Ferris comment: Porter and Sean are relaxing in Miami. I'm on The Digest today.
The Fed is releasing some preliminary results of the bank stress tests today... and some of the banks under question may have a difficult time raising additional capital if the government requires it.
The bad assets on big banks' balance sheets nearly tripled on average this year. Pittsburgh-based PNC Financial Services saw nonperforming assets – those no longer accruing interest – quintuple. According to Bloomberg, bad assets "more than quadrupled at U.S. Bancorp in Minneapolis. At 13 of the largest U.S. banks, bad assets increased 169 percent on average from a year ago."
What sane investor would put money into a bank sitting on tens of billions of dollars of nonperforming loans? He'd have to be an expert at investing in distressed financial institutions.
Against all odds – and certainly against our expectations – Ford Motor continues to restructure without government aid. Its first-quarter results, while absolutely horrible, are being sold in the press as better than expected. It makes a little bit of sense that Ford is in better shape than Chrysler and GM. The Ford F-series truck is the No. 2 best-selling vehicle in history, next to the Toyota Corolla. Ford has understood what truck buyers want since the 1940s, and it has consistently delivered.
Still, Ford is not a cash generator. It's a cash burner to the tune of more than $5.2 billion last year. It's deep in debt, too. Interest expense was 50% of gross profit last year. Over the last three years, Ford has lost $30 billion. This can't go on much longer.
By appearances, the company has close to $40 billion in cash and marketable securities. It spent a little less than $10 billion in interest payments last year. Who knows? Maybe Ford can make it another year.
I thought I'd take a quick look at the liquidity and capital resources section of Ford's new annual report, which came out February 26. But it was too long and way too complicated. I wouldn't touch the stock with a 10-foot pole. The annual report is almost 300 pages. It's like trying to buy Bank of America. I could never do it with a straight face.
GM, on the other hand, continues to show it can't stay in business without taxpayer funding, getting another $2 billion from the Treasury this week. The most recent handout raises its total bailout proceeds to $15.4 billion. Chrysler is busy denying rumors of imminent bankruptcy.
Friend and colleague Vitaly Katsenelson, author of Active Value Investing, says the only reason China appears to be rebounding is its Central Bank can do something ours can't. It can force Chinese banks to lend. So when it creates more money and credit, it's shoved into the economy immediately, propping up prices.
Here in the U.S., the Federal Reserve can make new money and credit available, but it can't force banks to spread it around.
That's why Vitaliy sees, "Record Loan Addition, Record Money Supply, Record Auto Sales, Record Imports of Copper, Iron Ore, and Coal, Strong Property Sales" in China, while we're still watching the air come out of the economy in the U.S. Vitaliy, like many today, is afraid. "China is desperately trying to figure out how to withdraw its funds from the U.S. dollar without driving the dollar down."
I don't know how China will get out of the dollar or even if it really wants to sell its dollars. But one time-honored way to get out of the dollar is simply to buy gold...
Since 2003, China has increased its gold reserves by about 75%, according to the Toronto Globe & Mail. China is now one of only six countries in the world that owns more than 1,000 tonnes of gold. Its gold reserves have fallen to about half the desired level, so perhaps it will become the first nation to own 2,000 tons of gold. Maybe the Chinese will buy the 403.3 tonnes the IMF is selling?
Or maybe China will buy the SPDR Gold ETF's holdings if it keeps selling. The ETF sold 1.53 tonnes in one day this week. As of yesterday, it owned 1,104.45 tonnes of gold.
Niall Ferguson, Harvard history professor and author of The Ascent of Money: A Financial History of the World, says politicians and others are lying about the possibility of an economic recovery next year in a desperate effort to boost public confidence. Ferguson says the global depression will usher new demagogues into power the world over and lead to violent political conflict, though not on the scale of a world war. Says Ferguson, "There will be blood."
The good news: Ferguson thinks the U.S., and its currency, will retain its status as a safe haven and will fare better than most of the world, though he admits, "It's almost paradoxical that an American crisis... reinforces the status of the United States as a safe haven."
In addition to what Ferguson says about politicians putting an optimistic spin on the economy, I've noticed the financial press spinning horrible earnings reports in a positive light. Aside from Ford's "surprisingly narrow" $1.4 billion quarterly loss, American Express' net income fell by "only" 56% in the first quarter. And 3M's net income fell 47%, causing its shares to... rise.
This is what markets look like when they're in bull mode: Even horrible news elicits a good reaction. Makes me wonder how much longer the current optimism will last.
New highs: none.
Yesterday, we asked for anecdotes about value investing in Detroit. As usual, the investment stories are boring, and the really interesting stuff is about more controversial subjects... Write to us here about anything at all, just make sure you write: feedback@stansberryresearch.com.
"I grew up in Detroit (NOT a suburb). My family was forced to move just before the riots because the police said our neighbors would murder us for our white skin. The police patrolled our house every two hours until we moved with three shotguns stuck out the windows. (No, I am not exaggerating.) I stayed a resident of the city until I was 30 when I was assaulted by three teens with weapons and was told by the police that it was my fault for being white and that they were justified b
ecause of 'race rage.' Understand, I have had blacks defend me from other blacks because they said prejudice by anyone is wrong. I believe the Bible that our body is 'clothing for the soul' and judging someone for the color of their skin is as stupid as judging someone for the color of their shirt. I've lived in the ghetto in LA, CT, VA and elsewhere. This is the only city that I know of where mayoral candidates repeatedly got on network TV and accused their opposition of not being 'black enough to represent Detroit against the Whites' in the suburbs. While there are many good people in Detroit anyone going there has to be prepared to deal with some of the most prejudiced people in the nation.
"In the late 1800s, Detroit was considered the most beautiful city in the nation. During the 'White Flight' people turned their houses over to the city for no cost. When I worked for the city government they were actively trying to hide a report that said that they owned more properties than any other landlord in the nation because of the number of people who had abandoned the largest investment of their life. After people gave their houses to the city, the city let vandals destroy the houses and then tried to sue the former owners for maintenance and demolition costs which occurred while the city held title. They even tried to sue people who had moved to other states. Most of the years which are called 'White Flight' were actually blacks leaving the city. I have seen statistics which show it is safer on the front line of a war zone than living within the city of Detroit.
"My brother was a landlord and attended a class on being a landlord given by Detroit City Government. The class attendees were warned to use a PO Box for rents and hide their personal ID and address from all tenants, to get a gun permit, to always be armed and ready to fire when going to their property, to accept that the police will not respond when called, to accept that the courts will leave tenants in the home for at least 90 days even when shown evidence of blatant destruction of property and refusal to pay rent. I have been told that things are better now. However, some people believe that history is important especially as it sets precedent for those who wish to return to laws that have been dropped." – Anonymous
"I fail to see what the big story is here with Kwame Kenyatta, unless it has to do with him being a bad mayoral candidate... You act like his mortgage is some type of moral obligation. Bull. It is a business transaction with the lender. Values drop and his mortgage goes up by $1,000, hell I would walk too, even if i could afford it. The banks in this country don't give a rat's ass about their customers. They cut off my home equity line even though it has never been late, becauase they don't have capital. They shut off my business line, same thing. Then they raise my rate on credit cards. I say screw them, it was a business deal gone bad, get over it. You investment guys are all the same – 'the market is down 40% and I am only down 10%, ain't I a great financial advisor.' Bull, I pay you to see it coming and you missed it. You lost me a ton of money. You are as much a deadbeat as Kenyatta. I remember your International Strategist sucked, and you shut it down. Time to move on." – Paid-up subscriber Jeff
Ferris comment: Paying what you owe IS a moral obligation. When you say you'd walk away from your obligation to pay even if you could afford it, it makes me feel like it's a mistake to do business with you. One of the things Ayn Rand got right in Atlas Shrugged was calling commerce a morality play. There are liars and cheaters and there are those who would do neither even if it means their business would suffer. No one can ever be perfect, but you should always be perfectly honest.
"Dan: 'UPS' famous brown trucks serve every address in the United States' is not true. Part of the reason for UPS' success is they are smarter than that. The US Postal Service is required by law to serve every address in the US, but UPS isn't. And since their rates aren't sensitive to the actual cost of delivery, really remote locations like rural Alaska can come out ahead mailing their groceries from Anchorage. UPS routinely uses the Big Brown system to get to Anchorage, Fairbanks, Nome, etc, and then visit the local Post Office to complete the delivery." – Paid-up subscriber John Matthew
Ferris comment: Did I get that wrong? Or did you just confirm that if I send a package by UPS to any address in the country, it'll get there even if the USPS finishes the job? But you are correct about whether an actual big brown truck will pull up in front of every home or business. So maybe I should have said, "UPS, the company with all the brown trucks, serves every address in the United States."
Regards,
Dan Ferris
Medford, Oregon
April 24, 2009