My bet for the biggest surprise of 2009? Foreigners stop buying our debt and long-term interest rates in the U.S. soar.
Think it can't happen? Think it won't? Well, it shouldn't happen (but it will). Foreign governments should buy our bonds like there's no tomorrow to help force down the value of their own currencies. But what if they don't have the money?
According to Thomas Rawski, who James Grant says studies China's economy from his post at the University of Pittsburgh, China's production of electricity fell 15% year over year in November. Those of you familiar with economic statistics know that power production is a far more accurate gauge of real GDP growth than China's government statistics. China's economy is collapsing – just as fast as our own.
What does that have to do with the U.S. Treasury bond market? Well, China has been our buyer of last resort, thanks to its huge trade surpluses. But China's not growing anymore. And therefore, China is no longer adding foreign exchange reserves. No more extra dollars. No more buying extra Treasury bonds.
We wrote it, did you short it?
Over the next 12 to 18 months, Capital One will see defaults on more than 10% of its total loan book, resulting in losses of around $15 billion annually. This will erode a majority of the company's equity. Depositors would quickly find a safer place for their money, and Capital One would find itself, like certain Wall Street firms of late, trying to raise capital in the midst of a panic. – Porter Stansberry, December 2008 PSIA
Today, Capital One announced a $1.42 billion fourth-quarter loss on impaired-goodwill charges from its auto lender and a $1 billion boost to reserves for bad loans to $4.5 billion. Net chargeoffs rose to 4.21% from 3.53% in the previous quarter. Thirty-plus-day delinquency rates hit 4.37% from 3.85%. Shares fell nearly 15% to less than $19 – a 10-year low.
Short seller Jim Chanos, head of Kynikos, did a video interview with the Financial Times yesterday explaining how he sees the Obama administration affecting business. Chanos is still very bearish on global infrastructure, particularly China and the Middle East. He's particularly bearish on steel and cement companies. He's also shorting health care, defense, and for-profit education businesses – all of which will likely face big pressure from Obama to show a cost-benefit analysis. Chanos expects Obama will increase spending, but health care and defense companies will have reduced profitability as the government rationalizes its spending.
At the end of the interview, Chanos was asked a series of lightning round "long or short" questions. He is long oil, short the dollar, long Citi, short Ford, long Google, short Blackstone, and long HSBC. You can watch the video here... (Make sure to watch the video titled "Jim Chanos on Washington and his shorts.")
One sector Chanos is short, the for-profit educators, is still climbing. Two of the biggest players, Apollo Group (APOL) and ITT Educational (ESI), have both soared since April 2008. Investors believe that, as the economy worsens, people will need more education to obtain jobs. But Chanos argues these prospective students will have an increasingly difficult time finding loans for their degrees (these for-profit educators charge as much as an Ivy League school). And as we've laid out before, he doesn't find these degrees all that valuable.
Warren Buffett may soon give the ultimate buy signal. In a New York Times interview, he said he'd consider buying back Berkshire Hathaway stock...
"I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity," Buffett said. "I'm not opposed to buying back stock."
Buffett also said Berkshire's stock has fallen 50% three times – including this most recent fall... "In 1974, it went from $90 to $40. Did I feel badly? No, I loved it! I bought more stock. So I don't judge how Berkshire is doing by its market price, I judge it by how our businesses are doing." Buffett said he'll make a public announcement if he chooses to repurchase any Berkshire stock.
Berkshire Hathaway is Dan Ferris' No. 1 place for new money. He believes it's worth around $150,000 a share. It's currently trading for less than $87,000.
American icon Harley-Davidson announced a 58% drop in fourth-quarter earnings. It will cut 1,100 employees in the next two years. The company is also closing some factories and consolidating others. Shares fell 10% this morning to an 11-year low.
New highs: none.
Well, I knew it would happen... Criticizing the government during the $170 million inauguration was more than some subscribers could stand. I might as well have kicked someone's dog. Throw stones at me here: feedback@stansberryresearch.com.
"Dear Mr. Stansberry: You obviously are in grave peril of blowing out all your arteries as you fret about the level of evil the government is about to attain because 'OBAMA!' is now at the helm. Strictly out of concern for your health, dear fellow, I hereby offer to buy you a ONE-WAY ticket to any other country on the planet. This is to be a permanent relocation. Sorry, I lack the financial wherewithal to offer to launch you to the moon. Regrettable, that." – Paid-up subscriber Greg Laxer
Porter comment: Actually, I find politics far more amusing than stressful. All of those fools – cheering. Ha, ha, ha. If they had any idea what was about to happen, how their savings will be destroyed, how the cost of living will soar, how the few liberties we have left will be taken, and how our future – for the next three generations – will be mortgaged. Old J.P. Morgan said it was bad business to short America... but he never dreamed our government would become the world's largest debtor or that any president would ever promise to run a budget deficit, let alone a $1 trillion one. Now who is going to clean up all of this mess? Take a guess.
"You keep churning back in history and all that's going to do for you is cause severe back and neck pain. President Obama isn't you. The young people who are inheriting this unbelievable mess let it be known with their vote. They are mad as hell, not going to take it anymore from a bunch of narcissistic, greedy old, white men! Perhaps cataract surgery, a hearing aide, walker and prunes will prolong your life and [you'll live long enough] to see the generation that President Obama inspires make us honest, healthy and just fairly comfortable." – Paid-up subscriber L. Dennis
Porter comment: While I do have a bad back, I'm only 36... and I don't believe my age or my race has anything to do with it. More people under the age of 40 (than over it) are skeptical of the government's promises and resentful of its burdens. We know what will be left in the till when we retire: nothing. By the time OBAMA! is finished, our distrust of government will have grown substantially and hopefully spilled over into civil disobedience. I'd love to know what the government would do if 10 million people simply refused to pay taxes. Put us all in jail?
"Talk about gangsters! What do you think the former bunch just exiting Washington were? As a lifelong Republican, I can hardly express my shame to be associated with these witless morons. Intentional greed and stupidity doesn't even begin to describe the evil foisted upon the American public by Dubya and company. And you have the balls to decry FDR. Get a life!" – Paid-up subscriber Jim Gall
Porter comment: Why can't you dislike both political parties equally? What the Republican Party became once it achieved a majority in 1994 was – as you note –reprehensible. See what I've written over the years about things like Bush's steel tariffs (from a "free trader"), the war in Iraq, torture, etc.
But don't you see? It doesn't matter which group is in power – Bush specifically promised not to do most of the worst things he later did. It's the nature of power to corrupt. It's inevitable. There is no "right way" to run things in Washington. The only right thing to do is to leave people alone – to permit as much liberty as possible while still maintaining a safe and orderly society.
That was the idea behind the founding of our country. Remember, "give me liberty or give me death?" Can you imagine how Patrick Henry would feel about our country today? Not an aspect of my life isn't taxed or regulated – from the things I'm allowed to publish to the cars I'm allowed to buy to how I'm allowed to enjoy my wife's body in the privacy of my own home! What has happened to our country? What has happened to our people? Where did all the Americans go? Where did all of these do-gooders come from telling us what to do and what we must pay for the privilege of living in our own country? And who are all of these whipped dogs who beg and plead for handouts from their masters in Washington? It's disgusting.
"Why did you print that rant from an anonymous moron claiming that Obama was a Muslim? Anyone who's been paying any attention at all knows that he is a Christian. And so what if he is Muslim? Wasn't religious freedom one of the founding principles of this country? People like this remind me that we still have a long way to go. Don't you feel that you have some responsibility to edit incorrect information from ignorant writers?" – Paid-up subscriber Rick Ganguet
Porter comment: Rick, we assume most folks with enough resources and intelligence to subscribe to an expensive financial journal would know OBAMA! is not a Muslim and would realize – as is often the case – the letter had been published to entertain and poke fun at the ignorant.
But... since the joke apparently wasn't clear to you... I'll explain. Some voters will tell you OBAMA! is a racist because his preacher – at a Christian church – says white men are devils or something like that. Then, just after they've told you they don't like OBAMA! because he's been attending the wrong Christian church, they'll tell you he is also a Muslim. The contradiction never occurs to them. What bothers me isn't OBAMA!'s race or creed – it's the fact that most Americans are so completely ignorant about the real issues they consider all of this other crap germane in an election.
"You ASSHOLE, I take personal exception to your remark in reference to felons. I am a felon. I am a responsible and tax-paying individual. There are numerous felons of very high integrity and moral fiber, of which I am one. This nation was originally populated with felons. It is your contemporary Christian attitude that bars felons from participating functionally and totally in society. You should be formally castigated for your comment." – Paid-up subscriber Dave Broer
Porter comment: If you don't think a governor in a tight election suddenly deciding to allow felons to vote is one of the more obvious examples of graft and corruption in the history of American politics, I don't know what to tell you. I mean... you just can't make this stuff up. Perhaps the only thing funnier is getting a letter from a felon about the matter – which made my day. As for most felons being "responsible," I have to wonder how many you've met...
Regards,
Porter Stansberry
Baltimore, Maryland
January 23, 2009