The Federal Open Market Committee's latest plan... Curzio's latest victory... Signs of a top... What Chanos is shorting... Vancouver is pricier than New York... World Bank calls the end of the dollar... Who's right on munis?...
The Federal Open Market Committee released its minutes today... which included nothing unexpected. The Fed said the first step it will take to tighten monetary policy is to stop reinvesting the principal payments on the mortgage debt it holds. In other words, combined with the end of QE2, the Fed will completely exit the Treasury market. Then, the Fed will raise short-term interest rates. If the Fed shrinks its balance sheet at the same time it raises interest rates, it will have a powerful deflationary effect on the economy. We'll see a massive selloff in commodities and a corresponding strengthening of the dollar.
But… is our economy strong enough to withstand those effects? We don't think so. The recent rebound in our economy has resulted solely from money-printing. The fundamentals aren't there. Once the Fed realizes this, it'll step right back in with another round of quantitative easing (QE3).
|
Let's use the market's pessimism to purchase shares at these levels. Again, the bounce back following a huge downturn in a brand-name stock can be more than 100%. If Take-Two meets its earnings estimate in 2011 – which I don't think will be a problem – the stock should at least double from here. – Frank Curzio, Penny Stock Specialist, December 2009 |
Take-Two (TTWO) is an example of one of Curzio's "give-up stocks." These are stocks the market has given up on, but still have huge potential. In Take-Two's case, the company had issued an earnings warning based on delayed video-game releases and weaker revenue. Shares plunged 30%. But Frank recognized Take-Two's strong portfolio of video games would drive up sales. Yesterday, shares popped nearly 9% after its newest game, L.A. Noire, garnered rave reviews. The recent move brings Penny Stock Specialist subscribers' total return to 117%.
Frank says his latest issue, due out today, is the "most important [he's] written in the past 18 months." He discusses the fundamental weaknesses he sees in the market. He also discloses an investment strategy to make "200%-plus returns in a weak market." To access Frank's latest, click here...
Signs of a top... Billionaire fund manager Howard Marks plans to list his Oaktree Capital Management on the New York Stock Exchange. Oaktree manages approximately $82 billion and focuses on fixed income. Marks sold shares in his company once before... In May 2007, months before the market peak, Oaktree sold a minority stake to institutional investors for $700 million.
We've said it many times... When these alternative asset managers, some of the brightest minds in the business, sell their companies, you don't want to be buying. Just look at private-equity firm Blackstone's IPO for proof.
In Howard Marks' case, he said so himself only two months ago. At a Berlin investment conference this March, Marks told investors it was time to be "cautious." He said the market could be "shaky" as the government reins in its quantitative easing...
"I'm quite confident we won't have a QE3, since I don't think there's any appetite for that, and this is what starts us on the path of restoration to market-derived interest rates rather than artificially low interest rates," he said at the conference. "That is a healthy thing as we wean the patient off of life support, but it is uncertain. To carry on the patient analogy, the patient will be a little woozy and a little shaky when he first gets out of bed."
If you're worried about the market, start hedging your equity portfolios with some short sales. Porter has recommended several short sales in his Stansberry's Investment Advisory. Dan Ferris has also recommended some shorts in Extreme Value.
But while almost nobody makes their entire living selling stocks short… Jim Chanos, founder of short-only hedge fund Kynikos Associates, does. Chanos is famous for his calls on Enron, WorldCom, housing, and secondary education.
His latest victim is China... Chanos points to China's real estate glut as the catalyst for its downfall. The central government is deploying capital to make forecasted gross domestic product numbers. Most of that money is going into real estate... China is spending hundreds of billions of dollars to build entire cities (where nobody lives) and acquire commodities. Chanos believes the bubble is already bursting. He notes real estate sales offices are closing in China. And the big Chinese money is moving cash abroad (more on this later). Meanwhile, the American public is rushing into every Chinese IPO it can find.
How is Chanos playing the China bubble? He's shorting commodity producers that rely on China for demand… or as he told CNBC this morning, "anyone that is selling into the investment boom in China." He's smart not to short China directly. It's sitting on $3 trillion of cash. And that can solve a lot of problems.
In the interview, Chanos also disclosed a short position in UK-based offshore gaming companies. He said management is shady and can't be trusted.
One benefactor of the Chinese moving their money out of the country is Vancouver. Sales of detached homes, townhouses, and condominiums in metro Vancouver increased 70% in February from January. They were up 25% from a year earlier. Sales jumped 32% in March from February – just short of the record for the month set in 2004.
Most of the buying is coming from China as its government is curbing real estate speculation at home. The local real estate agencies are clamoring to hire Chinese-speaking agents. One realtor said he's "never been busier" in his 30-year career. The surge of Chinese buyers pushed Vancouver prices past New York City's. The median home price is $618,000.
|
New 52-week highs (as of 5/17/11): SPDR Utilities Select Sector (XLU), Pepsi (PEP), Procter & Gamble (PG), Take-Two (TTWO), Altria Group (MO).
You may see conflicting viewpoints in our publications from time to time. Is that a fraud? No... It's smart business. Send us your thoughts here... feedback@stansberryresearch.com.
"In today's Digest Mike Dubuss asked you straight up to reconcile the conflicting advice between two of you on municipal bonds, a legitimate question. Your reply, in part, was: '... You'll have to read what we've both written about the topic and decide for yourself. That, as you know, is the responsibility of a free man.' No, you're the experts. That is the responsibility of an expert consulted on a matter.
"Your answer was arrogant and insulting, two descriptions which I'm sure you heard before. You may as well have just said, 'You go figure it out.' While I value the advice you give, or I wouldn't be subscribed to just about all you have, when you have conflicting information cross-analysis, you owe a reconciliation of it when requested as here, not a flippant response. Since you complain about politicians' answers and positions you shouldn't be doing the same thing." – Paid-up subscriber Pat
Porter comment: You've got it all wrong. I've written extensively about muni bonds. Extensively. I've probably written 20,000 words on the topic over the last two years. I've got reams of facts and stats to back up my view.
And just today… Meredith Whitney, who called for massive municipal defaults late last year, published a good op-ed in the Wall Street Journal. The numbers she quotes are astounding. Whitney says next month, the fiscal year-end for most states, balanced budgets are due. And states have more than $1.8 trillion in taxpayer-supported obligations – largely from underfunding pensions and other post-employment benefits. Also, the American Recovery and Reinvestment Act's $480 billion federal stimulus, which has subsidized states through the downturn, ends next month. Whitney also notes states have off-balance sheet debt of more than $1.3 trillion. You can read her entire piece here.
My view on the muni market is well established, and it hasn't changed. But regardless, other analysts, looking at similar facts, can certainly come to other conclusions. We publish their views, as well as my own. We do so because it doesn't make any sense to hire an analyst and then demand he write something he doesn't believe. No one would work for us if that were our policy.
Also… you shouldn't pretend that I told a subscriber to "figure it out." That's just not the case.
Good investing,
Sean Goldsmith
Baltimore, Maryland
May 18, 2011