We said just the other day that the folks buying the common stock of MGM must not be very good at math. You'll recall our reasoning: The company's bonds were trading for 40 cents on the dollar. Meanwhile, the company isn't earning enough money to pay for the interest on its debts and has been forced to sell assets to meet principal payments. Oh... and the company's debts equal 13 times the equity, even if you assume MGM's assets are still worth what they were in 2007.
Our point: Stock investors should pay a lot more attention to the bond market and avoid stocks whose debts trade well below par, as these situations almost always end with the common stock being completely wiped out. Coincidentally, about the time we were writing that piece, Carl Icahn was thinking the same thing and actively buying MGM bonds. The move sets him up as the likely future controlling stakeholder of MGM's assets. MGM is currently controlled by its largest equity investor, Kirk Kerkorian. But not for long...
MGM has $227 million of bonds coming due in July and $821 million in October. If the company is unable to make those payments, Icahn and another recent large buyer of MGM's debt, Oaktree Capital Management, could force MGM into bankruptcy. Icahn has traded Las Vegas properties successfully before, selling the Stratosphere and three other casinos at the top of the market in early 2007 for a $1 billion profit. It's also likely Icahn owns derivatives or credit default swaps that will increase in value if MGM goes bankrupt.
The math is compelling when you know there's zero intrinsic value in the equity. You can short the stock with leverage and use the proceeds to buy more of the debt. Then, you foreclose, and you get the assets for pennies on the dollar. And that's why, dear subscribers, you ought never buy a heavily leveraged operating company.
It probably won't make the evening news, but the most expansive federal power grab of all time began today. The EPA officially ruled so-called greenhouse gases are a threat to the public because they cause global warming.
In both magnitude and probability, climate change is an enormous problem. The greenhouse gases that are responsible for it endanger public health and welfare within the meaning of the Clean Air Act.
Keep in mind, no one has actually seen global warming. It only exists on the screens of computer models. In fact, it snowed yesterday in Las Vegas, the latest snowfall there on record – ever. No one can prove for certain whether the Earth is getting warmer... or cooler. And no one can know whether man, nature, or changes to the sun cause these tiny shifts in the Earth's average temperature. For every scientist who says one thing, someone equally credible will argue the exact opposite – with just as many "facts" standing by his side. But if you thought the debate about global warming was actually about science, you are woefully naïve...
Al Gore doesn't involve himself with science. He's interested in politics and power. By ruling that carbon dioxide, methane, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride cause global warming, the EPA now gains the authority to regulate all of these emissions under the Clean Air Act. Whether you agree with the EPA's science or not, whether you believe in global warming or not, the Clean Air Act was never intended to give the EPA total authority over everything that emits methane – like the entire livestock industry or the auto industry. The threat of such disruptive regulations will be enough to push through the real political objective: the so-called cap and trade regime of the Waxman-Markey bill, which is pending in Congress.
The Waxman-Markey bill is a piece of cruel, legislative genius. It will generate between $500 billion to $1 trillion per year in new revenue for the federales – an amount roughly equal to all of the income taxes collected each year. But it's not a direct tax. It generates revenue by requiring power companies and other large emitters of carbon dioxide to bid for "credits" that will allow them to produce carbon emissions.
OBAMA! will tell the public it's not a tax – it's just new regulation. Or he'll say it's a new market for carbon credits. It will not violate OBAMA!'s pledge not to raise taxes on 95% of Americans – as if those power companies won't simply pass along the new expense to their customers. All of the poor fools cheering OBAMA! believe they can continue to get something for nothing through him. Well, they're going to get what they deserve. Let's see how much they like their electricity bills doubling overnight.
When you open a restaurant in Palermo, Sicily, a man comes to see you. He acts friendly, but he warns you there are a lot of bad guys in the neighborhood. They might come and rough you up a little... take the money from your cash register, harass your patrons. Or maybe pass strict regulations against carbon emissions. It's OK, though, he says. For just a small fee, he can keep you safe from the regulators, er... thugs. All you have to do is agree to a little tribute. Just a bit. Not enough to put you out of business. Just a little to help the "community"... to make things fair... to "spread the wealth around" a little.
New highs: none.
In the mailbag... lots of great letters. Probably the best mailbag we've had in a long time. Enjoy. And send us your comments: feedback@stansberryresearch.com.
"Thank you so much to you, Steve, Dan, Jeff, Matt, and all the team for your wonderful service and inspirational insights. I have been a subscriber for a few years now and while I haven't yet made my fortune from your recommendations, (primarily because I have ignored your advice and not run stop loss limits), I am more than satisfied with my modest returns. More importantly however I have benefited enormously from your political and wider economic insights and observations.
"I agree totally with your 'End of America' prophecy but am rather surprised that you believe that simply leaving your country to live elsewhere will help in the worst case scenario? I would be most intrigued to know your views... Unless we persist there really will be no future (worth living) for our children and the Orwellian nightmare the elite have in store will be upon us sooner rather than later... Come on Porter, it's not like you to hold
back, and now not only your country but the world needs influential people like you to help fight the onset of global tyranny before it is too late!" – Paid-up subscriber Terry James
Porter comment: It's far too late. Once the mob (unlimited democracy) has gained control over the Treasury, it will never willingly concede power. That's occurred in all of the major western countries. The mob will require more and more tributes (taxes) to fund its objective – as much plunder as the economy will bear. Sooner or later, the mob will make a mistake. It will go too far and seriously disrupt the economy – perhaps it has with the huge amount of federal spending on the bailouts. But even then, the mob will not concede power without a struggle. And that's what makes our soaring debts and the increasing power of government so frightening. Any person truly interested in freedom, liberty, and personal safety cannot live in countries like the U.S.A., where there is no limit whatsoever on the state's legal right to tax and zero legal right to privacy.
The only option for people who truly want to be free is to live a multistate existence with a legal residence in a state like Singapore, which does not tax global income, and residences in several peaceful countries that have a culture of privacy. If you've done something like this, get in touch with us. We're interested in knowing how you did it... and why. If this sounds crazy to you, perhaps it is a little crazy to value your liberty so much that you'd go to such extremes. But you should know this: The American government fears its wealthy citizens fleeing and has made it nearly impossible to leave the country legally with your assets. And that makes me wonder what's coming next.
"Here's a business that in my experience is truly is recession proof: School pictures. Student photography is a $3 billion annual business. Yep, that's small potatoes compared to the mega-corporations, but it's dependable for the thousands of people in the industry. I became a school photographer right out of university. I had a sparkly new MBA degree but there just weren't any jobs available and I needed a job (to start paying back all those student loans) so I went to work with a friend who was in the school photo business.
"That was 45 years ago and I've been through a few of these 'recessions' in that time, but I can truthfully say that the school picture business has never slipped. I believe the reason is because even though families suffer when times are tough they won't give up the things that are meaningful to them. They may buy a smaller package of photos if finances are slim, but they will still buy that picture of their child no matter what." – Paid-up subscriber Jim Crawford
"Here is another vote for the Put Strategy Report... I only marginally understood puts prior to October 2008 (I knew what a put was, but not really how to use it to generate wealth). In 2008, I was headed for disaster, even though I am a long-time Alliance member, due to my 401(k) tanking so hard. Thanks to the investments I made through the Put Report... I MADE MONEY ($23K) the last two months of 2008, which prevented me from a true disaster.
"If only I had been using this strategy for the whole year and could have used it in my 401(k), I would have done so much better. Not only did S&A help me steer clear of disaster (ok, maybe more of a gut punch), but so far in 2009 I am UP 14% while the market is DOWN about 9% year-to-date, up $45K, and the market hasn't even really rallied yet (a real rally). So PLEASE keep the Put Strategy Report going. It is the best newsletter out there (even better than PSIA!)." – Paid-up subscriber JP
Porter comment: If I could teach my subscribers one thing, it would be how to sell puts. There's no better strategy in the market for anyone who wants to be a long-term owner of equities. You can literally make 20%-30% per year, without using any leverage, simply by promising to buy stocks you want to own, at a price that's below the market. I can't explain it any simpler than that. That's exactly how it works. We just put on three new trades this week – all of which should make us better than 15% gains in a few months without buying a share of stock.
For those of you who have never tried it, I don't blame you for being skeptical. If it sounds too good to be true... right? But ask any of my subscribers who have tried it. Believe me, the money in their accounts is real. I think it's so important you learn how to sell puts, I'm willing to pay you $1,000 just to try it. But only through midnight tonight. Click here to learn more.
"I was one of those skeptics who thought that trading options was like betting money against the house in Las Vegas. Adapting the Put Strategy was an eye-opener for me and very much on my way to making a full repair of my portfolio. Thanks Porter, for showing me the winning side of option trading!
"As a side issue, have you bought that hi-rise condo in Miami that you mentioned earlier? I am very much interested in getting details about this opportunity; where, what price are they selling now and who to contact for starters. My interest is a vacation place, at least a 2BR in a resort area and less than $200K. And what to expect for additional out-of-pocket expenses. I hope I am not intruding into your own investment affair by asking these personal questions. Lastly, I got a kick out of your April Fools joke. You pulled a similar story line in the early days of Pirate Investing. That's how long I've been a subscriber. You got me then, searching feverishly for the symbol SUKR in all exchanges. SUCR? Mmmm. sounds familiar. LOL!" – Paid-up subscriber Ron C.
Porter comment: No... We made an offer on a place but someone out-bid us. I'm going to Miami again next week with my partner to look at buildings Thursday afternoon. I'll report on what we find next Friday.
"You are the April Fool, Porter. Credibility is a precious commodity. You blew yours on that cute (???) but stupid 'April Fools' story. I NEED to trust you, so don't do that again!" – Paid-up subscriber Lyle Miller
Porter comment: I don't mind my credibility being impaired, if it was, by my annual jokes. It's a good reminder that the only person in this life you can ever really trust is yourself. Trust yourself, Lyle.
Regards,
Porter Stansberry
Baltimore, Maryland
April 17, 2009