Goldsmith comment: Porter's on vacation for the week, so I'm handling the Digest today and Wednesday. He should be back in action Friday.
Last year, we pointed out the FDIC was close to insolvency... The institution only had $53 billion in funds and had already committed 15% of that to bail out IndyMac depositors. Meanwhile, hundreds of bank failures loomed on the horizon. FDIC Chairman Sheila Bair confirmed our theory this March when she announced her organization "could become insolvent this year" as the depositor fund balance "approach[ed] zero."
Of course, the FDIC will never go bust. If the government will backstop GM, it will bail out the institution that insures America's bank deposits. The only question is how much money will that take...
The several large banks that hold the majority of the country's $8.9 trillion in deposits are "too big to fail" in the eyes of the FDIC. Bank of America, Wells Fargo, Citigroup, and JPMorgan have around $3.4 trillion of deposits – around 38% of the total. If one of these banks went under, the FDIC couldn't come close to insuring the deposits – it has around $20 billion left. The losses would fall onto the shoulders of the U.S. government, which would print trillions more dollars to keep the banks afloat.
Last Thursday, regulators closed seven banks (six of them in Illinois), bringing the total number of failures in 2009 to 52 – more than double the total for 2008. You can see the complete list of bank failures here.
The latest round of closures came less than a week after regulators shut five banks in one night – the worst day for failures since October 1992. The seven failed banks held a total of $1.5 billion in assets and will cost the FDIC $314 million. The FDIC's day of reckoning is fast approaching...
Now, Bair is trying to rally "nontraditional investors." At a recent board meeting, she said the FDIC wants to attract new private-equity buyers for failed banks... with a few restrictions. The new investors would have to keep the acquired banks capitalized at a 15% leverage ratio for at least three years. And they would have limits on their ability to sell assets and lend from the banks they buy. If you're trying to attract new capital to buy these garbage assets, this probably isn't the way to go about it.
MGM's City Center development seemed doomed from the beginning. The massive casino/condo development nearly dragged its parent company MGM Mirage into bankruptcy. Then, MGM's partner – Dubai World – sued the company for breach of contract. Now, buyers who already put a deposit down for a condo want their money back...
To date, buyers have put down $313 million in deposits on 1,500 units – out of 2,440 total units. Many of these deposits came in 2006 and 2007, when Las Vegas was booming. Now, home prices are down some 30%, and the unfortunate condo owners want MGM to discount their condos or return their deposits. A group of buyers hired legal representation to help their cause.
To make matters worse for the company, most of the first-round City Center buyers purchased during MGM's "friends and family" promotion, meaning they have a close relationship with the company. CEO Jim Murren put deposits down on two condos. Billionaire investor and major MGM shareholder Kirk Kerkorian also bought a condo. As one upset buyer, who put a $600,000 deposit down for a $3 million condo put it, "It's tricky for MGM Mirage. You make your best customers angry."
We wrote it, did you short it?
Given our total debt already exceeds $10 trillion, it seems improbable this level of deficit spending can continue without sparking a run on the dollar via foreign governments selling U.S. Treasury bonds. No one believes our creditors will ever sell the dollar. But they're wrong. Our creditors will not allow us to print money forever. We are squandering and destroying the greatest advantage of our country – control over the world's reserve currency...
Meanwhile, inflation will wipe out much of the value of long-dated U.S. government bonds, causing their prices to plummet. – January 2009 Porter Stansberry's Investment Advisory
In his January issue, Porter recommended going long corporate bonds – whose value would increase as the dollar fell and inflation returned – and shorting long-term U.S. Treasuries, which will disintegrate as the government continues printing dollars. The trade is currently up around 23%.
Describing his favorite type of investment, Jim Rogers famously said in the traders' bible, Market Wizards... "I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up." His point was clear... If you wait for a can't-lose trading opportunity, like Porter's Treasury short, you'll make a fortune.
So it's no surprise Rogers is jumping into the short Treasuries trade... "The government is printing lots of money and borrowing even more; that's not the basis for a sound currency," he told Bloomberg in a telephone interview. "The idea that anybody would lend money to the U.S. government for 30 years at three or four or five or six percent interest is mind-boggling to me."
Rogers said he's unloading dollars, and he plans to "short U.S. government bonds someday." Rogers has missed our 23% gain, but there's much more deterioration to come in U.S. Treasuries.
In the mailbag, debating Russian translations... Any linguists interested in jumping in, send you comments here: feedback@stansberryresearch.com.
"I disagree with Jeremiah; if you were writing a Russian language newsletter, 'tovarish' would be an appropriate word
. However, as I understand it, we are dealing in English here, and 'comrade' is a correct translation. My Russian-to-English dictionary says that ??????? (tovarish) can be translated as companion, comrade, or mate. My Russian-born co-worker and I freely trade barbs in both tongues and with both versions. Your words 'Amerika' and 'comrade' are fine with me, Porter. Keep up the great work (and humor)." – Paid-up subscriber Jim
"You asked if anyone was happy with their lifetime membership. That would be a definite yes! I was shredding some old files this weekend and came across a page with my order ID number for the 'Pirate Investor's Alliance Enrollment Form' dated 05/13/03. While my wife and I may not be among your wealthiest alliance members, we have certainly made many times over our original membership cost. My wife no longer regrets 'working at home' as she has made more money this last year using the Put Strategy, Advanced Income, and the Short Report than she did at a 'real job.' We really appreciate all the hard work your staff does researching – a task that most people would find onerous at best. Thanks to your newsletters, my investment and IRA accounts have weathered this bear market quite well." – Paid-up subscriber R. Brower
"When I became an Alliance member a few years ago it was a very large investment for me. (I still haven't told my wife how much I paid) I was already paying for a couple of your newsletters as well as a few others. Seeing now what I get every month for my trust and faith in Stansberry makes me feel like the smartest investor I know! What Value! What a great investment! Not only do I get more investment advice than I thought I would, I've been getting an education as well. All the newsletters are written so as to give a background and then a logical reason to consider the recommendation presented. I like that style and read everything in every newsletter and enjoy them as 'short stories' as well as investment letters. Go ahead, ask me how deep South Africa's mines are or how cancer might be cured with new treatments or what a virtual bank does! I love it! P.S. The money I've made ain't bad either. A VERY sincere thanks, guys." – Paid-up subscriber Glenn F.
Goldsmith comment: Nearly every e-mail we've received on The Alliance - nearly every e-mail we've received on the topic (we've received hundreds of them) has been super positive. The Alliance really is the best value in financial advice you'll find. Reading our publications will undoubtedly make you a better investor and hopefully add some cash to your brokerage account.
Regards,
Sean Goldsmith
Baltimore, Maryland
July 6, 2009