GM says it made a $1.3 billion profit in the second quarter. Who knows what the truth is... GM's existence is purely a political phenomenon. The only reason nobody wanted to put any more money into the GM or Chrysler bankruptcies was because the government's involvement loomed so ominously.
The government takes credit for stepping in where the private sector failed to do so, even though its presence is what scared the private sector away. Komrade Obama circumvented the legality of contracts to placate union interests (huge Obama supporters).
As William & Mary law professor Nathan Oman pointed out in a recent op-ed piece:
The bailout did not save GM and Chrysler. They could have gone through bankruptcy like everyone else. It did, however, undermine the trust on which successful capitalism depends.
I know it's typical for me to criticize the government's involvement in GM. So, too, would it be typical for a value investor like myself to criticize Mr. Market's irrationality. But Mr. Market has been doing the right thing lately: making stocks less expensive.
It's perfectly rational for an overvalued stock market to fall 3% in a few days' time. So much so that I have to wonder why anyone would doubt the inevitability of such an event or feel anything but relief upon its arrival. To even begin to get cheap, the big stock indexes would have to fall another 15% at least.
Mr. Market, if you're reading this, keep up the good work. You're off to a great start, but you're not nearly done yet. Maybe you're not so crazy after all.
Wall Street can't sell stocks fast enough the last few days. And Fannie Mae and Freddie Mac can't sell foreclosed homes ("REOs") fast enough... even though they're doing so at a record pace. Fannie and Freddie sold 50% more REOs in the first half of 2010 than in the first half of 2009. But still... Fannie's REO inventory doubled in the first half and Freddie's rose 80%.
The number of home foreclosures jumped 9% last month to 92,858. That's the eighth month in a row foreclosures have topped last year's numbers. No wonder the big homebuilder fund (ITB) is 30% below its 52-week high.
And don't forget, right now is the end of the peak warm-weather selling season for homes. Just imagine how the REO market will freeze up once the weather turns cold.
With mortgage rates at all-time lows of 4.44% recently, homes are much more "affordable." The housing affordability indexes (here and here) suggest families earning the national median income have more than enough financial resources to buy a house.
But it's not hard to see why affordability doesn't mean squat right now. There are fewer and fewer folks earning any kind of income lately, let alone enough income to buy a home. First-time claims for jobless benefits rose by 2,000 last week to 484,000 – the highest since February. Hiring is weak, and employers are still cutting jobs. Homebuilding stocks are getting hammered...
Of 22 homebuilding stocks listed on Yahoo Finance, only 10 still have double-digit share prices. Two of those (KB and D.R. Horton) are trading around $10, just above single-digit territory. At the rate foreclosures are piling up at Fannie and Freddie, I have to wonder if the United States needed even a single home to be built in 2010.
Some homebuilders look cheap, trading at big discounts to book value. But book value is based on historical costs... and in many cases, the property those builders own is worth a lot less than they paid.
Someday, homebuilders will be a good contrarian bet. For now, a better bet in the homebuilding and mortgage sectors is to stay long distress...
The homebuilders' and mortgage providers' loss is the distressed-mortgage investors' gain. The PennyMac Mortgage Investment Trust started up last August to invest in distressed mortgages. The company has a market cap of $287 million and $370 million of assets. Two days ago, it filed an SEC registration form to sell up to $500 million of new debt and/or equity securities. That could dilute current shareholders... but it could also more than double its asset base.
Are the folks at PennyMac savvy enough underwriters to make money in distressed paper? I don't know... but I'd like to find out.
As I write, the trading action is manic. Volatility is up and looks set to stay that way for awhile. After months of a rising market and apparent stability, reality is setting in, and the sentiment is heading the other way. That usually results in the choppy action you're seeing now. Our trader extraordinaire Jeff Clark anticipated higher volatility and his readers profited...
Volatility is set to expand... again.
The stock market has been pushing steadily higher over the past month, and the Volatility Index (VIX) has been drifting lower. The VIX is now trading at the same level it was just before the "flash crash" in early May. Back then, the VIX had been declining for several months. But it took only a few days for it to spike more than 60% higher.
That's just how the Volatility Index trades. The VIX is a measure of investor fear in the marketplace. It contracts over a period of weeks or months as investors slowly grow more complacent with stocks. Then it suddenly spikes higher when something happens that arouses investor fear. – August 4, 2010 S&A Short Report
As Jeff predicted, fear is returning to the market. And as we noted yesterday, the VIX spiked 15% following the Fed's decision to buy more Treasurys. Jeff's options soared. He closed half the VIX option position yesterday for a 45% gain. He closed half of the remaining position today for a 100% gain... in only one week.
Jeff also nailed the short euro trade, which he recommended two days ago:
The rumor is the Fed will now use the proceeds from MBS payments to go into the market and buy U.S. Treasury bonds. The goal here is to keep a bid under T-bond prices and keep downward pressure on interest rates.
Currency speculators are salivating over this rumor. Expectations for lower interest rates usually lead to a lower currency value. So the popular trade right now is to short the dollar and buy the euro.
The popular trade will be the wrong trade.
First, this is a classic case of "buy the rumor and sell the news." The currency markets have already reacted to the rumor. Speculators have been selling the dollar and buying the euro. If and when QE2 is announced, the market will have already discounted the news. Speculators will rush to unwind their positions. They'll buy the dollar and sell the euro. – August 10, 2010 S&A Short Report
Jeff recommended buying calls on a short-euro ETF. Readers are up around 70% in two days.
Jeff's track record so far this year is incredible. Already, he's closed out trades for gains of 88%, 93%, 106%, 73%, 69%, 78%, 52%, and 126%. While most traders and investors fear volatile markets like we're currently experiencing, Jeff thrives on them. That's how he made his fortune – scalping quick, safe gains with market swings. If you'd like to follow Jeff and add some "juice" to your portfolio with quick, large gains, click here.
World Dominator Anheuser-Busch InBev (BUD) announced a 7.5% boost in quarterly profit to $1.15 billion. Revenue rose 4.1% to $9.2 billion. AB-InBev owns Budweiser, Beck's, and Stella Artois, among dozens of other well-known global beer brands.
As Extreme Value readers expected, AB-InBev continues to pay down substantial amounts of debt. Last quarter, it paid down another $3 billion. A trio of brilliant Brazilian businessmen built the company. They've assembled the No. 1 beer company in the world. They've cut costs. They've expanded profit margins. They're paying down debt. They're doing everything you and I would do if we were in charge.
As the Financial Times reported today, AB-InBev CEO Carlos Brito "has repeatedly over delivered." It doesn't hurt that beer sales are up as folks enjoy a little more of the world's third-most popular beverage (just behind water and tea). I bet the world keeps drinking plenty of beer, no matter what happens over the next five or 10 years. Investors ought to bet that AB-InBev keeps selling more of it than anyone in the world. If you want to read my full report on AB-InBev (the May 2010 issue) – and my research on all the other World Dominator stocks – click here.
If you folks don't start sending us more feedback, I'm going to write a big, long Digest about George Soros and how his wisdom could save the world if only we'd all listen to him. Write us here (before it's too late!): feedback@stansberryresearch.com.
"I have been buying True Income bonds since the beginning of the service. I have probably purchased around 80% of Mike's recommendations. I am up a decent six figure amount, not including dividends. But, I thought I would offer my experience with brokerage houses. I have accounts with Ameritrade, Scottrade, E*Trade, and Interactive Brokers. Of the first three, E*Trade has easily been best for bonds. Ameritrade buys and sells bonds on a principal basis, which means you have no clue how much of a cut they are taking. E*Trade does bonds on a flat commission basis, and I think that is why they consistently offer better executions. Their online process for trading bonds is a little slow, but I have been very pleased with their execution prices.
"I have not yet traded bonds at Interactive Brokers, but they recently made an announcement that has me curious. Apparently, they have developed a platform where you can place your bond bids and offers directly in the market. Given the spreads that exist at times, this could be a huge advantage. They might be worth checking out, but as I said, I have not yet tried the service." – Paid-up subscriber LPL
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
August 12, 2010