China's Premier Wen Jiabao pledged to curb property speculation and add more affordable housing after the country's home prices gained 1% in January – the biggest one-month gain in six months. Last week, the Chinese government raised second-home down payments, told local governments to set price targets on new properties, and instated taxes on residential properties in Shanghai and Chongqing. And that follows two interest-rate hikes in the past four months and a ban on third mortgages. The New York Times reported China will likely raise interest rates again this month.
China bear Jim Chanos, founder of short selling hedge fund Kynikos Associates, thinks China's attempts to cool its housing market will lead to a crash. Chanos notes "fixed-income investment is now a record 70% of the Chinese economy." Of the $3.5 trillion, Chanos says some $100 billion goes to high-speed rails and similar low numbers for other infrastructure projects. Most of the money is in real estate. Chanos continues (as told to the Financial Times):
The problem is that consumers are less and less of this economy as this property bubble has gone on and a large amount of consumption that the consumers are embarking on is real estate related, it's furniture, it's appliances, these sorts of things you buy when you're buying a new house or condominium. Any time you try to take something that's 70% of your economy and reign it in and transition history tells us that usually the risks are to the downside.
While China may see a short-term pullback, the country's long-term demand for energy and food must rise. That's why Matt Badiali is stocking his S&A Resource Report portfolio with giant natural gas and oil reserves. Yesterday, he sent me an article that makes his natural gas thesis even more attractive. The article argues the U.S. doesn't have as much natural gas as most folks believe because the market is "confusing possible resources with proved reserves."
The belief that we have more gas than we could ever use is pushing the government to use natural gas instead of oil for transportation fuels. Also, two liquefied natural gas (LNG) exporters are applying for permission to add extra export facilities. If granted, the two terminals will have the capability to ship 3.4 billion cubic feet of gas a day – 5% of total production. The exporters believe natural gas will stay cheap (less than $5 per mcf) through 2023, attracting European and Asian buyers. So at the same time, the appetite for natural gas in China and India (aka "Chindia") is booming, the U.S. wants to increase its usage. Matt says this will eventually lead to an "oh s**t" moment when the natural gas supply can't keep up.
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When this happens, you'll be happy you own stock in North America's two premier energy "hoarding" companies. As we discussed in Monday's Digest, one of Matt's most recent recommendations is one of the largest owners of natural gas reserves in the world. It's cheap and pays a healthy, inflation-proof dividend. In Matt's newest issue, out today, he recommends the safest and best way to buy into the Canadian oil sands...
A quirk in the Canadian tax law system has created an incredible way to cheaply buy a stake in a massive tar-sand deposit. This company trades 30% below its closest peer. If oil prices continue to rise, Matt expects a 120%-plus return. To learn more about the S&A Resource Report and access his latest pick, click here...
The small correction in precious metals isn't scaring bullion buyers out of the market. The U.S. Mint sold 6,472,000 ounces of silver in January – almost 50% more than any other month in its 26 years of published sales history. The profit-taking in the paper silver market may continue. We're guilty of "taking some off the table" ourselves... In his January Resource Report issue, Matt closed Silver Wheaton for a 345% gain, Silvercorp for a 270% gain, MAG Silver for a 156% gain, and Silver Standard for an 89% gain... Regardless, physical buyers will continue to buy on dips. The Mint sold another 50,000 ounces of silver yesterday. Also, Canada's biggest bullion bank, ScotiaMocatta, announced it is "sold out" of all silver bars. (It just restocked 100-ounce bars seven days ago.)
In the latest issue of Stansberry's Investment Advisory, Porter and Braden shorted Assured Guaranty – the largest municipal bond insurer in the country.
[W]e suggest shorting the last municipal-bond insurer standing – Assured Guaranty (NYSE: AGO). All the other companies in this space have either gone out of business or stopped writing new insurance because the risks have become too large. When knowledgeable insurers like Warren Buffett completely step away from a market... you're wise to follow. But that's not what Assured has done. Instead it has written 98% of the municipal policies for the last year. It even boasts in its annual report it has no real competition. Look out below... – Porter Stansberry and Braden Copeland, January 2011, Stansberry's Investment Advisory
While we shorted it for its exposure to the municipal-bond market, it also insures mortgages. And that business is also doomed. Today, Genworth Financial, a mortgage guarantor and life insurer, posted a $350 million fourth-quarter loss. The number of borrowers who caught up on mortgage payments, known as "cures," fell to a 2010 low in December as unemployment remained above 9%. And Genworth expects "declines in cure rates going forward." Genworth Financial fell more than 11% on the news.
Last month, the Federal Reserve passed China as the world's largest holder of U.S. Treasurys... And we're only halfway through our latest round of quantitative easing (QE). The Fed now owns $1.11 trillion in Treasurys compared to China's $896 billion. And once QE2 ends this June, the Fed will own some $1.6 trillion in Treasurys (almost double China's position). Does anyone find it odd that the U.S. Federal Reserve is the world's largest owner of U.S. debt? What's going to happen when we can no longer buy all of our own debt?
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New highs: Denison Mines (DNN), Cambria Global Tactical (GTAA), Northern Dynasty Minerals (NAK), Sprott Resources (SCP.TO), Suncor (SU), Harmonic (HLIT), ConocoPhillips (COP), ExxonMobil (XOM), AmeriGas Partners (APU), Dorchester Minerals (DMLP), EV Energy Partners (EVEP), Vanguard Natural Resources (VNR).
A lone voice agrees with our thesis on Monsanto... And a Michigan resident speaks out. Send us your feedback here... feedback@stansberryresearch.com
"I could not agree with Porter more on all counts. Organic food solving world hunger at 20% premium prices and higher – right! Ethanol is a boondoggle raising food prices without creating any offsetting benefits in energy conservation or pollution. Obesity – give me a break. Let's see some evidence." – Anonymous
"I have lived in Michigan all my life. Granted, the Detroit area is not the greatest, but many areas out state are pleasant. Our problems have been that we are basically a one trick pony depending on the automotive industry. The recent democratic (socialist) regime has also harmed the state. I have traveled to most other states as a vacationer and for my job. I know of great places I would live in in most states. And there are many places in most states I would never live in. You could not pay me to live in Florida, although there are many spectacular places there.
"Anyway, the problems in Michigan have a lot to do with unions. I cannot think of any industry in this country that has prospered over the longer run when unions have been involved. Except for maybe the government where employees are overpaid to no end compared to other sectors of the economy. All you hear about Detroit and Michigan is the bad. As with just about anywhere, there is some good here also. I don't know if I will retire here, but I have been to many places around the country where I could do a lot worse. I don't know if you have ever been here, but before you go putting down Michigan maybe you should spend some time here. Just stay away from Detroit..." – Paid-up subscriber Thomas Majewski
Goldsmith comment: I've never visited Detroit. But for anyone considering a trip, I recommend you read Porter's essay on the city first.
"At the end of S&A Digest, there are lists for 'top 10 open recommendations' 'top 10 totals' & 'Hall of Fame.' What are these? Are they current recommendations or just a record of past recommendations? I don't see any suggested price to buy in so I have no idea how to use this information. Please let me know." – Paid-up subscriber AL
Goldsmith comment: The "top 10 open recommendations" are the 10 stocks currently open in our portfolios with the highest returns. The "Hall of Fame" is a list of the best-returning closed positions over the history of our business. These lists should not be interpreted as buy or sell recommendations. They're simply for record keeping.
Regards,
Sean Goldsmith
Baltimore, Maryland
February 2, 2011