Goldman Sachs vs. Singapore... European problems are back... Spanish yields top 6%... Occupy Union Square... Amgen dupes bondholders... Porter, Doc, and Sjug bullish on banks... A Buffett hater...
Not many things are certain in the markets... especially not today, when government money printing can warp the results of any investment or trading thesis. But regardless of the macro environment, you can be sure of two things: Goldman Sachs doesn't lose money trading (aided by its Rolodex of high-ranking contacts) and sovereign wealth funds (large pools of government money) are horrible investors. We've chronicled both of these theories for years...
For example, in 2009, Goldman Sachs lost money on only 19 trading days... Yes, the bank made money 244 of the 263 days it traded. And the firm made more than $100 million on 131 trading days that year. Goldman's profits are partly due to of the firm's sophisticated trading strategies that lower its risk – for example, selling options (as opposed to buying them) and putting on pairs trades (going long one asset while shorting another). But its access to top government officials certainly doesn't hurt trading results.
And then there are the sovereign wealth funds (SWF) – those behemoths of poorly allocated capital. These firms manage hundreds of billions of dollars each. The ones from Abu Dhabi, Singapore, and China rank among the largest. And they're among the worst investors we've encountered. These funds put money in almost every investment bank near the top – Bear Stearns, Merrill Lynch, UBS, and Bank of America. In one specific example, between late-2008 and mid-2009, Singapore's fund, Temasek Holdings, lost $40 billion on its financial positions, including a huge stake in Bank of America. The fund had approximately $200 billion under management at the time.
We have consistently advised that SWFs were bad for countries, but great for Wall Street...
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And while we have no doubt that sovereign wealth funds will be great for Wall Street, we wonder how well they will do for their ultimate owners – the citizens of Singapore. It has long been our experience that the farther a dollar travels from the pocket of the man who earned it, the more likely that dollar will be lost, stolen, or bled dry by fees. |
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The idea of a sovereign wealth fund is an investment banker's dream: These are dollars won through trade, deposited into central banks (in exchange for local currency), and left for the government to manage. This isn't merely "other people's money." This is money that never belonged to anyone in the first place. This is money that ought to disappear into the endless hole of human perfidy. We bet it does... and faster than most people expect. – The S&A Digest, December 10, 2007 |
Consider today's news... Goldman announced it would sell its stake in the Industrial & Commercial Bank of China (ICBC) to Temasek Holdings for $2.5 billion. Goldman is one of many non-Chinese banks that bought $22 billion of ICBC shares before its 2006 initial public offering. And according to its filings, Goldman Sachs has made $3 billion on its position. Now, it's making its largest divestiture to date...
So in an environment where analysts debate just how bad China's slowdown will be... which side of the trade are you on? The side of a bumbling SWF? Or the investment bank that almost never loses?
In the past week, Europe has once again dominated headlines... This time, Spain is the country in question. The potential failure of another European sovereign isn't really news to us... On Friday, we outlined why the European Central Bank's (ECB) bailout efforts – the so-called long-term refinancing operation (LTRO) – has been and will be a failure.
As Digest readers know... Greece was only the warm-up. Soon, Spain will get a bailout (in addition to the LTRO money). And things will be better for a few months. Then, the market will have to worry about Italy... then Portugal... then Spain again (once the ECB realizes it didn't grant the country enough funds in the first place). It's a vicious liquidity cycle that all leads to massive asset inflation and the likely breakup of the European monetary union.
European officials travel to Washington this week to beg the International Monetary Fund (IMF) – whose largest contributor is the United States – for more cash. The IMF's spring meeting takes place April 20-22. The ECB believes it's done enough on its own, namely the 1 trillion euros in LTRO money, to help its crisis. Now, it wants the rest of the world's central banks to chip in.
Today, credit default swaps (insurance contracts that pay out in case of default) on Spain jumped 19 basis points to an all-time high of 519 (5.19%). And for the first time this year, Spanish bonds breached the 6% mark. (Seven percent is considered the point of no return – Greece, Portugal, and Ireland all sought government help when their debt reached that level.) Yields rose 16 basis points to 6.15%.
The ECB, and potentially the IMF, will bail out Spain. Otherwise, Spanish yields will continue rising, making Spain's already unsustainable debt load even more so...
On a more personal note, I will be vacationing in Barcelona and Madrid next month. I look forward to reporting anything crisis-related with my "boots on the ground." In the meantime, I'd appreciate any recommendations you have for restaurants, sights, or anything really, in the two cities. It's the first time I've visited in more than a decade. You can e-mail your suggestions to feedback@stansberryresearch.com.
As I walked though Union Square in New York City on my way to Whole Foods yesterday, I noticed an abrupt change in the passersby... Halfway through the park, the scene changed from overwhelmingly yuppie (attending a farmers market) to longer-haired, colorfully dressed folks dancing and singing... Up the steps, toward the subway entrance, folks were dancing around in circles, drumming and chanting. One was sitting cross-legged in a box, shirtless, painting pictures on cardboard. I figured this was your typical hippie gathering – just folks enjoying the sunshine. But I read "shirtless in-a-box" guy's painting and realized this was the reincarnation of Occupy Wall Street.
I knew they had left Zuccotti Park, the birthplace of the movement, for Union Square. But I thought the police had arrested them and banned them from the premises. The Occupiers are still there, rallying against "the 1%." It's ironic that these folks continue to hate Wall Street... while ignoring a much more harmful group: Congress.
Also while walking yesterday, I saw a local bank advertising a 60-month CD at 1.2%. Let's say you're one of the poor suckers who locks up his money for five years at these rates. The government says inflation is running at 2.7%, according to the consumer price index (a basket of goods and services across the U.S.). We bet inflation is running closer to 4%. But let's assume the government is right... you're automatically losing 1.5% on your savings each year. And that's before you take taxes into account.
Meanwhile, speculators, banks, and businesses can borrow money for next to nothing and buy higher-yielding assets. Perhaps I should explain this to my colorful friends on my next trip to the grocery store...
If you're among those who can obtain cheap credit today, which higher-yielding asset should you buy? If you're corporate America, your own equity is a great place to start. As we wrote earlier this month...
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... In fact, on March 14, a lot of people lent Coca-Cola $750 million until 2015 at 0.75% per year. That same day, Coca-Cola also issued $1 billion in bonds due 2018, paying just 1.65%. |
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This is great for Coca-Cola... It can borrow money for nearly nothing and buy back its stock (which pays a 2.9% dividend yield) all day long. – The S&A Digest, March 22, 2012 |
We don't know exactly what Coke is doing with the money. According to the press release, the company will use the new funds to "repay outstanding commercial paper." If it did plan on buying its shares back, Coke probably wouldn't state those plans in the press release. After all, who on Earth would lend a company money for less than 1% if that same company said it would use your money to buy its higher-yielding equity?
Last November, Amgen, the world's largest biotech company, raised $6 billion in the bond markets. The debt sale included three-, five-, 10-, and 30-year debt. Amgen's blended interest-cost was 3.79%. It was the largest bond sale since March 2011, when Verizon issued $6.25 billion of debt.
A funny thing about the Amgen offering... The biotech firm did announce it would use $5 billion of that money to repurchase its shares (which yield 2.2%). From the company's press release...
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"This tender offer reflects Amgen's confidence in the future outlook of our business and the Company's long-term value," said Kevin W. Sharer, Chairman and CEO at Amgen. "Our strong balance sheet and cash flow enable us to complete this transaction in an attractive interest rate environment while also preserving the flexibility to further accelerate the growth of our business through focused, strategic acquisitions." |
That's how hungry the world is for yield today... and further evidence of the bubble in the bond market. If a company wants to lend you money, then says it's going to use the proceeds to buy its own stock, it may be worth your time to consider buying the stock instead.
It's rare that three of our leading analysts simultaneously turn bullish on one sector. But when it happens, you should pay attention... And right now, Porter, Steve Sjuggerud, and Dr. David "Doc" Eifrig are all bullish on the financial sector.
As you may know... banks make money on their "interest rate spread." They borrow short-term money and lend it out for long periods of time at higher rates. And with current short-term rates near 0%, banks can borrow money for almost nothing and lend it to businesses for between 4%-5%.
As Porter wrote in his latest issue of Stansberry's Investment Advisory...
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My thesis on the world's biggest banks is simple. Despite the ongoing financial problems in Europe, both the European Central Bank (ECB) and the U.S. Federal Reserve have the ability (thanks to the printing press) to stop any run on the banks. Their previous actions (quantitative easing) have committed them to an inflationary policy to save the banks and continue the monetary system as it exists today. |
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The price we will all pay is inflation – and ultimately the loss of the U.S. dollar as the world's reserve currency. But these problems can be kicked down the road a bit, allowing more time for the wealthy to prepare for the inevitable collapse. I believe that's exactly what's going to happen. And that means the world's largest banks will continue to be bailed out via continuous manipulation of the money supply. – April 2012, Stansberry's Investment Advisory |
And Doc Eifrig, in his latest Retirement Millionaire, explained the bull case...
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A lot of people don't realize the industry is turning the corner quickly. In fact, the U.S. banking sector hasn't been this healthy in more than a generation... |
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[T]he absolute lending levels are approaching the pre-recession levels of late 2007. And last year, commercial and industrial lending grew nearly 10%... and shows no signs of stopping. This is good news for the sector. Banking profits come from high volumes and good margins... |
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...The interest spreads are attractive, since short-term rates are so low. And with growing demand for loans at longer and longer maturities, this suggests even more profits are on the way for banks. But the stock market doesn't quite believe it yet... It's still pricing bank stocks on the cheap... even though levels of safety and measures of liquidity are as good as they've been in decades. |
Both Doc and Porter recommended financial stocks to their readers. (Alliance members and subscribers to those publications can access those picks in the latest issues.) But Steve has the most interesting and unique way to play the financial sector. Porter agrees the asset Steve discovered is "even better" than his own.
In short, Steve says readers will make 793% in the "base case" scenario. And "if things simply go back to normal," as Steve explained in his True Wealth Systems advisory service, readers could make 1,233%. We're certain you haven't heard about this opportunity anywhere else. And it could be one of your biggest profit opportunities this decade.
New 52-week highs (as of 4/13/2012): Altria Group (MO).
Longtime Digest readers know any mention of George Soros incites rage in the mailbag. Now, it seems Warren Buffett is becoming a controversial figure... Send your feedback to feedback@stansberryresearch.com.
"Just thought I'd drop you a line to repeat my disgust with Uncle Warren who was bailed out by U.S. tax payers on his bad bet on credit default swaps. This does not slow you down on your ad nauseum lie that he is a great man. He is next to Bernie Madoff in the Scam Hall of Shame. By all means, please keep repeating the lie. Your credibility shrinks each time you genuflect at this phony's alter." – Paid-up subscriber Bob
Goldsmith comment: When we mention Buffett, it has nothing to do with his politics or personal beliefs. We follow Buffett for his investing wisdom. He's a brilliant investor – perhaps the best in American history. Politics aside, you're a fool if you don't pay attention to what he says about money and investing.
Regards,
Sean Goldsmith
New York, New York
April 16, 2012