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Editor's note: Porter and Justin Brill, who edits our financial news aggregator website, the Daily Crux, are in New York attending the Ira Sohn Investment Conference. The lineup this year is incredible. Speakers include Bill Ackman, David Einhorn, Steve Eisman, Jim Chanos, and Carl Icahn. We will hopefully have updates for you later this week.
As oil prices plummeted in the early 1980s, the tanker business was bleeding cash. About 70% of the industry's ships were sitting idle. At the time, it cost around $50 million to build a new ship. Used ships in great condition sold for only $5 million – a 90% discount. You could buy a used ship for less than the value of its metal, or "scrap value."
While most investors were fleeing the shipping business, a young James Tisch started buying tankers. A 1986 Fortune story estimated the value of the tankers had risen to around $20 million each, just a few years after his purchases. Tisch – the current CEO of Loews Corp. and the son of the late billionaire investor Larry Tisch – made many times his original investment as the shipping business recovered.
We're far from the doldrums of the 1980s, but the shipping business is once again struggling. Today, Frontline, which operates the world's largest oil tanker fleet, reported an 81% decline in first-quarter earnings compared to last year. The company says oil supply is far outpacing its demand...
"It is hard to see a strong recovery in the tanker market as long as the net supply of tonnage grows faster than the total… demand," Frontline stated.
This two-year chart shows the company's hardships...
With a plummeting share price and slow shipping demand, Frontline is considering selling and idling tankers. The company increased its fleet size leading up to 2008. In July 2008, large crude tankers commanded $177,036 per day. Today, they charge only $8,900. While we doubt these ships will sell for less than scrap value, we could see a time in the near future when they do.
If you're not interested in fire-sale tankers, perhaps you'd like some prized European assets. The Greek government is selling stakes in OTE Telekom, Postbank, the ports of Athens and Thessaloniki, and the Thessaloniki water company "to frontload its ambitious privatization program," finance minister George Papaconstantinou said. Greece didn't say what price it expected from these sales and gave no timetable. However, the European Union and International Monetary Fund ordered the country to raise 50 billion euros.
Spain, another failing European nation, will privatize its state lottery, Loterias y Apuestas del Estado. The planned stock market listing of 30% of the lottery would create the world's largest publicly listed gambling company (worth as much as $35.2 billion) – bigger even than casino giant Las Vegas Sands. In 2009, the Spanish lottery had revenues of $13.8 billion with an average spend of $295 per citizen.
The lottery – and gambling in general – is a wonderful business during inflation. History shows people gamble more in times of high inflation (their only chance to keep pace with massive devaluation).
Spain will also consider selling its 49% stake in the state airports authority that controls the Madrid and Barcelona airports (which could raise an addition $11.2 billion).
As the weaker euro nations sell off prized assets to pay down debt, the euro hit a new low against gold of 1,087.8 euro per oz.
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New 52-week highs (as of 5/24/11): Dreyfus High Yield Strategies Fund (DHF), Sprint (S), McDonald's (MCD).
If you've got any stories about the horrors of the shipping business, we'd love to hear from you... feedback@stansberryresearch.com
"I'm a paid subscriber from Italy. Today I received a letter from Spain with an invitation to buy a 20 euro ticket for their national lottery... I think it's sign of warning, no money everywhere, but Spain will be the next bailout?" – Paid-up subscriber LB
Goldsmith comment: They're probably just trying to collect as much lottery money as possible before selling out.
"Spot on regarding Porter's May 20 Digest. I have had several businesses, all with employees. About 14 years ago I decided I had enough and got out of all these businesses. I have had other business ideas but all required employees other than myself. I decided against each one of them. Besides the government making life miserable, the employee could give a hoot about the business. They only cared about how to get out of working and still get paid. Nobody cares about the business but the owner.
"I now have a business with only myself as employee and employer. I don't make as much money but I don't care. Money isn't everything. Never use to think like that but now that is the dominant thought." – Paid-up subscriber Rick Govern
Regards,
Sean Goldsmith
Baltimore, Maryland
May 25, 2011
Incredible lineup at Ira Sohn... Is the 'Tisch Trade' back?... Frontline struggling... Greece selling itself... The world's largest gambling company... New low for euro/gold... 888 possible bank failures...