic social services to our citizens weren't good enough for you." – Paid-up subscriber Stewart Miller
Porter comment: No, actually, I don't consider it a legitimate function of the government to provide social services of any kind. The government owns a monopoly on the legal use of force and the power to tax. These are the ultimate powers in society. These powers ought to be used sparingly – to enforce contracts and provide security – so the rest of society can function on a civil basis. Instead, our government is now directly in control of more than 30% of our economy and has begun to tax the next several generations of Americans to pay for it. Meanwhile, more than half of the living citizens pay nothing in taxes.
Such policies have transformed our country. We were once the world's largest creditor. Now, we are the world's largest debtor. We were once the freest country on Earth. Now, we are barely in the top 10. We were once a "city on a hill," respected by the whole world for the nobility and the restraint of our government. Now, we maintain the world's most powerful armed services and bases in more than 100 different countries, most of which consider us occupiers. We once adhered to a gold standard, which made our currency the most reliable in the world – literally better than gold itself. We now have a central bank that wor
ks day and night to destroy the value of our savings, while propping up notoriously corrupt banks.
While I don't know what will happen from here, I can certainly see the trend. Frankly, I wonder why any American wouldn't want to own a second home that's out of the country. At the very, very least, every American should be terrified of what has happened to our country and should take whatever precautions he can afford.
Regards,
Porter Stansberry
Baltimore, Maryland
June 10, 2009