I was encouraged to attend the local homeowners association meeting last night. Our next-door neighbor has been fined for having too many dogs and was appealing to have the fines waived. She has three dogs, and the rules say you can only have two pets.
We also have three pets: two dogs and a cat. But we're not being fined. The difference is simple. For the last three years, our neighbor's dogs have barked constantly, sometimes for 20-30 minutes without stopping, and occasionally late at night. We can barely open our back door without setting them off. They're tiny dogs, and one of them has a blood-curdling screech.
The neighbor on the other side of her called the police and had her fined... to no avail. We've called the homeowner's association, and again, she was fined... and still the dogs bark. She doesn't understand it's her job not to be a nuisance to her neighbors. It's her responsibility not to disturb the peace.
She said we were as much in violation as she was, with our three pets. I tried to explain her responsibility not to be a nuisance was the one and only issue. Nobody really cared how many dogs she had, as long as she kept them quiet.
She never got it. She never said, "I apologize for all the noise. I'll take care of it." She tried to shift the blame onto me. "Why didn't you come over and say something?" As if it's my job to make sure she's not a nuisance. (We've actually spoken to her several times in the last few years.)
It's hard to imagine the notion of freedom and limited (or no) government in a world where self-reliance and responsibility are becoming more scarce. I figure I'm responsible for everything I say, do, and own (including my animals). I thought everybody knew this. It seems few people do.
In Aldous Huxley's classic novel, Brave New World, the government used a drug called "soma" to control the population. These days, the U.S. government is issuing a different panacea (dollars), but it's still calling it SOMA...
At the Federal Reserve, SOMA means, "System Open Market Account." You'll often find SOMA listed among buyers of U.S. Treasuries at auction. For example, at last week's auction of 30-year Treasuries, SOMA accounted for 11% of all purchases, just shy of $1.8 billion worth.
Think about this... the Federal Reserve buying more than 10% of a Treasury auction. A glance at other auction results tells me this isn't unusual, making it all the more troubling. The Fed simply prints money out of thin air to buy Treasuries, a purely inflationary act.
Besides SOMA, you'll find three other kinds of buyers at Treasury auctions: indirect buyers, primary dealers, and direct buyers. Their actions tell a disturbing tale of last week's auction...
So-called indirect buyers of U.S. Treasuries purchased large amounts of Treasuries through one of 18 primary dealers. These are the big foreign buyers, like China and Japan. In the past four Treasury auctions, indirect buyers accounted for about 40% of purchases. Last Wednesday, indirect buyer purchases sunk to just 29% of the auctioned securities. Asians aren't buying Treasuries like they were.
Primary dealers bought 47% of last Wednesday's auction... but these buyers have no choice. They've agreed to purchase Treasury securities in whatever amounts are necessary to ensure a liquid market. They have to buy them.
Another group of buyers, so-called direct buyers, purchase small amounts directly from the Treasury. These buyers are unreported and untraceable. At 24% of last Wednesday's auction, they purchased a record high amount of Treasuries. Since nobody knows who these buyers are... the Fed itself could be among them.
Any way you slice it, this Treasury auction should have made Wall Street Journal headlines.
Foreigners don't want Treasuries. China isn't even the biggest holder of U.S. Treasuries anymore. Japan is.
The Fed bought at least 11% of the auction, maybe more.
With banks set to report huge commercial real estate losses, foreigners buying fewer Treasuries, the Fed printing money to purchase them, and some mysterious buyer making record purchases of Treasuries...
Do you feel confident about the value of the U.S. dollar?
To me, the U.S. dollar feels like a giant dam full of cracks. Water is starting to appear in the cracks. Can the flood be far off?
There are different ways to play inflation, which is really just an increase in the amount of money in the system. Financial stocks, like banks and brokerages, ought to do well as their assets under management increase, generating growth in fees.
David Tepper, whose Appaloosa Management was one of last year's best-performing hedge funds, is loading up on financial stocks. Tepper increased his Citigroup stake by 73% to 138.1 million shares (13% of his fund) and purchased 11 million shares of Wells Fargo. As of December 31, financial stocks comprised 86% of Appaloosa's $3.4 billion in assets. Tepper established his financial positions as the market cratered in 2009 and scored huge gains on the recovery in April and May. His flagship fund, Appaloosa Investment LP, posted a 117.3% return for the nine months ended September 30 – the top fund with assets totaling more than $1 billion.
Value legend Bruce Berkowitz of Fairholme Fund is also buying Citigroup. He says the bank has gone through a "scrubbing process" similar to bankruptcy with the U.S. government. The bad loans are more evident now and easier to quarantine. Also, there has already been massive capital injections and shareholder dilution. Now, it's just a matter of time before Citi's new loans overtake the old, existing loans.
Tepper also invested in four U.S. airlines: AMR Corp, Delta, UAL Corp, and U.S. Airways. The total position is only $133 million. Our own Jeff Clark, editor of the S&A Short Report, is taking the other side of Tepper's airline trade...
Jeff Clark already booked a 100% gain in less than two weeks shorting Continental Airlines. But unlike Tepper, he says there's plenty more downside.
After Jeff took profits on his Continental short, the airline sector rebounded to its upper-level of resistance again. And he sees the same bearish pattern he saw with Continental forming in another airline stock (it's one of the four in Tepper's buy list). Jeff says this company loses money on every flight, is super vulnerable to oil price increases, and "is a bankruptcy poster child."
Despite this company's horrible fundamentals, the stock has increased more than 400% in the past eight months... But its chart looks sickly. And Jeff says it's going to plunge. If the stock hits the low end of Jeff's price prediction, his recommended trade will return 600%. And given Jeff's current streak (he's closed six trades this year, all for gains around 100%), you can't afford to miss his latest trade. This is the hottest I've seen Jeff in four years. To access his latest trade, click here...
Maybe inflation is pushing Extreme Value pick Portfolio Recovery Associates higher. Portfolio Recovery rose 18% on Friday, and it's up another 5% today.
Portfolio Recovery buys and collects charged-off consumer debt. Inflation makes it easier to pay off debts, since newer, less valuable dollars can be used to pay off debts issued in older, more valuable dollars. It's like borrowing $1 and only having to pay off 70 or 80 cents of it.
Extreme Value hasn't published a new long stock pick since last August, when I recommended IMS Health at $13 a share. Within three months, a buyout was on the table for $22 a share. The transaction is set to close soon, getting Extreme Value readers a quick 70%. My new long pick came out Friday, in the February issue of Extreme Value. I think it has even greater potential than IMS Health. The business is one of the best-financed players in a protected market that's very difficult to enter. It gushes cash and trades at less than six times the past year's cash flows. It could easily double this year. To get access to Extreme Value, click here...
New highs: Berkshire Hathaway (BRK-B), Portfolio Recovery Associates (PRAA), Steak 'n Shake (SNS), Rex Energy (REXX).
What would it take for you to surrender your gold? Let us know: feedback@stansberryresearch.com.
"I've seen about a dozen e-mails on the '$59 computer.' By this point, isn't it too late to drop a big chunk of cash on Phase 1 Investor? Wouldn't all those Phase 1 folks have driven up the price of whatever the stock is by this point?" – Paid-up subscriber Mitch
Goldsmith comment: Now is the best time to purchase a subscription to Phase 1. Our special discount ends tomorrow at midnight. And our favorite way to play the $59 computer is still well under its "buy-up-to" price. To learn more about the $59 computer, click here...
"What is to prevent Obama from outlawing individual US citizens from owning gold as FDR did by a stroke of the pen? Keeping it overseas may not work. Obama would simply authorize those governments to seize the gold assets belonging to an American and then split the take. Since there are so many governments these days that are cash poor, only the most altruistic would pass on that deal." – Paid-up subscriber S. Mathews
Ferris comment: He can outlaw gold, though I don't think even he would be dumb enough to do that now. If he did, seizing all of our private gold holdings is another thing altogether. Would you surrender yours?
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
February 16, 2010