In the latest issue of Extreme Value, I said U.S. Treasuries ought to be rated triple-C (like junk bonds), not triple A (the highest possible credit rating). Time will tell if I'm ahead of myself, but it seems the wheels of fate are rolling in the right direction...
A new ratings agency based in China agrees the United States government is not a triple-A credit. Dagone International Credit Rating Company rates the U.S. double-A. Dagone, which means "Big Justice" in Chinese, also put the U.S. on a negative credit watch, meaning more downgrades are probable.
The downgrade makes sense, given that a credit rating ought to take the balance sheet into account. The U.S. government's balance sheet foots to –$11.5 trillion. If my balance sheet were -$1,150, I wouldn't be able to get a home loan. Rating the U.S. double A when it's $11.5 trillion in the hole isn't such a great leap.
It's curious that the government has a line on its balance sheet for "stewardship land and heritage assets," yet there's no value reported. The corresponding footnote (No. 27) says the land isn't reported because, "Except for military bases, this land is not used or held for use in general Government operations. Stewardship land is land that the Government does not expect to use to meet its obligations, unlike the assets listed in the Balance Sheets." The footnotes say most stewardship land was acquired "between 1781 and 1867" and it "accounts for 28 percent of the current U.S. landmass."
Whether the government expects to use this land to meet its obligation or not, I'm pretty sure 28% of the U.S. land mass's highest and best use does not involve the stewardship of a bunch of semi-competent public servants. Why, for example, does the government need to own 90% of the state of Nevada? Is it planning to build a beach resort for Congress when California tumbles into the sea after "the big one"?
If the government sold all the national park land it's seized over the years... maybe it could pay down some of that $13 trillion in debt, and tens of trillions more in unfunded public insurance liabilities. Even as I type this, it sounds totally far-fetched, and I know it'll never happen, but a fella can dream.
Truth is, all this land talk is probably just me being overly sensitive to the issue of land use. I've been like that since I moved out West almost 10 years ago. I noticed there's so much open space everywhere out here, like you can't imagine if you're from back East. But when you look at a map, it seems like the government owns most of it or otherwise controls its use. That's such a crime. In fact, you could argue the housing crisis had its roots in too much government interference in land ownership (among other causes, of course).
In reading Thomas Sowell's The Housing Boom and Bust last night, I came across the following conclusion Sowell makes after offering pages of concrete supporting evidence:
These variations in the affordability of housing prices over time tell essentially the same story as variations in the affordability of housing prices from place to place at a given time: Where there is the greatest government intervention, housing is least affordable.
If the government sold off all that land and stopped restricting its use so much, we could kill two birds with one stone: No more horrible government credit profile, and the housing market becomes less restricted and more open to all Americans.
It's interesting that, of all the "affordable housing" solutions proffered by government, not one of them has included reducing the government's involvement. It's like I told Extreme Value subscribers this week. To be taken seriously on this topic, you must include a huge role for government.
The government is like a stupid, lazy cousin whose father we depend on for employment. Because our job is on the line, we have to give the inept cousin a job and pretend he's not an albatross weighing us down.
David Einhorn, the Greenlight Capital fund manager famous for calling Lehman's collapse, recently disclosed a 5.2% (7.42 million shares) position in deep-sea driller Ensco. It's a new position for Einhorn, though he owned Ensco in the fourth quarter of 2008.
Einhorn's position is a less risky play on the BP oil spill than actually buying BP or Anadarko. Ensco wasn't directly involved in the spill, but its shares sold off on fears of a drilling moratorium. Ensco hit a 52-week high at more than $50 a share before the oil spill, but sold off to $33. Shares are currently trading around $42.
Another famous value investor, Bruce Berkowitz of Fairholme Capital Management, is loading up on financials. He disclosed yesterday an 11% stake (22 million shares) in bond insurer MBIA. Shares jumped nearly 11% today. Berkowitz also increased his stake in insurer AIG from 18.9% in May to 24.3%.
Berkowitz is super-heavy financials in his fund... In addition to MBIA and AIG, Fairholme holds Citigroup, Goldman Sachs, Bank of America, Regions Financial, Americredit, and CIT Group. Berkowitz is positioning his portfolio to benefit with the U.S. government... Financials are backstopped by taxpayer funds and the zero fed-funds rate means banks can borrow money essentially for free.
Today's Wall Street Journal features an article saying the Federal Housing Finance Agency (FHFA), Fannie and Freddie's regulator, is sending 64 subpoenas to mortgage-backed securities issuers it believes misled Fannie and Freddie. The government-sponsored entities (GSEs) couldn't invest directly in mortgages, only through pools of mortgages. Of course, Wall Street is the biggest issuer of mortgage-backed securities. From the Journal:
[T]he top private issuers of mortgage securities included Bear Stearns Cos. and Washington Mutual Inc., which were taken over by J.P. Morgan Chase & Co., as well as Countrywide Home Loans and Merrill Lynch, which were taken over by Bank of America Inc.
The FHFA's efforts are absurd on so many levels... including the fact that none of the banks mentioned above even exist anymore. Lending standards became so lax due to the U.S. government's creation of Fannie and Freddie and its belief that every American should own a home (also covered in Sowell's housing boom book)... When the GSEs are backed by limitless funding and buying every MBS Wall Street throws its way in order to fulfill Barney Frank's vision of affordable housing for all, what do you expect the bankers to do?
The FHFA will try to prove the materials marketing the MBS misled Fannie and Freddie... In truth, the GSEs knew exactly what they were buying. They are the reason those assets existed. We don't expect anything to come from these suits... It's just a way for the government to puff its chest and show Main Street it's keeping an eye on its $2 trillion of bailout money.
The Baltic Dry Index (BDI) posted its 33rd consecutive down day. The index, a proxy for global trade, is now trading at a 14-month low of 1,790. The Baltic Dry Index tracks the cost of oceangoing transportation of bulk commodities like grains, coal, and iron ore. Rises and dips in the index are generally thought to reflect the demand for those commodities and anticpiates price movements.
Don't forget, other factors influence the BDI. If the supply of dry bulk tankers goes up, the BDI could fall. If fuel gets more expensive, it could cause shipping costs to rise. But even I have to admit a nearly 50% slide with the index down every day for 33 days in a row... well, I don't think that's about tanker supply or fuel costs.
But wherever in the world things might be slowing down, the U.S. doesn't appear to be the drag on the BDI...
The ports of Los Angeles and Seattle have both reported rises in shipping volumes. Los Angeles' shipping volume hit a 20-month high in June and was 32.4% above last June's levels. Seattle reported May shipping volumes 57% higher than last May.
Meanwhile, CSX, the country's third-largest rail carrier, posted great earnings today. Revenue and earnings increased 22% and 51%, respectively, on higher volume and cost-cutting initiatives. CSX's total rail shipments rose 13%, with a 63% gain in auto shipments, a 44% rise in metals shipped, and a 7% increase in coal shipments.
In the mailbag, more information on traveling with gold, plus one subscriber's idea for a new advisory. Send your messages to feedback@stansberryresearch.com.
"Seeking greater clarification on this sensitive issue, I spoke today with a Supervisor at the Canadian Border Services Agency, Canadian equivalent of Customs. Supervisor stated that both gold and silver coins and bars must be declared upon crossing border. Tax may be assessed if purity of either gold or silver, both coins & bars, is LESS than 99.5% purity. No tax is assessed on 99.5% purity or better. Penalties for failure to declare can be as severe as fine of up to $25,000 per instance PLUS confiscation of non-declared coins & bars." – Paid-up subscriber Carl Johnston
"All IPOs that are related to owners unloading a pc. or all of their startup should be shorted. period, end of subject.
"want a new subscription area on your website: 'the IPO short advisory.' list up all the dumb IPO ideas and the blackstones of the world as they blow it our to the retail crowd. dogfood.com comes to mind. carry on." – Paid-up subscriber David Kiessling
Ferris comment: I'm definitely with you in spirit. Most IPOs probably deserve to be shorted. But the public loves public offerings and routinely runs the prices up. Being short out of the gate can be quite a painful experience.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
July 13, 2010