Congress has finally gotten around to asking a few obvious questions about the $700 billion TARP bailout and the Federal Reserve's $11 trillion (not a typo) bailout of the financial system. We were never fans of these bailouts. We knew they would inevitably be corrupt – and they were. We knew they would create a terrific moral hazard (where the people who acted the most recklessly would receive the largest benefits) – and they did.
And most importantly, we knew they would decimate the value of our currency – and they have. Why were these costs preferable to the normal bankruptcy process, where creditors take a hit for making unwise and unsound loans? Because the people going broke in this case were very rich, very powerful, and very well connected in Washington – and none were more so than Goldman Sachs.
You may recall we were among the first publications anywhere to report Goldman Sachs was AIG's largest trading partner. Specifically, on October 3, 2008 – about two weeks after AIG was bailed out – we reported Goldman had received $20 billion via the Fed's AIG bailout:
Most people never understood how AIG was the linchpin to the entire system. And there's one more secret yet to come out... AIG's largest trading partner wasn't a nameless European bank. It was Goldman Sachs. We'd wondered for years how Goldman avoided the kind of huge mortgage-related writedowns that plagued all the other investment banks. And now we know: Goldman hedged its exposure via credit default swaps with AIG.
Sources inside Goldman say the company's exposure to AIG exceeded $20 billion... Without the credit default swap market, there's no way the banks can report the true state of their assets – they'd all be in default of Basel II. That's why the government will push through a measure that requires the suspension of mark-to-market accounting. – October 2008 PSIA, The Secret of September
Congress apparently doesn't read my newsletter. It has only now figured out what the real motivation was for these bailouts. Watch this video. (And Geithner's a Democrat!) Apparently even folks as dumb as congressmen eventually figure out when they've been ripped off – if the fraud is big enough and blatant enough.
Oil giants ExxonMobil and Royal Dutch Shell finalized a deal this week to develop the West Qurna Phase 1 oilfield in southern Iraq. Exxon has the bigger stake in the deal at 80%. Shell has the remainder. Under terms of the 20-year deal, Exxon and Shell will earn $1.90 for each barrel of oil they produce on top of current production levels. Exxon says it will increase production to 2.325 million barrels a day, up from a current 279,000 barrels. The West Qurna field has estimated reserves of 8.7 billion barrels.
As we've discussed before, the extra cash from these Iraqi production deals is insignificant to the Big Oil firms operating there. Let's say ExxonMobil extracts all 8.7 billion barrels from the ground and earns its $1.90/barrel fee for all of it (not just additional production). That means Exxon would earn $13.22 billion over the course of its 20-year deal – or $661 million a year. Exxon is a $312 billion company with close to $500 billion in annual revenues. It had net income of more than $45 billion in 2008. An extra $661 million is meaningless.
Big Oil is only getting involved in Iraq for political reasons. The country has the world's second-largest oil reserves at 115 billion barrels. And those numbers are a decade old and based on 30-year-old technology. We know Iraq holds enormous, undiscovered reserves. And so does Exxon...
Our resident geologist, Matt Badiali, thinks modern technology could prove Iraq holds as much as 400 billion barrels of oil. And he started researching the situation early last year. He eventually recommended a midcap oil producer called Addax Petroleum. The company already had producing wells in Iraq and great political connections to keep it safe. Matt expected hundreds of percent gains. But Matt wasn't the only person to realize Addax's potential... It was taken over by a large oil firm weeks after Matt's recommendation. Readers made a quick, but disappointing, 75%.
Matt's no longer recommending oil companies operating in Iraq (except one, which I'll tell you about later) because that's not where the big money will be made. He's looking for smaller companies... Companies that will double or triple in value once they start earning cash flow from Iraq.
In particular, Matt likes "pick and shovel" plays, or the companies that provide goods and services to major oil firms. He wrote about it in today's Growth Stock Wire. Matt's currently researching the best "backdoor" Iraqi oil recommendation. We'll let you know when he's finished his research.
The company Matt has already recommended was one of the Iraqi oil pioneers. The former head of one of the world's toughest mercenary companies runs this company. And his early entrance into this dangerous country earned his firm rights to billions of barrels of oil. Also, the company recently cashed in some of its noncore assets for $1.5 billion. It will use that money to fund aggressive Iraqi exploration.
The company is still trading near where Matt originally recommended it to Phase 1 Investor subscribers. (It was simply too small to recommend in Matt's Resource Report.) And this recent cash infusion and increased exploration are the exact catalysts this company needed to boost its share price. It's the absolute best way to play Iraq right now. To learn more about the hugely profitable oil situation in Iraq, click here...
We had more than 1,000 people listen in to our conference call yesterday about the huge natural gas discovery in the South Pacific. Barry Minkow – a former con-man and convicted felon who now specializes in uncovering financial frauds – says the discovery is nothing but hype. Minkow argues the company, which is now worth several billion, is a great short sell.
We wanted to know the truth, so we sent two experienced geologists, one of whom has personally found and produced 4 million barrels of oil, to see the test drilling with their own eyes. We also brought in Rick Rule – the most experienced resource investment banker in the world – to consult with us. And we asked the company's director of capital markets, who is a former Wall Street resource analyst, to join the conversation.
It was a spectacular discussion. There were frank admissions from Barry Minkow that he hadn't seen the site and was impressed with our due diligence. But he also brought forward several unexplained and troubling problems with the company's corporate governance. Our geologists remained convinced this will be one of the most valuable resource discoveries of all time. Rick Rule remains cautious because of the big risks of trying to develop a resource that's so far off the beaten path.
Whether you buy the stock or short the stock, the entire discussion is a great education on how experienced and knowledgeable investors approach these kinds of special situations. If you take the time to listen, I know you'll learn a lot.
But imagine how much better it could be if we were able to link everyone together via video...
That's why, for the first time, we're making a special effort to produce more videos – especially educational ones. For example, we recently posted a video of Penny Stock Specialist editor Frank Curzio explaining his "hitching a ride" technique – one of the best ways to make huge profits in stocks that trade for less than $10.
Much like Matt Badiali's "pick and shovel" plays, "hitchers" are small companies that derive their profits from the growth of a larger company, for example a semiconductor firm that supplies chips to Dell or an organic vegetable producer that sells to Whole Foods. Frank recently recommended a small firm that supplies a key component to Apple's iPhone (one of the best-selling technology products in history). When word gets out that this firm landed the contract, its stock will explode. You can read the details here.
Today, we released Frank's latest video. In it, he tells viewers about "low-expectation stocks." These stocks trade for less than $10 because they're hated and ignored. But an experienced analyst can earn huge profits "bottom feeding" if he knows what to look for. To watch Frank's new video, completely free, click here (you must use Internet Explorer 6.0 or higher to view this video).
New highs: Burlington Northern Santa Fe (BNI), Kinder Morgan Energy Partners (KMP), Keyera Facilities (KEY-UN.TO), Icahn Enterprises (IEP).
In the mailbag... Like you, probably, we are always suspicious of the testimonials we see in newsletter promotions. Who really wrote those things, we wonder? Was it the editor's uncle? Was it the copywriter's best friend? And so, when we receive a nice letter, we're always hesitant to publish it – lest you come to suspect us of being nefarious. Besides, the angry, bewildered accusations are always more fun to read, aren't they?
But today we actually got a nice note from a real subscriber. He is not related to us, we promise. And as far as we can tell, he wasn't drunk or mentally incapacitated when he wrote his note. Please don't let your subscription expire without sending us at least one note. We read them all. Really. Every single one. Send yours here: feedback@stansberryresearch.com.
"I have been a subscriber for about 1 year now and have been thrilled with Sjug's newsletter and the research you guys do. It's worth every penny – which brings me to my questions; but a little background first. I am just starting out saving and investing and thus don't have very much money at all. I've been paying attention to your articles about investing in small-caps to create a greater amount of wealth than large caps could provide. In addition I saw your offer for the Wealth Alliance and am seriously considering that option, but here are my concerns/problems. We all know that if momma ain't happy, ain't nobody happy.
"Well, momma doesn't invest (and doesn't want to know how) and would like to know your company background, how long you've been around, etc. If you could give me some of that info that would be great. Even if we can only go with 1 newsletter again I am seriously considering switching to Curzio's new newsletter since it will be easier for me to purchase 100 shares at a time (up until now I've only been able to do odd lots with recommendations). Would it be advisable for me to take this course of action?" – Paid-up subscriber Don
Porter comment: The first part is pretty simple, Don. We have been in business for 10 years. Our partner, Agora Inc, has been in business since the late 1970s. We have never had a serious dispute with a customer, an employee, or a partner. In fact, I have worked with Bill Bonner (the head of Agora) for my entire professional career in one capacity or another. I've been best friends with Steve Sjuggerud, our senior editor, for almost 25 years.
We have more than 100,000 paying subscribers in more than 200 different countries (at last count). I believe we are the largest independent provider of financial research in the world.
We've built our business using a simple philosophy: We provide our subscribers with all of the information we would like to know about an investment from the standpoint of experienced and knowledgeable analysts. We do so strictly on an independent basis. We do not accept any compensation for our coverage nor do we allow our analysts to trade in the stocks they cover. Finally, we know nobody wants to read anything that's boring, so we do what we can to make our stories fun and interesting to read.
We know not everyone appreciates our approach or agrees with our opinions. So we provide a money-back guarantee on almost every product we sell. (There are rare instances where this simply isn't practical, such as very specialized reports on single stock investments.) If you're genuinely unhappy with our work, we'd much rather give you your money back and part as friends. We believe that's the right way to do business.
In regard to which of our letters you ought to read, we don't offer any kind of personalized advice. Doing so is against SEC regulations. It is also impractical: There are far too many of you for us to offer any useful individual advice.
On the other hand, I would advise every subscriber to participate in our lifetime programs (the Private Wealth Alliance or the S&A Alliance). They offer tremendous value and help support our business. You will certainly get much more from us, for much, much less if you'll agree to be a long-term customer. If you're interested in these programs, just give our customer-service team a call – 888-261-2693. (You'll be pleasantly surprised by the quality of our customer-service staff, which is all American, works at our headquarters in Baltimore, and is all college educated.)
"Just have to laugh a bit about people trying to dig into you for not making the Hershey call perfectly. For my part, the way you handled the whole thing: backing up your 'prediction' with reasoned arguments, cautioning not to buy until the deal might go through to take advantage of a possible short-term dip in price, and then giving us enough background on Hershey that, to an intelligent person, it wasn't even a downer that the Cadbury deal didn't materialize, because I was so well educated about what is really a great stock to purchase, 'deal or no deal.' In short, the whole thing simply reinforced my confidence in you and your expertise as a whole.
"You and Steve – and all of your people, really, but I only subscribe right now to WEALTH and PSIA – seem like very balanced individuals who love your jobs and are eager to share your knowledge with others. I continue to enjoy all of your work, and would love to meet you some day in person." – Paid-up subscriber Bruce
Porter comment: Thanks, Bruce. Most people don't bother writing to us unless it's to complain. And you're exactly right about me and Steve: We absolutely love what we get to do for a living. We don't take it for granted either. Thanks for your subscriptions.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
January 27, 2010