The Chinese government released data today showing imports, exports, and its trade surplus all increased…
Imports for crude oil and copper rose 6.8% and 14.1%, respectively, from the previous year. Iron ore imports jumped 8.4% from a year ago. The growth was slower than 2011, but still a record-high volume.
China's exports also rose 14.1% in December – the fastest in seven months and above November's growth of 2.9%.
Record-high imports of industrial commodities and growing exports both point to a strong Chinese economy. (Growing exports also mean China's trading partners, in particular Europe, are strengthening.) And they helped China post a $231 billion surplus for 2012 – which is more than 50% greater than 2011 and broke three annual declines in a row.
Following his company's solid earnings announcement, steel company Alcoa's CEO Klaus Kleinfeld said in an interview with the financial news channel CNBC that China's "clearly coming back." Alcoa forecasts growth in all of its major markets for the year.
Let's turn our focus to copper (one of the most important commodities in construction)… Nick Trevethan, an analyst with the Australia and New Zealand Banking Group, estimates China's copper demand grew 6%-7% in 2012.
And that means big business for Matt Badiali's S&A Resource Report pick Southern Copper (SCCO)…
China is the world's largest consumer of coal, iron ore, and copper. (It consumes 40% of the world's copper.) And global mining companies depend on a growing China to consume their goods.
Badiali recommended Southern Copper in his January 2012 issue. Southern Copper is one of the world's largest copper miners, with a market capitalization of $33 billion. It owns the world's largest volume of copper reserves (138 billion pounds). And it owns the world's longest-lived copper mines, with an average life of 81 years.
In addition to its copper, SCCO also has 5.2 billion pounds of molybdenum, 2.8 billion pounds of zinc, and 898 million pounds of lead.
And because China showed strong growth in 2012, shares of Southern Copper soared…
Southern Copper's performance is also proof of one of our biggest investment themes today… the Bernanke Asset Bubble. As global central banks continue easing (printing money), asset values around the world will increase.
We don't expect central banks to cut back their money printing anytime soon. And it's clear China is recovering. (It's expected to grow around 8% this year.) Southern Copper is one way to get exposure to both… Plus, the company paid more than 10% in dividends last year (and it paid 9% in 2011).
Why the huge payouts? Southern Copper has more than 144 years' worth of production in reserves… So it doesn't have to invest much money back into the mines. In 2011 (the latest numbers), it had capital expenditures of $613 million. It paid more than $2 billion in dividends.
A double-digit yield is rare today… And it's almost unheard of in a mining company.
Profit from China's rebound and collect a double-digit dividend…
Score one for the China bulls. In today's Digest Premium, we review the signs of strength coming from the huge Asian economy… and one stock that should ride higher on China's growth…
To continue reading, scroll down or click here.
Profit from China's rebound and collect a double-digit dividend…
Score one for the China bulls. In today's Digest Premium, we review the signs of strength coming from the huge Asian economy… and one stock that should ride higher on China's growth…
To subscribe to Digest Premium and access today's analysis, click here.
The Herbalife controversy heats up... Everybody chimes in... Ackman: 'It's a pyramid scheme'... Loeb: 'It's an undervalued high-growth company'... Icahn: 'I'm with Loeb'... Porter: 'I don't admire MLM companies and can't recommend them'... Ferris: "Not my cup of tea"...
The battle over nutraceutical company Herbalife is heating up...
Digest Premium subscribers learned of hedge-fund manager Bill Ackman's short position in the company after I (Sean Goldsmith) attended his presentation in New York City.
Ackman spent one year researching Herbalife. He came to the conclusion the multilevel marketing (MLM) business is a pyramid scheme. His hedge fund, Pershing Square, shorted $1 billion of Herbalife stock. The company's top executives vehemently denied his charge… and accused him of creating the situation for his own gain. (Ackman has said he will donate the profits to charity.)
These are serious charges… with much at stake. Should Ackman prove Herbalife is indeed a pyramid scheme, the company is a "zero." The government will shut it down.
We ran a full write-up of Ackman's presentation in Digest Premium. If you don't receive Digest Premium, you can subscribe here and gain access to our coverage.
Without getting into the finer points, Ackman argued Herbalife makes the majority of its money through recruiting new salespeople, not by selling its products. And Ackman estimates 93% of Herbalife's 3 million salespeople make no money... Only the top 1% make more than $6,000 a year.
You can view Ackman's entire presentation (it's around 300 slides) here.
After Ackman's presentation, Herbalife shares plunged 40%:
But as you can see, shares quickly recovered... And now, others on Wall Street have stood up to defend Herbalife.
Earlier this week, fellow billionaire fund manager Dan Loeb announced he took an 8% position in Herbalife. The stock rallied.
In a letter about his position, Loeb countered Ackman's argument…
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The pyramid scheme is a serious accusation that we have studied with our advisors. We don't believe it has merit. The short thesis rests on the notion that the [Federal Trade Commission (FTC)] has been asleep at the switch, missed a massive fraud for three decades and will shortly awaken (at the behest of a hedge fund short seller) to shut down the company. We find this to be preposterous...
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... even the short seller conceded that the FTC was not looking at Herbalife's practices. In our experience, expert regulators like those at the FTC do not respond to sudden pressure from a hedge fund whistleblower by acceding blindly to their demands. Finally, even if there were some regulator intervention, we are comforted by the fact that 80 percent of Herbalife's revenues come from overseas.
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Loeb said he believes Herbalife is a viable company with strong growth and fundamentals. And he thinks the stock could return to its April highs of more than $80 a share. He concluded in his letter…
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[Herbalife's] Volume, revenue and earnings are all growing double digits and the balance sheet is largely unlevered. Management has a history of returning 100 percent of net income to shareholders in the form of dividends and buybacks. If management were to deploy its existing $950 million buyback authorization in the $40-45 range (only taking leverage to approximately 1.5x), we estimate that run-rate EPS for 2013 could be $5.50-5.70 using the reduced share count. Applying a modest 10-12x earnings multiple suggests Herbalife's shares are worth $55-$68, offering 40-70 percent upside from here and making the company a compelling long investment for Third Point.
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And this morning, the New York Post reported billionaire investor Carl Icahn took a long position in Herbalife.
Based on past dealings, Icahn and Loeb both seem to have axes to grind with Ackman. Loeb lost money investing in Ackman's Target fund, when Ackman raised $2 billion to invest in one, secret stock. (We were shocked how many otherwise sensible investors fell for Ackman's Target fund, which was obviously one of the silliest hedge-fund ideas ever.)
And Icahn lost a legal battle with Ackman in 2011 after a real-estate deal between the two went bad.
Today, at the Four Seasons in New York, Herbalife is hosting a presentation to debunk Ackman. It seems to be working. The stock jumped as much as 5% today. You can read highlights from the presentation at the Wall Street Journal's blog.
At one point during the 2.5-hour presentation, Herbalife Chairman and CEO Michael Johnson said, "Girl Scouts sell cookies on a direct selling basis. Nobody attacks them."
But... nobody is attacking direct selling (which we do, too). The controversy is with the nature of multilevel marketing, not direct selling. So the comment fails to address the core controversy. It's probably extremely difficult if not impossible in the eyes of many to credibly defend the core business model of an MLM company. Still, we must recognize that it's highly doubtful they're doing anything illegal...
Many people consider Herbalife's business to be a pyramid scheme. But there is a federal definition that the MLM industry was able to push through the Federal Trade Commission in the late 1970s...
Around 1975, the FTC came after MLM company Amway for violating consumer protection laws. After years of litigation, in 1979, Amway prevailed and the "70% rule" came into effect. The rule states distributors must sell 70% of the products they purchased from the "mother" company before reordering.
The case became known for its "Amway safeguards," which protect MLM organizations.
Herbalife's business model is predicated upon meeting the 70% rule and one other constraint (which we'll discuss in a moment).
One note on Amway... The founder, Richard DeVos, has strong ties to the Republican party. (Gerald Ford, a Republican, was president at the time of DeVos' legal troubles.)
Today, Dick DeVos Jr. is married to Betsy Prince, sister of Erik Prince – the founder of the politically powerful private army contractor Xe. (Until recently, it went by the name Blackwater.)
The Prince/DeVos marriage, linking Amway and Blackwater, has been called the most politically influential family in the Republican party... though it seems a bit odd, marrying multilevel marketing of cleaning products (among many others) with mercenaries. What are they going to do, invade Cuba and clean all its bathrooms against its will? Would that be so bad?
In 1994, the FTC targeted another MLM organization, Omnitrition. The case emboldened the FTC to revisit the legitimacy of MLMs. And from this case came the "50% rule," which states a distributor must obtain 50% of his sales from customers outside the network.
This is another benchmark Herbalife is designed to achieve through business practices and accounting.
In 2000, things got easier for MLMs... The former head of the Direct Selling Association (DSA), a lobbying group for companies like Herbalife, was in charge of the FTC from 2000 to 2008. He paved the way for giant MLM companies to flourish in the U.S.
The battle surrounding Herbalife comes down to politics... The government is no longer controlled by Republicans. And Ackman is a Democrat (at least according to his political contributions). The question is, can he use his political sway to persuade the FTC to shut down Herbalife?
Ackman controls billions of dollars (both personally and through his hedge fund). And he said he can't be bought off in this battle.
Now, Loeb and Icahn (also controlling billions) have entered the arena... We predict this will be a long, arduous battle. One side will make a fortune. But nobody will escape unscathed.
Our friends at the Bronte Capital blog called the fight "the hedge-fund equivalent of Stalingrad"…. referring to Hitler's bloody and ultimately futile siege of the Russian city during World War II. Ackman's not going away, so Herbalife is going to have to defeat him totally. Someone's going to lose big. Even the survivor will emerge so bloodied, the victory will feel hollow.
I (Porter) spent the better part of a week trying to develop some conviction for either side of this trade. I couldn't...
Multilevel marketing companies, like Herbalife and Amway, prey upon the gullibility of the masses. They entice millions of people to believe in a very, very unlikely course of events... that they'll be one of the few people to be successful in an organization whose design makes it impossible for most people to succeed.
That's not the kind of business I'd want to own because I believe in the idea of capitalistic karma. If your business doesn't actually serve the interests of its owners, employees, and customers… sooner or later, it will fall apart. I can't prove that will happen anytime soon to Herbalife or Amway... but sooner or later, its poor business practices will become apparent. The fad of these kinds of firms will die away.
On the other hand, these firms have plenty of political muscle, and they operate under thoroughly litigated legal precedents. I think Ackman is unlikely to prevail. But... because these aren't the kind of firms I admire, I can't recommend you invest in them.
I (Dan Ferris) looked into Herbalife a couple years ago and simply chose to avoid it. I didn't believe then and don't believe now that it has a durable competitive advantage. Though the odds are against building as large an organization as Herbalife, it wouldn't be very difficult to start up a new competing organization.
Its success isn't predicated on the products, but on management's ability to foment greed in new recruits. I'm sure there are plenty of folks who can do that. It's similar to the risk in many technology businesses. A smart person working from his garage can put you out of business.
But Ackman made one important point in his presentation. The products are overpriced commodity products, not strong brands. I seriously doubt anyone will ever say, "No thanks. I only buy Herbalife," in the same way I often say, "Pepsi? No thanks. I only drink Coke."
Add it all up and here's what I get: Commodity products with no brand-name value, super-high prices versus competitors, low barriers to entry, and public criticism of its core business model.
I don't really care how fast it's growing. In my experience, this isn't a recipe for a great long-term investment result. I don't know if it'll take 10 weeks, 10 months, or 10 years. But sooner or later, I expect the margins and returns to equity to deteriorate. I'm avoiding Herbalife. And I don't expect to become interested in multilevel marketing.
New 52-week highs (as of 1/9/13): Guggenheim BulletShares 2015 High Yield Corporate Bond Fund (BSJF), iShares Home Construction Fund (ITB), SPDR Barclays High Yield Bond Fund (JNK), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), Guggenheim China Real Estate Fund (TAO), Targa Resources (TRGP), Monsanto (MON), RPM International (RPM), 3M (MMM), Consolidated Tomoka (CTO), Alico (ALCO), American Financial Group (AFG), Brookfield Asset Management (BAM), Kohlberg Kravis Roberts (KKR), Becton-Dickinson (BDX), Cheniere Energy (LNG), Magellan Midstream Partners (MMP), CVS Caremark (CVS), Walgreens (WAG), and Home Federal Bancorp (HOME).
In the mailbag… turns out we've got a few "midnight gardeners" among our subscribers. Send your e-mail to feedback@stansberryresearch.com.
"Where I hide my gold... Would you like a map?" – Paid-up subscriber EL
"I hide it in two places. A small amount of gold and junk silver is stashed in some PVC pipe behind a raw wood pile in my workshop. The bulk of it is in some capped PVC pipe buried at the center of a circle defined by three large trees. My kids know how to identify the trees, and they're smart enough to figure out where the center of that circle is." – Paid-up subscriber EH
Ferris comment: Are you kidding? Please tell me you're kidding.
"Lately in the Northern Virginia area, thieves have been using metal detectors to hunt for gold in their target houses. So the ideal place to hide precious metals would be in some naturally metallic part of the house that would be safe for the gold, not obstruct some critical system of the house, and appear plausible when scanned with a metal detector. Any ideas? I'm still working on this one..." – Paid-up subscriber Pete
Ferris comment: Pete... you're a subscriber... so... I mean... um... we have your address, you know?
Regards,
Profit from China's rebound and collect a double-digit dividend…