Everyone is worried – or at least should be worried – about how the government's quantitative easing program will erode the value of their savings…
One way we've recommended protecting yourself is to take out a 30-year mortgage at 3.5% and buy a house, which will increase in value with inflation... Meanwhile, the value of your debt is also inflated away.
But how else can you hold debt to sell the dollar short? There are many ways... You could simply borrow the money and hold debt, waiting for an opportunity. Or you could borrow money and buy Singapore dollars. You can make a lot of money doing this.
But my advice to nonprofessional investors – anyone who is not a speculator by trade – is to never do this. There are too many ways the rules can change and punish you. Again, unless you are a professional speculator, avoid this scenario…
If you are a professional, the best way to short the dollar would be to buy a high-yielding asset in the United States. That could be a group of mortgage bonds or some low-rent apartments that pay a 12% yield after fees and taxes. You should set up a small holding company to make this purchase, so you can borrow the money on a "nonrecourse" basis. That means you won't have personal liability. If you default, the lender can seize your collateral, but can't come after any of your other personal assets.
For example, I (Porter) set up a small company called Baltimore Apartments LLC... I funded it with my own cash. We're buying up to $5 million of apartments and renting them out. We want to get a strong rental history.
Once they're 95% occupied, we'll go to the bank and ask for a mortgage on this performing asset. The bank will lend against a strong rental record and high occupancy. We'll do a mortgage that's for 75% of the value and take our cash out. Now we're short the dollar to the tune of $4 million.
But you should only do this if you have "clear carry," meaning the yield on the asset is 10% or 12% and the payment on the debt will be 3% or 4%, leaving you with a net yield between 7% and 8%. In this scenario, I'm making a healthy profit by borrowing money.
The most important part is that the mortgage would be "nonrecourse"... As I said, that means the bank can't come after my personal assets in the case of default. It can only go after the assets of my holding company – essentially the properties.
And that's the case no matter what happens. If I fail to meet the terms of the note, the bank can seize the property. But it can't seize any of my personal property. That's the only way to do it.
But again, I would tell you not to do any of that unless you're a speculator by trade... The reason is because you just can't know how the government will change the rules... but I guarantee you the rules will change.
Look at what happened in Argentina in 2002... The government seized all the banks and said all deposits were now in pesos. It didn't matter if you had deposited dollars, euros, or any other currency. It converted it all to pesos. Then, it devalued the peso by 75% against the dollar. But none of the government's debts, all of which were denominated in dollars, changed currencies. Only the savings were "pesofied."
So anyone who borrowed money got wiped out completely. You can't afford to bet against the sovereign because it will screw you by changing the rules on a whim.
– Porter Stansberry with Sean Goldsmith
The exodus at J.C. Penney continues...
As we discussed Tuesday, J.C. Penney CEO Ron Johnson has been ousted amid massive sales declines. The retailer replaced him with his predecessor, Myron Ullman III. The market didn't like the announcement... J.C. Penney (JCP) shares dropped nearly 13% on the news. For the full story, read the April 9 Digest.
Three other top executives have since left the firm, as reported by the New York Post. Chief Operating Officer Mike Kramer, Chief Talent Officer Daniel Walker, and Chief Creative Officer Mike Fisher – all Johnson hires – are gone. We wouldn't be surprised to see more high-level employees jump ship... or get pushed.
The company is facing major headwinds – a dying brand, plunging sales, fewer customers, etc. But instead of focusing on fixing these, likely fatal, issues, JCP will now have to focus on executive turnover.
We liken the situation to the one facing Hewlett-Packard, the troubled personal-computer manufacturer. We've long been bearish on HP. The company is loaded with debt. It's the No. 1 player in a declining market (a rank it won back from Lenovo at the end of 2012). And like JCP, it shuffled through top executives while attempting to fix its core problems.
Here's what we wrote in the October 11, 2012 Digest...
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HP has $29.7 billion of long- and short-term debt on its balance sheet and total liabilities of around $85.5 billion. It has so much debt because the company has made horrible acquisitions over the years (starting with the desktop-computer brand Compaq a decade ago and, more recently, the mobile-device-maker Palm). Hewlett-Packard borrowed tons of money to overpay for these companies. Now, it's left with garbage.
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The company's single-largest asset is its $36.8 billion in goodwill. Goodwill is the premium over book value a company pays for an acquisition... HP conceivably overpaid for these acquisitions by $36.8 billion.
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In addition to tons of debt and poor acquisitions, HP has gone through three CEOs in two years. Starting in 2010, longtime CEO Mark Hurd left following a sex scandal. Leo Apotheker replaced him. He was fired before his one-year anniversary last September. Now, former eBay CEO Meg Whitman holds the position. At a time when HP should have been developing strategies to regain market share and combat a falling market for PCs, it instead had to focus on shuffling executives.
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HP also faces competition from Asia. Today, news came out that Lenovo bested HP to become the No. 1 PC maker for the first time in its history, according to research firm Gartner.
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China-based Lenovo had a 15.7% share of global shipments in the third quarter, compared to 15.5% for HP.
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HP stock is down as much as 7.7% today after the latest numbers for the global PC market came out. They were ugly. According to market research firm IDC, global PC shipments fell 14% in the first quarter to 76.3 million. That's the fourth consecutive quarterly decline and the biggest since records began in 1994. IDC was expecting a 7.7% decline. HP's shipments fell 23% in the quarter.
Big technology stocks fell across the board after a two-day rally... Microsoft was down 5%. Intel dropped 2%.
Steve Sjuggerud updated DailyWealth readers recently on his bullish investment thesis on Japan. He also told readers where he sees the next government-fueled equity rally...
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As I've written many times in the last few months, Japan's new leader Shinzo Abe is doing everything in his power to spark an asset bubble. He is taking Japan's monetary policy to extremes that have never been attempted before.
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So far, his crazy schemes are working! Japanese stocks have soared 40% since mid-November, and surveys show the people of Japan now believe that prices (inflation) will rise again.
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So as investors, we have to ask... Who's next? What country will be the next to follow Japan's lead?
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You might be surprised to hear it... but I think the next country to follow Japan's lead is Russia...
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Billionaire hedge-fund manager Daniel Loeb, founder of Third Point, recently released his letter to investors. Loeb, like Steve, was long Japanese equities and short the Japanese yen.
Loeb also went long nutraceutical company Herbalife after fellow hedge-fund manager Bill Ackman accused the company of being a Ponzi scheme.
From Loeb's letter...
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The "Abe-nomics" catalysts have played out essentially as we anticipated, and his approach has been met with unusual public support from the Japanese. Our optimism was reinforced by the appointment of Haruhiko Kuroda as the Governor of the [Bank of Japan (BOJ)] on February 27.
By analyzing Governor Kuroda's speeches and papers over the past two decades, we recognized him as a proponent of radical change, structural reform, and "dovish" monetary policy. Another important catalyst was the (grumbling) acquiescence by Western powers throughout Q1 as Japan began asserting its case for devaluing its currency.
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Despite massive market speculation and an already significant move in the Yen, potential [quantitative easing] measures were simply speculative until last week's first Kuroda-led BOJ meeting. We increased our position ahead of the meeting, rejecting the market consensus that the upside was already baked into any policy moves that might be announced.
As we had hoped, the Governors managed to exceed even the highest of expectations with their initial actions, ticking all of the boxes we anticipated and adding others. The steps amounted to a complete reboot of the Japanese monetary experiment. The impact of this bold plan should be far-reaching, not only for Japanese companies but also for Japan's trading partners.
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Loeb is still bullish on Japanese equities. So are we...
New 52-week highs (as of 4/10/13): ProShares Ultra Nasdaq Biotechnology Fund (BIB), Berkshire Hathaway (BRK), Wisdom Tree Japan Hedged Equity Fund (DXJ), Fidelity Select Medical Equipment & Systems Portfolio (FSMEX), Cambria Global Tactical Fund (GTAA), Hartford Financial Services (HIG), iShares Dow Jones U.S. Insurance Index Fund (IAK), iShares Nasdaq Biotech Index Fund (IBB), SPDR International Health Care Fund (IRY), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), W.R. Berkley (WRB), SPDR Utilities Sector Fund (XLU), V.F. Corp. (VFC), Anheuser-Busch InBev (BUD), Coca-Cola (KO), Pepsico (PEP), Abbott Laboratories (ABT), Eli Lilly (LLY), Prestige Brands (PBH), ADP (ADP), 3M (MMM), Calpine (CPN), Dominion Resources (D), American Financial Group (AFG), Chubb (CB), Navigators Group (NAVG), Blackstone Group (BX), Kohlberg Kravis Roberts (KKR), DCP Midstream (DPM), Procter & Gamble (PG), CVS Caremark (CVS), GenMark Diagnostics (GNMK), and Philip Morris (PM).
In today's mailbag, a retail insider speaks up about J.C. Penney's decline. Send your feedback to feedback@stansberryresearch.com.
"As always, great information. Thank you for sharing the information you would want to have, if our roles were reversed. You have gone out of your way over the past 6 or so years of my Alliance Membership to educate me, and while I have not always agreed with all the information, I have always appreciated it, and it certainly made me think and (re)evaluate my positions.
"I have grown more and more concerned about our U.S. Government, its abuse of power, over the years, and not just due to your research but my own experiences with the government. Your Digest Premium article [on the government's pursuit of hedge fund SAC] today articulates so well what is wrong with our Government today, on both sides of the aisle!
"While I certainly understand the rationale behind your need to charge for subscriptions (by the way, continue to charge me my renewal fee, I want to keep you in business!), this information is something that you should disseminate to as many people as possible, as quickly as possible, as it so clearly articulates the issues we face as citizens. While this is just one small example, it is serial in the way our U.S. Government operates." – Paid-up subscriber Justin Fowler
"Comments on the 4/9/13 Digest regarding JCP: As a former mass market retail apparel buyer, I believe that the worst mistake retailers can make is to become ashamed of their customers. Even Walmart flirted with the 'upscale' strategy.
"I once had a job interview with AJ Wright, a former division of off-price retailer, The TJX Companies. When asked by my interviewer to describe some of my successful merchandise strategies, I spoke of a classification of off-price basics (branded, no less) that provided millions of units of annual sales with high profit margin and fast inventory turnover. My response from the interviewer was, 'We don't care if we can sell a million units. We don't WANT that business.' AJ Wright is now out of business.
"I also wanted to comment on the DailyWealth Premium article 'How to get a raise at work.' Throughout my career, I have always adopted the work ethic standards described by Mark Ford. I would, however, offer one caveat…
"No matter how quietly or modestly you go about exceeding expectations, you may be greatly appreciated by upper management but you will almost certainly be resented by your peers. Teamwork no longer means cooperatively pulling your own weight to achieve and surpass company numbers and goals. Mutually assured mediocrity is a primary goal of HR departments. In another of my infamous job interviews, the very first words out of the mouth of my interviewer were 'We're not looking for superstars!'
"Even though you offer upscale services, thanks for not being ashamed of your basic newsletter subscribers!" – Paid-up subscriber LM
Regards,
Do not make this trade unless you're a professional investor…