Jim Rogers hit the media circuit this morning, telling CNBC the U.S. government should let AIG go bankrupt.
The insurer recently announced a $61 billion fourth-quarter loss – the largest ever for a U.S. company – and received an additional $30 billion in government funds (it already received $150 billion). Rogers argues "AIG has trillions of dollars of obligations, let them fail, let the courts sort it out and start over. Otherwise we'll never start over."
Rogers pointed to Japan's "lost decade," which was caused by trying to bail out the banks... "The idea that you have too much debt, too much borrowing, and too much consumption and you're going to solve that problem with more debt, more consumption, and more borrowing? These people are nuts."
If the government keeps the bad assets on a financial company's balance sheet and merely bolsters those assets with bailout money, the company can't focus on the future. It focuses efforts on minimizing losses to the existing loans instead of seeking more dependable borrowers who can drive the business forward.
Rogers also argues power is moving away from "money shifters" to people who produce real goods. He advocates becoming a farmer. "We're still going to eat, probably; we're still going to wear clothes, probably. Farmers cannot get loans for fertilizers right now. So the supplies of everything are going to continue to be under pressure," Rogers said.
He is the director of two funds that are buying farmland in Brazil and Canada. The funds are clearing the land, fertilizing it, irrigating it, and hiring farmers. They'll consider selling the land in the future.
With bank capital getting scarcer and scarcer, the biggest banks are cutting dividends. Of the 10 biggest banks, only two haven't cut their dividends: Wells Fargo and U.S. Bancorp. It's a good bet they both reduce payouts to preserve capital before the year is out.
My Stansberry colleagues and I looked long and hard for the good underwriters in the mortgage and banking space. There really weren't any. That's what happens in a central bank/fiat money system. Businessmen and entrepreneurs occasionally find it extraordinarily difficult to make plans. Capital allocation becomes difficult to impossible. This bubble ate everything in its path, and its path covered everything.
I spend more and more money at the grocery store. My utility bills, too, never seem to go down, only up. Car repairs are more expensive than ever. Carpet cleaning costs more than it did last year. Plumbers, gardeners, window washers... everybody wants more money now.
So if everything costs more, why are corporate earnings and stock prices falling through the floor? Probably to discount the enormous economic destruction now being planned and perpetrated by Obama and his gang of clueless propeller-heads.
This morning, SocGen global-equity analyst James Montier quoted the following from a recent report by Bridgewater Associates titled, "The Performance of Individual Stocks During the Great Depression."
The best 20 performing large companies sailed through the depression relatively unscathed. Their earnings were roughly flat from the peak in 1929 until the bottom in 1933. On the other hand, the earnings of the worst 20 performing large companies fell so much that the losses were nearly as big as the prior profits. Despite this radical difference in earnings performance, the prices of the best 20 and worst 20 earning companies fell by similar amounts, -80% for the best and -96% for the worst.
In other words, it did absolutely zero good to know which were the 20 best-performing businesses among publicly traded companies. Either way, you lost most of the money you put into stocks. If this is the Greater Depression, as Doug Casey calls it, stocks are not the ticket.
Aside from the Great Depression scenario, Montier wrote about two other possibilities – one based on the experience of Japan from 1990 to the present, during which time value investing beat the market by 7% per year. The overall Japanese equity market from 1990 returned about -4% a year. But if you bought the cheapest Japanese stocks by price to book value and held them, you made 3% per year. If you also shorted the most expensive stocks, you made 12% per year.
Sounds like a plan: Buy quality value and short overpriced crap.
The third scenario Montier described is that the government's massive inflation succeeds, sending stocks higher. Buying the cheapest stocks works best there, too.
It's important to remember the Great Depression was no accident. It was caused by heavy government intervention in the economy, featuring large tax increases and price supports. Obama is raising taxes everywhere he can, lowering deductions on everything from charitable contributions to mortgage payments, and the protectionist clamor in the steel industry has recently become deafening. Look out below...
From here on out, your mistakes will be punished even more ferociously (trust me on this one). The bar for establishing value and safety will go higher. On average, equity buyers will make more mistakes, and make less on their successes. It's the opposite of the bubble years, when most people made money and mistakes weren't always punished so badly.
Yesterday, we mentioned Jeff Matthews, who noticed Berkshire Hathaway's equity portfolio is selling for right around its historical cost. If you think that means Buffett hasn't added value as a stock picker, be careful. Don't forget about the substantial dividends Berkshire earns. Coca-Cola, for example, just raised its dividend and now pays Berkshire Hathaway about $328 million a year in cash ($1.64/share times 200 million shares).
Also remember, Buffett has sold many stocks in the past, sometimes at enormous profits. He put $500 million into PetroChina and sold it for $4 billion. Buffett has "round-tripped" his current holdings, but over time, he's created enormous value...
Berkshire is in the business of growing its net worth, which it has achieved at a rate of 20.3% over a period of 44 years (as of December 31), a stellar performance. Buffett has created enormous value by both investing in securities and by acquiring controlling stakes in 70+ businesses, which continue to produce large amounts of cash flow.
Lately, Buffett has sold stocks and bought large fixed-income deals. He invested $14.5 billion on fixed-income securities issued by GE, Goldman, and Wrigley's, all at high current yields, and hundreds of millions more on bonds of Harley-Davidson, Tiffany's, and Sealed Air. He did three insurance deals last year, which he estimates will produce $1.5 billion in pretax income (almost $1,000 per A share), plus a chance fo
r capital gains.
Considering the $50 billion of new investments Buffett has bought recently, and that he insists on getting at least 10% a year, it appears Buffett may have brought in some $5 billion, over $3,000 per A share, of new pretax earnings for Berkshire Hathaway over the past year. The fixed-income earnings won't last forever. But the odds of Buffett replacing them are not bad, considering Berkshire's financial strength versus the financial industry's ongoing solvency crisis.
Last week, Jeff Clark called the exact start of the short-term decline in gold (gold has fallen for seven consecutive days). And today, one of Jeff's favorite oil indicators is flashing "BUY." Jeff told his S&A Short Report readers:
We probably won't have too many opportunities to profit buying stocks this year. So we need to take advantage of favorable risk/reward setups on the long side. You won't find too many setups that look better than the one we have right now in the oil sector.
As you can see from the below chart of Jeff's indicator, oil is setting up for a huge rally.
Jeff recommended an option play that could make readers hundreds of percent when oil rallies. To learn more about the S&A Short Report, click here...
Last December, at the annual Alliance meeting in Hong Kong, I discussed a scenario in which it was not out of the question for the S&P 500 to bottom out somewhere between 343 and 490. I showed the audience that the average price of the S&P 500 from 1974 through 1984 – 11 years! – was 9.5 times earnings.
That level is another 21% straight down, according to Mr. Irrational Exuberance, Professor Robert Shiller. Shiller says the index is currently at 12 times earnings. That's lower than the historical average of around 16, but it makes you wonder, how low can it go? At market bottoms in the '20s, '30s, and '80s, the S&P traded between five and eight times earnings. That's another 35% to 55% from today's prices.
How do you protect yourself from this potential fall? My colleagues would tell you trailing stops will help a lot. Make sure you own some gold, too. Keep lots of cash on hand, deploy it slowly and carefully, and buy only when you think you've got a really safe, great idea. Finally, you should learn to sell short stocks like this...
We wrote it, did you short it?
In the next three years, MGM must manage debt maturities totaling almost $3 billion. Additionally, its $7 billion credit facility matures in 2011. And depending on sales (which aren't good), it must come up with perhaps another $2 billion to complete City Center. It currently has about $1.5 billion in cash. It barely breaks even on its operations, thanks to its crushing interest expenses: $150 million per quarter.
I believe MGM will tumble into bankruptcy much sooner than anyone expects. – Porter Stansberry, December 18, 2008, Put Strategy Report
Today, the Las Vegas Sun ran a story outlining how dire MGM's situation truly is... months after Porter picked up on the trend. In addition to the billions of dollars in debt already coming due, MGM pulled the last $842 million from its $4.5 billion revolving credit line because of the turbulent credit markets and "uncertain state of the global economy."
MGM stock hit an all-time low of $2.60 today, down 96% from last year. Credit-rating agencies fear the company is running out of options to obtain money and will struggle to finish its $9 billion City Center project, which is slated for completion at the end of this year... And these days, Las Vegas casino revenues are in the toilet.
"It's unfortunate that the company has so many near-term maturities at a time when earnings are so weak and the credit markets have seized up," said Peggy Holloway, vice president and senior credit officer of Moody's. Standard & Poor's and Fitch Ratings expect MGM to default on its bank loans this year.
New high: our short on American Campus Communities (ACC).
In the mailbag: Give our few defenders something to work on. Send your unfounded attacks here: feedback@stansberryresearch.com.
"In defense of Stansberry and Associates: I was invested in Bank of America, then heeded your advice to avoid financial stocks. Took a 40% loss on BOA when I dumped it, but that is better than a 90% loss. Thanks for the info." – Paid-up subscriber Scott
"I am just an old coger from Mississippi who is certainly no guru or expert stock picker but lately my picks have done better than all the high priced advice I have received. I really believe that we will see the Dow below 5000 and maybe testing 3000. When I first got into trading the Dow was 2000 and I would never consider buying a stock whose PE was over 4. I made money and so did the companies I bought, but CEO's didn't get $5M bonuses, ball players didn't sign contracts for millions per year, and oil was $12.00/barrel. At that time many people believed that 1 ounce of gold was worth one barrel of oil.
"I am looking forward to the time the gurus touting the idea that gold will soon be $5,000 or more per ounce sell what, if any, they bought. If gold is worth $5,000/ounce bread will be $10-$15, milk will be $25-$40/gallon, and a new car will cost about $250,000-$350,000, and best of all we will not need to buy stocks because we can make 25-30% interest on our CD's.
"I got out of the market when the Dow exceeded 7000. Woe is me, I missed all those big gains, especially the taxable ones. But a smart man stayed and made those gains, paid his taxes, sold his $7,000 house and bought a $1,000,000 home, and two Mercedes and became CEO of a bank, and experienced the 'good life.' O, by the way he declared bankruptcy last month. But don't feel bad for him because he has a box full of beautiful stock certificates from companies which don't seem to be listed on any exchange anymore to leave to his grandkids." – Anonymous
Regards,
Dan Ferris
Medford, Oregon
March 3, 2009