I started warning investors not to buy banks or homebuilders in April 2008. I'm still not anywhere near ready to get into either of these sectors...
The FDIC shut down four banks late Friday, bringing the year's total to 13. Last year, a total of 25 banks failed. At the current pace, we'll easily pass that number by April... Hundreds of bank failures will occur this year.
As for homebuilders, well, they're facing a whole new bubble that's going to start popping any day now...
"This bubble starts in 2009 and runs well into 2012." That's what Stuart Tyrie of Wells Fargo Home Mortgage told the National Association of Home Builders conference last month in Las Vegas. Tyrie was talking about the option-ARM loan bubble that's due to start popping this year and completely blow up starting next year.
With option ARMs, borrowers got to choose each month whether they would pay the minimum payment (which doesn't even cover the interest), an interest-only payment, or a normal interest-and-principal payment. Of course, everybody chooses the minimum payment, which causes the loan balance to rise. The catch is, these loans reset periodically to reflect the new balance. When that happens (and it will start happening this year and next), borrowers get hit with payments as much as 100% higher than what they're paying now. A foreclosure tsunami will result, sending the supply of homes through the roof... and likely pushing many teetering homebuilders into bankruptcy.
Porter saw the avalanche coming in the credit-card sector and told his readers to short Capital One Financial (COF). PSIA readers are up about 60% in two and a half months. In a regulatory filing today, Capital One said its annual net charge-off rate for U.S. credit cards was 7.82% in January, up from 7.71% in December. Capital One expects even higher U.S. card-loss rates, increasing to more than 8% in the first quarter. To learn more about Porter's recommendation and PSIA, click here.
Friedman, Billings, Ramsey analyst David Rochester told American Banker commercial and industrial lending is going to become a bigger problem for banks in 2009. He said banks exposed to states like California and Nevada are particularly vulnerable. This includes U.S. Bancorp, Comerica, and City National Corp. The worst among these is Comerica, with a so-called "Texas" ratio of 14.85%, as of its most recent quarterly filing, though admittedly, that's not a very high ratio...
The Texas ratio measures nonperforming loans and foreclosed property as a percentage of loan-loss reserves and tangible equity. When your Texas ratio gets to 50%, you're in trouble, and as it approaches 100%, the prospect of failure becomes much more likely. Last week, I calculated Texas ratios for 93 publicly traded banks with market caps of more than $100 million. The worst one was Great Southern Bancorp, with a Texas ratio of 50.3%. The best one was Cardinal Financial Corporation, with a Texas ratio of 0.38%.
Sirius XM Radio is getting bailed out, but not by you and me. Liberty Media has agreed to invest $530 million into Sirius. Among other things, Liberty will get 12.5 million shares of preferred stock that would convert into 40% of Sirius' common stock. The first step in the deal is a $280 million loan, $250 million of which XM gets today... so XM can pay off $171.6 million of maturing bonds, the majority of which are held by Liberty rival, Charles Ergen, who controls DISH Network and EchoStar.
For the first time since 2005, Silicon Valley employment fell, dropping 1.3% in December 2008 compared with December 2007. And for the first time since 2003, Silicon Valley's per capita income fell, declining 0.8% to $63,880 a year. Venture capital investments in the area fell 7.7%, the first drop in three years.
Donald Trump's bond investors fired him today, sending Trump Entertainment into bankruptcy. Trump resigned from the board last week. He wrote a sharp, critical letter after resigning, pointing out that his own Trump Organization has prospered, while the board-led Trump Entertainment has floundered. Trump said the company's bondholders made "a series of bad decisions" and "encouraged wasteful spending, which has led to severe problems with the company." This is the second time in four years Trump Entertainment has gone bankrupt. It went bankrupt with $2 billion in assets and $1.7 billion in debt.
New highs: Short of Capital One (COF)
Which is a better investment, gold or land? Let us know here: feedback@stansberryresearch.com.
"I understand why Porter buys gold and a lot of people buy gold as I think it makes them feel secure and safe from all that would destroy their wealth. For me, I think it is a very poor commodity with which to preserve one's wealth. I would never recommend that anyone buy gold to protect them from inflation or as any kind of investment. I read an article recently which stated that in King Nebuchadnezzar's day, about 562 B.C., one ounce of gold would buy approximately 350 loaves of bread, and I think today one ounce of gold will still buy approximately 350 loaves of bread. I guess in terms of bread, gold will protect one's wealth. However, I don't see any growth in value here. I submit that land is a great protector of wealth, protector against inflation and undoubtedly one of the best-known commodities a man can invest in. Land will produce income... I believe the Harvard Endowment Fund which has a very impressive rate of return for the past 10 years reports that approximately ten per cent of it's funds are in Timber..." – Paid-up subscriber H.S.
Ferris comment: You say gold's no good, but that it has preserved purchasing power over a period of millennia, nothing any form of money has ever done. That's exactly what we've been saying. Thanks for the backup.
Land is a fine investment, especially during recessions, when you can get it cheaper. But land is not a very good form of money. Land isn't nearly as liquid, portable, divisible, or fungible as gold. Try paying for your groceries with a piece of your backyard. It doesn't work. Timberland is a fine investment, but everyone who started imitating Harvard and Yale over the past two years has been crushed. They made the basic mistake everyone makes. They chased performance, instead of doing what Harvard and Yale did to get there, assessing value versus price.
"Can you tell me which Gold ETF's actually hold physical gold to back up your investment? Most prospectus are not real clear on that subject. Several of us question if it is derivative long positions. Would you give us the facts or your best view of this subject. Additionally, where can you buy gold and be sure you have title to it. Enjoy your PSIA recommendations and insights given in Q&A." – Paid-up subscriber Neal G.
Ferris comment: I'm unaware of any derivatives used by the SPDR Gold Shares ETF (GLD). As far as I know, it simply buys gold on the London bullion market, which it stores in its London vaults. It sells shares and buys gold, and occasionally sells gold to redeem shares (in 100,000-share blocks called baskets). It also sells small amounts of gold to cover expenses. That's all it does to my knowledge.
The Ultra Gold and UltraShort Gold ETFs do not invest or sell short bullion directly. From the prospectus: "The ProShares Ultra Gold and the ProShares UltraShort Gold... will not directly or physically hold the underlying gold, but instead, will seek exposure to gold through the use of Financial Instruments..."
But I don't like ETFs because they're a trader's tool, turning physical gold into paper gold. If I'm going to buy the ETF, why not just buy the physical gold instead? In fact, the type of physical gold the ETF buys isn't the small gold bars or gold coins that have become more expensive and difficult to get lately. It's large gold bars, which are in ample supply for all who want them.
If that market starts getting tight, look out. That's when you'll feel smart for owning gold. If I want liquid leverage to the gold price, I'd rather buy stocks like the ones I'm recommending in the current issue of Extreme Value. Click here to get access to the new issue and the conference call we're hosting this Friday.
Me? I don't sell gold. I only buy it. I believe Porter has said something similar. To me, it's just savings. It's not a trade, short term or long term.
Regards,
Dan Ferris
Medford, Oregon
February 17, 2009