Fear and loathing at Grant's... Asians "full throttle" bullish... "Like it's 1999"... First bank IPO in more than two years...
I attended the Grant's conference in New York City this week, my last stop on a quick tour that took me from Stansberry headquarters in Baltimore to my parents' place on Maryland's eastern shore and finally to New York.
I ran into a longtime Stansberry Alliance member at the conference, who offered a penetrating insight on the day's presentations: Several of the speakers expressed a profound sense of fear of one kind or another...
John Paulson, the famous billionaire hedge-fund manager, fears for the integrity of the dollar. Bond investor Paul Singer fears for the integrity of the rule of law in the U.S., as it applies to creditors in bankruptcy proceedings. Top-down investor Jeffrey Gundlach fears the government will default on a major obligation (like Social Security). Real estate investor Jerry O'Connor says the commercial real estate debacle is now in full swing and will get worse.
Talking to various Grant's attendees, I found a short-sale-portfolio manager from Ziff who told me about the difference between Asian and American investors. "Americans are somewhat uncertain," he said, "but Asians are full throttle, pedal-to-the-metal bullish." Another attendee nodded and said, "There's much more of a gambling mentality [among Asian investors] than Americans."
A couple attendees told me about a notorious leveraged equity product in Asia called an "accumulator." These products purport to give investors a chance buy stocks at a discount, but carry enormous risk if stock prices decline. Asian investors are buying more of these now than they were in the huge run-up to the Asian crisis of the late 1990s. (I could report a lot more on the Grant's conference, but I promised Jim Grant not to scoop his own report.)
When I read of Twitter's plans to raise $100 million from a group of investors that includes T. Rowe Price and private-equity firm Insight Venture Partners, the old Prince hit started playing in my head, "Tonight, I'm gonna party like it's 1999..."
According to the Wall Street Journal, Twitter is valued at $1 billion. It makes me wonder how Twitter is worth anything – let alone $1 billion – if it hasn't earned any revenue and hasn't even formed a plan for actually selling anything?
The Journal said the investors used the same method to value Twitter as they used for Facebook, which is alleged to be worth $15 billion. Twitter is expected to have 25 million users by the end of the year. Facebook has 300 million users. I guess the belief is, if you wanted to sell something to a bunch of people... they're all on Facebook and Twitter and that's worth something.
We deal with lists of potential customers all the time in our business. I heard of one list somebody thought was worth $0.10 a name once. Valuing 300 million Facebook users at $15 billion means someone thinks the list is worth $50 a name. I readily admit I don't participate in that side of the business at all, but... $50? Twitter is valued at $40 a name?
Both Twitter and Facebook must overcome a tough hurdle. No matter what anyone tells you, a business is worth all the cash you'll get out of it over its lifetime, with appropriate math to account for the cash that will arrive at some point in the (possibly quite distant) future. What's the probability anyone will make accurate judgments about the timing and size of future cash profits of a business that hasn't sold anything yet?
Unlike 1999, IPOs aren't so popular these days. IPOfinancial.com says 23 IPOs have taken place so far in 2009, a little more than half of the 43 during the same period last year. There were 144 during the same period in 2007.
Not one bank IPO has taken place since Encore Bancshares of Houston raised $41.6 million in July 2007... until now...
First United Bancorp in Boca Raton, Florida (of all places!), raised $70 million this week in the first bank IPO since July 2007. President and CEO Rudy Schupp says he's raising capital to buy failed or struggling banks in Florida.
This is part of what George Soros would call the "reflexivity" of markets. The market goes up, banks take advantage of it and raise capital... essentially getting bailed out by the bullish sentiment. In other words, if the market goes up, to a certain extent it doesn't matter if business conditions have improved. The act of the market rising improves conditions for many businesses because they're able to raise capital at higher prices.
New highs: Korea Electric Power (KEP), Morgan Stanley Emerging Markets (EDD), PowerShares Insured National Muni Bond (PZA), Hatteras (HTS).
In today's mailbag... Canadian subscribers, we're wondering how you feel about your health care system. Let us know here: feedback@stansberryresearch.com.
"You keep bloviating about fiat currency and gold as real money without addressing reality. I must conclude that you don't know any better or ignore it so your rants aren't exposed as folly... Money is only a medium of exchange for things of value. Gold cannot be printed, but unless you restrict transactions to settle in physical gold only (unthinkable in today's digital world), the currency based on it can and does multiply in much the same way as so-called fiat money.
"The gold standard bugs want money supply strictly limited to gold inventories, but how do they want to implement such a feat without a Central Bank and fractional reserve requirements to control the multiplier effect of money creation? What gives money currency is its acceptance aka trust. When that is lost, gold will be no better than cows, salt, or spices etc. all of which Casey cited as having served as money at one time or another." – Paid-up subscriber Erich Kellner
Ferris comment: Nothing has been money as long or as consistently as gold. And nobody says a true gold standard wouldn't require changes so massive they're highly unlikely to occur. Reducing the multiplier effect isn't terribly difficult. Just let unsound banks fail. That might put a lid on it right quick.
But really, who knows what the market would come up with if it weren't constantly interfered with? Everyone blames the market for the government-caused failure of highly regulated industries like banking. Yet nobody comes close to advocating the logical step: get the government out of the banking industry.
"How could The Digest miss this one? Last night on the venerable David Letterman show, the commander in chief, in all his sophistication, remarked that everyone in Canada was 'perfectly happy' with their healthcare system. Of course this seems to blur the line between tangible reality and fantastic myth, yet one wonders what Canadians themselves think about their system. Are there Canadians out there who would like to comment on this fact or fiction? I know of individuals who had to cross the border into the U.S. to get a correct diagnosis in 24-48 hours that eluded them Up North for more than 6 months. They are then thankful for every last second of life remaining to them, which their illustrious system never figured out to inform them. So I am certain they were always 'perfectly happy' there. After all, ignorance is truly bliss, especially when we are so well taken care of by our careworn and conscientious commanders and bureaucrats. No sarcasm intended." – Paid-up subscriber DR
Ferris comment: Obama just talks and talks and talks... At the Grant's conference last week, our host was trying to quiet the crowd after a break and jokingly said, "The next speaker is Barack Obama and why not, since he's spoken everywhere else."
I, too, would love to hear comments from Canadian subscribers about health care. Here's one personal anecdote: While visiting with the folks last week, my father told me about Canadian union contracts that specifically cover health care payments for services rendered in the U.S. In other words, everybody knows they're going to have to cross the border to get needed care at some point, so they want to make sure their program will cover the cost of it.
"OK, Seabridge was a great pick. When are you going to send some of your hot shot folks over to China. Warren Buffet owns 10% and wants to buy more. Richard Russell bought some at 4. Closed today at 9.45. BYD expects to have a car on the market in the US in 2010. Sounds like quite a story to me." – Paid-up subscriber RG
Ferris comment: I'll volunteer for that trip. I did a lot of research on batteries some years ago... Buffett and Russell's presence notwithstanding, Asians are crazy bullish right now. Be careful.
"As the debate over where to store gold & such continues, I thought you might find this interesting. States are paying contractors to go after safe deposit boxes as a source of revenue according to this piece." – Paid-up subscriber Kenneth Stone
Regards,
Dan Ferris
Medford, Oregon
September 24, 2009