Last night, I was treated to a nauseating two-hour flight that took us one-third of the way to St. John's, Newfoundland, and right back to where we started in Newark, New Jersey. I spent the night at the dingy Holiday Inn Newark (nice big showerhead, but it was too low on the wall). I flew out first thing this morning and arrived around 10:45 a.m. local time... which is actually 1.5 hours ahead of East Coast time. That's how far east we are here. According to my cab driver, Spear Point – about 20 minutes from where I type this – is the easternmost point in North America.
I've been eavesdropping on some of my Canadian colleagues here at the Resource Investors Conference. At lunch, I heard this joke: "How many Newfoundlanders does it take to screw in a light bulb?" Answer: None. They hire two unemployed Ottawa autoworkers to do it.
That's a nasty jibe at Ottawa... but it's my understanding the jokes have been coming the other way for years, and locals think it's time for a little payback.
Overall, there's a sense of the Newfoundland/Labrador economy coming into its own, even as the rest of Canada suffers under the global credit-induced malaise. I even spoke with a writer who says Newfoundland novelists are doing well now, and anything set in Newfoundland is apt to sell more.
So there you have it. This is Dan Ferris, reporting for Stansberry & Associates, here at the new center of the universe. I can only imagine it'll be inundated with Wall Street bankers just before it all goes to hell in 10 years.
On Thursday, I'll fly out to Deer Lake to see a gold-mining project, and then to Wabush to see an iron-ore project. More to come...
As we approach the beginning of the fourth quarter of 2009, we all need to remember how awful last year's fourth-quarter results were.
Last year, the S&P 500 lost $23.25 per share for the fourth quarter. In the second quarter of 2009, 369 out of 478 companies, representing perhaps 97% or 98% of the total market cap, reported negative earnings over the previous year.
So... for the next two or three quarters, you can expect plenty of reports of vastly improved earnings, even if those results aren't really so great. As you parse the news and evaluate your own investment goals, keep your head about you and don't be afraid to spend extra time getting deeper into a company's numbers, its market, its history, and its future prospects than you normally would. And for Newfoundland's sake, don't buy anything that isn't dirt-cheap.
Housing is doing even worse than the S&P 500... and the press likes it even better. This year's housing sales numbers overall have been worse than last year's, yet they're still reported as an improvement.
The latest report touts the monthly increase of home prices in the S&P Case-Shiller Index of 20 major metro areas around the U.S... Except, of course, for Las Vegas, which is joined by Seattle as the only two areas where home prices fell. The increase is over the previous month, and a very typical seasonal occurrence. The results measured over the previous year are a different story...
Though the Wall Street Journal headline says, "Home Prices Post Monthly Increase," the story delivers the real news: "For the 16th straight month, every region posted year-over-year declines." In other words, housing is still falling apart. The best report was from Cleveland, which posted only a 1.3% decline versus the same period last year.
The month we're talking about, by the way, is not September... it isn't even August. It's July. Reporting the traditionally favorable seasonal July results in the seasonally weaker month of September... well, if I were a conspiracy theorist, I'd swear they did it on purpose so they could report good news as the year-over-year comparisons continue to look horrible.
There must be someone at the Wall Street Journal looking at headlines before they go out and saying, "No, no, no. That's not bullish enough... Let's get some good news in there."
Perhaps the most promising thing I've heard about housing prices is how far they've actually fallen since the peak. Through July 2009, the 10-city Case-Shiller Index has fallen 33.5% from its mid-2006 peak, and the 20-city index is down 32.6%.
Those numbers are special only for their sheer size. Prices go where they will, and you and I would be foolish to try to predict them. But at some point, Steve and Porter are going to look pretty smart for telling everyone to buy select properties here and there because the prices are so beat up.
S&A's Tom Dyson published a good piece in DailyWealth about commercial real estate over the weekend. Tom's message is similar to what I heard at the Grant's conference last week at the Plaza Hotel in New York. The commercial real estate debacle has finally begun to unravel in earnest.
At Grant's, the news was delivered by Jerry O'Connor from O'Connor Capital Partners. He said the deluge of debt defaults was now in full swing. O'Connor says there'll be $1 trillion (with a "t") in bank loan and commercial-mortgage-backed bond defaults over the next three years.
Who's holding the bag? Life insurance companies own about 10% of outstanding commercial mortgages. About 24% of them are backing commercial mortgage bonds held by a wide variety of investors... and 52% of outstanding commercial mortgages are held by banks. Kinda makes you wonder why anyone is talking about a recovery in banking.
I've got my own ideas about a certain regional bank that overloaded on commercial real estate and construction projects in states like Nevada and Arizona. I looked at all the numbers and told Extreme Value readers to sell it short. I know a lot of hedge-fund managers who covered many shorts over the past several months... but they're still short this dog. Click here to get access to our monthly Extreme Value, plus full weekly e-mail updates.
What does that old pervert Uncle Sam want to do about the banks? Aside from giving them hundreds of billions of essentially free money to help them recapitalize, he now wants to take a bite back out of their capital and stick them with a bill for three years worth of deposit insurance coverage. The FDIC is failing and needs to recapitalize. So it's proposing banks pay three years worth of deposit insurance today. It expects to bring in at least $36 billion... not quite as much as it has burned through over the past year.
An FDIC memo cited "the extraordinary circumstances facing the banking industry," reminding me of something Oaktree Capital's Howard Marks said last week at Grant's...
Marks reminded us of the story of the six-foot man who drowned crossing a stream that averaged five feet in depth, admonishing investors that they must be able to survive their worst day, week, month, year, etc. if they want to build wealth over a long period of time. The FDIC's unworkable insurance scheme has proved unable to survive its worst period. So it's scrambling to recapitalize... the same way the FSLIC – the deposit insurance scheme for savings & loans – scrambled to recapitalize before it finally collapsed and was folded into the FDIC.
I should fully disclose that I don't much like the FDIC. I think the best way to control risk isn't to put up phony insurance schemes that lull us into a false sense of security. The best way to control risk is to make the exposure crystal clear and put the least amount of mitigation between it and the retail investor. The SEC, too, is a phony scheme. It doesn't protect anybody from anything. SEC employees sit and collect paychecks while the likes of Bernie Madoff steal $60 billion right under their noses.
New highs: PowerShares Insured National Muni Bond (PZA), Hatteras (HTS), Annaly (NLY), Sprott Resources (SCP.TO), iShares High Yield Bond Fund (HYG), Korea Electric Power (KEP).
In today's mailbag, see what your notes have taught me about Canadian health care. Thanks for the replies. Keep them coming here: feedback@stansberryresearch.com.
"Sure, I'm Canadian and I'd love to comment on the Canadian Health Care System. In my opinion it is grossly over-rated. There are long waiting times for MRI's and almost any kind of surgery. By the time you see a specialist it is often too late for optimal treatment because the illness you are experiencing has advanced (heart conditions and diseases don't know they are supposed to wait 3 to 6 months).
"In Canada you don't hear good things about the health care system until election time when all political parties try to gain points by saying how wonderful it is and how hard they will fight to maintain it. And where do our political leaders go when they need surgery? To the good ol' USA. There are many examples of this. And there is NO free health care. Government premiums are about par with private insurance in the States. We have some good doctors but unless you know one personally or happen to play in the NHL prepare to stand in line." – Paid-up subscriber T. Anderson
"Someone had asked recently what Canadians think of their healthcare system. Like all things, it's all grey, with pros and cons. On the positive side, I would note that we have zero uninsured citizens, that it costs not much above half the cost of the U.S. system. As well, we have no cases of anyone losing their houses after finding out their insurance will not cover them and they have to sue them. Our FDA equivalent is not a branch of the Big Pharma lobbies. And we do not suffer drug ads either. Our doctors do not have to hire dozens of staff to fill out insurance forms, and the first question at emergency is 'What is wrong?', rather than 'How are you paying?'
"On the negative side, we do often have to wait much longer times to get service, and because it appears 'free' (we still pay for it through taxes) too many people use the health service for ridiculously benign problems. Also, we train, and export to the U.S. too many fine doctors who are attracted to the much higher potential income from private clinics and all the 'extra money' that drug companies send their way to nudge them in the right direction. Here the poor fellows are limited at 150k-350k a year depending on the specialization, and can hardly make a living." – Alliance member Pierre-Yves St-Onge
Ferris comment: Your notes tell me the laws of economics have not been repealed. Smart doctors will go where they're treated better, and creating artificial demand lowers not only the relative quantity but inevitably the quality of service.
Canadians don't pay less for health care. They pay much more than they would otherwise. Also, Canadians only pay less for drugs because they're subsidized by U.S. drug customers. If drug companies had to deal with the FDA on what they make on Canadian drug margins, they'd be out of business quickly.
"Please tell me more about that Stearns & Foster mattress. Was it inner springs or latex? I'm looking for a really good mattress, but I am allergic to latex." – Paid-up subscriber J.H.
Ferris comment: It's the S&F Plaza model, named after the hotel. Read about it here. Doctors should prescribe a night at the Plaza for anxiety and back pain. One of our readers says he had a wonderful night's sleep at the Waldorf. I've been there twice, though the last time was over a year ago, and it didn't compare to the Plaza.
"I have to respond to subscriber Len Busha who says: 'Our Nation's ability to create fiat currency therefore is, can and should be limited only to our and other nations' judgment of our capacity for continued innovation and productivity.' In theory he is correct, but it assumes the national government is disciplined enough to maintain a balance between the quantity of fiat currency and the balance of goods and services. It seems clear that is not the case with our past or current government. Dan's response that the price of gold has risen from '$252 in 1999 to more than $1,000 today' is a reflection of that lack of discipline. I fear we will see more irresponsibility and a further rise in the price of all things." – Paid-up subscriber Jeff Sawdon
"'$252 to $1000 reassertion that gold is money' By that measure so is copper, sugar, and a score of more useful assets and rightly so. Gold has much in common with art and collectibles; their 'intrinsic value' is in the eye of the beholder. Unfortunately, Dan, you give your pat responses to reader queries that don't answer the question or educate.
"I submit that the world got off the gold standard because it was inadequate to serve an economy that was growing faster than the supply of new gold, hence currency volume had to be adjusted by either printing or loosening reserve requirements to avoid deflation, i.e. when money becomes too rare relative to available goods and services. Perhaps it would be a good idea if you smart S&A researchers would think your concepts thru rather than repeating bumper sticker slogans – give it the kind of thorough research you do so well on stocks." – Paid-up subscriber Erich Kellner
Ferris comment: When money buys more goods and services than it used to, that's deflation. Why is avoiding deflation necessary? The essence of a rising standard of living is deflation. Deflation is a good thing. It's what we all pray for. I don't know anyone who doesn't wish his money bought more of everything he wants. If there's one thing our economy is most desperately in need of, it's a heaping helping of deflation. Not allowing deflation to set things aright is our worst and most often repeated error, economically speaking.
And I don't put 5% of my monthly salary into gold bullion based on bumper sticker slogans. Gold's purchasing power hasn't waned for 5,000 years. I'm satisfied there's been no other money that's held its value as long or been as consistent. For me, gold is the objective bottom to a highly subjective subject. It is a recognition of the reality that all of life is a series of black and white decisions about grey subjects. Gold is real. It’s money for people who get it.
If you were right about free-floating paper currencies, why do they always inflate and blow up... and why does gold never fail? It would be comical if it weren't sad: You believe you're a sophisticate now, having fallen for the most typical dilettante bait – academic arguments in favor of fiat money.
Good investing,
Dan Ferris
St. John's, Newfoundland
September 29, 2009