Swine-flu panic is in the air. Cases are popping up all over the world. More than 150 people in Mexico are dead.
I'm supposed to fly to southern California next week and sit in a room with a few hundred other people. The prospect of breathing recycled air for two hours, then breathing next to a bunch of people who've done the same... I know the number of swine flu cases reported so far is tiny, but still... I don't like it.
Reacting to the swine flu reports yesterday, Mexican airport stocks were hit hard, down 14%-17%. Grupo Aeroportuario del Sureste (ASR), Grupo Aeroportuario del Pacifico (PAC), and Grupo Aeroportuario del Centro Norte (OMAB) – Mexico's three airport stocks – enjoy large, regular cash flows. Their financial condition is excellent. PAC has more cash than debt. ASR is debt-free and has 15% of its market cap in cash. ASR goes for about 8.5 times 2008 free cash flow today.
If the human race isn't decimated by swine flu, people will continue to travel to Mexico once this is all over. The airports will continue to function normally, and, from a glance at their financials, they're pretty good businesses overall.
I have to give credit where it's due. Pershing Square's Bill Ackman was right. He said Citigroup and Bank of America were insolvent, and the government's stress testing seems to have reached the same conclusion.
Apparently, the $95 billion taxpayers already gave Bank of America and Citigroup wasn't enough to save them... Last night, the Fed announced preliminary results showing both banks need billions of fresh capital. BofA and Citi disagree and are preparing rebuttals to the government's findings.
The government, not satisfied with telling us how to do everything else, is now going to tell us how to think about Citi and BofA. It says we shouldn't think of the banks as insolvent. This is straight out of George Orwell's book, 1984. I wonder if we can be arrested for "crimethink," the failure to engage in "newspeak" and "doublethink"? If so, that would be doubleplusungood for you and me.
Instead of crimethinking about insolvency, we're supposed to think the new money is merely to cushion the banks from any future losses. This shows you quite clearly how utterly clueless these overeducated government twits really are. Capital is a cushion against future losses. Without it, you're insolvent... not in the future, but right now. Since these banks need it now, they're insolvent now. We don't have to wait for any future losses. The past losses have done their job quite nicely.
The Fed will release the "official" stress test results next week. "Bad" banks will have six months to raise the required capital. The hope is they'll raise it from private investors. Hope... one of the classic telltales of a lousy investor. I seriously have to wonder who on Earth would be dumb enough to go into business with the government, but you never know.
And what happens when investors decide they'll pass on failed megabanks? Nothing. The government said it won't allow any of the 19 banks to fail.
But not everybody in government likes that idea. Sheila Bair of the FDIC doesn't mind if big banks fail. She says the idea of "too big to fail" should be "tossed in the dustbin."
She should know about failure. Earlier this year, she admitted her agency, the FDIC, was approaching insolvency, which would occur later this year. As with any bureaucrat, having terrible ideas, being incompetent, and running a fraudulent government insurance scheme won't prevent Bair from gaining more power. Now she wants the FDIC to have the power to take over "systemically important financial firms" when they fail.
One famous investor seems eager to go into business with the government: Wilbur Ross. Ross says he'd invest $1 billion in the Treasury's Private-Public Investment Program (PPIP), a scheme to rid banks of toxic mortgage assets. The plan calls for 6-to-1 leverage, a feature Ross says is "critical," because it allows him to bid 10% more for the assets...
This is really just a scheme to prop up banks' balance sheets by selling toxic assets into an artificial market jimmied by the government to produce higher prices. It's a price-supporting program, financed primarily by FDIC-guaranteed debt, with the Treasury providing half the equity financing.
Politically, the plan involves private investors like Ross so it can claim the assets are being bid for in a competitive market by real private investors with their own capital on the line.
In reality, the plan is simply another scheme to create new money – about $500 billion at first and as much as $1 trillion later – and to then make sure the new money goes into the purchase of assets that would otherwise sit, waiting for a bid. It's inflation, pure and simple, focused with a laser beam at one particular group of assets.
It's as though they want you to believe that if you remove lethal toxic waste from your backyard and put it in your neighbor's backyard, it won't kill anyone.
Wilbur Ross says residential housing is the "linchpin of the U.S. economy." Maybe he's ready to invest in the PPIP because he's seen some of the recent housing reports...
The latest Standard & Poor's/Case-Shiller housing data indicates the barest hint of an improvement.
Home prices in 20 major cities are down 18.6% from February 2008. But for the first time in 25 months, the decline was not a record. Isn't that great? The news isn't all good. Prices fell by record amounts in half of the cities, and prices fell by more than 10% in 15 cities – including Las Vegas, San Francisco, and Phoenix. In total, home prices have fallen 30.7% from their peak in the summer of 2006. Another 20% or 30% lower, and prices might actually stop falling.
Good news in California. Sales of existing single-family homes increased 64% in March from a year ago, and median prices rose month-to-month for the first time since August 2007. California's inventory of unsold homes fell to a three-year low of five months – meaning it would take five months to clear the inventory – compared to 12.2 months for March 2008.
Here's a little more sunshine peeking throug
h the clouds... IBM increased its quarterly dividend by 10% to 55 cents a share, the 14th year in a row it has raised its dividend. It also announced a $3 billion share repurchase. The company has nearly $13 billion in cash. Its shares have held up much better than the market, down a mere 22% from the peak. (Did I just say a 22% drop was good? Wow... I'm really slipping.)
Big technology companies are sitting on loads of cash... Apple has more than $23 billion in cash and short-term securities. Dell has $9 billion. Hewlett-Packard has $11.3 billion. Extreme Value World Dominator pick Microsoft has $20 billion. Another World Dominator pick, Intel, has $11.8 billion...
Cash can be used for dividends, share repurchases, or acquisitions. That's part of the attraction of great businesses with pristine balance sheets. There's far less risk of being painted into a corner by creditors, which is what you get with debt-heavy, commodity-oriented companies.
New highs: none.
We read all of your notes. Send one here: feedback@stansberryresearch.com.
"My father owned a pair of cafes in the late 1960's. He fell behind in paying his quarterly taxes. The IRS called him into their local office to discuss the issue. They came to an agreement that everyone, including the section manager, signed. The agreement stipulated a payment plan for him to catch up on the delinquent taxes and penalties. The next morning, the IRS raided every bank account that my parents had: checking, savings, business checking. When my father went back to ask why they had broken the contract before his first payment was due, the section manager told him that he did not trust small businessmen, 'because they always lie to us.' My father asked why he had bothered to sign the agreement. The answer: 'So you would trust us and we could get our just due before you could squirrel it away.' It took my parents a year to pay the back taxes and penalties and another 2.5 years to get the IRS to lift the garnishments. My [father] had to sell both cafes to pay for the legal fees. He never again ventured into business for himself." – Paid-up subscriber Gerald Horn
Ferris comment: That's a horrible story, but not a surprising one.
"The real-world is crazier than fiction. I'm about a third of the way through Atlas Shrugged and just read the part where the government removed the requirement for companies to pay back their bondholders. Then I read today's Digest to see that's exactly what's happening with GM. What's next? Where is John Galt?" – Paid-up subscriber Chuck Nienburg
Ferris comment: Your last question, I'm sorry to say, seems rather typical of our age. Here we are, a bunch of grown adults sitting around wondering who is going to come and save us. Maybe that's why, as CNN reported, sales of Atlas Shrugged this year have already exceeded sales for the entire year of 2008. People want answers, but John Galt didn't ask anybody else for answers. He created answers. He didn't ask anyone what to say or think or do. He didn't talk or write or publish. He simply acted.
Regards,
Dan Ferris
Medford, Oregon
April 28, 2009