Reality denial on Main Street, USA... Michigan reckoning nears... Tennessee utility 10 years in arrears... Consumer borrowing up... Sjug/Clark short the euro... How to download Gold Investor's Bible... PSI shorts BKS... 
The more we look at the municipal bond market, the less we like what we see. No matter where you look, you find big problems...
In Michigan, a $3.1 billion, three-year federal government stimulus will soon come to an end. Many Michigan cities may face bad ends shortly thereafter. Tax collections in the state have fallen as much as 20% the past year. One county executive says, "This gets real bad in about 90 to 150 days." That's how long some Michigan towns have to find out if they'll borrow more, get bailed out again, or... default. No municipality has ever defaulted in Michigan, and they need permission from the state treasury to declare Chapter 9 bankruptcy (a special bankruptcy only for municipalities).
Hamtramck, Michigan petitioned to declare Chapter 9 bankruptcy but was denied by the state treasury department. Instead, the city was offered three loan options. In other words, the state would rather deny reality and pile more loans on top of already bad loans.
Some weird, awful financial situations confront U.S. cities and towns... For example, a gas utility in Tennessee is 10 years behind on its payments. That's not a typo. It's 10 years behind – and it hasn't declared bankruptcy yet.
The Clay (County) Gas Utility District of Tennessee filed a notice recently saying it hasn't made a scheduled principal and interest payment on its bonds since 2000. The notice removed all future hope, saying, "It is not expected, at this time, that the district will be able to make future principal and interest payments."
Clay County was expected to have 600 gas customers, but it lost its biggest employer, children's clothier Oshkosh B'Gosh, and now the county has less than 200 gas customers. It hasn't made a single payment since the first bond sale to begin building the gas system in 1998.
Slightly less bizarre was the December 2009 bankruptcy filing of the New York City Off-Track Betting Corporation. This is a business that basically taxes the financially illiterate. It's like opening up a little corner store that sells nothing but lies, and miraculously, everyone in town wants as much as they can get.
How could anyone fail to manage such a business properly? All you'd have to do is show up and collect money every day. And yet these bozos screwed it up, declaring Chapter 9 last December. The city-owned corporation has 1,300 employees. Either they're all millionaires or the company employed thousands upon thousands once upon a time... because it has piled up some $700 million in pension obligations, according to its website.
What can investors do about the rotting of America from within? How do we sell short the worst-managed cities, states, and towns in the country? Shorting muni bonds is too hard. Maybe we could short the iShares S&P National Municipal Bond index (MUB). It's caved in the last several weeks, recovered a bit, and looks like it's starting to roll over again. But shorting it could be expensive. It pays a 3.5% yield right now. Short sellers would have to pay that. You could buy credit default swaps... but only if you don't have a few tens of millions of dollars.
Municipalities aren't the only ones piling up new debts. Consumers are borrowing more this holiday season, too. According to the Federal Reserve, commercial banks held $1.128 trillion of consumer credit at the end of the third quarter of 2010 – up 36% versus the third quarter of 2009. Total consumer credit outstanding has fallen only because the securitized asset pools of consumer loans have shrunk by nearly 80% since the third quarter of 2009.
Are there really more creditworthy consumer borrowers this year than last year at this time? Unemployment hasn't budged nationwide. The number of people unemployed five weeks or less has fallen by 173,000 versus a year ago, but the number of people unemployed 15 weeks or more has risen by almost 300,000.
I don't believe the longer you're unemployed, the more creditworthy you become. I can only conclude a smaller number of folks are running their credit card balances up higher this year. Their brokerage accounts have risen, and they're feeling a little freer with their spending.
The securitization market effectively doubled the size of the banking system during the Great Bubble. Though it's showing some signs of life today, the securitization market is a pale shadow of its former, steroid-enhanced self. And according to the Fed numbers cited above, it looks like the commercial banks are picking up some of the slack, to the tune of a little less than $300 billion.
I'm not sure how you find success by increasing lending when there's record unemployment. But hey, I'm not a brain-damaged, Ivy League-trained financial wizard who thinks spending is the source of economic growth. I've always been horribly unsophisticated that way.
Unlike the 7,000 people who lined up outside Macy's flagship store in Manhattan Friday morning at 4 a.m., the crowds in the currency markets aren't standing in line to buy. They're heading for the exits in a mad rush...
Fears hit the euro and euro zone bonds today. The premium to hold Spanish and Italian 10-year bonds over the benchmark German bund hit a record high today. Borrowing costs are also soaring for Belgium, not normally considered a vulnerable EU member. It looks like the market is betting on a breakup of the euro... The euro dipped below $1.30 today (before recovering to $1.3010).
Two of our editors nailed the short-euro trade... Steve Sjuggerud recommended the ProShares UltraShort Euro fund (EUO) on November 18 in True Wealth. His readers have made nearly 10% in less than two weeks.
And on October 21, 10 days before the euro topped, Jeff wrote this to Advanced Income readers:
You see, the long-euro/short-dollar trade is back in vogue, and it's more popular than ever. Ever since the Fed announced plans for a second round of quantitative easing, the dollar has been falling and the euro has been rising. Currency traders have piled into the euro – the currency that was on the verge of imploding just a couple months ago. And they're enormously short the dollar – the currency that everyone flocks to in times of crisis.
This trade is poised to blow up. And we're going to profit off it.
It's time to go short the euro. – Jeff Clark, October 21, Advanced Income
Jeff recommended buying EUO, as well... But he also sold calls against the position, making readers another $0.85 a share. This trade worked perfectly, and Jeff's readers earned an annualized income of 30% on their investment.
I know a super-safe 30% return doesn't sound as sexy as the overnight double you may see in Jeff's Short Report... or the doubles and triples Matt Badiali has made recommending junior resource stocks... But Jeff doesn't focus on the highfliers in Advanced Income. Instead, he aims to generate super-safe double-digit income for readers every month. If you're interested in generating big income from your existing portfolio, I recommend you give Jeff's Advanced Income a try. We're currently offering the service at a generous discount. You can try it out here.
One of our colleagues at S&A has been working hard to update our popular Gold Investor's Bible for our "techie" subscribers. You can now download our book as an application for your iPad or iPhone. The S&A Gold Investor's Bible reached as high as No. 40 for all business applications in iTunes... quite a feat. If you'd like to download your own copy, you can do so here.
We wrote it, did you short it?
More and more people are reading books and magazines electronically. Worse, the best buyers of books are the most likely to switch to Amazon's Kindle reader or Apple's new iPad. And since the Kindle and iPad are fighting for market share, the price of books themselves has plummeted – especially for hardback titles. The price war will devastate Barnes & Noble (NYSE: BKS). – Porter Stansberry, May 2010, Stansberry's Investment Advisory
Barnes & Noble announced a $12.6 million loss for the quarter – up from last year's $24 million loss. But the numbers were still below analyst expectations, and the stock plummeted around 10% today. SIA readers are up over 31% on the short.
New highs: Denison Mines (DNN), Fronteer Gold (FRG), Keyera Facilities Income Trust (KEY-UN.TO), MAG Silver (MVG), CARBO Ceramics (CRR), Hatteras Financial (HTS).
In today's mailbag... a few subscribers comment on our strategies... send your messages to feedback@stansberryresearch.com
"Yes, I learned my lesson after many $1000s of losses. I am a Private Wealth member, but I thought I knew just as much as all you guys, and would buy and sell on my own, wouldn't use trailing stops, got in higher risk investments in hedge funds. Well, 2 years ago I made a pact with myself and would NOT do anything that you guys didn't recommend. What a Difference the past 2 years have been and I'm still going strong and forward, not backwards losing money. Thanks for the great ideas and keep it up. You have made me a believer and I only use you all. My only problem is I don't have enough money to go around all your all's great ideas...lol!" – Paid-up subscriber Tom Martin
"I read your November report on Carbo Ceramics which you recommended to buy up to $85. I looked it up on Google Finance and it's already past $96.00. Should I chase it or wait for it to fall back to $85 range or will it not see $85 again?" – Paid-up subscriber Rosemary Deahl
Goldsmith comment: If the report says buy up to $85, only buy up to $85. We put the buy-up-to-prices in for a reason. Paying too much to establish a position limits an investors potential gains and throws the risk-reward proposition against him.
"Hello, Looking at your 'true income,' I'm thinking of the bond market today, not being the place to be. Am I missing something? I like what I read and want to subscribe. Please give me your feedback." – Paid-up subscriber R.S.
Ferris comment: While I agree bonds in general are a bad place to be right now, I also think True Income editor Mike Williams has a bond strategy that works in all sorts of environments. Critically, he only buys bonds at a discount. The bonds he's bought aren't the fairly-valued or overvalued variety so popular with lemmings. He recommends the unloved, undervalued bonds nobody is talking about. And he does meticulous analysis to ensure the companies generate enough cash to cover the interest due. To learn more about True Income, click here.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
November 30, 2010