The financial reform bill looks like it'll be signed into law sometime next week.
It's ironic that the bill is named Frank-Dodd, for its sponsors, Congressman Barney Frank and Senator Chris Dodd. They were among the most enthusiastic supporters of the idea that poor people who can't pay back loans should get houses they can't afford. They both expressed the desire to see Fannie Mae and Freddie Mac take on more risk – a primary cause of the financial crisis.
Frank famously said, "I would like to get Fannie and Freddie more deeply into helping low-income housing... I want to roll the dice a little bit more in this situation towards subsidized housing."
Dodd was famously clueless about Fannie and Freddie, calling them "strong, viable institutions" in July 2008. Fannie fell from $40 to $0.30 that year, Freddie from $25 to $0.25. They're both delisted now.
Now, the dynamic duo of finance is blaming the free market for the failure of Fannie, Freddie, and the idea of giving mortgages to people who can't repay them. They're writing a 2,300-page law to saddle the market with even more regulations.
That's how it works inside the Beltway. You ruin everything, blame it on the free market, then take over the industry.
I think one of the consequences of the new law is the same as all new regulations: It'll strengthen the position of the largest, best-capitalized incumbents. Do you really think Bank of America, JPMorgan Chase, or Citi will suffer under the new regime? Of course not. They were probably whispering into Barney Frank's ear to tell him what to put into the new law.
That's why investors like John Paulson and Bruce Berkowitz have big stakes in companies like AIG, Bank of America, and Citi. They understand the value of buying the companies that get the biggest favors from the government.
In the most recent Extreme Value weekly update, I went through a whole list of well-capitalized companies that have big competitive advantages due to government interference. I told my readers, "We get a lot of complaints at S&A about being too political. But it's virtually impossible to do your job as an investor without paying attention to politics... As an investor, you need to find ways to get paid by the government."
To get access to the list of Extreme Value companies that can help you get paid by the government, click here. Once you get access to Extreme Value, just go to the e-mail update from July 12, 2010, titled: "Weekly Update: Grove and Munger." There, you'll find six safe, undervalued stocks, all of which benefit directly from government programs that reduce competition in their industries.
Stocks are higher now than they were Monday, but investors are more scared than ever.
Today, the polling group Rasmussen Reports said its Investor Index fell to its lowest level since July 28, 2009. The index measures the "economic confidence of investors on a daily basis." Since Monday, the S&P 500 is up about 1%, but Rasmussen says investor confidence is down 12 points.
That happens in sideways markets. Stocks ratchet up and down, up a year or two then down a year or two at a time. Investors never quite get that old bull-market confidence back, so they start getting skeptical.
In his February 2010 issue of Stansberry's Investment Advisory, Porter explained a few situations he looks for when selling stocks short...
The second approach is to pick out overly indebted firms, like General Electric. These are probably my favorite situations in all of finance. There's something reassuring about shorting a company that cannot afford its debt. It's like playing chess when you've got your opponent locked up. The game might be four or five moves from checkmate, but you can see it coming and you know your opponent has no way out.
On an individual level... If you're broke, do you spend your way out of debt? Of course not. But that's how GE's CEO, Jeff Immelt, is "solving" the problem. GE's media and finance revenues are shrinking, so Immelt plans to boost R&D spending in GE's technology sector in hopes of developing blockbuster products. GE will spend $20 billion through 2012 on technology R&D. If this corporate projection is like all the others, the actual number will be much higher.
A quick look at GE's income statement shows the company is currently spending around $20 billion a year in interest (the actual number should be much higher, but GE receives preferred interest rates because the government is guaranteeing its debt). Add another $10 billion a year for R&D. That's $30 billion a year GE is spending just to service its debt and hopefully create a successful new product. That's more than GE has earned ($28 billion) in the past two years.
If you haven't already shorted GE, maybe this will convince you. To get access to everything Porter's written about GE in his Investment Advisory, click here...
If you're looking to bolster your stock portfolio with super safe, income-producing securities, you need to check out Tom Dyson's "Black Market Income Secrets." Tom spent years working for Citigroup in London, collecting income secrets the bank would use for its personal account... and never reveal to its clients.
Tom's also picked up a few secrets of his own as an income analyst for his 12% Letter. In his latest report, he tells readers how to actually increase the dividends they receive from U.S. corporations. He also shares the details of a 24% Tax CD – it is guaranteed by local governments and it's not correlated with the stock market. And Tom shares his discovery of a special tax code that allows investors to collect double-digit yields from certain companies that normally don't pay dividends, like Google.
Tom's Black Market Income Secrets collects the best off-the-radar income generators we've ever seen... After reading Tom's reports, you will discover several opportunities to produce safe, double-digit income. As a bonus, in his issue – out today – Tom updates readers on which of these secrets they can begin using immediately. To learn more about these secrets and read Tom's latest recommendations right away, click here.
After fixing a leak in a cap designed to stop the Gulf spill yesterday, BP is preparing to test the cap today. BP is hoping for high pressure (signaling only one leak in the well). If the pressure is low, it means there are more leaks, lower down in the well.
BP will take 48 hours to determine if the cap is working. If the cap works, BP should be able to capture all of the oil within the cap... Or if the pressure is too great, the oil will channel through lines to as many as four container ships. Currently, BP is catching around 25,000 barrels of oil a day. A successful cap would increase recovery to 60,000 to 80,000 barrels by the end of the month.
The market is bullish on BP's prospects. Shares are up over 3% today... and up over 36% since bottoming at $27.02 on June 25. The bad news is priced into this stock. The dividend has already been cut. Investors already know the cleanup will cost tens of billions of dollars. And people already expect this to be one of the worst manmade disasters in history. Of course, there's still the government risk – which has permeated every corner of the market. Regardless, investors are buying the stock again.
Our friend Whitney Tilson is an outspoken investor in BP. Today, oil legend T. Boone Pickens said he thinks BP is a good buy... "You're going to have to stand a little more heat, but I think [BP will] kill the well by mid-August," Pickens told Bloomberg. Pickens said BP's reputation will be further damaged when the government starts its investigation – an arguable point – but also says, "Today BP is a good buy."
As of March, Pickens held no BP shares. He does own Anadarko, Halliburton, and Transocean – the other three companies involved in the spill. And he's currently adding to his Transocean position.
New highs: Keyera Facilities Income Trust (KEY-UN.TO), Anheuser-Busch InBev (BUD), Enterprise Products (EPD).
In today's mailbag, do you count yourself in John Steger's middle class? Let us know here: feedback@stansberryresearch.com.
"I had always considered myself to be in the 'middle class'; but if, as John Steger states, the middle class does not like your opinions on the government etc. Then I'm obviously not a part of his 'middle class' and neither are many of my friends and co-workers. So I will accept my position in the 'lower middle-class' if it means I am not lumped in with the idiots in Steger's middle class that don't see anything wrong with the horrific handling of 'our' money, the damage done by excessive and idiotic regulations, and obvious payoffs/free pass to cronies doled out by Congress and OBAMA! A truly disgusting display of mismanagement, arrogance, and stupidity by our self-serving public officials." – Paid-up subscriber Mike Huskey
"'The underlying cause of all the world problems is overpopulation...' Mr. Steger must have gone to college. This is how 'over populated' the world is. 6 1/2 billion people in the world. divide by square miles in Texas, 268,601... equals a population density of 24,199 per sq. mile. Mumbai – highest population density in the world = ~29,650 per sq. mi. New York City = ~26,403 people per square mile. Conclusion: Every man, woman, and child in the world would fit into the state of Texas and still be less populated per square mile than the cities of Mumbai or New York. That leaves 49 states and 191 countries left over." – Paid-up subscriber Robert McGuire
"Did I miss something in the recent comments by other subscribers about government land? We/I, am the government last time I checked, at least in Canada & the US. I think this reaction is very indicative of the current meme regarding government and its role in our life. I am a happy Canadian resident living in a resort with lots of condos around. The idea that our natural environment is under some threat of encroachment by nasty capitalists is absurd. There is nothing but total wilderness for hundreds of kilometres in every direction. If you don't believe me, take a plane ride sometime from Vancouver to Whitehorse, and tell me how many signs of civilization you see in the 2.5-3 hour flight. Do you really think some nasty developer is going to want to develop a strip mall in the middle of nowhere just because he might be able to own the land? For gods sake, get real." – Anonymous
Ferris comment: I know what you mean. Take a plane from any city in the American West to any other city and you feel like you're flying over an ocean of brown, green, and white.
Good investing,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
July 15, 2010