Editor's note: Porter is otherwise engaged in Paris today. He will return to The Digest on Monday.
After nailing its calls on Greece and BP, Moody's returned today with a top-notch follow up... The rating agency downgraded BP three levels to A2 (the lowest investment grade) – the second downgrade this month. Moody's first downgraded BP on June 3 – more than a month after the explosion. Apparently, it took the firm that long to draft a report saying the oil spill will hurt companies operating in the Gulf region. It took Moody's another two weeks to conclude the spill will hurt "free cash flow generation and overall financial profile for a number of years." Moody's also "cautions" that BP's $20 billion damage fund doesn't cap the firms' potential liabilities. Moody's ended the report stating, "Substantial uncertainties remain as to what the costs of the spill will be."
While we don't listen to Moody's opinions, we do listen to Bond King Bill Gross, manager of the world's largest bond fund. And he's buying BP debt. Gross recently purchased $100 million of BP's 5.25 percent notes due in 2013. The debt traded as low as 87 cents on Wednesday, down from a high of 110.8 cents earlier in the year. Gross also bought six- to 12-month Anadarko debt. While we think there's too much uncertainty to buy BP stock right now, the debt will likely turn out to be a great investment. As long as BP doesn't go bankrupt, which we don't think it will, Gross will be repaid at par (100) and collect more than 5% interest for three years.
Former Fed Chairman Alan Greenspan wrote a great op-ed for the Wall Street Journal today comparing the U.S.'s debt problem to that of Greece. Greenspan comments on the U.S.'s surging debt and our inability to stem any spending. But Treasury rates remain low because the U.S. government debt is still perceived as the safest instrument in the world. Greenspan says the low long-term rates are dangerous because they're lulling investors into a calm:
Despite the surge in federal debt to the public during the past 18 months – to $8.6 trillion from $5.5 trillion – inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
Instead of fixing the debt problem, the government continues to print money and Congress continues to grant billions more for initiatives that will please its constituents. Greenspan says the only way to get out of this mess is "politically toxic cuts," which we know the government won't support. He says we need a "tectonic shift" in fiscal policy to fix our situation. In the end, Greenspan concludes long-term rates could remain low for another year, but they can jump unexpectedly... He notes the time between October 1979 and February 1980 when the 10-year yield jumped nearly four percentage points. Coincidentally, gold hit an all-time high of $1,258.38 an ounce today.
In his latest issue of The 12% Letter, Tom Dyson tells readers how to receive a 193% special dividend from a leading biotech company. Companies pay huge special dividends for several reasons. They may have too much cash on the books and simply want to give shareholders a "gift." Other times, companies will load themselves with debt and use that money to pay a special dividend (the new debt discourages private-equity shops and competing firms from attempting a takeover). But the company Tom discovered is paying this massive dividend for another reason...
I can't give away too many details for fear of revealing the stock. But I can tell you the top biotech firms in the world pay this company huge money for its patented technology. And this company is returning as much capital as possible to shareholders before its patents expire. It's an unusual situation... one most investors (outside of some of the world's top hedge-fund managers) don't know exists. Tom estimates the company will pay nearly $11 a share in special dividends before it closes its doors. To sign up for The 12% Letter and receive Tom's latest recommendation (the July issue), click here...
New highs: Atac Resources (ATC.V), Eldorado Gold (EGO), Enzon Pharma (ENZN), Akamai (AKAM), Molina Health Care (MOH).
The religion and Limbaugh mailbag will have to wait until Monday. In the meantime... send us a note to feedback@stansberryresearch.com.
"PLEASE keep your political opinions to yourselves. I don't read your letters for those views. If I want to hear about that I will go to 'Truthout' and other political sites, folks who do not comment on the financial markets. Each biz has its own experitese and should stay with what their readers expect them to know something about." – Paid-up subscriber Colin Offenhartz
Goldsmith comment: Unfortunately, when the government is taking control of a new business sector every month, you've got to comment on it from time to time.
"Steve's recommendation was in his January True Wealth which was published in mid-December. At the time of the recommendation the Euro was close to a 52 week high, not a 52 week low. The position was closed last week for a 42% gain, not 30%." – Paid-up subscriber Bob Tanner
Goldsmith comment: Thanks for correcting our mistakes, Bob. We're happy you made more money than we thought.
Regards,
Sean Goldsmith
Baltimore, Maryland
June 18, 2010