On November 8, 2007, we published one of the several mock quarterly letters I wrote from the "chairman" of General Motors. In it, I warned:
The simple fact is, we're going bankrupt. It's only a matter of time before our accountants force us to insert "going concern" language into our filings. That means they won't approve our audit unless we admit publicly that we know we're heading for a bankruptcy filing. That won't be a good day to be a shareholder.
At the time, GM was trading in the mid-$30s, which gave the company's stock a market value of roughly $21 billion. Yesterday, GM announced its auditor was (at last) threatening to insert the aforementioned "going concern" language into GM's 2008 annual report, which should be filed with the SEC shortly.
GM's stock fell to $2.38, which values the company at roughly $1.4 billion. And quite honestly, the remaining market cap should be negative.
General Motors claims it needs another $16.6 billion (it's already received $13.4 billion) from the government after announcing a $9.6 billion fourth-quarter loss. The company lost $30.9 billion in 2008 and $86.6 billion over the past four years. Oh... then there are the pension losses: GM said its pension fund went from a $20 billion surplus last year to a $12.4 billion deficit today.
You might think I'm bragging. Maybe I am. When I began writing that bankruptcy was unavoidable for General Motors in January 2007, hundreds of people responded with a level of vitriol I found very surprising. Some people even made comments about how I was raised... and where I ought to live if I didn't love America!
It was shocking to see how many people could be so dedicated to avoiding the blindingly obvious: GM hadn't made enough money to afford its debts, its capital program, and its dividend for 19 out of the last 20 years. At the time I began writing about the company, it had used debt to fund both its dividend and its interest payments every year since at least 2001.
This wasn't a car company anymore. It was a Ponzi scheme, where new investors were paying off old ones. And the sums had become fantastic. I estimated (accurately, as it turned out) GM would require more than $5 billion each year just to pay the interest on its bonds.
Here's the other thing to consider about our GM reporting... If a not-too-bright newsletter editor working by himself off Yahoo Finance and the SEC's database – with no special knowledge of GM's business and no direct knowledge of its finances – could be more than two years ahead of GM's own auditors in warning investors about the fate of the business, isn't something wrong with the auditors? And wasn't there something criminally negligent about GM's senior managers and its board of directors?
To turn our economy around, we need people to invest in America's businesses. To do that requires trust, integrity, and the proper actions of people with fiduciary responsibilities. Among the many problems GM has suffered over the last several years, this one – a deficit of honesty – is perhaps the company's biggest problem. No government bailout will fix it, either. It's liars shoveling money to liars. The whole thing is a travesty and a tragedy.
Speaking of travesties... Nationalization is starting on a major scale. Today, the Treasury agreed to convert as much as $25 billion of Citi preferred shares into common stock as long as private holders agree to do the same. The Treasury would ultimately own around 40% of the bank. This third rescue attempt – Citi received $45 billion last time – could dilute existing shareholders' stake by 74%. Shares fell by as much as 48% on the news.
Vikram Pandit, Citi's CEO, told shareholders in a statement, "This transaction – which requires no additional investment from U.S. taxpayers – does not change Citi's strategy, operations, or governance." There's another huge deficit of honesty right there. And what good is a bank run by a bunch of liars?
Seeing Citi nationalized brings to mind the big nationalization last year – Fannie and Freddie. How do you think that's going? The Treasury is injecting a fresh $15 billion into Fannie Mae – the mortgage giant is drawing it from the $200 billion federal bailout pool – after announcing its sixth straight quarterly loss. Fannie lost $25.2 billion for the quarter, driving its net worth below zero. (You might recall, we predicted this would happen too.) This loss is on top of last quarter's $29 billion mishap... bringing total losses for the year to $58.7 billion.
But wait a minute... How many times did Barney Frank, Hank Paulson, and Ben Bernanke tell the American people last summer – in front of Congress – that Fannie and Freddie were "well-capitalized"? Do you have any idea how quickly the SEC would have sued me if I had written in a report what Frank, Paulson, and Bernanke said before Congress? Welcome to Amerika.
And Fannie expects things to worsen: "We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth." What net worth?
We've previously mentioned the "stress tests" the Treasury is imposing upon U.S. banks to see which are in need of bailout funds and which are beyond repair. It turns out the government will have the banks perform the tests themselves... Regulators will check the results. Banks will check "potential firm-wide losses, including in its loan and securities portfolios, as well as from any off-balance-sheet commitments," according to the Federal Deposit Insurance Corp.
What could possibly go wrong with this scenario? For one, these banks have absolutely no idea what's on their balance sheets – that's become clear as they continue writing down tens of billions of dollars each quarter.
Also, the banks have every reason to make themselves appear healthy. If the tests aren't satisfactory, banks will have to tap into the new Capital Assistance Program. Under the program, banks would have to sell the government new convertible preferred stock that must be converted into common stock within seven years if it isn't bought back. The banks must pay 9% on the preferred. They also have the option to immediately convert the preferred into common stock, which spares them the dividend payment, but dilutes existing common shareholders. Of course, that gives the government even greater ownership in the banks.
Be sure to look for Warren Buffett's letter to shareholders, which comes out tomorrow morning. When it does come out, you'll find it here.
In today's Daily Crux, learn why New Yorkers are walking away from $1 million condo deposits, which airline may begin charging to use the toilet, how a blanket with sleeves became a national phenomenon, and what ridiculous projects states are trying to get into the stimulus plan (they include a $1.25 million sidewalk). Visit The Daily Crux.
Tom Dyson sent us this note today:
Selling covered calls right now is the single best way to earn income. There are two parts to a covered call trade. First you buy the stock then you sell call options against that stock. The shares you buy cover your potential liability to the call option owner, so the premium you receive becomes a simple "one-off payment."
The financial crisis has made these option premiums incredibly valuable. Option premiums today can be four times as high as they were two years ago in the calm markets. The results are astounding. Right now, I'm working on a trade for silver. I calculated the silver ETF is paying covered call investors 76% in annual income...
Tom has written a special report about this situation. For more information, you can click here.
New highs: none.
In the mailbag... We're crooks again. Yes, that's right. Nevermind what's actually in our reports, we should be responsible for what the message board crowd assumes we've written... Send your accusations to: feedback@stansberryresearch.com.
"Classic pump and dump on [this biotech stock]... I was warned by another professional that you guys are classic pump and dumpers... glad I did my own research after receiving your promotions to subscribe to another expensive letter that will give me the name of the company... well I figured it out, and saw it run up and now run down... saved me a fortune, because your promotion was tantalizing. But I've been at this game long enough to recognize a phony promotion. You people have no conscience. Shame on you. It is like stealing. And I understand you have had other run-ins with the SEC on similar pump and dumps. How do you sleep at night?" – Paid-up subscriber Robert Bloch
Porter comment: "Pump and dump," for those who are new to securities-fraud lingo, is a scam where someone buys up lots of low-priced stock and then writes all kinds of nonsense about how great the stock is, sending out fliers, e-mails, newsletters, etc. As soon as the stock begins to move up, the promoter sells, making his profit on the stock. Doing so is usually a crime, and the SEC has sent lots of people to jail for it.
Sometimes, people – like Robert Bloch, here – mistake our newsletter promotions for stock promotions. But there are a few important differences. First, our editors NEVER own shares of the companies they recommend. (Although our employees may buy shares following our recommendations, we don't allow the actual writer of the report to ever own the stock. We have this rule in place to prevent even the slightest appearance of impropriety.) Also, you'll notice stock promotions give away the name of the company, while newsletter promotions don't. To get our advice, first you have to pay for the newsletter.
Now, about the SEC... Yes, it's certainly true the SEC has sued us. But the lawsuit isn't a criminal matter and doesn't involve an allegation of pumping or dumping. Instead, the SEC alleges we misquoted a company official, thus publishing a fraudulent report. We have always denied the allegation, and we continue to fight the SEC in court. (The suit has been ongoing since 2003. I've written about it before.)
Finally, regarding the recent price and volume spike of the stock to which you refer... Yes, the company was the subject of one of our recent research reports. But we are not to blame for the wild price action of the stock. In fact, Rob Fannon had been telling his paying subscribers not to buy the stock. And on February 5, after the first big move in the stock, he sent out this update:
[P]lease note that I do not recommend you buy [this] stock. While positive... results could send shares 200% higher, negative data could send the stock plummeting to $1 per share or less (75% lower from today).
So... If we weren't pushing up the stock price, what happened? My bet is lots of folks read our newsletter promotion and thought they had figured out which stock we were recommending. They thought they could make a quick buck buying the stock before our subscribers got the chance. But the joke was on them, wasn't it? Our paying subscribers knew exactly what our actual position was and how to handle the situation safely.
The next time you want to accuse us of committing a crime, maybe you'll bother to actually read our research first. And maybe the lemmings will stop trying to rip off our subscribers if they get burnt like this once or twice. I hope so.
"Thanks to Jeff for his recent call on Gold and AEM. I was able to enter the trade at $2.70 shortly after the e-mail arrived. Additionally, I exited GLD positions for a reentry at lower prices. I also noticed the AEM position touched $2.65 one day after the original e-mail permitting entry for those who missed the first entry point. Jeff is your own stimulus package!" – Paid-up subscriber David
Porter comment: For every subscriber who cries and moans about how he can't get filled on Jeff's recommendations, we get two e-mails like the one above. By the way, Jeff closed out of the AEM trade over $5 yesterday.
"Jeff Clark is absolutely the best at what he does. I've been a retail investment broker for 22 years, and have tried out many option/trading services over the years, and there is know on who compares to Jeff. I became an Alliance member ~2 years ago – my wife was skeptical until I showed her how much money we made on Jeff's recommendations (and I haven't even gotten to Porter yet!) Keep up the good work!!" – Paid-up subscriber Stu Gardiner
"Dr Eifrig first post is outstanding. He reminds me of you 'just tell it like it is' and 'pass the ammunition' type guy. I admire a guy who does not care about what people think of him. Independent thought is what I admire. This doctor seems to have it. Plus he is one of my colleagues who has retired from the awful waste and extortion of medical doctors by the government. Until people understand saving a life maybe more important than earning a fat bonus check, we as a society are doomed." – Paid-up subscriber Thomas Petersen MD
"While I agree Richard has no idea how the Fed works, unfortunately, your reply fails to educate. I value your research and enjoy reading the digest for education as well as entertainment, but wish as a researcher you would make more use of the opportunity to educate. Too often I come across glib bumper sticker slogan like statements or responses. Richard is wrong but so are you, in my humble opinion, when you say the Fed is creating money at will. The Fed is purchasing debt with real collateral, so it is in effect simply converting assets rather than creating something new out of thin air. This action is reversible, while the spending in OBAMA's! stimulus is literally money out the door that must either be borrowed or printed without collateral other than the promise that future Americans will repay it. Please, correct me if I am wrong." – Paid-up subscriber Erich Hellner
Porter comment: You are wrong. The Fed has openly admitted it is now using what it calls "quantitative easing" to stimulate the economy. "Quantitative easing" is a euphemism for printing money, creating it out of thin air. Specifically, if you look at the Fed's balance sheet one year ago (February 2008) and you look at it today (February 2009), you'll notice the numbers don't add up – they're off by more than a trillion dollars.
A year ago, the grand total of the Fed's assets was $861 billion. Almost all of these assets were held in the form of Treasury obligations ($713 billion). Today, the Fed has assets of $2.1 trillion. It owns roughly $500 billion of Treasury obligations, $550 billion of toxic mortgage securities recently purchased from various sources, and $760 billion of "Maiden Lane" assets, which used to belong to Bear Stearns.
Where, pray tell, did the Fed acquire $1.2 trillion in the last year with which to purchase these assets? Not from taxpayers. You don't recall Congress approving a $1.2 trillion loan to the Fed, do you? So where did the money come from?
"The last few times I heard you say that a company was going bankrupt with absolute certainty you were right. I just finished reading OBAMA! to the 'Rescue' in the Digest. Oh boy, people are in trouble. And the worst part is that most of them don't even know it." – Paid-up subscriber Stephen
"Gentlemen, I wish you were as good with your stock selections as you are at penning your wonderful daily communiqués. You do a great job in this piece at commenting on many aspects of Obama's speech, how about a few comments on, if you were in his position today, what course of action would you propose to SOLVE our dilemma??" – Paid-up subscriber Raymond Burke
Porter comment: That's simple. First, follow the laws as they're written in our Constitution. Namely, eliminate progressive taxation and paper money. The Constitution requires all citizens be treated equally under the law. Thus, at the very least, we ought to be taxed at the same rate. (You could make the argument that every citizen ought to pay the same amount, but that's probably going too far.) The Constitution also says Congress shall have the power to mint coins, not to authorize a paper currency.
Without progressive taxation and paper money, the burden of government would be dramatically reduced. No more oppressive taxation. No more inflation. Secondly, we should only have as much government as people are actually willing to pay for. If you simply forbade running a budget deficit, except in the case of an actual invasion (or at least a declared war), I think you'd see the size of government fall from the current 28% of GDP to well below 10%. (People only vote for more government because they're not paying for it.)
Reducing by two thirds the expense of the government would provide the largest economic stimulus in the history of the country. And getting rid of paper money would position America as the world's soundest economy. America would boom.
Regards,
Porter Stansberry
Baltimore, Maryland
February 27, 2009