The next phase of the financial crisis hits

The next phase of the financial crisis hits... The collapse of commercial real estate... Lining up the dominoes... Friday's bankruptcy filing... Another chance to make a killing...

Today, we must take a break from the normal Digest fare. I have to tell you about an urgent and critical development: One of America's biggest and most important companies will file for bankruptcy on Friday.

This company operates in more than 200 locations across 44 states. It does business with virtually every single consumer product company in the United States. This failure will have massive repercussions across our entire economy. It will set in motion the next wave of bankruptcies. No, it's not the failure of GM. We began warning you about GM's demise two years ago. And no, Friday's bankruptcy has nothing to do with Wall Street's mortgage mess. Again, we were way ahead of the crowd on that story, telling you Fannie, Freddie, and Lehman would all go to zero months before they collapsed. Friday's bankruptcy will be the next big story.

In part, I figured this out on my own – like I did with GM, Fannie, Freddie, and most recently, Gannett, America's biggest newspaper publisher. But after getting so many predictions right about America's crumbling financial situation, I've garnered a fair amount of media attention. My work on GM was widely passed around Wall Street – even sent to Warren Buffett. My work on Fannie and Freddie was published on the front page of Barron's, the paper of record in finance.

With all of the attention came access to even more information. People began to seek out my opinion of other heavily indebted industries. And finally, late last month, I was invited to a unique meeting in New York. I've already told you a bit about this meeting. I sat across the table from one of the world's most renowned investors in "distressed" assets. A former partner of George Soros, he wanted to talk with me about the next major industry in America to collapse. And although he didn't tell me directly, he pointed out the company that's going to go bust on Friday. The vultures are circling.

How can I be so sure a major company will go bankrupt on Friday? Simple. The firm in question owes $900 million due Friday at midnight. It doesn't have the money. And it can't get the money because its interest payments already exceed its operating income. Like a homeowner whose mortgage payment is bigger than his paycheck, this company can't refinance its debts. Bankruptcy is the only option.

I can understand why Digest readers would be skeptical of such an abrupt prediction. You can get in a lot of trouble for saying a company is going to go bankrupt if you're wrong. But the proof is there for anyone who cares to look at the company's financial statements – just like it was for GM, Fannie, Freddie, Lehman, and Gannett. With GM's problems hogging the headlines, nobody is talking about this next crisis. And almost no one has figured out what it means.

The one thing I missed in all of the work I did on GM was the impact a bankrupt GM would have on the entire automotive sector. If GM files for bankruptcy, the liquidation of its assets and the closure of its dealer network would wreak havoc on all carmakers. That's why Ford's share price has fallen just as much (if not more) than GM's. That's why even Toyota and Honda's share prices are hurting. And that's what's got me worried about Friday's bankruptcy. The company in question is the second largest in the business. More than 30 other U.S. companies do the exact same thing as this Chicago-based business. Roughly a dozen of these companies are in very precarious financial situations. For example:

• January 15: A Colorado firm has a $50 million debt payment it can't afford that's due on January 15, a little more than a month from now. The company owes another $200 million in June 2009.

• January 30: An Ohio company has a $275 million debt payment it can't afford due on January 30, just seven weeks from now. It has another $500 million due in 2010... and another $500 million due in 2011.

• March 15: A New York company in the same business has a $200 million payment it can't afford due March 15.

• December 20: A Georgia company in the same business has $185 million coming due that it can't afford.

Coming after a major bankruptcy, there's no way these firms will be able to get additional financing for these debts, for one simple reason. After the first bankruptcy, the liquidation of so many assets in this industry will push down asset prices significantly. Rather than extending more credit, the bankers in this sector will be forced to make margin calls and demand additional collateral on their existing loans. This situation is exactly like what's happened in the residential housing market since 2006. Homebuyers took on too much debt. They had too little equity in their mortgages. They had payments they could not really afford. And once the foreclosure process began (in late 2007), home prices collapsed.

Making money on the collapse of the residential real estate sector wasn't difficult, as long as you knew how the dominoes were lined up. First, it was the mortgage brokers. Then came the mortgage bankers. Then, the investment banks. Finally, the homebuilders themselves will go bust. The exact same process is about to happen again – except not in residential real estate. It's going to happen next in commercial real estate. And I predict the crisis will begin, literally, this Friday with the first major bankruptcy filing.

If you didn't make big profits on the crises of 2007 and 2008, if you didn't take our advice to sell Fannie and Freddie, to sell Lehman, to sell GM, or to sell Gannett, you're getting another chance. More than a dozen companies will fail in a chain reaction because of Friday's bankruptcy. I've been mapping out the precise sequence – which companies owe how much, by what dates, etc. As credit is cut off in the commercial real estate sector, all the dominoes will fall.

To make a killing, all you've got to know is which companies owe how much and when the payments are due – because we know they can't afford these debts and won't be able to refinance. Says one of the major credit-rating agencies: "These companies are situated at the nexus of a recessionary economy, weakening property fundamentals, near-frozen debt capital markets." Stalking these companies – and making huge profits from their collapsing shares – is almost too easy.

In my new trading service, Porter Stansberry's Put Strategy Report, I've already recommended buying puts on two major commercial real estate companies, SL Green and Macerich. (Buying puts allows us to profit, in a highly leveraged way, as stock prices fall.)

We only put on the Macerich trade yesterday, but our first foray into this crisis was an enormous success. We recommended puts on SL Green when the stock was trading for $25 per share. In only a few days, it fell to less than $10, as I predicted it must. One of our subscribers wrote to tell us he'd earned $200,000 on the trade.

Just a short note to tell you I did indeed participate in your SLG put recommendation. You were quite convincing SLG was going all the way down to 10 so when it gapped down at the opening I bought some out of the money puts (the 15s). When it dropped below $10 I sold them for a handsome profit. I like this new approach. Please send more along when the timing is appropriate. Thanks again. – Paid-up Put Strategy subscriber M.T.

It's a bit ironic... When I launched my Put Strategy Report in mid-October, my plan was to take advantage of panicked investors by selling puts on companies with great businesses and strong balance sheets. I figured the panic selling was far overdone and the market would reverse course sooner or later. By selling out-of-the-money puts, we could be wrong about exactly where the bottom in stocks would be and still make a lot of money.

Most subscribers simply didn't understand the strategy or were too scared to try it. We got less than 100 subscribers, which isn't even enough to maintain the service. But many of our S&A Alliance members told me how much they love the approach. As of yesterday, the average gain on the eight puts we recommended selling is 41% so far. Almost all of these puts expire in January. That means we should see average returns near 100% over the course of the next month.

Now, I'm shifting gears in my trading service to take advantage of the collapse I see coming in commercial real estate. We'll be buying puts on these companies, one by one, as their debts come due. It should be very easy to make huge gains.

No matter how hard I tried, I couldn't convince most people GM would go bankrupt, until it was too late. And no matter how hard I tried, I couldn't convince most people selling puts during October and November was a once-in-a-decade opportunity to make a lot of money safely. I have a feeling that no matter how many facts I present, I won't be able to convince even 1% of our readers to buy some puts on these hugely indebted commercial property firms... but I have to try.

If you haven't already taken advantage of this situation, Put Strategy readers can click here to see my report.

Regards,

Porter Stansberry

Baltimore, Maryland

December 10, 2008

P.S. We'll return to our regular Digest format tomorrow. I hope you'll pardon the interruption... but certain situations call for your immediate attention. I believe this is one of them.

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