Further sanctions in Russia, yet stocks rise...

Further sanctions in Russia, yet stocks rise... On the ground in Ukraine and Mongolia... Chinese are No. 1 in Manhattan... $3.5 billion in the Bahamas... Amazon tanks... Reader feedback: Apparently we're 'boring'...
 

 Russian sanctions continue to pile up...

 

The U.S. targeted seven new Russian officials and 17 companies either owned or controlled by Russian politicians – including Russian oil giant Rosneft. The U.S. also imposed sanctions on gas-pipeline-construction firm SMG Group.

 

 S&A Global Contrarian editor Kim Iskyan – who recently returned from a trip to Ukraine – sent us an update on the Russia situation...

 

"The news out of Russia just keeps getting worse. Last week, ratings agency Standard & Poor's cut Russia's sovereign rating to BBB-... a notch above junk bonds on negative outlook and sanctions concerns," he wrote.

 

"The country's central bank hiked interest rates by half a percentage point... that's after a 1.5 percentage point hike several weeks ago. Its currency, the ruble, is down 8.6% this year (a huge move) and shows no signs of slowing its fall."

 

As Kim explained, the U.S. and Europe are preparing for another round of sanctions designed to punish Russia for not doing its part to implement the new four-way deal signed in Geneva a few weeks ago to de-escalate the crisis...

 

New sanctions might add to the list of people in Russia whose assets will be frozen. I've also heard that Russia's third-largest bank, Gazprombank, might be put on the sanctions list... this bank (controlled by the country's gas monopoly) is 10 times larger than Bank Rossiya, the only Russian bank that was hit with sanctions last time around.

 

 Kim says this could lead to more fund managers dumping Russian stocks...

 

As we suggested a few weeks ago, this will further spook fund managers and investors in the West. If I'm a hedge-fund manager or mutual-fund manager in Europe or the U.S., I'm cautious about holding anything that can be linked back to Russia.   Gazprombank has tentacles throughout the Russian economy... and the last thing I want is the distraction of my compliance department poking around my portfolio. If I'm them, I'm selling now and asking questions later. A broker friend in Moscow said he's seen U.S. investors sharply cutting their fixed-income exposure to Russia.

 

 But, Kim says, the bigger problem could come when Russia has to roll over its debt...

 

International investors have loaned Russia a lot of money by buying bonds and debt that Russian companies and the government have issued. But if sanctions continue, these investors might not be interested in rolling over the debt... and over the next year, around $115 billion in debt in Russia is falling due. That's a lot of money... It's equivalent to around 5% of the country's total economic output.   In theory, Russia could turn to domestic sources (like the big state banks) for money. This is feasible... Russia is a net creditor to the world. One of the ironies of the S&P's downgrade is that Russia has a tiny amount of sovereign debt. But this level of borrowing would stress the banking system and create distortions in the domestic capital markets. Russia could turn to China and the Middle East for financing... but investors there have reason to be wary of Russia. The net effect will be that Russian companies will grow more slowly and be forced to defer investment.

 

 Still, Russian stocks are somehow up on the news... The Market Vectors Russia Fund (RSX) was up as much as 2% today. Russian oil giant Gazprom was up nearly 3%. It seems the bad news was already priced into one of the world's cheapest stock markets.

 

 Meanwhile, things still aren't looking good in Ukraine. And in this month's S&A Global Contrarian, which hits e-mail inboxes tonight, Kim discusses his recent trip there... and what's next for the country.

 

Kim is currently traveling in search of investments in another contrarian market: Mongolia. We'll be sure to update you on Kim's travels. And if you have any connections in Mongolia that Kim should meet while he's there, let us know at feedback@stansberryresearch.com.

 

 In the October 18 Digest, Porter wrote about China buying trophy assets in the U.S. At the time, a Chinese company had just purchased One Chase Plaza, a landmark New York City building...

 

A building – One Chase Plaza – was sold yesterday in New York for $750 million.   Not surprisingly, the building was bought by a Chinese asset-management firm, Fosun.   Today's Friday Digest is about this deal... and the massive economic forces that lie behind it. The story of One Chase Plaza is the story of how America was sold to its bankers. It's the story of how inflation plundered our wages. It's the story of how credit, rather than savings, came to dominate our economy and transform our way of life. It's the story of how America was packaged and sold to our foreign creditors – mostly the Chinese.

 

But buying real estate is only part of China's plan. As Porter wrote...

 

Since 1996, the Chinese have made 51 major acquisitions in America, including deals to own or control iconic U.S. assets like computer giant IBM, carmaker GM, meat producer Smithfield Foods, U.S. power company AES Corp., major airplane lessor International Lease Finance Corp., investment bank Morgan Stanley, and private-equity firm Blackstone Group. They've also bought trophy real estate around the U.S., like the GM Tower.

 

These deals didn't happen by accident. They happened because the U.S. continues to consume far more than it produces. We finance this consumption with debt that's owned in large measure by foreign creditors. Take the U.S. Treasury debt, for example. At nearly $17 trillion, this is the world's largest pile of obligations. If you exclude Treasury obligations held by the U.S. government and the Federal Reserve, 54% of the remaining obligations are held by foreign creditors. And these foreign debts continue to grow rapidly – at about $500 billion annually.

 

Debt service on these obligations allows our foreign creditors to continually buy America's best assets. Today, foreign creditors directly own and control U.S. assets worth more than $25 trillion. That's roughly a third of all the wealth in America. And that's far more than what Americans own overseas: Americans only own about $20 trillion of foreign assets.

 

 Now, it seems, the Chinese are turning their eyes to New York City residential real estate...

 

According to a Reuters poll of five leading real estate brokerages, Chinese buyers overtook Russians for the first time in both volume and value of sales in New York City.

 

The brokers Reuters consulted said it's a "valuation play"... Luxury apartments in Hong Kong cost between $4,100 and $5,000 per square foot. The same apartment in New York City costs around $2,500 per square foot.

 

 We don't blame the brokers for not understanding the Chinese economy and larger macroeconomic issues, but the reason for spiking Chinese purchases in New York (and other major markets around the world, like London and Sydney) is because buyers want to get their money out of China.

 

Chinese buyers don't trust their government's ability to engineer the economy to endless 5%-plus annual growth. They're afraid of a big blowup. So they're moving their capital outside of China and into stable countries with deep capital markets and lots of experience with rule of law and property rights.

 

 They are also parking some cash in the Bahamas...

 

Last week, we held our annual Spring Editors Conference at the Ocean Club on Paradise Island. On the way to the resort, my driver pointed toward two huge towers under construction. "This is the Chinese project," he told me. "They're building a giant, Vegas-style casino."

 

The project is called Baha Mar... It consists of four hotels, 200,000 square feet of convention space, a giant casino, and an 18-hole Jack Nicklaus-designed golf course. It cost a reported $3.5 billion and is scheduled to open in December. A Chinese bank committed most of the financing... And the general contractor is a Chinese firm, too. It will compete with the tourist-laden Atlantis, Nassau's mega-resort/casino.

 

 The Chinese own almost the entire inlet, except for the Breezes hotel, which refused to sell. In response to its stubborn neighbors, the Baha Mar built a massive laundry facility right next to Breezes, blocking half the resort's oceanview rooms.

 

 Shares of online-retail giant Amazon fell nearly 10% on Friday after the company announced disappointing earnings...

 

The company reported revenue of $25.6 billion in the fourth quarter – a 20% increase from a year ago, but still below estimates of $26 billion.

 

Net income was $239 million for the quarter – up from $97 million a year ago, but again, missing estimates.

 

Before its earnings miss, Amazon was trading around 150 times earnings – an absurd valuation. That's the problem with buying shares of companies that are priced for perfection... If the market smells anything but roses, the stock tanks. But Amazon's problems are a bit deeper than a fickle market...

 

 Earning only $239 million on revenue of $25.6 billion is dismal... And the reason for it is CEO Jeff Bezos' soaring capital expenditures.

 

Amazon's total operating expenses rose from $15.9 billion a year ago to $19.6 billion in the fourth quarter. The company's operating margin fell from 1.1% to 0.7% over the same period.

 

Bezos spends a fortune to maintain and grow Amazon's infrastructure... And he's continuing to spend on warehouses, grocery delivery, and a TV set-top box. In fact, the company expects a loss this quarter between $55 million and $455 million.

 

 Amazon shares are down another 4% today. As regular Digest readers know, we're not surprised. From Porter's April 11 Digest...

 

At the start of the year, not a single Wall Street analyst had a "sell" rating on Internet retailer Amazon. As I noted in the January 10 Digest, the stock was grossly overpriced, trading for 20 times book value and 150 times earnings. There isn't an honest or responsible way to recommend buying a company this large, at these huge multiples.

 

 Be sure to reread that Digest... Since Porter's warning, shares of Amazon have fallen from nearly $400 to less than $290 today...

 

 

 

 New 52-week highs (as of 4/25/14): Apple (AAPL), Berkshire Hathaway (BRK), Dominion Resources (D), Altria (MO), ProShares Ultra Utilities Fund (UPW), and Utilities Select Sector SPDR Fund (XLU).

 

 In today's mailbag, one sincere note and one ridiculous note. We read them all... Send your feedback to feedback@stansberryresearch.com.

 

 "Along with the wealth of knowledge and investing information, one of the best 'gifts' to me has been alleviating fear of what the market may do. While I've been investing mostly for all the wrong reasons, for 40+ years, I never had the benefit of Stansberry's expertise.

 

"I have 'learned' to respect what the market is capable of (anything!) while now being able to manage my participation with trailing stops and no longer having any emotional attachment to any investment. Thanks to you Porter, and to all your editors, for honesty, admitting when you are wrong and genuine concern for your subscribers 'learning' how to profit." – Paid-up subscriber Steve Vazzano

 

 "[Rent-A-Center] was the most boring article you have written. 10 pages? You kidding me? You can do better, I've read them." – Anonymous

 

Goldsmith comment: We're sorry you didn't find the April issue of Stansberry's Investment Advisory more captivating. But hopefully you saw past the "boring" write-up and bought the stock... Porter's subscribers were up as much as 13% in less than three weeks as of intraday trading today.

 

Regards,

 

Sean Goldsmith

New York, New York

April 28, 2014

 

Why the Fed's money printing won't work...

 

The Federal Reserve has printed nearly $4 trillion, but we still haven't seen a true economic recovery yet.

 

In today's Digest Premium, financial expert Jim Rickards explains why the Fed's efforts are futile...

 

To subscribe to Digest Premium and receive a free copy of Jim Rogers' latest book, click here.

Editor's note: The Federal Reserve has printed nearly $4 trillion, but we still haven't seen a true economic recovery yet.

 

In today's Digest Premium – excerpted from Episode 147 of Stansberry Radio – Currency Wars author Jim Rickards, a former senior executive at several investment banks and hedge funds – explains why the Fed's efforts are futile...

 

 

Porter: By my calculations, the Fed has created roughly $3 trillion in reserves. That's a rough number, I might be off by $100 billion or so, but who's counting?

 

Since 2009, the U.S. economy has created roughly 6 million jobs. You do the basic math and that comes to $500,000 in new high-powered money per job. My question is, why is the central bank's policy lever so inadequate to fulfill its dual mission?

 

Rickards: There are a couple of reasons for that. One question a lot of people have is how could you print almost $4 trillion and not get inflation? The answer is that it's like making a ham and cheese sandwich... You can't do it with just the ham. You need the cheese. The money printing is the ham, but the cheese is what's called velocity or the turnover money. They can print all the money they want, but if people don't want to borrow it, don't want to spend it, and they'd rather stay home and watch TV than go out and take their friends to dinner, then you're not going to get the inflation.

 

That's the kind of mode we've been in for the last five years, and that's because we're in a depression. This is not a normal business-cycle-type recovery. We're in a global depression. We've been in this since 2007, and that is very largely behavioral and psychological. The Fed has to basically change the psychology and get people out there lending and spending money again.

 

So that's one impediment. But the other problem is that the difference between a depression and a normal recession and recovery cycle is that depressions are structural. A normal business credit cycle is cyclical, meaning that the economy gets a little hot, the Fed tightens policy, the economy cools down, unemployment goes up, and the Fed says, "OK, that's enough."

 

They ease policy, jobs are created, and the economy goes up again. It's like a sound wave. It goes up and down, up and down. It's the same business cycle we've seen over and over 20 times or so since World War II.

 

That's not what we're in today. One of the reasons that expectations of a recovery have been disappointed is that in 2009, everyone talked about green shoots. Those turned brown pretty quickly. The point is, we're not in that normal recovery. Depression is structural. You cannot solve a structural problem with a cyclical liquidity solution. That's the biggest problem: the Fed is trying to use money to solve a problem that cannot be solved by money. It can only be solved with structural changes and a change in confidence.

 

The problem is, the Fed thinks it can. The fact it's not working doesn't deter it, because it thinks it can print enough money to get the economy going. It won't work. It's like treating cancer with aspirin... it's not going to be very effective, but because the Fed thinks it is, it will keep printing and ultimately collapse confidence in the dollar itself.

 

 

Why the Fed's money printing won't work...

 

The Federal Reserve has printed nearly $4 trillion, but we still haven't seen a true economic recovery yet.

 

In today's Digest Premium, financial expert Jim Rickards explains why the Fed's efforts are futile...

 

To continue reading, scroll down or click here.