Something about star-crossed lovers fires the imagination. Maybe it's all that conflict and sex... sex and violence... in one titillating package. No wonder Hollywood has made so much money from it: Romeo & Juliet, Heathcliff and Cathy, Rhett Butler and Scarlett O'Hara... and yes, Mr. Market and Wall Street. (Placing Wall Street in the feminine role seems a grave disservice to the fairer sex. Advance apologies to our female readers.)
In the late 1990s, Mr. Market and Wall Street were locked in the throes of a glorious, mad passion. Wall Street said Amazon should be $300 a share and Mr. Market made it so, like Spock and Captain Kirk. Wall Street begged for another 20% year, and Mr. Market gift wrapped it in glossy magazine covers, and heralded its arrival with a Greek chorus of ever-louder talking heads.
So far this year, the bloom has rotted right off the rose, with the unhappy pair stomping around, slamming doors, and yelling at each other. Wall Street cries, "You never listen," and Mr. Market replies, "What did you say?"
Mr. Market has pushed Wall Street's lowest-rated stocks up so much, they're leading the market this year. Meanwhile, Mr. Market is crushing Wall Street's highest-rated picks. In December 2009, Wall Street analysts were recommending non-cyclical companies with little dependence on U.S. growth. For example, Coca-Cola had 14 buy recommendations versus one sell. It's down 7.9% this year.
Of course, Mr. Market and Wall Street are less like Romeo & Juliet and more like the Pied Piper of Hamelin. The Pied Piper contracted to rid Hamelin of rats by playing his magic pipe. He rendered the service as agreed. When the town refused to pay, he lured its children away, never to be seen again.
Like rats and children, investors send much wealth chasing after our star-crossed lovers, where it follows the pair into the financial wilderness, never to be seen again.
Wall Street's disdain for "sell" ratings ought to be well known by now. Rating a company a "sell" all but guarantees you will not receive its investment banking business. The desire to avoid career risk pushes analysts to follow the twin Pied Pipers, Mr. Market and Wall Street. If Mr. Market likes a stock, so do they. If all the other Wall Street analysts are bullish on a stock, so are they. It makes sense, too. If 90% of Wall Street analysts covering a stock make a wrong call, your boss is far less likely to fire you. I think it was economist John Kenneth Galbraith who said it's more acceptable to fail conventionally than to succeed unconventionally. He knew all about star-crossed lovers and pied pipers.
While they were bullish on Coke and other big names in December of last year, Wall Street analysts were the most bearish on companies whose earnings fell the most during the recession (in other words, the most hated sectors)... banks, real estate developers, and automakers. Those sectors gained 12% on average this year. Buying hated industries with uncertain futures and an upside catalyst is hard, because it requires you to thumb your nose at Mr. Market and Wall Street. But it's a surefire way to make money in the market. We can hardly blame Wall Street analysts for their behavior (though we can blame no one else). The reward for a correct call against the crowd (a pat on the back) is eclipsed by the punishment for a bad call against the crowd (unemployment).
Our story of Mr. Market and Wall Street isn't just for fun. It hits you in the pocketbook. In fact, you have to be careful about taking advice from anyone who faces career risk for giving unconventional advice. Trouble is... if unconventional advice were popular, it wouldn't be unconventional and it wouldn't work. By definition, most people are going to fall for the sex and violence of star-crossed lovers, the bad advice that leads them astray.
They don't recognize good advice because it can look like bad advice for years at a time. And bad advice can masquerade as genius for longer than you'd believe. It's hard to tell the difference. Jeremy Grantham of Grantham, Mayo, Van Otterloo has some ideas about the kind of advice investors take versus the kind they ought to take but don't.
Grantham says investors tend to fall for "a logical, clear-cut, and simple process," and if they're not very careful, they'll wind up hiring "eloquent and plausible amateurs rather than sometimes incomprehensible experts."
I'd go even further. Clients like to hear sexy, outrageous stories and big promises of fast, large profits. They like to look straight into the rear view mirror of recent history and see an outstanding performance. Clients want to be sold, not educated.
While Wall Street was doling out bad advice, our own Steve Sjuggerud told his True Wealth readers to short the euro in December 2009. He followed that with a recommendation to buy gold. Readers closed out of the euro trade for more than 30% gains. And gold is up double digits. Porter went long natural gas and short hard-drive manufacturers. Those trades are up 50% and 25%, respectively. Tom Dyson recommended a utility company, also up double digits, and recommended a "virtual bank" that made his readers nearly 40% gains.
What was yours truly up to in December 2009, when Steve, Porter, and Tom were making winning recommendations?
Back then, I told Extreme Value readers to hang on to an energy company that had recently spun off from a previous Extreme Value oil and gas recommendation. The spinoff is up 22%. It's poised to explode to the upside, too... Consulting firm IHS Cambridge Energy Research Associates says Canadian oil sands will become the United States' No. 1 source of imported oil this year. The firm also says oil sands imports will roughly equal combined imports from Saudi Arabia and Kuwait.
The company I reported on has over 130 billion barrels of oil sands on its lands. It expects to increase production 400% over the next several years. It pays a regular dividend, which I expect to rise sharply as production increases. Canadian oil sands will likely be funding many investors' retirement, providing potential for 400% in capital gains and rapidly rising income as the years go by. My report on the company is in the December 2009 Extreme Value. For more info on Extreme Value, click here.
Whether it's Porter, Steve, Tom, me, or any S&A editor, Stansberry Research remains totally independent. It is beholden to no one but its readers. It exists solely to give advice that makes profits for you – the individual investor. Wall Street earns most of its money by serving giant corporations and institutional investors who can generate huge volumes of trading and banking business. It doesn't care about the "small fry" customers.
Paulson & Co, the hedge fund founded by billionaire John Paulson, is going long Las Vegas. Paulson recently purchased 40 million shares in MGM Mirage and 4 million shares in Boyd Gaming, becoming one of the largest shareholders in both. Paulson is also converting previously purchased bonds in Harrah's Entertainment for a 9.9% equity stake in the firm. In total, Paulson has $1 billion on the line (about 3% of his total fund).
While casino stocks are up multiples from their March 2009 lows, they are still over 80% down from their 2008 highs...
Paulson & Co wouldn't comment on its Vegas position, but the firm's investment conference last month gives us some idea of Paulson's thought process... "We're looking for a very strong period of corporate earnings growth," Paulson said at the conference. He also urged Americans to buy homes, saying he believes prices will rise this year and next (even though existing home sales unexpectedly fell 2.2% this month). Unlike the Street, Paulson is betting on a sector with crushed earnings, that is highly indebted, and highly dependent on U.S. growth for profits. While we wouldn't put our money alongside him, he'll make a fortune if the U.S. continues its recovery.
Paulson & Co will also make a fortune if our inflation fears come to pass. Paulson has bought gold, big banks, and now highly indebted owners of real property on the Vegas strip. They're all inflation bets on way or another... Gold is an obvious inflation bet, the anti-dollar. Big money-center banks grow in proportion to the number of currency units in the system. When government printing presses send that number higher, big banks' earnings grow. Inflation naturally lightens levered companies' debt burdens, since they're paying back less valuable dollars than they borrowed.
New high: ATAC Resources (ATC.V).
Notes to the professor in today's mailbag. And a possible top for gold? Send us your comments: feedback@stansberryresearch.com.
"Prof. D.B Haley offered his opinion... interesting that he has an opinion to offer. To the Professor: (if in fact he has credentials) Please refrain from drinking your own bath water as it may be as toxic as your lectures! Please begin your navel gazing as soon as you find your bottom, (you know ...the part your legs are attached to), as your rant is also misplaced. You may revisit Plato an his treatis On the REPUBLIC ...You may have heard of this work if your education was received from an institution that continues to teach ethics and manners." – Paid-up subscriber Mac
"I had to chuckle a bit when I read the note from the good Professor as I had just finished a discussion of education with my daughter. Much of the populace equates education and intelligence, however in my experience (my education being BS in Mechanical Engineering and an MBA), there is next to no correlation. As my dear old, gray haired daddy used to say (he only had a BSME from MIT): 'The dumbest bastards in the world have the longest list of letters after their names.' It seems that this theorem is consistent with some of your subscribers as well as most of the members of the White House staff. My dad and I agreed that the first qualification for public office be that one must have earned a real living." – Paid-up subscriber Bill Hamilton
"While I still believe that gold & silver will have large rallies from this point, it's a bit sobering that central banks are adding to their reserves when gold is at/near all-time highs. Given their 'investing' record, one could interpret this as a possible top for gold. After all, when the Bank of England sold its gold near 2000, they picked the very low of the market, starting the bull run through today. Now, with the central banks buying belatedly and paying top price for gold, it could be a sign that they may be the ones stuck without a chair when the gold rally music stops. Just saying, these guys aren't the best at timing this sort of thing." – Paid-up subscriber Mark Glinsky
Ferris comment: Central banks are to gold what pension funds are to stocks and bonds. Always the last to arrive, just before the party ends.
But I also agree gold and silver both have a long way to go. I'm not selling an ounce.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
June 22, 2010