Ferris comment: Porter and Goldsmith are traveling to Nicaragua. I'm on The Digest.
Despite the government's efforts, some of the old stalwarts are fading away... Citigroup was thrown out of the Dow Industrials Index, replaced by its former subsidiary, Travelers. GM was thrown out, too. It's already starting to break up, selling its Hummer unit to a Chinese company. It was poetic that Citigroup managed the Hummer sale for GM, like one old beat-up drunk helping another cross the street.
AIG is fading away, too, having sold off several businesses and real estate properties already. AIG had to lower the asking price for its Taiwan-based Nan Shan Life Insurance unit. It was asking as much as $2.5 billion. Now, it's asking $1.8 billion and starting to get some interest.
With the old giants falling from grace, you have to look forward and figure out who the stalwarts of tomorrow might be... You can find a couple such ideas in the Extreme Value model portfolio (on page 8 of every issue):
· One of Extreme Value's stalwarts of tomorrow is a consumer-products company whose products you probably use. The company is dirt-cheap these days at less than five times free cash flow.
· Another stalwart in waiting is one of the few financial services firms designed to profit from the ongoing credit bust and managed well enough to get the job done.
· Still another is a weird little foreign bank that's been around for a long time, but which most investors have never heard of. It is essentially untouched by the financial crisis and has more capital than any U.S. bank I know of.
· And still another new stalwart is a company most people would have laughed at in March, but now it's up about 70%. It has a fantastic low-cost business model and an credible shot at making investors 20 or 30 times their money in the next several years.
Sometimes you don't need to sweat the details to make money trading just about anything, like in the late 1990s or maybe even the bull-market rise from late 2002 to 2007. But nowadays, you better do your homework before you invest. It's like Third Avenue's Marty Whitman says, "The devil is in the details" when it comes to investing.
Extreme Value provides more detail about its investment ideas than any other letter we publish (except Phase One, which has a totally different focus). To get a look at all of the Extreme Value World Dominating stalwart businesses, click here.
As the 20th anniversary of the Tiananmen Square massacre approaches (June 4), the Chinese government is ramping up its censoring efforts on foreign news media and the Internet. It's getting as bad as it was just before the Beijing Olympics. The Financial Times listed several actions by the Chinese government, like shredding newspapers and blacking out BBC newscasts.
I've avoided Chinese stocks, but I've recommended some companies that do business in China, including Wal-Mart, KEPCO (the Korean electric utility), and POSCO (the Korean steel giant).
Some Korean stocks have gotten cheaper... just like they did the last time Kim Jong-il's nuclear weapons testing made headlines. After the last time, KEPCO doubled and POSCO tripled.
Coca-Cola's not afraid of China. The Chinese government "censored" Coke's attempted $2.4 billion acquisition of Hong Kong-listed China Huiyuan Juice Group earlier this year. But Coke plans to invest $2 billion in China in the next three years – more than it has invested there in the past 30 years combined. The money will be spent on new plants, research & development, and expanded distribution and marketing. Two new Chinese Coke plants go on line this year. According to a story at alibaba.com, China is already Coke's third-largest market globally. Maybe Jim Rogers is right, and we should all learn to speak Mandarin.
The folks over at acrossthecurve.com say the Fed bought $7.5 billion of about $21 billion in Treasuries offered them. Most of the money, $5 billion, was spent on a brand new seven-year note issue – a direct monetization of Treasury debt. Maybe I'm a cynic, but I can't believe the Treasury and the Fed don't work together, with the Fed saying how much debt it'll buy, so the Treasury can issue more. It would be more honest and less costly for taxpayers if they just dropped that amount of new currency from helicopters.
Yesterday, the Wall Street Journal reported stress-tested banks have raised $84 billion of new capital. Moody's points out, "numerous banks would be insolvent" without the government's capital and liquidity programs. Over the last two years, the Federal Reserve has created 12 new ways to lend new money to financial and other corporations.
When I got into this business 11 years ago, the last thing I ever thought I'd do was endorse an options guru. But our own Jeff Clark and I are of one mind lately. He's anticipating a stock market collapse. That makes sense to me, given the huge moves in the S&P 500 and Nasdaq since early March. The S&P 500 is up around 34%, and the Nasdaq is up close to 40%. SocGen analyst James Montier says U.S. stocks are trading at fair value once again. Mr. Market looked in the mirror and saw a 98-pound weakling in March. Now, he's planning to enter the Mr. Universe competition.
If you want to read Jeff Clark's S&A Short Report to find out how he's preparing to profit big when stocks collapse, click here.
Another trader friend of mine, author/trader Ron Coby from Oregon-based trading firm Coby Lamson, says his firm has "gone from net long in stocks and commodities to big time short everything." Ron sold his last long stock positions today, and now he's shorting some commodities and "all kinds of stocks that are high and rolling over." Ron thinks the S&P 500 could get to 1,000 before turning south sharply, but that "it's very high right now." The S&P 500 closed at 944.74 yesterday.
New high: Seabridge Gold (SA).
Let's
hear what you have to say about any financially relevant topic besides gold or inflation. Write us here: feedback@stansberryresearch.com.
"I am afraid that Leland Hosford has a point and I would not write off the deflationary forces quite yet. For a better definition of inflation and its workings have a look at Rob Parenteau's latest Richebacher letter." – Paid-up subscriber Humphry Hamilton
Ferris comment: Since Rob writes a letter about Austrian economies, he quoted the Austrians, who say inflation is an increase in the money supply not backed by savings. After which, he immediately added the point I made yesterday: "Price inflation is merely the symptom of such money creation." He also quotes the famous Austrian economist Ludwig von Mises by saying when people are scared, they can hoard the new currency, muting the effects of inflation, and possibly prolonging a depression.
Von Mises certainly knew more about inflation than I ever will, but he was also working with the 1930s as an example. Deflationary events like bank capital destruction happen. But inflation is not an event. It's how the banking and currency systems operate at all times. The more deflationary the event, the greater the inflationary response.
There's a reason why the U.S. Treasury secretary flies all the way to China to tell the country its dollars are safe – and gets laughed at!
"I want to start buying gold but I'm worried about buying gold that is not pure. Do you have trusted sources you can disclose? Can I purchase from companies via the Internet or should I find a local shop to buy from? Please advise this novice?" – Paid-up subscriber Les Wilmot
Ferris comment: I can only tell you what I do. I buy Kruggerands, the most widely circulated bullion coin in the world. They're 91.67% pure gold and the rest copper. They weigh a little more than one ounce, so you get a full ounce of gold, and the rest copper. The copper makes them harder, helping to resist scratches and dents from handling. You should be able to get them at just about any shop that sells gold coins. For a list of recommended gold-coin dealers, click here.
Regards,
Dan Ferris
Medford, Oregon
June 3, 2009