One of the more controversial aspects of Porter's "End of America" thesis is his prediction that – as the financial crisis deepens – many government services people have come to rely on will stop. The government simply won't collect enough tax revenue to pay the pensions, benefits, and salaries of government employees. States and municipalities will declare bankruptcy. Huge cutbacks will take place. Riots and protests (like those going on in New York City and Greece right now) will become commonplace.
This is a problem that runs through the system at all levels: local, state, and federal. It's going to cripple the government's ability to pick up garbage, police communities, and fight fires.
We're in this situation because public employees – and a good portion of the public they serve – have discovered that they can vote themselves the Treasury. Rather than viewing the government as an entity that should set and enforce rules and protect the public in times of war, many people see it as a gravy train.
As Michael Lewis writes in his latest article for Vanity Fair, the gravy train is crashing in California. Lewis, who in our opinion is the best financial journalist in the world, recently traveled to California to investigate the state's financial crisis.
He notes that in the city of Vallejo (which is next to San Francisco), you can park anywhere you like. There aren't any meter maids around to write tickets. Police and fire departments have been cut in half. The city declared bankruptcy in 2008. The pay and benefits of "public safety" workers consumes 80% of its budget. The city's finances have been crushed because too many promises were made for too many years.
This story is playing out in many California cities... and others across America. It's playing out in the private sector as well. Lewis notes his thoughts while talking to Vallejo city manager, Phil Batchelor…
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...as he talked about the bankrupting of Vallejo, I realized that I had heard this story before, or a private-sector version of it. The people who had power in the society, and were charged with saving it from itself, had instead bled the society to death. The problem with police officers and firefighters isn't a public-sector problem; it isn't a problem with government; it's a problem with the entire society. It's what happened on Wall Street in the run-up to the subprime crisis. It's a problem of people taking what they can, just because they can, without regard to the larger social consequences. It's not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They'd been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans. |
Lewis' article also contains an interesting section on former California Governor Arnold Schwarzenegger, who he interviewed for the piece. It details the suffocating bureaucracy and incredible power of special interest groups that control California... and prevent any meaningful change from taking place.
The story of Vallejo, the section on Schwarzenegger, and the story of a fat pheasant named Henry all make for a great article. It's long... So you might want to print it off and save it for weekend reading. Right now, the article is free on Vanity Fair's website. You can read it here.
How are other aspects of the "End of America" narrative playing out? Let's consult the ultimate judge – the stock market.
Regular readers know Porter recommends hedging any long positions in super-high-quality dividend-paying stocks, like Intel, with "short positions," which are essentially bets that a particular stock will fall. Readers who aren't comfortable shorting or trading should simply stick with the profitable "50/50 portfolio," which you can read about here.
Porter's readers have made huge gains in his recommendation to short troubled European banks Deutsche Bank and Royal Bank of Scotland. Stansberry's Investment Advisory readers also booked a 50%-plus gain by shorting troubled homebuilder Pulte. And one of his most recent short recommendations, homebuilder D.R. Horton is starting to move his way as well.
Like many homebuilders, D.R. Horton is still suffering the "hangover" of the housing boom. Inventories are rising, and cash flow is drying up. Margins are falling. As you can see from the chart below, the market is waking up to D.R. Horton's situation. Shares just "broke down" to a new 52-week low... and the stock has much further to fall.
As economically sensitive sectors like natural resources and homebuilders fall, it's important to note the stocks that fit into one of our big themes here at Stansberry & Associates are holding up just fine.
Our "big theme" is one Dan Ferris has written about constantly for the past few years... seeking the safety and dividends of elite "World Dominator" businesses. On Monday, we showed you how two dividend dominators, Coke and cigarette-maker Altria, are holding up extremely well while the broad market is crashing.
Today, we point out two more dividend payers that are holding up during the crisis – drugmaker Abbott Labs and consumer staple/drug giant Johnson & Johnson. Below is another "performance chart." It plots the performance of Abbott (red line) and J&J (green line) alongside the performance of the benchmark S&P 500 index (black line). The two dividend payers have gained in 2011 while stocks in general have crashed. It illustrates why we encourage investors to own only the best stocks and consider shorting the worst ones, as the "End of America" plays out.
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New 52-week highs (as of 10/4/11): None.
Our subscribers take more shots at Greg V. in today's mailbag. Send your thoughts to feedback@stansberryresearch.com.
"Interesting. Really... So what's up with *THAT*? In this market – a huge homebuilder UP, much less up to a 1-year high when new home sales are at their lowest in how many decades? Inquiring minds want to know..." – Paid-up subscriber Jim
Goldsmith comment: We get these e-mails constantly... We are shorting D.R. Horton in Stansberry's Investment Advisory. When the stock falls, we make money. When it hits a 52-week low, it's a 52-week high for our position.
"I think Porter Stansberry's Feb 25, 2011 Friday missive is a must-read and read-again piece. I used it to good effect this year. Suggestions by Mike Williams, Dan Ferris, and Doc Eifrig are great for filling the 50% cash portion of Porter's portfolio. Suggestions by Dan Ferris and Doc Eifrig have helped me build the 30% of dividend growers and World Dominators. Steve Sjuggerud, Mat Badiali, Frank Cuzio, and Jeff Clark give me all I need for the 20% Speculative portion of the portfolio. And, with Porter's Friday hints, its a total package. A real Team effort! I hope to graduate to include selling options and shorts. Thanks guys." – Paid-up subscriber John Prather
"Please tell Mister Greg V that my company has a whole plant in Appleton Wisconsin dedicated to build new high tech vending machines for Coke-A-Cola. My plant here in Buffalo Grove Illinois specializes in medical Equipment ( Abbott, Cerner, Medtronic's, Johnson & Johnson are some of our customers). We took that high tech and applied it to a Coke machine, see CNBC 'The New Real Thing' that runs often at night and weekends. Our product comes on about 48-49 minutes into the program, or 11-12 minutes before the end.The market for this new vending machine, every bar, restaurant, cafeteria, convenience store, & gas station in the world." – Paid-up subscriber Jack McLean
"After reading Greg V's opinion on Coke, I wanted to add my two cents. I e-mailed this comment before, but decided it's time send it again.
"I'm an engineer. I work internationally on projects such as building billions of dollars' worth ships in Korea, trillion-dollar LNG projects in the Middle East. As well as travelling and working extensively throughout, Africa, The Middle East, Northern Europe and also Asia. There are currently some very extensive engineering projects going on in the world. Google Singapore's water and sewer treatment project or Kuala Lampur's SMART (Storm water Mgmt and Road Tunnel) Tunnel.
"The sad thing is that these projects are not being built by American companies or even American workers. These projects instead are built by mostly German, French and British firms using mostly Indian labor. A lot of the jobs these projects produce are high paying blue-collar jobs (operating heavy equipment, rigging, safety mgrs.). Some jobs earning in the 100k USD range on these projects, that's for blue-collar jobs.
"The reason we don't see American companies building these projects is TAXES. Because the US govt taxes US companies on their overseas profits, US companies cannot compete internationally. Their bids are always higher than the competitors bids due to having to also cover taxes on the job. And so as a result, US companies do not participate in these projects. As a result we are not only losing jobs, and earnings, but our stature in the world.
"Just think of the nuclear industry, or the space industry. The same is true today in shipbuilding, mining, construction and other engineering mega-projects. It's sad to say, and it's embarrassing, but as a country we are falling behind the world. On another note, we as American's possess a can-do attitude that's rare in the world. My advice to the generation starting out in engineering or construction is to go work overseas for some time." – Anonymous
Regards,
Brian Hunt and Sean Goldsmith
Delray Beach, Florida and Baltimore, Maryland
October 5, 2011
The 'End of America' strikes California... How to bleed a society to death... Big gains rolling in for short sellers... Porter's latest target…