Porter and I are heading to Cabin Bluff, Georgia today for a quail-hunting trip with The Atlas 400. I visited the property during our Alliance meeting at Sea Island last year. It's one of the best hunting grounds in the country... And if you're a golfer, it has an 18-hole, Davis Love III-designed golf course on the property.
About 10 of us have rented the property for the week. We also brought a few subscribers and prospective members along. I'm sure we'll have some stories to share later in the Digest. And if you're interested in learning more about the club, you can watch this short video of our past adventures.
"This country is on the verge of an explosion of greatness."
Billionaire hedge-fund manager David Tepper told Bloomberg he's "going to come out of the closet" as a bull in 2013.
Tepper's Appaloosa Management was one of the top-performing hedge funds last year with a 30% return. And today, he believes the tailwinds provided by the Federal Reserve's money printing (and the gradual economic recovery in the U.S.) will mean big returns for investors this year.
Tepper said the "main thing right now is to be long equities." In particular, he likes financial services giant Citigroup – one of his fund's biggest holdings. He thinks the bank stock has 50% upside from here.
We also like bank stocks this year... The sector is healthier than it's been in more than a generation. Banks have lots of cash right now. And consider their business model...
They borrow money at a low rate and lend it at a higher rate. Right now, banks can borrow money basically for free. The Federal Reserve has pledged to keep rates near zero for years, so banks pay their depositors (the source of their borrowing) almost nothing.
They then lend that money at a higher rate (currently around 3.5% for a 30-year, fixed mortgage and 4%-5% for business loans). And bank lending is on the rise (approaching pre-crisis levels).
The Fed said it will continue buying $85 billion of debt per month until unemployment falls to 6.5%. (It's currently at 7.7%.) So short-term rates should stay low for the foreseeable future.
While this policy makes it cheap for banks to borrow money, it also pushes down the long end of the yield curve compressing the "interest-rate spread." In other words… short-term rates can't realistically get much lower than zero. So as long-term yields fall, the difference between what banks pay to borrow and what they receive to lend shrinks…
Regardless, this easy-money policy will lead us to inflation. And inflation will jack the long-term interest rates much higher. When that happens, banks' interest-rate spread will explode (meaning higher profitability).
Meanwhile, this money printing is already causing real estate prices to rise. And these rising prices mean banks can reverse the huge write-downs they took during the financial crisis.
Tepper's position is similar to his stance in late 2010, when the Fed had promised to support the economy with money printing. In short, don't fight the Fed. As we wrote:
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Despite bond yields languishing at record lows, mutual funds (Main Street's favorite investment vehicle) are still pouring into bond funds. Of course, when a security becomes popular, it usually pays to be a contrarian. Billionaire hedge-fund manager David Tepper is certainly in that camp. Last Friday on CNBC, Tepper described the Fed's statements that it would support the economy amid signs of a downturn as a "put." Tepper is so confident in the government's ability to goose the market that he's shifting his predominantly bond-focused fund into equities...
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"What, I'm going to say, 'No Fed, I disagree with you, I don't want to be long equities.'" said Tepper. "We're a bond place, but we changed up to a little bit more equities recently." Tepper's reasoning is solid. He said either the economy will naturally improve over the next three months, in which case stocks will perform best... Or the economy won't do well over the next three months, and the government steps in. In which case, every asset class will rise except bonds.
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Tepper has some experience making money from government intervention. Last year, his $7.5 billion fund returned 132%, mostly from betting on financials. You can watch his interview with CNBC here.
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We'd like to take a moment in today's Digest to support our friend and fellow financial publisher Sean Egan of Egan-Jones Ratings. We often call Egan-Jones "the only reputable ratings agency." The firm, like us, sells its information on a subscription basis... That's unlike the large ratings agencies (like Moody's and S&P), which are paid by the debt issuers for ratings – a clear conflict.
Egan-Jones was the first ratings agency to downgrade the United States' credit rating... It cut the triple-A rating in July 2011. And it cut the credit rating again in April 2012 from double-A-plus to double-A. And the government fought back... Here's what we said at the time...
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The Securities and Exchange Commission (SEC) is once again doing something that should make you furious. It's suing one of the few ratings firms in the country that actually publishes real, useful ratings on insurance companies, banks, and bonds. The firm is called Egan Jones and its founder, Sean Egan, is one of the most trustworthy, earnest, and honest folks I've met in finance.
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Interestingly, his business model is like mine: The folks using his ratings pay for them, unlike Moody's and Standard & Poor's, where the bond-issuing banks (aka, the big banks) pay for the credit rating. SEC rules require every bond sold in the U.S. come with at least two ratings by its approved ratings agencies. These "approved" agencies are the same ones that rated every horrible subprime mortgage as triple-A during the credit bubble. Guess who didn't? Sean Egan.
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Like me and a few others, Egan warned loud and clear that the subprime mortgage market suffered from massive problems. He wouldn't go along with the charade that was orchestrated by the big banks and their SEC lapdogs. You'll never guess why the SEC is suing Sean Egan. It's not because of his ratings – which have always been vastly more accurate than the SEC-sponsored firms. No, it's because he applied to become SEC-approved. The agency is suing him for civil securities fraud because it alleges he filled out the form incorrectly. I'm not making that up.
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Last September, Egan-Jones downgraded the U.S. again... This time to double-A-minus. An elementary school math student would agree... We're adding $1 trillion a year to our deficit. But the government once again got upset.
Yesterday, the Securities and Exchange Commission (SEC) announced it reached a settlement with Egan-Jones over the "errors" in its application to become SEC-approved. According to the settlement, Egan-Jones "agreed to be barred for at least 18 months from rating asset-backed and government securities issuers as a [Nationally Recognized Statistical Rating Organization]."
The ruling doesn't affect Egan-Jones' capacity to rate corporate debt. We don't like bullying... especially not from the government (an issue we have some experience with as a firm). And the latest with Sean Egan is not only egregious, but ludicrous. I asked Porter, who knows Egan, for a statement...
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Sean Egan is a pioneer in the credit-rating agencies business. He fought the SEC for decades, simply to be allowed to pursue a business model that wasn't inherently corrupt. [Sean Egan's business depends upon the buyers of bonds, who pay for his ratings, as opposed to the major rating agencies who are paid by the sell side.] The lawsuit against Sean Egan removes the last pillar of any credibility or honesty in our capital markets.
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Take a look at today's massive new highs list. Everything is at a new high... insurance, housing, China, Italy, Australia, junk bonds, natural gas stocks, food and beverage stocks, medical stocks, and private equity. It's amazing what a few trillion new dollars can do to goose a market...
New 52-week highs (as of 1/22/13): Berkshire Hathaway (BRK), Morgan Stanley China A Share Fund (CAF), iShares Australia Fund (EWA), iShares Italy Fund (EWI), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares High Yield Corporate Bond Fund (HYG), iShares Dow Jones Insurance Fund (IAK), iShares Home Construction Fund (ITB), SPDR Barclays High Yield Bond Fund (JNK), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Guggenheim China Real Estate Fund (TAO), Targa Resources (TRGP), W.R. Berkley (WRB), Anheuser-Busch InBev (BUD), Automatic Data Processing (ADP), 3M (MMM), Chicago Bridge & Iron (CBI), Consolidated Tomoka (CTO), Calpine (CPN), Hershey (HSY), American Financial Group (AFG), Loews (L), Navigators Group (NAVG), Travelers (TRV), Alleghany (Y), Blackstone Group (BX), Kohlberg Kravis Roberts (KKR), Medtronic (MDT), Southern Copper (SCCO), Enterprise Products Partners (EPD), Cheniere Energy (LNG), Union Pacific (UNP), Government Properties Income Trust (GOV), Two Harbors (TWO), Walgreens (WAG), and Emerson Electric (EMR).
More kind words in today's mailbag... And our favorite gold dealers. Send your feedback to feedback@stansberryresearch.com.
"I think the 12% Letter is one of the best values in your collection. I really appreciate the excellent advice. At first I didn't think it was helping me very much. I thought the advice seemed obvious and repetitive. However, after a few months I realized that although that may be true, it was good counsel and in fact I had not been following it very consistently.
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"I look at my Stansberry subscriptions as tuition payments to the school of investing... you guys really deliver." – Paid-up subscriber Jeffie H. Pike
"You recently published the name of your favorite gold coin dealer in an article that compared melt values to retail values. Can you please email the name of the dealer." Paid-up subscriber Peter Grimm
Goldsmith comment: Our recommended coin dealers are Van Simmons from David Hall Rare Coins (949-567-1325) and Michael Checkan at Asset Strategies International (1-800-831-0007). As always, we receive no compensation for recommending them. We just know they have treated our subscribers right over the years.
Regards,
Hunting quail and pigs with The Atlas 400... Tepper is coming out of the bullish closet... Why we like bank stocks... More SEC bullying... Everything is at a new high... Our recommended coin dealers...
Where Porter hides his gold...
As promised... in today's Digest Premium, Porter discusses where he stores his gold bullion and why he thinks the silver market is being manipulated.
To subscribe to Digest Premium and access today's analysis, click here.
Where Porter hides his gold...
As promised... in today's Digest Premium, Porter discusses where he stores his gold bullion and why he thinks the silver market is being manipulated.
To continue reading, scroll down or click here.
As I said yesterday... I (Porter) don't trust the banks to store my gold with them. So what do I do with it?
I store it in places where I know it's safe. And I keep it in multiple locations. Of course, I'm not going to tell you exactly where it is. But I will tell you... it's never in my house. So don't rob my home looking for gold. It's not there. I don't put my kids and my gold in the same place because I'm not stupid. It's not going to be anywhere someone's likely to look.
The other thing to remember... gold doesn't rust, so you can put it virtually anywhere. Put it in a shoebox and hide it in the back of your barn. It'll be fine. No one is going to look for it there.
I think anytime you've got a country that's as bankrupt as ours... that has a trillion-dollar annual deficit and no political will to stop the spending... it's a good time to buy gold.
By the way, this just came out last week... The U.S. Mint has run out of silver.
It ran out of silver Eagles and had to suspend sales. When the mint cannot keep up with demand for physical bullion (gold and silver), something is totally wrong with the spot prices. It makes no sense that there would be so much preference for physical bullion that the mint can't keep up with demand, unless the spot price is being manipulated to keep it artificially low.
Now I'm not a giant conspiracy theorist. But I know how economics work. The demand for physical bullion is a sure sign that the marketplace does not trust the futures price, period. The futures market pricing for gold and silver is becoming more and more irrelevant. And the shortages you're seeing in physical gold are sure signs that something has gone terribly wrong...
Where Porter hides his gold...