The 'dividend recap' scam... Bass' EOA prep... 'Gold's got a lot further to go'... The platinum rally... Iceland: Currency wanted... Gosh, it's good to be stupid...
It's good that Mitt Romney's fame has shone a new light on private equity. It's one of the great, ongoing financial scams of all time. Private equity is essentially a scheme for taking control of corporations and paying yourself hundreds of millions of dollars by borrowing against the business' assets.
Six months after private-equity firms Carlyle and Clayton Dubilier & Rice took Hertz Corp. private, they borrowed $1 billion and paid themselves a fat dividend, according to a Bloomberg story. Quite simply, they exposed their clients to additional debt risk to pay themselves a fortune.
The transaction is called a "dividend recap," and it's standard practice...
In 2010, Dunkin' Brands Group – the company that owns Dunkin' Donuts – borrowed $1.25 billion... so it could pay Carlyle, Bain Capital, and Thomas Lee Partners a $500 million dividend. Dunkin' went public last year with nearly $1.9 billion in debt. Dunkin' Brands shareholders got stuck with more risk so Carlyle, Bain Capital, and Lee could make obscene amounts of money.
The Washington, D.C.-based Carlyle Group is at it again... And this time, it's sticking it to Carlyle Group shareholders... Carlyle is set to go public this year. In late 2010, it borrowed $500 million that was supposed to be used for new investments. Instead, it paid $398.5 million of the proceeds to three of the company's owners as a dividend. Bloomberg says recent filings indicate it has the option to borrow and distribute another $400 million.
Carlyle's fat cat owners don't have to sell their shares to cash out. They can keep their shares when the company makes its initial public offering and still receive huge tax-advantaged paychecks. They're tax-advantaged because dividends are taxed more lightly than regular income. Also, the corporation can deduct the interest payments before paying taxes. So what's good for the corporation isn't necessarily good for shareholders, who would be better off with less debt, since debt claims (like all other claims) are senior to theirs. Clearly, these private-equity firms have huge incentives to take control of corporations, lever them up, and collect huge cash dividends out of them... before taking them public again.
Carlyle Group is no fly-by-night outfit. It's the second-largest private-equity firm in the country. It's got $148 billion under management.
I can't imagine knowing about dividend recaps and giving a penny to a private-equity fund... Then again, if you make millions as a private-equity client, why would you care?
Texas-based hedge-fund manager Kyle Bass, founder of Hayman Capital, has made a fortune in the markets... Bass made his fortune buying credit default swaps (CDS) – insurance contracts that pay out in case of default – before the housing crash. A mutual friend says Bass is a billionaire.
Bass is also sympathetic to our End of America thesis. Bass owns a huge piece of property in Texas with an "arsenal of automatic weapons and sniper rifles and small explosives to equip a battalion," according to Michael Lewis' book, Boomerang. And he's buying tens of millions of nickels.
Bass recently appeared on CNBC to discuss fiscal policy and gold. Much like us, he expects more "easing" (money-printing) for the former and is bullish on the latter...
"The pattern is set that we are going to monetize fiscal deficits by expanding central bank balance sheets," Bass said. "Call it what you want to call it... I call it money creation out of thin air. Therefore, gold's got a lot further to go."
Last April, Bass made headlines when he advised the University of Texas endowment to take physical delivery of $1 billion in gold bullion. He explained his recommendation on CNBC... "It costs you a certain amount of money to roll a front month futures contract [on gold]... if you take delivery, you have to pay storage and insurance." Bass said it costs 90 basis points a year to roll the futures contracts. But the UT board convinced HSBC to store and insure the gold for "a lot less."
Platinum rallied for the fifth day in a row today (the metal's longest streak since October). And at the peak of today's rally, the price of platinum surpassed that of gold for the first time in six months. At the time of this writing, both metals are trading for $1,687 an ounce.
The price of platinum is up more than 20% so far this year, driven mainly by supply disruptions in South Africa, the world's largest producer.
Platinum and gold are currently at parity, or a ratio of "one" as evidenced by the chart above. That's well below the historical average ratio of 1.73 since 2000.
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New 52-week highs (as of 3/12/12): iShares Dow Jones U.S. Home Construction Fund (ITB), Virginia Gold Mines (VGQ.TO), Anheuser-Busch InBev (BUD), Abbott Labs (ABT), Dun & Bradstreet (DNB), BLADEX (BLX), Procter & Gamble (PG), and Target (TGT).
The stock market is taking out old highs and making new ones. Do you think it's going to crash soon... or at all? Do you think we're in a new bull market? Write us and let us know what you're thinking here: feedback@stansberryresearch.com.
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Ferris comment: Good job! I wish someone had told me about investing when I was a senior in high school. I graduated in 1979. Instead of borrowing money to pay for college, I could have gotten a job and put every penny into stocks like Coca-Cola and reinvested dividends.
"I live in Northern NJ and the electric company here, PSE&G, has decided to put 1 solar panel on as many telephone poles as possible. Yesterday, I noticed that the solar panels were covered in a bright white muck. As it were, the pigeons in our area live high above us on things such as building ledges and TELEPHONE POLES. The have literally excreted so much solid waste onto the solar panels that they there is no possible way that I can see that sunlight is even getting to the cells...
"This is all so stupid, and here is another example of how stupid is all is. The pigeons are laughing at us, hahaha! Happy Investing and Enjoy telling everyone they wrong and dumb because I love it!" – Paid-up subscriber Anthony E. Cardinali III
Ferris comment: I don't tell everyone they're "wrong and dumb," and I doubt someone who does so often is enjoying life.
I find your cynicism in somewhat poor taste, and the implication that there's a group of smart people (like you, us, or anyone else) that never does anything stupid is false. We're all stupid. If you're breathing, you're stupid… and thank goodness for it. Stupid is the realm just beyond the tiny little circle of familiarity we all live in every day. Stupid is where the best ideas are born. Stupid is the scorn you brave when you're sure you're right and absolutely nobody agrees with you. Stupid is your limits. It's self-knowledge, a valuable commodity. If you're never stupid, you'll never be very smart.
Sean Goldsmith and Dan Ferris
New York, New York and Medford, Oregon
March 13, 2012