The S&A Digest: The smell of desperation in Miami

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As of 06/17/2013

The smell of desperation in Miami... Don't buy Dubai... Airlines up 300% in a month... Pickens down... Biotech watch list... Frauds!...

As I flew into Miami early this morning, I immediately noticed a major difference in the city's skyline. Now, 40-story (and taller) towers stand where, during my last visit (January 2007), there were mostly cranes. And as we warned, the real estate market here has been creamed.

In the downtown area, several entire buildings are at risk of failing because of widespread mortgage fraud. In some buildings, squatters have become a problem because most of the units are empty. Prices on most of the new downtown condos have fallen by more than 40% from their peak. Some are now selling for around $200 per square foot. For less than $200,000, you can buy a new condo in downtown Miami.

When I was here last, my realtor confidently assured me the downtown condo mania wouldn't spread to South Beach. I knew better. On the beach, 83 current "short sell" condos are now for sale. These units are in default on their mortgages, and the bank is willing to sell for less than the note. The best properties in Miami – including ultra-lux Fisher Island and The Continuum – are now experiencing defaults and short sales. At the Continuum II, more than 25% of the units are for sale.

So... why am I here? Miami is one of the world's great playgrounds. These towers will eventually be filled with people, making the city bigger and more valuable. At some point in the future, these properties, especially the waterfront places, will rebound. It might take 10 years... But if you're able to buy anywhere near the bottom, you could end up owning a luxury condo for free for a decade. (The capital gains you'll make will cover all of your ownership costs.)

I knew the market wasn't close to a bottom the last time I came. Everyone was still in complete denial of the disaster on the horizon. About six months ago, the real panic began. With it, prices have fallen and transactions have picked up again. Last week, I got a call about a short sell penthouse for sale – down 50% from where the current owner bought it. That smelled like desperation, so I came to see the market again for myself. I'll tell you what I found on Friday.

There's another looming real estate disaster worth mentioning: Dubai. Since 2002, real estate prices there have appreciated 79% per year, according to the Wall Street Journal. On the manmade island, the Palm Jumeirah, villa prices have gone up 600% since '02. It'll now set you back $3.2 million to own a zero-lot line villa on a deserted, manmade island in the Persian Gulf. I wouldn't recommend buying now: Another 200,000 condos are under construction.

Oil's at $113, and it could be heading lower. Reuters reports "U.S. oil demand during the first half of 2008 fell by an average 800,000 barrels per day (bpd) compared with the same period a year ago, the biggest volume decline in 26 years, the Energy Information Administration said on Tuesday." And OPEC pushed its production to the highest level in its 48-year history last month, the International Energy Agency (IEA) announced Tuesday. Crude is down 24% in the past month.

Of course, lower oil prices are good news for the stock market. Oil directly and indirectly plays a role in every company's costs, be it shipping costs or just keeping the lights on. But high crude prices weigh heaviest on transport companies (trucking, shipping, airlines), and their stocks are the most sensitive to changes in oil prices... They've already had a huge rally. Look at this chart of UAL Corp. (UAUA), United Airlines. The stock hit a low of $3.13 on July 15 and closed yesterday at $13.30 – a 325% gain in less than a month.

But low oil prices are bad news for ole T. Boone Pickens. The oilman's hedge fund, BP Capital, lost 35% in July and is believed to be down 10% for the year. In typical investor relations fashion, a Pickens spokesperson said, "We notified our commodity-fund investors last week that the steep decline in natural gas and oil prices has had an adverse impact on our performance... We continue to analyze the market and adjust accordingly."

We like to keep a close eye on biotech companies that fall out of bed because we've seen, time after time, these stocks end up being purchased by other companies at a premium for their pipelines or their patents. Yesterday, Altus Pharmaceuticals fell 50%. Its pill for patients with Cystic Fibrosis didn't perform as well as expected, even though it showed some benefit. The company has $2.98 per share in cash on its balance sheet... And the stock is trading below $2.50. While it's not worth buying for the cash, the price gives you some indication that investors ascribe a negative value to the company.

Value investor William Ackman announced a 15.4% position in Longs Drug Stores last week. Yesterday, CVS Caremark announced it would buy Longs Drug for $2.7 billion, or $71.50 a share – approximately 55% higher than Ackman's entry price. Nice trade.

Correction: In yesterday's Digest, we provided the wrong ticker for Warnaco Group. The correct ticker is WRC. We apologize for the error.

New highs: none.

In the mailbag, Porter's back... And so is the vitriol. Send yours to: feedback@stansberryresearch.com.

"I think you guys are frauds! I am new to investing and know little about how to make money grow. I thought wouldn't it be great to find a company that can give me 'advise' about the stock market and help me 'grow' my money with good sound 'research'? Well I 'suckered' about 15 months ago and plunged in head first... 'Research said' – buy, buy, buy, so I did. I didn't have a clue as to why things went up but I was happy because my money was 'growing'! But then things started to turn toward the 'dark side' and my money growth began to slide. Again I didn't have a clue as to why things were 'going south' so I wrote to ask about what was going on with a company that was in the 'gold' business but was starting to loose value... I asked 'research' if I could at least get some overall advise about what I might read so I wouldn't be 'clueless.' Again, not a word of advise was given! I watched my 'growth' drop 300% before I couldn't take any more an bailed out with a loss. But the 'cheerleading' list still has the growth of the 'researched' stock up over 500%! Now I know I am stupid because 'research says' keep patting us on the back for great picks... So much for 'research'! I'll bet 'research' doesn't have the guts to print this letter to your 'chairman'? Still stupid and with less money in California." – Paid-up subscriber "DSC"

Porter comment: As you know, we don't provide any individual advice. And certainly not all of our recommendations pan out. We do our best... And that turns out to be very helpful for a remarkably large number of investors. For folks who are new to us, I've given lots of advice in the past about how to get started. But the most important things to remember are pretty simple:

"I have been both an employee and an employer. I have been contibuting about 7.5% of my wages to social insecurity since 1964. As an employer, I contributed about 7.5% to social insecurity on behalf of my nine employees. That makes aboooout 15% of wages go to social insecurity. Mediscare contributions are additional. Here is the thing. I have worked thirty years and contibuted 6% of my wage and my employer contibuted an additional 6% to a pension fund. I am 7 years past retirement eligibility. My monthly withdrawal is estimated by the fund to be over $4000 a month for the rest of my life (as estimated by the funds actuaries). The fund is solvent and fully funded. My social insecurity check will be about $1200. a month after 40+ years of 15% contributions. My other fund check will be $4000. + for 30 years service at 12% contribution. Quite a contrast. I read the letters from the chairman of GM and I think about Social Insecurity. I am totally angry about the corruption and fraud (my opinion) in both of these outfits. Guns, food, silver, toilet paper. God help us. And thank you for someone honest enough to say it like it really is." – Paid-up subscriber JK

"Porter, the following is a comment from a local GM of a Chevy dealership. (He got a copy of the 'Last Letter' through me.)

Interesting stuff... As you know, we've had our wagon hitched to this horse for a long time, and I've been living with it my whole career. Much of GM's problems today are the 'legacy costs' of the past that come from it having been around for so long. The Toyota's of the world didn't have that to burden them when they came to this market. I'm starting to get on my soap box and will stop and just say that I disagree with this guy's gloomy assessment and think Rick Wagoner has done a hell of a job and if we hadn't hit this $4 gas GM would be well on it's way back to huge profitability. The $4 gas caught everybody out... everybody. Toyota announced yesterday they are laying people off and had a big drop in Q2 earnings. GM has restructured it's labor costs to get them in line with the Japanese and that will soon start to kick in and help the earnings and cash flow. I'm buying GM stock. Don't get me wrong, they've made a ton of mistakes in the past but this team has its act together and will win this fight.

"I'm happy to see the optimism, however ill founded. How about you?" – Paid-up subscriber JJ

Porter comment: I guess he can't read financial statements. It's pretty simple. When you're spending more money on interest payments than you can make with your operations... and when you're already $40 billion in debt, not including future pension obligations... you don't have a prayer. GM's stock can't possibly have any residual value. It is bankrupt. It just isn't insolvent – yet. And as I've explained many times, bankruptcy is the best thing for GM's dealers, customers, and employees. Until GM is allowed to shed its absurd union contracts, its limitless health care expenses, and its endless interest costs, it won't be able to produce competitive automobiles. The sooner GM goes bankrupt, the better for everyone... except its shareholders, of course.

"Regarding Goldman Sachs, I see several interesting parallels with Enron:

Porter comment: When the government sues us both for spreading 'false rumors' about a financial institution, I'm going to tell them it was all your idea.

"It would be very nice if you could send out an email when one of your investments hits the trailing stop value you are tracking. That goes for Steve and all the rest. I was distracted and completely missed the stop on COF. (And for Steve, I missed CY.) It's a much bigger loss that it should have been. Your friends at the Oxford Club do that, send out notices when a portfolio member hits a trailing stop, and they do that very well. (that's about the only thing they've done well in the past year, though – I won't know how well thay do next year since, I'm sticking with Stansberry, and not renewing them.) And to do it, you don't need to have any of your big time anlalysts do it. Your editorial staff can set it up." – Paid-up subscriber Heinrich

Porter comment: Your investments are your responsibility – period. The SEC frowns on newsletters reacting to market events. We're only protected from regulation to the extent that our publications are "general and regular" in circulation. So don't expect us to handle your trading for you. We make the recommendations; it's up to you to decide which of our ideas is worth your time and money.

If you need help watching your stops, we recommend checking out software for your computer like XLQ or using www.tradestops.com, which is a website that can track your investments and will notify you via e-mail when you hit a trailing stop.

Regards,

Porter Stansberry

Miami, Florida

August 13, 2008

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