Mumbai's elevated sidewalks
The streets of Mumbai, India, are so congested, you can't walk on them. So the city is going to spend $300 million to build 50 elevated steel walkways to allow pedestrians to get where they're going. Mumbai has nearly 18 million people and its sidewalks are crowded with street vendors, some of whom have been selling their wares on the same spot for 20 years or more, according to the Wall Street Journal.
I hear the word "infrastructure" thrown around a lot, especially when investors talk about China and India. But I rarely hear anyone tell me what it really means in simple terms that anyone can understand.
A city of 18 million without enough sidewalk space... that I understand.
Mumbai's space problem reminds me of Julian Simon, economist and author of The Ultimate Resource II. The ultimate resource Simon refers to is human beings. Peak Oil proponents and other environmental alarmists don't get that with every new mouth to feed comes a new brain that thinks. Though there can certainly be short-term shortages of various goods and services – like walking space – over the long term, the rule for humanity has been abundance.
Think about New York City. Today's population (19 million) is roughly similar to Mumbai's. But 150 years ago, the population of pre-Civil War New York wasn't near its current size, and the city would be hardly recognizable compared with today's metro area.
Given Mumbai is starting off with enormous population resources, imagine what 150 years of progress will look like there. New York to the 10th power? It boggles the mind.
This potential for huge growth excites investors more than just about anything else. It's the reason Jim Rogers remains so bullish on China, despite his admission that property markets there are overheated. I'm heading over to Chennai, India, in early March. Maybe I'll have a good sidewalk story to tell when I get back.
It's not just Asian countries like India and China that have investors excited. Investors the world over are excited about growth prospects these days... a little too excited. The folks at Bespoke Investment Group do some interesting research. This time, they've made a chart showing the cross section of price-to-earnings ratios of major stock indexes with GDP growth for several different countries.
The metric is called the Price to Earnings Growth, or PEG ratio. A PEG ratio of less than one is said to be cheap. India's PEG, at 3.27, is the cheapest on the list. The UK, at a PEG of more than 48, is the most expensive. Japan, Australia, and Spain all have negative PEG ratios. (In this case, negative isn't necessarily cheaper than a positive 1 or 2 PEG ratio. It merely reflects a country in such bad shape it has no stock market earnings or GDP growth.)
As expected, Goldman Sachs reported huge earnings in the fourth quarter, making 2009 a record year for the bank. Goldman earned $4.95 billion compared to a $2.12 billion loss for the same period in 2008. For the full year, net income was $13.4 billion – more than five times last year's earnings – and eclipsing the record earnings of $11.6 billion in 2007.
Per usual, the largest chunk of Goldman's revenues – around 40% – came from its fixed-income division (which includes the bank's infamous proprietary trading desk). Investment banking revenues increased more than 82% to $1.64 billion. Revenue from advisory services for mergers and acquisitions doubled. As with all other banks this quarter, fees for equity and debt offerings soared – up 72% and 60%, respectively.
To quell outrage, Goldman cut its compensation to negative $519 million in the fourth quarter from $5.35 billion in the third quarter. The bank did this by subtracting $519 million from its existing compensation pool. Goldman will use that money to fund one of its philanthropies, Goldman Sachs Gives.
Despite the charitable gesture, Goldman's full-year compensation is still $16.2 billion, up 48% from 2008, but below 2007's record $20.2 billion. However, the bank's compensation-to-revenue percentage is the smallest since 1999 at 35.8%... still enough for each employee to earn an average $498,000.
The government giveth and the government taketh away. Incessant money printing by the Federal Reserve has created a prime environment for bank profits, but the government can't have banks making too much money. Enter Obama...
The president is expected to publicly endorse measures pushed by former Fed Chairman Paul Volcker, which would place restrictions on proprietary trading for commercial banks. In essence, the measure would prevent banks from using customer deposits to fund "speculative" proprietary trading.
According to the Wall Street Journal:
The White House's proposal, one aide said, wouldn't resurrect the exact limits put in place by the Depression-era Glass Steagall Act, which essentially walled off commercial banks from investment banks and was repealed in 1999. Instead, the White House proposal would seek to return the "spirit of Glass Steagall," meant to limit large banks from becoming too big and complex that create enormous risk.
Komrade Obama's Atlas Shrugged-esque "Financial Crisis Responsibility Fee" will also hamper banks' earnings potential. The proposed measure would levy a fee of 15 basis points on firms' qualifying liabilities – basically everything but deposits.
The tax will only apply to financial instiutions with assets of more than $50 billion and that directly or indirectly received TARP money. Small banks and financial firms are excluded. Fannie Mae and Freddie Mac (the largest recipients of TARP funds) and Chrysler and GM, two other large TARP recipients, are also excluded from the tax. No surprise there, since the government is the majority owner of those firms.
Companies subject to the tax have already repaid their TARP loans, with generous interest. The Financial Crisis Responsibility Fee would stay in place until all TARP losses have been recouped (an estimated $90 billion in 10 years).
Even Warren Buffett, a man who seems to be in love with taxes and reasons to raise them, is against this ridiculous new fee. He said in a recent CNBC interview:
The government's made a lot of money off Wells. They've made a lot of money off Goldman. They've made a lot of money off JP Morgan. And to say that they should be paying for the fact that the government lost a lot or may lose a lot of money in Freddie and Fannie and perhaps with the auto companies, it just doesn't make any sense to me.
Tomorrow will be your first opportunity to sign up for our newest advisory, Penny Stock Specialist. I can't share too many details, but editor Frank Curzio is revealing the name of his favorite penny stock. This small firm just landed a huge contract with one of the world's leading technology firms... But nobody knows about it. One of our inside contacts recently told us the news.
You won't want to miss this recommendation... Frank expects the stock to increase more than 200% in the next year. And if history is indication (we've studied the price action of several small companies who have partnered with the large firm in question), you'll make much more.
We will be offering Digest readers a discount on Frank's new service, but only for a limited time. More details tomorrow.
Next Tuesday, we're airing our long-awaited conference call discussing Matt Badiali's recent oil and gas discovery. We've gathered seven investment professionals (including a company insider and one of the most outspoken short sellers of this company's stock) to discuss every aspect of what could likely be the largest oil and gas discovery of our lifetimes. If this trade plays out as Matt expects, readers will make 1,000% returns. To sign up for the conference call, click here...
(Note: If you're a subscriber to Matt's S&A Resource Report, check your inbox for a special deal to access the call.)
New highs: Burlington Northern Santa Fe (BNI), Keyera Facilities (KEY-UN.TO), Icahn Enterprises (IEP), Latin American Export Bank (BLX), Prospect Capital (PSEC).
In the mailbag... gold-coin scams abound. Whether its stocks or coins, please always research what you buy before parting with your cash. Send your questions to feedback@stansberryresearch.com.
"Watch out for dealers located in Texas who sell coins, particularly commemorative gold coins like Olympic coins. The coins are legitimate and graded by PGCS – BUT they are priced way over market. The coins are sold with instructions to hold them for at least 5 years. Then when you sell through the dealer who sold you the coins, they treat the sale as a refund and you get your original investment back.
That dealer then sells the coins to some other unsuspecting person at a profit. So they use your money to store the coins while the market price of gold increases and then resell them at a profit, which they keep. If you try to sell your coins through some other dealer, you most likely will find that the bid is a fraction of what you originally paid for the coins.
"If this has happened to you, contact a lawyer in Texas and sue the dealer under the Deceptive Trade Practices Act. There are several dealers who are connected with the same scam. The phone number for a group who can refer you to an attorney is 713-237-9429... I'm not providing my name because I am a victim of this scam and will be taking legal action in the near future and in case the dealer subscribes to your publication I don't want them to know my intentions." – Anonymous
Ferris comment: I'm sorry to hear about this. But knowing what you're doing in the first place is better than going in blind, getting screwed, and then calling a lawyer.
"Regarding The Digest response about how to verify that your gold coins are what they are supposed to be, a part of the response was: 'the only way to verify their authenticity is to have them graded.' That is probably true for collectible coins. However, I don't think that's necessary for bullion coins. If you are particularly inclined, you can go to the extent of using Archimedes Principle with measured volumes of water and knowing the specific gravity or density of gold.
"Or if you are a little more lazy... err... efficient, from the Internet you can easily obtain the weight of the particular coin (they provide you with either the grams or the troy ounces; NOT ounces, there is a difference), and they give you the diameter and thickness of the various coins (eagles, maples, krugerrands, pesos, etc.). You can make your measurements with a metric ruler that you buy for your grade school kid (and with me, a pair of glasses), and you can buy an appropriate scale on Amazon for under $100. If your weight and dimensions are correct, then your coin should be legitimately gold (meaning that if you go through the trouble, your density should come close to that of gold). Please correct me if I'm wrong.
"Some gold bullion coins have a small amount of other metals in them for purposes of durability, so the density could be a little off.
"What troubles me is how to determine if the coin you have has tungsten in it. Tungsten has almost the exact same specific gravity/density as gold. Typically, a government would have to be cheating (imagine that!) if they put tungsten in a coin... which would be a really big deal worldwide, so I think the odds of that are small. Tungsten is very brittle (twice as brittle as steel and over 5 times more brittle than gold); but I don't know how that helps a guy in a home. A chemical analysis could be done with a kit, but what if the coin is gold coated with a tungsten interior?
"I'M NO EXPERT, but let's put it this way: it is hardly worth the effort to coat a tunsten bullion coin or a 1 oz ingot with gold. However, when you start looking at 5-10-100 oz bars, you could have a real problem, especially with tungsten at about a buck an ounce. If anybody has some input/suggestions about this tungsten issue, it would be appreciated (just appreciation... no coins!)." – Paid-up subscriber Matt
Ferris comment: Maybe I'm naïve, but I never worry about my Krugerrands containing tungsten, though it wouldn't be the first time a government degraded its coins. Maybe a science whiz out there can suggest how to proceed.
Regards,
Dan Ferris & Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
January 21, 2010Mumbai's elevated sidewalks... Is the whole world overpriced?... Goldman: profits and paychecks... Glass Steagall redux... A tax even Buffett hates... We're finally selling Penny Stock Specialist... Badiali on the biggest oil discovery of our lives... Texas coin debacle...