Deutsche Bank says hedge funds worldwide will hold $2 trillion in assets by the end of 2010, as big rally-led returns in 2009 lure investors back in. Hedge-fund assets bottomed out around $1.33 trillion at the March lows and recovered to around $1.53 trillion by September. Deutsche Bank says the investors it serves plan to put more money into hedge funds next year.
Markets crashed in 2008 when leveraged hedge funds exited... well... everything. Maybe they'll lever up again, which shouldn't be a problem, considering the three-month LIBOR global benchmark interest rate has fallen from about 2.8% a year ago to... 0.28% recently. What's the cure for a bursting bubble? A new bubble, of course.
There's more than one way to skin a cat...
For example, let's say the cat you want to skin is making $1 billion. You could build a great business, offer customers a great deal, and grow it all over the world... like Intel. Or you could sue Intel because you don't have the innovative muscle, like AMD.
Don't knock AMD. It worked. Intel has agreed to pay AMD $1.25 billion to settle all the legal problems AMD has created for Intel. And Intel has agreed to license technology to AMD.
Yes, you read that correctly. As part of the deal, the two rivals will cross-license technology for the next five years. Other things being equal, do we wonder which company is more innovative? Do we wonder which company will benefit most from licensing the other's technology?
Over the years, AMD has made a good business out of suing Intel. As I wrote in the April issue of Extreme Value...
AMD wouldn't even be enough of a company to fight Intel without Intel's help. Back in the early 1980s, IBM chose Intel's x86 chips for its personal computers, which would run the Microsoft DOS operating system. IBM wanted a second supplier, and Intel picked AMD, giving AMD access to Intel's 286-chip technology. Intel then created the 386-chip, of which it wanted to be the sole supplier. AMD accused it of trying to establish a chip monopoly, a dispute that was settled out of court three years later. AMD sued Intel again in 1991 and was awarded $10 million and a royalty-free license on any patents used in AMD's 386-like processors... which seems to have done it no good at all.
Looks like AMD is still in the business of suing Intel. And business is good. I bet you anything this latest settlement does AMD shareholders zero good over the next several years. I wonder what AMD will do for a living next?
One of our favorite companies – General Motors – will soon file its first earnings report since emerging from bankruptcy. Look for it on November 16. We'll be curious to know if the financials resemble anything remotely like a company that isn't headed for "Chapter 22," i.e., a second trip through the bankruptcy courts. With Uncle Sam at the helm, that's the most likely outcome. Think U.S Postal Service, Amtrak, Fannie Mae, Freddie Mac, FDIC...
... And Brazilian electric power. A power blackout in Brazil left millions in darkness for several hours Tuesday night. The lights went out across the country just after 10 p.m. and didn't come back on until just before 3 a.m., affecting 60 million people in 18 of 26 Brazilian states.
The problem? The failure of two major transmission lines coming out of the Itaipu hydroelectric dam, a joint venture between the Brazilian and Paraguayan governments. The project supplies 20% of Brazil's power and 90% of Paraguay's. The lights went out in Paraguay, too, but were back on in 15 minutes.
For the last several years, the Brazilian government hasn't spent much on essential items like power transmission lines. Instead, it stole the power generation revenues and put the money into government payrolls and pension funds.
In other words, like so many countries (Mexico comes to mind), energy is in shorter supply because the government behaves like the Mafia, coming around every week, sticking its hand in the till, siphoning off cash that winds up in social programs and bureaucrats' pockets. I wonder how Brazil will do when it hosts the 2014 World Cup soccer tournament and the 2016 Olympics? By then, maybe the stolen loot and the bureaucrats who took it will be in Switzerland... or Paraguay.
With unemployment at more than 10% and the price of gold indicating rising inflation, Extreme Value pick Wal-Mart reported a 3.2% rise in net income. The company increased its market share "all over the world."
To find out how Wal-Mart is making big banks and government look really bad, read my essay, Viva la revolution! Viva Wal-Mart! below.
Retirement Millionaire editor Doc Eifrig passed along this note yesterday...
This past week at the annual S&A Alliance Conference on Kiawah Island, South Carolina, at least a dozen members asked me: "Would you take the swine vaccine or give it to your kids?"
My answer: No way. Last time we had a vaccine push like this in 1976, hundreds of people died from complications. Worse, the vaccine's preservative contains small amounts of mercury (a deadly toxin).
Truthfully, swine flu is not that common. The CDC stopped testing for swine flu in July 2009. Since halting testing, it still reported pandemic levels of swine flu from states and doctors, but this was all ONE BIG LIE. Several states' tests showed more than 80% of the originally alleged cases are NOT EVEN INFLUENZA (likely just a cold). Yet the government agencies continue to hype every sniffle and cold as swine flu. Worse, it says nearly everyone should get a vaccine. Absurd.
There are better ways to keep your immune system working properly: A little bit of exercise (try walking) plus getting the right amount of sleep every night.
To learn more about medical myths and other ways to keep healthy, check out Doc Eifrig's Retirement Millionaire. Every month, he explains how to live the millionaire lifestyle – without all the costs – and provides other tips on how to enjoy a healthy, successful retirement.
Last month, he showed readers the "easiest exercise you'll ever try." It lowers blood pressure and increases the levels of serotonin in the brain – the same chemical that wards off depression. To access this issue – and learn how to save as much as 80% on almost everything you buy – click here.
Bloomberg today reported recent unemployment claims fell by 12,000 to 502,000 in the week ended November 7 – the lowest since January. And that means, according to Bloomberg, firings will likely cease because companies have cut their staffs to the "bare minimums." I'm not sure which would be worse – if firings continued or if companies have already fired everyone they can. The marginal pain of higher unemployment would likely be less harmful to the U.S. economy than the business sector taking a huge hit to earnings because it can't cut any more costs as the top line falls.
And assuming unemployment begins ticking down, consider this... a recent study showed folks reentering the workforce are taking an average 40% pay cut from their old jobs. According to University of Connecticut economics professor Kenneth Couch, it usually takes six years before people start earning 80% of their old paycheck. Either way, it looks like the economy's in for some pain.
Penny Stock Specialist editor Frank Curzio published his latest beta issue yesterday, and his newest pick could easily double due to the government's thirst for tax dollars...
Massachusetts Democrat Barney Frank reintroduced a bill in May to legalize and regulate online gambling (a $100 billion a year industry). House lawmakers are signing on in droves, and the bill will likely pass in the coming months. Curzio's latest recommendation is a leader in the online poker world, but it still has huge growth potential. Plus, it has a rock-solid balance sheet with hardly any debt and trades at par to sales and two times cash flow.
If the government does pass Barney's bill, Curzio believes this stock could soar up to 400%. Penny Stock Specialist is still in "beta mode" and only available to Alliance members, who can access his research here. We'll continually update Digest readers on its progress and alert you when Frank's research is available to the public.
New highs: iShares S&P Index ETF (IVV), Fairholme Fund (FAIRX), Market Vectors Gold Miners ETF (GDX), BNSF (BNI), McDonald's (MCD), Keyera Facilities (KEY-UN.TO), Coca-Cola (KO), Microsoft (MSFT), Automatic Data Processing (ADP), IMS Health (RX), Goldcorp (GG), Yamana (AUY), Silvercorp Metals (SVM), Silver Wheaton (SLW), Sino Gold (SGX.AX), Eldorado Gold (EGO).
Read today's essay Viva la Revolution, Viva Wal-Mart below today's mailbag. Then, let me know what you think: feedback@stansberryresearch.com.
"I often find it interesting that so many people chose to use words for which they either don't really know the meaning or lack the communication skills to integrate them effectively into a grammatically correct sentence.
"Mr. Porter provided the most recent example of such behavior with his poorly conceived missive published in the November 11, 2009 issue of The S&A Digest. I am really not sure how your marketing materials, although admittedly aggressive, could be construed as 'extortion,' I would certainly respond a bit more forcefully to any slanderous remark directed toward me, especially one accusing me of felonious conduct. I suppose I might even point out to Mr. Porter that his threat to falsely accuse you of extortion, unless you respond to his question, is, by definition, far closer to being extortion than any methodology employed by Stansberry in your marketing practices.
"People really should be more careful in their selection of verbiage, particularly in the written format, as not everyone is as forgiving of such slurs as is the Stansberry business group." – Paid-up subscriber Ken McGaha
"I have been unable to answer this question, and I hope you could help. Someday, I will want to trade in my gold coins for whatever asset will be chosen for the IMF currency. How will I know it is time to exchange gold coins for whatever. If the dollar is down as it is in this todays market, why would I make an exchange of a winner (gold) for a looser (US dollar). Exchanging gold coins for US paper money will give me a currency that is devalued and cost me more for a product due to the devalued dollar." – Paid-up subscriber John
Ferris comment: I don't understand. Why exchange your gold for anything but valuable goods and services?
Viva la Revolution! Viva Wal-Mart!
By Dan Ferris
Extreme Value World Dominator pick Wal-Mart (WMT) today reported its earnings.
Unlike most of the earnings reports you hear in the retail world, this one was genuinely good. Wal-Mart's net earnings rose 3.2%. The company says it expects sales for the current quarter – including the holiday season – to be flat or down 1%. CEO Mike Duke reported Wal-Mart is gaining market share "all over the world" as the economic crisis makes it harder to make ends meet... and a better idea to shop at Wal-Mart.
Wal-Mart is firing on all cylinders these days, and not only because it's the best place to get low prices on everything from groceries to guns and gold jewelry. Wal-Mart is also serving those with little or no access to banking. This is classic Wal-Mart. Wal-Mart has always been good at serving customers other retailers shun (notably rural communities).
Back in 2007, the banking establishment prevailed in pressuring the government to block Wal-Mart from starting its own bank. So Wal-Mart decided to build its financial services in other ways.
One of its most popular financial products is prepaid debit cards. Considering the enormous overdraft fees charged by banks, paying $2 a pop for a prepaid card is a bargain. Wal-Mart cut the fee from $3 to $2 back in February, a perfect moment when the country's banks were wallowing in the disgrace of bailouts and scandals.
As of last February, Wal-Mart had sold more than 2 million prepaid cards, accounting for more than $2 billion worth of transactions. Wal-Mart also offers money-transfer, check-cashing, and bill-payment services at more than 3,500 U.S. stores.
In a few more years, Wal-Mart will be right in the big banks' faces, doing what they've been trying to do (or at least talked about doing) for years – serving the unbanked and underbanked customer, a vast sea of individuals with too little money to participate in the traditional banking system. The big banks have failed miserably only because they can't figure out how to collect enormous fees from a customer who has little money. Banks only want customers they can keep captive with checking accounts, credit cards, and other products that allow them to charge you fees you don't even know you're paying.
How have the big banks responded to the poor economy? They've raised interest rates and fees on credit cards. I canceled a Chase business card, which I've paid faithfully, because the bank raised my interest rate to 29%. If they're charging me 29%, what are they doing with the customers who don't pay on time? 129%?!
Wal-Mart isn't like that. As Lloyd Constantine, a class-action lawyer who represented Wal-Mart in its case against Visa and MasterCard, put it: "Wal-Mart's instincts are just the opposite [of the banks'] – lower prices, lower excess, streamline, simplify."
Constantine told American Banker. "That approach to banking is absolutely necessary and desired in the United States, and the fact that they were blocked from doing that is an absolute tragedy." Lloyd said if Wal-Mart had been granted a bank charter in 2007, it "would have served the American public well."
So especially these days, whom is the low-income, underbanked customer going to trust? A bailed out "too big to fail" bank or Wal-Mart, the company that offers customers the lowest-cost option for groceries and other basic items? I vote for Wal-Mart and against the government and its banker pals.
I said it three years ago when I wrote The War Against Poor People, my initial Wal-Mart recommendation. And I'll say it again today: Wal-Mart is a revolution. It was a discount-store revolution. It's a jewelry-store revolution. It became a grocery-store revolution. Now, it's a financial-services revolution, at possibly the most perfect moment in history for such a revolution to happen.
It is a perfect irony the government and the banks refused to grant Wal-Mart a banking charter back in 2007. Now, both the government and the banks are more and more discredited every day, and Wal-Mart continues helping everyone save money.
Wal-Mart still has its critics... and the company itself likes to be cautious about projecting future results these days, which doesn't give the average know-nothing investor (on or off Wall Street) much confidence. But it's a fantastic business today and will likely be one for many years to come.
World Dominator stocks like Wal-Mart are much better investments these days than most others. Smaller, less well-managed companies simply don't have the competitive advantages or enormous financial resources of the World Dominators. And nowadays, with the U.S. stock market at 29 times earnings, they're way overpriced.
In the November issue of Extreme Value, due out tomorrow after the market closes, I'll show you the one World Dominator company that's still dirt cheap and safe. In fact, this company is the world's safest credit risk. That's a bold statement, but my report gives you the facts that prove it.
This World Dominating company's balance sheet is loaded with cash. It makes so much money and has so little debt, it can pay its annual interest expense with just two days worth of free cash flow. It dominates its industry. It has several new products coming out over the next year. It earns some of the thickest profit margins of any business on Earth.
And best of all, with the market up 60%-plus, this stock is still so cheap and the company such a cash gusher that it could easily afford to issue enough debt to purchase all its outstanding shares... and still have more than $7 billion a year left for its owners to spend any way they desired. To read about this amazing opportunity in Extreme Value tomorrow afternoon, click here.
Sincerely,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
Thursday, November 12, 2009