We're from Goldman Sachs, and we're here to help.
Goldman Sachs didn't stand a chance of becoming the lead underwriter for the General Motors IPO. The bank recently paid a $550 million settlement to dismiss the SEC's allegations of fraud. Considering its close ties with the government, favoring Goldman after such negative press would have outraged "Main Street."
Instead, the Treasury awarded the top spots to JPMorgan and Morgan Stanley – two banks whose reputations remained largely intact. The two lead banks should make $120 million on the deal. But they could have made four times as much...
Knowing they wouldn't get top billing, Goldman offered to take a 0.75% fee – normal fees are 3%. The low-ball offer put Goldman back in charge. The public would be outraged if they discovered the Treasury rejected Goldman's bid. After all, these are the same banks the government just bailed out. So the Treasury forced the other banks to accept 0.75%. We doubt Goldman minds losing the extra cash on the mergers and acquisitions advisory business... We all know the firm makes its money trading, anyway.
We've been covering the for-profit education sector for more than a year (read previous coverage here and here). Our thesis has always been the same... For-profit educators (FPEs) are doomed. These companies are expensive and deliver little value (no more than a nearly free community college). These companies are predatory, and most of their profits come from government-backed student loans.
Needless to say, we weren't surprised when the Department of Education released a negative report on the for-profit education sector last Friday. The government has proposed regulations that would penalize the FPEs for leaving their students with big debt loads. And last week, the DoE listed the fiscal 2009 loan repayment rates for more than 8,000 FPEs in order to show which companies would be hurt by the regulation. The threshold is 45% repayment. According to the Wall Street Journal:
The proposed rule is intended to measure how well for-profit schools train students for gainful employment in a recognized occupation. It would penalize programs for graduating students with heavy debt burdens – and students who don't land jobs good enough to pay off the debt. Schools could "pass" based on student loan repayment rates, or by maintaining a debt-to-income ratio below a certain percent.
The scores were awful. Shares plunged. Industry heavyweights Corinthian Colleges, The Washington Post Co., ITT Educational Services, and Strayer all posted terrible numbers. Washington Post's subsidiary Kaplan Inc. posted a 28% repayment rate. At that rate, many Kaplan schools wouldn't receive federal student aid, which "could have a materially adverse effect on the future results of the Company's higher education division," the Washington Post Co. said. If these schools are no longer eligible for federal aid, they will go to zero.
GE Capital, the giant finance arm of General Electric, may also face further government regulation. The Federal Reserve will oversee the $589 billion GE Capital as a result of the Dodd-Frank Bill. GE Capital won't technically be a bank, but it will likely be treated as one. That means it can't engage in "nonfinancial activities," which would include GE Capital's $28.3 billion real estate portfolio. New regulation could force GE Capital to spin off that real estate and announce major losses on its portfolio.
As we wrote last week, GE has yet to announce major losses. But we know it will eventually. In addition to spinning off the real estate, the Federal Reserve could require GE Capital to increase its capital ratios. Both moves would hurt the company's equity. Make sure to read Stansberry's Investment Advisory for the full writeup on GE. Also, don't miss Porter's latest short sell recommendation. For a recap on the situation, check out Friday's Digest. To learn more about Stansberry's Investment Advisory, click here...
To update on Dan's contrarian homebuilder watch... The National Association of Homebuilders released its monthly sentiment survey. Sentiment dropped one point to hit a 17-month low of 13. To put it in perspective, any reading below 50 is bad. From the report:
"Builders are expressing the same concerns that they are hearing from consumers right now, particularly the sense that the overall economy and job market aren't gaining any traction," said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. "Meanwhile, many continue to report that problems with inaccurate appraisals, competition from the large number of distressed properties on the market, and tight consumer lending conditions are causing them to lose potential sales."
In Friday's Digest, we noted how poorly infrastructure stocks are performing and asked our readers to chime in. Don't miss some of their responses in today's mailbag. Any other real-world market data you'd like to share? feedback@stansberryresearch.com.
"I have owned and operated my construction company for 31 years and we are the highest rated contractor in our field. My remodeling sales have imploded from $5M to $2.6M in just 16 months and 2010 sales are slightly behind 2009. Plenty of bids but the majority of our potential customers have decided to delay their projects. Same story with all my contacts and vendors in the business. Taking jobs just to keep our guys working..." – Paid-up subscriber Scott
"I work in construction installing stone and porcelain tile in Connecticut. Business has fallen off a great deal over the past two years but recently has picked up by shifting away from new construction to remodeling existing homes. Homes in the 1.3 million and up are being built but at a slower pace. New homes under 400 grand are selling but those between 400 and 1.3 mill are not. I thank God that I have the work that I do for many do not. I'm seeing a lot of trucks stopping at my and neighbors houses asking if a new roof or driveway is needed." – Paid-up subscriber Angelo
"Thirty four years ago, I started a business to repair, protect and strengthen concrete infrastructure. Like orthopedic surgeons to bones, we are the same to structures made of concrete. While the old adage of don't throw your shoes away if they are in disrepair, get them resoled has value, it can be selective based on the owners status. Try that with a 25-story class A property with a parking garage for 3,000 cars. Say the garage has structural defects and may be red tagged by city inspectors. Can't throw it away and buy new... So we fix it. Minimum disruption to tenants, owner has problem solved and we generate revenue, employee workers and pay taxes. Sewer tunnels & plants... need to flush. Ports need to dock that ship to unload China crap... Some say location, location, location. I say Business model, Business model, Business model. Isn't America great!" – Paid-up subscriber Hank Taylor
"Keep an eye on our short sales of obsolete hard-drive makers Seagate Technology (Nasdaq: STX) and Western Digital Corporation (NYSE: WDC). The nearly 50% gains we have made on these are exceptional. And 50% also happens to be the magic number when you're short. After that, since the most a short position can ever make is 100%, you're entering the land of diminishing returns. It doesn't make sense to stay there. – August 2010 Stansberry's Investment Advisory
"I made more than 100% – instead of shorting these stocks, I bought LEAP puts. The WDC put I bought for $380 has increased in value by $477. Thanks for the reco... PS – Gannett put doing well also." – Paid-up subscriber Calvin Reeves
"What is enterprise value? How is it calculated?" – Paid-up subscriber Ron
Goldsmith comment: Think of a company's enterprise value as its takeover price. In other words, it's the price a private-equity firm would pay to take the firm private. You calculate enterprise value by adding market capitalization and debt, then subtracting cash.
"I don't know what I don't know but thought that I did know – if that makes sense. "My question is, I bought a dividend stock days prior to its ex-dividend date. Must have been good timing (rare for my ability). A week of ownership of the stock it went up 20%. I sold half of my position to capture the gain and hung on to half to capture the dividend.
"To my surprise it paid its dividend (today) on the total of owned shares as of ex-dividend and not what I owned on the dividend date? I guess that's correct?? Is this how dividend buyers make their money on short term ownership of these type of stocks? I've owned dividend stocks but never seen or read about this short term technique. I've always owned through its dividend pay date. Would you explain and recommend a good 'How to Book' on dividend buying." – Paid-up subscriber Roland Holland
Goldsmith comment: As long as you own a stock at market open on its ex-dividend date, you will receive the dividend payment. The "ex-dividend date" is simply the day the stock begins trading without its dividend or "ex-dividend." While I don't know a good book for dividend investing, I would direct you to Tom Dyson's newsletter, The 12% Letter. He's producing fantastic returns with super-safe, high-yielding securities. In addition to the stock picks, you will also receive a better dividend-investing education than any book will give you. You can learn more here...
Regards,
Sean Goldsmith
Baltimore, Maryland
August 16, 2010