Sign of a top in Internet stocks?... Investors are too bearish... What to do now... Italy's turn to implode... The (next) Unicredit blowup... Irish debt = $0.10 per $1... Calpers track record intact... Opportunity: dividend stocks... Steve's next TWS signal... Housing's double dip...
In a Financial Times article today, PayPal founder and Facebook investor Peter Thiel says Wall Street screwed up by pricing professional networking website LinkedIn's recent IPO too low. The stock doubled the day it went public and now trades north of 1,200 times earnings. "Whenever a stock price goes up as much as it does with LinkedIn," Thiel says, "you assume the IPO was mispriced and the bankers screwed up." He says Wall Street has "a certain antipathy" towards Silicon Valley companies, and that they "don't quite believe it's real."
Thiel means bankers didn't get enough money for themselves and their client, LinkedIn. But that's not how you should interpret it. You should hear that a Wall Street banker's job is to rip the public's face off in an IPO. It's a banker's job to be more irrationally exuberant than the general public (no small feat). It's his job to sell a company for more than it could ever be worth.
But in this case, Wall Street left hundreds of millions of dollars on the table. At $45 a share, LinkedIn's IPO raised a mere $352 million. The stock hit $122 a share its first day out, and sits around $85 today. That's another $300 million (and probably much more) that could have been raised by selling the stock to you at more than 1,200 times earnings.
Thiel has planted the idea that Wall Street isn't sufficiently in love with Silicon Valley (which I assume he said with a straight face). So other social networking companies will insist their companies are worth much more when it comes time to go public. Groupon, Twitter, and Facebook will all be able to drive harder bargains with bankers, insisting on higher pricing. By not pricing LinkedIn at 1,200 times earnings, the bankers were guilty of the ultimate IPO sin: insufficient irrational exuberance. The quintessential toppy mistake.
It's true Thiel's complaint comes from a somewhat different perspective than that of the outside minority shareholder. But it still defines the sucker's mindset, the feeling that keeps investors buying and holding when they should be selling and raising cash... the palpable feeling that "we could have made more."
But while we're seeing all these ugly signs of the top in the valuations of social networking companies, individual investors are behaving like we're nearer to a bottom than a top. Though stocks aren't especially cheap today, investors are more bearish than they've been in months. The American Association of Individual Investors Sentiment Survey shows individuals are less bullish and more bearish than they've been all year. Of those surveyed, just 25.61% were bullish as of last Wednesday, versus more than 55% on January 6. It's usually around this time stocks start moving up, not down.
Investors are worried the end of the current round of quantitative easing (QE2) will cause a rise in interest rates and a fall in stock prices. The problem with this view isn't an irrational fear. It's perfectly rational. The problem is, the whole world knows about the end of QE2. And that knowledge is already "baked in" to stock prices.
So what should you do right now? All I can come up with is this: Hold cash, hold gold and silver, sell short overvalued weak stocks, and buy undervalued strong stocks.
It's official... Italy is next.
We've long believed the only political certainties come after a politician explicitly denies (or, in the case of Fannie and Freddie, supports) an issue. Or as Otto von Bismarck, chancellor of the 19th century German empire, so eloquently put it, "Never believe anything in politics until it has been officially denied."
Throughout this entire crisis, we've seen political leaders across the globe attempt to calm markets by denying any problems. Federal Reserve Chairman Ben Bernanke denied printing money (though he admitted his actions were akin to printing money in an earlier interview). Hank Paulson assured Americans that Fannie Mae and Freddie Mac were perfectly solvent. The stocks then plunged to zero, and the government took them over, initiating a nearly $1 trillion bailout. Looking into the future, the U.S. government claims it will end quantitative easing on June 30 of this year. Perhaps it will. However, we'd bet the money-printing continues at a later date.
The government's claims haven't stopped on our soil... Like Kevin Bacon assuring the stampeding crowd in the movie Animal House, we've seen various European political leaders assure the markets "all is well."
Most recently, Federico Ghizzoni, CEO of Italy's largest bank, Unicredit, told CNBC Italy is fine. "Yes Italy has a debt. It is higher than other countries, and it is 120% of the GDP," Ghizzoni said in an interview. "But if you take the total debt of the country... the external debt is very low."
No, Ghizzoni is not a politician per se, but he's a bank CEO, so he might as well have his paycheck signed by the government. "What is important in this period of time is the deficit: It is only 4.6%, many other European countries have a different problem here," he said. Ghizzoni believes his country's debt isn't an issue so long as Italy can grow its way out of crisis. Let us go on record saying it can't. And the only way to achieve temporary, artificial growth is to increase debt, thereby increasing the deficit. And that wouldn't put a dent in Italy's officially reported unemployment, currently at seven-year highs of around 9%.
Unicredit's history makes the above statements even richer. As Porter detailed in the March 2010 issue of Stansberry's Investment Advisory, the bank, founded as Oesterreichische Kredit-Anstalt by the Rothschilds in 1855, has been at the center of nearly every financial crisis since the early 1900s. The bank was declared insolvent on May 11, 1931, after assuming the liabilities of weaker banks following the crash of 1929. After many mergers and takeovers, the original Oesterreichische Kredit-Anstalt emerged as Italy's Unicredit.
In its most recent form, the bank has navigated the 2008 financial crisis in expert form – managing to get involved in every fraud and bubble in the world. In 2008, shares of Unicredit crashed because it was one of the largest holders of European subprime mortgages in the world. The Libyan dictator Moammar Gadhafi saved Unicredit with a $1 billion investment. In 2009, Unicredit announced its private bank subsidiary Bank Medici had lost $2 billion with Bernie Madoff.
Now, Unicredit is one of the largest creditors to Eastern Europe. And when the time for its next bailout comes, it can't turn to Italy. The country has too much debt (though Ghizzoni says everything is OK). It'll be at the mercy of the European Union and the International Monetary Fund. Let's just hope Unicredit's bondholders get a better deal than the Irish did...
Bank of Ireland plans to give subordinated bondholders a 90% haircut as it exchanges debt for cash or equity. The bank, which must raise 5.2 billion euros of capital, said it expects to pay cash of 10% of nominal value for Tier 1 securities and 20% for Tier 2 securities, with no settlement of accrued interest.
"We were expecting the terms of the offer to be bad, but this is worse than expected," said Stephen Lyons, a fixed-income analyst with Dublin-based securities firm Davy. "Another approach would have to been to engage with subordinated bondholders and not leave such a bad taste in the mouths, particularly for investors that might take the equity alternative, who the bank may wish to participate in a subsequent share sale."
If the soaring European yields were tempting you, you may want to hold off...
Even without government-imposed losses, the California Public Employees' Retirement System (Calpers) still managed to lose more than Bank of Ireland bondholders. A 10,200-acre site in Arizona sold for $32.5 million last week. The sellers were a group of investors including Calpers. Five years ago, they bought the land for $400 million. That's 8% of what the original investors paid. Private-equity fund, Arcus Property Solutions, paid cash for the property.
The chief of investment-management group BlackRock, Laurence D. Fink said he's more bullish on U.S. equities than bonds because companies are benefiting from the weak dollar and have surplus cash to invest for growth.
"We love equities, we love dividend stocks," Fink said in a Bloomberg Television interview today in Hong Kong. "You own Treasurys because you're worried about the world and the future, but if you believe the world is a good place to invest for the long cycle, you have to be in equities."
Mr. Fink could mean anything by the term, "dividend stocks." But there is a small, select group of companies you can count on to pay higher dividends every year. One of them has raised its dividends every year of its life as a public company – 35 years. Another has been paying dividends for more than 100 years, and has raised its dividend every year for 28 years in a row. Still another (the newest addition to the list), has been paying dividends since 1924 and has raised its dividend every year for the last 39 years in a row.
Most of them are growing dividends 10% a year or more, some 20% a year. Few income investments today will give you a 10%-20% raise this year. I doubt most of the "dividend stocks" BlackRock likes are as good as these. If you want to know more about this small, elite group of the best, safest, cheapest and most lucrative dividend paying stocks on earth right now, I'm doing a special update about them tomorrow for subscribers of The 12% Letter. To learn more about the advisory and gain access to my research, click here.
Mr. Fink co-founded BlackRock in 1988 and built the world's biggest asset manager through acquisitions including the purchase in December 2009 of Barclays Global Investors. Fink said in a March 3 interview he's a "big buyer" of the U.S. dollar, doesn't see a bear market in bonds, and would buy Treasurys if yields rise above 4%.
Mr. Market certainly agrees with Fink and BlackRock (for now)... The 10-year Treasury yield was little changed at 3.08% as of 12:04 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The rate slid to 3.05% earlier today in Asia, matching the lowest level this year. Yields will advance to 3.84% by year-end, says a Bloomberg survey of financial companies.
Of course... the folks surveyed have no idea what will really happen. But they work in finance. It's their job to pretend they know. Their most recent forecasts were given the heaviest weightings in the survey, so, like almost everyone else in the U.S. right now, financial professionals responding to Bloomberg surveys are bearish.
Last Friday, Porter told you about Steve Sjuggerud's newest advisory service, True Wealth Systems. He wrote:
|
What Steve does in True Wealth Systems is evaluate dozens of different assets from around the global economy. He looks at every major stock exchange (all of which can be bought via country ETFs). He looks at the major U.S. stock market sectors (again, all of which can be bought via single ETFs). He follows all the big commodities – gold, silver, oil, coal, etc. And all of the major currencies, plus special income vehicles like mortgage REITs and high-yield bonds. |
|
True Wealth Systems puts the entire investment universe at your fingertips and tells you exactly what you should buy and exactly what you should sell. It's that easy. |
The key to investment success in the coming years will be asset allocation... only buying assets when they are cheap and out of favor. And Steve's True Wealth Systems advisory tells you exactly when to buy and sell these assets. It's simple. Also, today is the last day you can subscribe to True Wealth Systems at a generous discount. To learn more, click here...
|
New 52-week highs (as of 5/27/11): Dreyfus High Yield Strategies Fund (DHF), Forest Laboratories (FRX), Royal Gold (RGLD).
In today's mailbag... one subscriber describes the absurdity in alternative energy subsidies. Send your messages to feedback@stansberryresearch.com.
"You mentioned Jim Chanos' comment that government subsidies of alternative energy doesn't produce innovation, it just pays for installations.
"We just installed a 3KW solar electric system at our home. In our case, it should come close to cutting our electric bills by about 40%. It's a $17,000 system. The contractor gets an immediate $5,000 kickback/subsidy, which he passes on to us, so we only put up $12,000. Our first-year tax credits come to about $5,000, and then another $1000 per year for four years. That leaves us with a net cost of about $3,000.
"The system will pay for itself in about 5 years. (Hey, that's 20% per year!) After that, it's all gravy. Think about it: without all those subsidies in the form of tax credits, the payback would be more like 50 years! A totally senseless project without the subsidies.
"But there's more: Don't forget – the manufacturer of the solar panels is getting all kinds of subsidies, too. Same for the manufacturer of the inverters.
"So here we have an industry where the manufacturers, the installers, and the customers are all subsidized! Not only that, but the electric company is losing money on the deal, because in Oregon, the utility credits us for every watt generated, at retail price! The utility's loss, of course, is paid for largely by raising rates across the board for everyone, unless the utility is getting a government subsidy that I don't know about. That means all the people that don't have solar are paying for 40% of my electric bill in their higher rates. It does make me feel a little guilty, but I couldn't resist taking advantage of it.
"Anyway, Mr. Chanos is absolutely right. There is no way alternative energy could even come close to standing on its own two feet." – Paid-up subscriber Al C.
Porter comment: I don't blame you... just to be clear... You are only acting rationally. But this is exactly what has gone wrong with our entire country. And in that larger way, it is a tremendous loss.
"I want to reassure you that, thanks to you – and your colleagues – I've become a successful investor: in fact, the price I've paid to subscribe to Private Wealth Alliance years ago is one of the best investment in history." – Paid-up subscriber Giuseppe Cloza
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Rancho Santana, Nicaragua
May 31, 2011