We wrote it, did you short it?
We have a difficult decision to make... Do we take our profits now? Or do we hunker down and risk giving back some profits with the goal of bigger profits down the road?
I think we choose the second option. The trend in the euro is incredibly powerful... Even with the large number of investors who have joined us in betting against the euro, it is STILL falling... Now that is a REAL bear market. – Steve Sjuggerud, May 2010 issue of True Wealth
Steve originally recommended shorting the euro last December. At the time, Steve noted the extreme weakness in Greece and the other "PIGS" (Portugal, Italy, Spain). He predicted if Greece were bailed out, the rest of the troubled countries would also seek bailouts.
Greece's borrowing costs recently soared to a record 8% – almost triple that of Germany. At that cost, the country could never afford to pay off its 300 billion-euro debt. Today, Greece made a formal request for a $60 billion bailout from the European Union and the International Monetary Fund (IMF).
The bailout will let the euro live to fight another day, and I expected it to soar on the news. It didn't. That's incredibly bullish for the short euro position. Steve's readers are already up 10%. Kudos to Steve for making the right call.
Last week, one of the world's best macro hedge-fund managers, Louis Moore Bacon, agreed with Steve. He wrote in an April 16 letter to investors, "Perhaps the most interesting area for the foreseeable future is in the potential breakdown of the European Monetary Union." Bacon thinks the bailout is an awful idea...
Instead of punishing the Greeks for their free-rider and fraudulent gaming of the Maastricht rules – either by ejecting Greece from the Union to propel them to reform and come back at a competitive exchange rate or by forcing them to restructure their debt within the confines of monetary union, either of which would have eventually strengthened and solidified the euro – the European leaders have decided to reward the prodigal Greeks with a bailout, socializing their ills and taxing once again the prodigious Northern European workers.
Bacon also pointed to the sovereign wealth funds, which bought trillions of dollars in euros to diversify outside of the U.S. Sovereign wealth funds have grown to be the market's best contrary indicator. They have an uncanny ability to purchase assets (amazingly, across all sectors) at the exact wrong time.
They got burned on banks, oil, real estate, dollars... Once these funds realize the garbage they own, they're likely to start selling euros en masse. And that would be the end of the euro.
Government bailouts, soaring borrowing costs, foreign creditors dumping your bonds... Sounds eerily similar to another country we know.
Next Friday, April 30, at 5:30 p.m. Eastern time, we're hosting what might be the most profitable conference call of your life... You see, our friend, Texas wildcatter Cactus Schroeder, recently bought a chunk of land in South Texas. He's already made a fortune in the oil business, but he believes this new land "could be the largest oil discovery in the history of the United States."
Cactus wasn't the only person to buy land in the region... The oil majors started buying up all the property around him, "ring fencing" him, as Cactus puts it. Now, these companies are trying to buy Cactus out. They know how valuable this land is. As one major energy CEO with operations in the area said, "We believe [this] play will prove to be one of the most significant United States oil discoveries in the past 40 years."
There are currently 50 rigs drilling in the area. To date, they've discovered 231 wells. They've only completed 123 wells. But production is about to ramp up quickly. One insider source says there could be as many as 50,000 wells in this field. The huge money is yet to be made.
This property is still relatively unknown to the public, but it will produce hundreds of billions of dollars worth of oil... And it will make lots of people millionaires in the process.
Our resource analyst, Matt Badiali, said this new discovery (and the associated equities) reminds him of Ultra Petroleum (UPL). UPL made a huge discovery in Wyoming. Its shares soared from $1.50 to $100 between 2000 and 2008. That's a 6,667% return on investment. To put it another way, for every $25,000 you invested, you would have made $1.5 million. There's only one difference between this new discovery and Ultra Petroleum. Badiali says the South Texas find "has a whole lot more potential."
To join Cactus, Badiali, Porter, and a major oil insider (whose name we can't disclose) click here...
New highs: Fairholme Fund (FAIRX), Washington REIT (WRE), Hershey (HSY), Visa (V), McDonald's (MCD), Kinder Morgan Energy Partners (KMP), Keyera Facilities (KEY-UN.TO), Microsoft (MSFT), Longleaf Partners (LLPFX), W.R. Berkley (WRB), Sequoia Fund (SEQUX), Automatic Data Processing (ADP), Portfolio Recovery Associates (PRAA), Akamai (AKAM), Carpenter Technology (CRS), Shaw Group (SHAW), HMS Holdings (HMSY), Jinshan (JIN.TO), Rowan Drilling (RDC).
In today's mailbag, more on SEC v. Goldman and a subscriber's definition of due diligence. What's on your mind?... feedback@stansberryresearch.com.
"I don't understand why Paulson is not being investigated in consideration of a criminal suit for insider trading. At the racetrack, considered a hotbed of sleeze and corruption, if a trainer, owner, or jockey is found to have bet AGAINST his own horse in a race, it is grounds for banning him from the track. Game over, career over. Is Paulson simply too rich to be treated like Martha Stewart? If he bought puts on his own fund, it would seem to me prima facie evidence of insider trading. I understand hedging is legal; it would seem to me to be a simple matter of determining whether he bet more on the fund or against it. Am I being overly simplistic?" – Paid-up subscriber Penny Douthwaite
Goldsmith comment: There was no insider trading. Paulson picked a bunch of garbage mortgages he wanted to short and told Goldman Sachs. Goldman created a synthetic CDO using those mortgages, then found buyers for that CDO.
The important fact here is that it was a synthetic CDO. Abacus (the CDO in question) didn't actually contain any mortgages. It simply tracked the movement of a bundle of mortgages. To create a synthetic CDO, you need someone on the long side and someone on the short side. It's like a side bet at a casino. It only exists because there are two people on either side of the bet.
Paulson simply took the short side of a trade. There is nothing illegal about that – at least not yet. And at the time of this trade, Paulson wasn't the rock star he is today. This was the trade that made his career. At the time, he was a small-time hedge-fund manager with a super contrarian bet.
"Your analysis of the Goldman situation is right on target. It was clearly a synthetic transaction, not a cash transaction. Everyone in the synthetic market knew that hedge funds were typically on the short side of these trades. Furthermore, going into this transaction, Hedge Funds had been shorting the RMBS market for years with little or no success. Paulson was not yet famous... He was just another hedge fund manager... and this trade IS what made him famous. The real scandal is that Wall Street sold massive amounts of fraudulent loans to the public through RMBS securitizations. It is the biggest private sector fraud of all time, dwarfing the combined frauds of Enron, Worldcom, Bernie Madoff, and Charles Stanford." – Paid-up subscriber S.K.
"Let me kick in my two cents with regard to due diligence, as I see and practice it. When it comes to reading company quarterly reports, I leave that to you, but if you tell me that a company has no debt, I'll believe you. If you tell me that it pays 50 cents per quarter in dividends, and that dividends have doubled over the last ten years, I'll believe you. I trust you to get facts such as these right, and I don't feel a need to go check up on you, although I will try to notice discrepancies if I run across them.
"On the other hand, if you tell me that a company is likely to show huge returns because commodities are headed up, I will evaluate that against everything else that I read, see, experience, and understand. And I will also decide how much of my trading account I am willing to place on a particular investment, and how much of that amount I am willing to risk in the event that the price moves against me. And if I lose a pile of money on an investment that you recommended, it is my responsibility to deal with it. You recommended it, but I am the one who made the decision to make the trade, and I am also the one who managed it. Likewise, if I make a pile on a particular investment, I will be grateful to you for calling it to my attention, but again, the responsibility is mine. I pay close attention to your recommendations, but risk/benefit analysis and decisions to act thereon are mine alone.
"I would define 'due diligence' as follows: Make the effort that is necessary and proportional to satisfy myself that ANY investment decision is appropriate for my trading account, risk tolerance, and market expectations. Larger fractions of my account require more diligence (i.e., study, analysis, reflection, and possibly discussion with others), and any time my gut starts churning or I have trouble sleeping, I take that as a sign that I need to reduce my risk. This is not usually a result of thought or logic, but of intuition and emotion, compounded by quite a few years of experience and no small number of losses, as well as quite a few gains. I am delighted to let you (and others) scout out promising opportunities, but I retain the full responsibility for what I invest in and how I manage those investments.
"Kind of wordy, but there it is." – Paid-up subscriber Gordon Foreman
Regards,
Sean Goldsmith
Baltimore, Maryland
April 23, 2010