We've never believed a word that's come from any politician's mouth (other than "higher taxes on the horizon"). When government officials from the world's 20 most powerful nations gather to solve the world's problems – as they attempted at last weekend's G-20 in Toronto – our B.S. meter is cranked extra high.
What did the Group of 20 propose to solve our economic malaise? Austerity... The G-20 nations agreed to cut their deficits in half by 2013. They're hoping the private sector will lead the world out of the crisis. But at the same time, government will raise taxes on the private sector... Interesting logic, we know. Will the world's wealthiest countries cut government spending? Probably not. Will they raise taxes? Absolutely. We don't know how this reform will play out. But the government needs to be careful weaning corporations and deadbeats off the "free-money" teat. Whatever does happen, we're happy we own gold right now.
Our first [short position] of 2010 will be on the shares of Barnes & Noble (NYSE: BKS). The problems of book retailers are obvious: More and more people are reading books and magazines electronically. This greatly reduces demand for paper-based media, whether softback, hardback, or periodical. Worse, the best buyers of books are the most likely to switch to Amazon's Kindle reader or Apple's new iPad. And since the Kindle and iPad are fighting for market share, the price of books themselves has plummeted – especially for hardback titles.
The price war will devastate Barnes & Noble. Selling books has always been a low-margin business. Barnes & Noble lives on a razor-thin 3% operating margin. It simply cannot afford a decrease in top-line revenue. And there's no doubt that will happen this year. Look at what has already happened to Barnes & Noble's top competitor, Borders. Borders revenues fell 13% over the last year... – Porter Stansberry, February 12, 2010, Put Strategy Report
Today, with volatility even more depressed, I think it makes sense to buy a naked put – if we can get a good price on the puts. Right now, the BKS January 2012 $20 put (the at-the-money option) is trading for between $5 and $5.50...
I expect the shares to fall sharply because it will be increasingly difficult for Barnes and Noble to earn a profit selling hardbound and softbound books at retail locations, thanks to the lower price and great convenience of buying books through national wireless networks...
I believe there's a secular and permanent change taking place in the book industry that will be cataclysmic for Barnes and Noble – just as it has been for its competitors. If I'm right, revenues will begin to decline rapidly, the stock's dividend will be eliminated, and its share price will fall by 50% over the next 12 months – at least. If this comes to pass, the options you pay $5 for today will be worth at least $10 by this time next year. – Porter Stansberry, March 12, 2010, Put Strategy Report
Barnes & Noble hit a new 52-week low yesterday (it's down another 2% today). The stock has plummeted from more than $20 at the time of the short recommendation to about $13 today. Stansberry's Investment Advisory readers who simply shorted the stock last month are up more than 30%.
As for the puts Porter recommended buying? They're currently asking $9.90. If you took our advice in Put Strategy Report, you've essentially doubled your money in only three months. To read about Porter's latest idea in his Put Strategy Report, see the June 11 Digest, here. To learn more about Porter's Put Strategy Report, click here.
If you want to know Porter's three favorite assets to buy right now (and a special trade that will produce between 15% and 20% in yield annually – with almost no risk), don't miss our latest Off The Record conference call today. In addition to Porter's favorite ideas, you'll also hear from Dan Ferris, Steve Sjuggerud, and Doc Eifrig. Dan discusses his current favorite World Dominator stocks. Eifrig discusses a trading strategy that allows you to buy the world's best companies (including some of Dan's World Dominators) for below-market prices... and how to generate extra yield from these same stocks.
And Sjuggerud lets us in on his favorite sector to buy today. According to Steve, these stocks are "trading at single-digit P/E ratios as a group and my research showed that the last time they traded anywhere close to these values you would've made 100% to 150% over the following three years." He also tells listeners about "once-in-a-lifetime" buying opportunities in the oil sector. Finally, Steve recommends buying a fund currently trading at a huge discount to net asset value. He has never disclosed this pick before (it's just too small for his True Wealth readers). Historically, when the fund has traded at these price levels, investors make 46% a year. To access the call, click here. As a special courtesy to Digest readers, we are extending the 5:30 p.m. discount deadline (which you'll note in print) to midnight tonight. If you've been looking for a way to protect yourself from the market's wild volatility... this is it.
New high: Porter's Barnes & Noble (BKS) short.
An update on GE in today's mailbag. Which company do you think is headed to zero, and why? Send us a note: feedback@stansberryresearch.com.
"Please continue the great work, love the insight, love the sarcasm (or do you use sarcasm?), and keep up the usage of Comrade as it is perhaps the most accurate of all your writings.
"On to shopping for gold. I live in a small Kansas town and don't get out to the city much. I have found that Bulliondirect.com is a very nice place to shop for gold and silver. Yes, you do pay for shipping, but if you are paying 7% premiums for your Krugerrands, it is a bit cheaper to get them with bulliondirect. After your first purchase, they don't charge as much, or at least it seems that way. I just priced 5 Krugers and with their gold quote of $1241, the price per was about $1293. About a 4% premium. They also allow for small lots, individual pieces and such. They seem to ship in decent time, I send in a check and get my pieces about 3 weeks later. Just a thought for you." – Paid-up subscriber Richard
"What happened to GE – it has gone up ever since you folks said it would go bankrupt? Same for CAL, SPG, and other 'doomed' companies. You never come out and say you were wrong, or say that XXX has hit your T.S. You could be a lot better." – Paid-up subscriber Jim
Porter comment: Nothing has changed about our analysis of GE. We invite you to look at the numbers yourself and try to imagine a positive outcome for the company's equity owners. According to Yahoo Finance, GE's total liabilities are in excess of $660 billion. And while GE claims to have more than $700 billion in assets, nearly $400 billion of these are receivables. A large percentage of these receivables are of highly dubious value. GE has an enormous credit-card book. It has an enormous commercial real estate portfolio. And it has enormous exposure to Eastern Europe, where currency devaluations will most likely lead to huge writeoffs. GE spends millions on lobbyists. Thus, it has successfully avoided being forced to mark these assets to real market prices.
Fudging the accounting, however, doesn't change the reality of the problem – it simply postpones the day of reckoning. Thanks to a government guarantee to its creditors, GE is only paying about 2.5% interest right now, on average, across all of its debt maturities. That low rate of interest is completely unsustainable given the company's precarious financial position. But even paying so little for its debts, the company must spend more than $4 billion per quarter on interest payments. It is only earning $7 billion from operations each quarter. Any free market interest rate would most likely bankrupt the company. Likewise, any real-world accounting of its receivables would most likely bankrupt the company, too.
For investors who are nervous about the future, GE is the perfect hedge. It will go bankrupt if interest rates rise. And it will go bankrupt if the world economy slows and interest rates fall, because writing off its receivables will wipe out all of its equity.
While it is only my opinion GE's balance sheet will have to be reorganized, all of the reasons for my view are simple to understand and based solely on the numbers in the company's publicly available balance sheets. I don't believe an honest analyst can reach any other conclusion than GE is highly unlikely to escape its debt burden. Just apply any reasonable interest rate on its $660 billion in debt. A 7% interest rate, for example, would cost $46 billion annually to service. That's almost twice what GE earns from its operations. Now... ask yourself this question: Who in his right mind would own equity in that business? No one. And that's why GE's stock is one of the 10 most common reference securities for credit default contracts in the world.
Meanwhile... I've noticed over the years our subscribers tend to resent our analysis the most when it is this certain. There's something about math they just don't seem to be able to grasp.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
June 30, 2010