OBAMA! is at it again... General Motors is scheduled to declare bankruptcy next Monday. (This should come as no surprise to readers of these pages. We were the first research group to pronounce GM's bankruptcy as inevitable, beginning in early 2007.) There are two legitimate stakeholders: the union, whose high wages and work rules have hamstrung the company for the last 40 years; and the bondholders, whose $27 billion in loans kept the company afloat for the last 15 years. Ironically, the union is owed $20 billion, thanks to contract negotiations in 2007.
Given these two claimants and the amounts they're owed, it would seem reasonable to give them both roughly equal stakes in the restructured company. But not to OBAMA!...
Apparently, "spreading the wealth around" applies with special rigor to creditors of General Motors. They've been offered 10% of the new company. The UAW will get almost 17.5%, plus warrants for another 2.5%. The only logic to such apportionment is political, not financial. Fearing a lawsuit – which they'd lose – the Feds offered bondholders warrants on an additional 15% of the new company, potentially bringing their stake to 25%. My bet is those warrants won't ever be worth a penny. While the union agreed to give up reimbursement on Viagra and Cialis for retirees (I'm not kidding), it did not agree to any further reduction of wages, health care, or pensions for current employees...
That means we should be publishing letters from the chairman of GM again within a few months. But at least the next bankruptcy will finally wipe out the people who most deserve it.
You might recall our skepticism a few years ago about the importance of so-called sovereign-wealth funds. The media was apoplectic that foreign governments would end up owning the crowning achievements of western capitalism: Citigroup, Merrill Lynch, and Bear Stearns. We said there are no worse investors than governments...
These kinds of deals are admittedly wonderful for sovereign wealth funds, which are now seen as paragons of investing. But... we wonder... how would you like to be the largest investor in a bank that's made such woeful capital allocation decisions and stands ready to dilute its shareholders at any moment? We suspect, much like a man who promises to marry his mistress, UBS may find itself unable to be any more faithful to its new shareholders than it has been to its last.
And while we have no doubt that sovereign wealth funds will be great for Wall Street, we wonder how well they will do for their ultimate owners – the citizens of Singapore. It has long been our experience that the farther a dollar travels from the pocket of the man who earned it, the more likely that dollar will be lost, stolen, or bled dry by fees. The idea of a sovereign wealth fund is an investment banker's dream: These are dollars won through trade, deposited into central banks (in exchange for local currency), and left for the government to manage. This isn't merely "other people's money." This is money that never belonged to anyone in the first place. This is money that ought to disappear into the endless hole of human perfidy. We bet it does... and faster than most people expect. – The Digest, December 10, 2007
Singapore reported today its sovereign-wealth fund lost $40 billion in the last six months, led by losses in Bank of America.
Hunt has done it again. Longtime subscribers will remember the legendary stretch of trades Brian Hunt made coming out of the last recession in 2003-2004 in his first trading publication, Microcap Moonshots. For example, his Taser International pick made more than 150% in less than a year. His picks focused on small-cap stocks – companies with market caps of less than $250 million.
Hunt, now our editor in chief, has spent more than a decade figuring out how to optimize trades in these tiny stocks. His strategy is pretty simple: He only trades them when they're going up by leaps and bounds, which is about once every 10 years. It turns out, small-cap stocks always produce their best rallies following recessions – with hundreds of stocks going up 500% or more.
They are starting to soar again, so Hunt has come "out of retirement" to show us his best ideas. He's working with Tom Dyson on a new trading service, Penny Trends. We've been testing the service in "beta mode" with our S&A Alliance readers. So far, the results are spectacular. Dyson and Hunt have six penny stocks in their portfolio, and so far, every one is up. The lowest return is 15% in less than three weeks. The highest return is more than 120% in three months.
If history is any guide, these guys will recommend more than a dozen triple-digit winners over the next 12-18 months. Learn more here. (By the way, we're currently reserving subscriptions for our existing readers. But we're going to open the doors to the public on June 16. Given Hunt's track record, I know we'll sell out almost instantly.)
Bruce Berkowitz, manager of True Wealth pick Fairholme Fund (FAIRX), spoke with Bloomberg while attending the Morningstar conference this week. He's buying stocks in the "recession proof" health care and defense sectors. In particular, he likes Pfizer (PFE), WellPoint (WLP), and Boeing (BA). Berkowitz's analysis is simple... Regarding health care, he says, "We're all getting older... The baby boomers are retiring." And defense companies make up the defense system of our country... and "What's more important than the health and safety of our families?"
In addition to close ties with the government, all of his picks produce tons of free cash flow. Berkowitz is known for performing stress tests on his potential investments, where he tries to "kill" the company. Apparently, he doesn't think OBAMA! and his cronies are lethal or their reforms will harm either industry.
But as we noted yesterday, Jim Chanos disagrees and has sold short both health care and defense stocks. He doesn't believe OBAMA! will let these historically high-margin businesses continue with such great profitability. We're not sure which fund manager will come out on top, but Berkowitz is supremely confident in his stock picking. As Steve Sjuggerud noted in the May 2009 issue of True Wealth, Berkowitz said, "I am in the process of putting 100% of my liquid net worth into the fund. I mean, I can't make it any clearer than that."
A couple weeks ago, I told the readers of my Inside Strategist letter to buy a tiny tech company out in California. For the past few years, it has been quietly monopolizing one of the most pervasive new technologies in the world. A system so ubiquitous, I bet you've used it countless times this week alone... without realizing it. When I recommended the company, many of the highest-level insiders were buying the stock like mad. That's always the trigger I start with when analyzing these stocks. And I knew immediately something was up... But since that time, something truly amazing has happened. I've never seen anything like it. And it's led me to one conclusion: If you buy this stock before the market opens on Tuesday, June 2, I believe you'll make at least 50% by the time it closes. If you're interested, you can read more here.
New high: Seabridge Gold (SA).
In the mailbag... Anytime we mention our abiding skepticism of global warming, we get dozens of expletive-laden notes in reply. What's notable is they all focus on name-calling instead of any of the core scientific issues.
Perhaps that's because manmade global warming only occurs on computer models and cannot withstand any of the standard empirical tests of real science. The fact is, no one knows for certain what causes the centuries-long up and down trends of the world's weather, or even whether or not we're in the midst of a warming or a cooling trend.
Even if you believe long-term measures of "average" global temperature are accurate (and I don't), sunspots seem far more correlated to temperature changes than atmospheric carbon – something Al Gore doesn't mention. Likewise, even if the Earth is heating up because of manmade carbon emissions, no one knows for certain whether or not a hotter planet is a good thing or a bad thing. And finally, even if the world is heating up and it's our fault, the solutions to the problem are likely to be far worse than the disease. That's certainly the history of such Malthusian efforts to control man's impact on the environment. I'm sure the name-calling will continue. Send your contribution here: feedback@stansberryresearch.com.
"God... why can a guy as smart as Porter be such an absolute certified ass about energy, global warming and politics... It's astounding that the two can exist in the same body let alone the same brain... Talk about clowns Porter?... look in a mirror!" – Paid-up subscriber John Landry
Porter comment: The progress of mankind can be measured by the ascent of reason and the liberty required to pursue it. One cannot exist without the other. "Global warming" is both an embrace of irrationality and the tyranny required to sustain it. Likewise, one cannot exist with the other.
"You are one gigantic asshole as a global warming denier. You probably believe in a 10,000 year old earth (flat, of course) and the power of prayer, too. Instead of ridiculing the knowledge base beyond your conception, why not provide us with financial advice that can profit from a warming planet? Perhaps floatation devices for all those in coastal regions. Stick to financial matters where you have some expertise – and which we pay for. You only embarrass yourself when you stray from that narrow field. What, pray tell, are your academic qualifications? Probably a college dropout like Lush Rumbaugh and Karly Rove. That is the usual case when someone tries to belittle a genius like Dr. Chu. I'm guessing that I could spot you 20 points on an IQ test, myself (I'm at 142). And my academic stops include Purdue, Notre Dame, and the U. of Dayton." – Paid-up subscriber Joel W. Arnold
Porter comment: I've never needed a degree or an IQ score to prove my value or ability. No one has ever asked me about either, in my entire life. In any case, nearly everything I was taught about finance and economics at the University of Florida was completely wrong – and laughably naive. Since then, I've worked with lots of very smart people who are just out of college. In my experience, few people are smart enough to recover from what they've been taught. (I've hired two Harvard graduates; had to fire both of them.)
"I assume that, as an S&A Alliance member, I will receive this new publication [Penny Trends] automatically as part of my membership? Could you confirm? Thanks... " – Paid-up subscriber Mike Lyonette
Porter comment: You can count on me to always stand behind any promise I've made. When we sold you a lifetime subscription to all of our newsletters (except Phase 1), we specifically promised to include any future publications. We will live up to this obligation, just as we have for the last six years (since we launched the S&A Alliance).
As an Alliance member, you have already had access to the "beta" issues of Penny Trends. And yes, you will continue to receive Penny Trends at no additional cost. (To learn more about the letter and the system we've developed for it, please read The Penny Trends Trading Primer under the "Special Reports" section on our website.)
You might wonder why we'd choose to do this. After all, we might make more money if we didn't include all of our products (and future products) in the S&A Alliance. Our strategy is to reward our longtime customers by making the S&A Alliance more valuable, year after year. This allows us to increase the price of joining the group. Thus, newer members are financing the additional products. This is the way we would want to be treated, were our roles reversed.
Also, we know that by constantly improving our offering, we make the S&A Alliance a better value. This year, we will raise the price to $10,000, up from the original $2,700 back in 2003. But even with the higher price, the Alliance is a better value today than it has ever been before. And by adding more and better analysts and more and better products, we'll continue improving it year after year. That was our promise from the start. It still stands.
"As a paid-up subscriber, I would never divulge your market research and recommendations with others. Let them pay it for like I did! But I have to confess to sharing some of your juicier rants about the government with some of my like-minded friends. It's good to hear one's own thoughts verified and bolstered by solid facts and sound reasoning. Hope you don't mind." – Paid up subscriber David Skofstad
Porter comment: Not at all. We got a lot of questions regarding my copyright warning in Wednesday's Digest. I didn't mean to imply that you're not allowed to share anything we've written. There is a principle of the law known as "fair use" that provides for the free exchange of ideas. (You can read the code yourself here.)
Basically, the law says you can share excerpts from copyrighted material as long as you don't take too much and as long as your taking isn't commercial in nature. So if you cut and paste a paragraph or two, you're fine. If you're forwarding a complete copy of The Digest each day to your brother-in-law, you might be in trouble. And if you're charging for copies of our newsletters, you're definitely in big trouble. Please understand... we're not interested in fighting with our customers. On the other hand, when people start posting complete copies of our newsletters on the Internet, we have no choice but to get litigious.
"Since I am a retired physician and have spent my professional lifetime avoiding unnecessary contact with lawyers, I am not intimately conversant with copyright law. I understand that copying and forwarding an entire monthly issue or the daily Digest would be clear violations. But is it a violation for me to have a simple discussion of your latest recommendation or market outlook with my son? I greatly respect the hard work you do on our behalf. An obvious retort from you would be to suggest that I buy my son a subscription to PSIA. I am ashamed to admit that even with the help from your services the market downturn has hit us hard. We have cut out all luxuries, reduced charitable giving, and lessened the monetary value of gifts to our loved ones. I have suggested to my son that he subscribe to PSIA, but he has four school-age kids and is struggling himself... So if you would, please provide more specific guidelines for permissible conduct for those of us receiving your wisdom." – Paid up subscribe Don B.
Porter comment: Just to reiterate... we're not interested in fighting with our legitimate subscribers. In fact, we're flattered folks think enough of our ideas to discuss them with friends and family. Sharing quotes or highlights of our work is fine – and a compliment to us. Such sharing is permissible under copyright law and even if it weren't, we wouldn't object.
My comments were intended to remind the few folks out of thousands of readers who have no respect for our copyright and have put complete copies of our work into broad distribution for their own commercial purposes. I will spend whatever it takes to find these people. The prospect doesn't make me happy. But if someone kept mugging you on your way home from work, sooner or later, you'd buy a shotgun and make them sorry. Any help subscribers can offer in this regard is appreciated and will be rewarded.
"I've bought into the idea of position sizing (4% maximum of portfolio). But what happens when your position size increases to 10% of your portfolio thru gains in the underlying investment? Do you sell some to come back in line with the model, or do you ride the gains? Just curious because I'm in that boat right now (which is a nice boat to be in)." – Paid up subscriber Roger C
Porter comment: There are two fundamental principles to successful speculation. One, strictly limit risk. And two, let your winners run. Use position-size limits and stop losses to limit risk, not gains.
Regards,
Porter Stansberry
Baltimore, Maryland
May 29, 2009