THE S&A DIGEST: Too Many Big Deals for Comfort

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(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/05/2013

A fateful corporate Christmas party draws near… SEC clamps down on hedge funds… Two more "dividend grabbers"… The Bataan Death March of mining companies… Subscriber diatribes… Private equity signals a top…

The apex of the holiday season approaches… the Agora Christmas party is this Friday evening.

Agora Inc. is a holding company that owns controlling stakes in dozens of companies around the world – including Stansberry & Associates Investment Research LLC. For the most part, its operating companies are all in the publishing business… though there are exceptions. Like rival siblings, Agora’s operating companies don’t like each other very much. That makes Agora’s Christmas party even more of a spectacle. Each year we wait… almost holding our breaths… to see who will drink too much and act like a fool. Last year, a drunken rival told my wife that he’d like her better if she were dead. The year before that, someone got a DUI on the way home. And this year? Well, I’ve dared Goldsmith to give Agora owner Bill Bonner a hug when he meets him for the first time at the party…

The SEC is trying to make it more difficult for individual investors to get into hedge funds. The original laws, passed in 1982, stated that an investor must have a net worth of $1 million or an annual income of $200,000 for the previous two years. If adopted, the new rule will call for investors to have $2.5 million in investment assets, excluding the primary residence. In 1982, 1.87% of all U.S. households were qualified to invest in hedge funds, compared to 8.5% today. According to the new restrictions, the percentage will be reduced to 1.29%, an 88% drop.

Two more special dividends that might be worth "grabbing." Imperial Sugar (IPSU) has declared a special dividend of $3 payable on January 5, 2007, to shareholders on record as of December 26. Retailer Buckle (BKE) has also declared a $3 dividend payable on January 2, 2007, to shareholders on record as of December 22.

Another e-mail today from our oil and mining analyst, Matt Badiali, who is on an "insider’s tour" of Vancouver-based mining companies with Steve Sjuggerud and Rick Rule…

"Today was the Bataan Death March of mining companies. We had enough time to wolf down Subway subs between meetings. We saw Almaden, Hunter Dickenson, Farallon, Rockwell, Northern Dynasty, Lara, Reservoir, Silver Standard, Rimfire, Esperanza, and Eurasian today. Afterwards, we went to Rick Rule’s condo (oooh la la) and on to dinner at Le Crocodile. How does caribou done medium rare sound? I had a chanterelle salad and a fantastic chocolate banana pastry thing for dessert.

"These companies we’ve seen are the best of the best… These are the 4% of companies worth a damn as decided by Rick Rule. And they’re awesome, even the uber-speculative ones. We saw an alluvial diamond miner that had a cast of a diamond it had found, the size of your thumb. Very speculative, but awesome potential.

"Probably my two favorites from today were a father-and-son team with great prospects… exploring in Turkey, Haiti, and Kyrgyzstan. Amazing mine prospects, at least two worth the market cap of the company. I also got a name to be on the lookout for: Michael Winn. I’ll organize my notes and give our S&A Gold Report subscribers the complete view. Now, I’ve got to fall into bed…"

Matt Badiali tells me he’s going to publish a Top-10 Prospectors list early next year, giving his S&A Gold Report subscribers a group of the best junior mining companies to buy for 2007. With speculative companies like these, you can’t afford to buy one or two. You’ve got to buy at least six or eight… and the more, the better, because it’s impossible to know precisely which of the companies will hit it big and be bought out for 10 times more than you paid. But it will happen to some of the stocks on Matt’s list. So, if you decide to go after this segment of the resource market, please spread your bets thin and wide. If you do, it really isn’t even that risky. Sjuggerud – Mr. Conservative – told me he’s going to put some of his own money into these stocks.

New S&A portfolio highs: Akamai (AKAM), Disney (DIS), Chevron (CVX), Eni (E), Telstra (TLS), Tejon Ranch (TRC), Xcel Energy (XEL), Berkshire Hathaway (BRK-A).

As always, we’ve printed a selection of your diatribes below. But, before we get to the mail, we need to repeat our two seasonal reminders: First, our office will be closed from Christmas through New Year’s Day. We think it’s important for our staff (more than 50 people now) to spend time with their families during the holidays. I hope you’ll understand. Give us a call on January 2 and you’ll find us hard at work again. Second, if there’s a golfer in your life, spend a few dollars buying Mike Palmer’s book, Secrets of the Irish Links. There’s no more honest, useful, and beautiful book available about golf… See for yourself.

"Porter, I have one question for you. Did you sell me out? It’s irritating enough to read your reports with the constant references to the secret royal currency, secret oil reserve under LA, etc., etc. Now I’m receiving Dear Friend teasers from other newsletters with ‘Secrets.’ Did you sell me out or are these part of a grand conspiracy centered in Maryland to flood my e-mail and PO Box with drivel?" – Paid-up subscriber Carl Shafer

Porter Comment: We do not sell or rent e-mail addresses to anyone, ever.

"I salute your decision to give the staff extra time off… Happy holidays to you and yours." – Paid-up subscriber Robin Aubrey

"Huzzah! Today was a nice tutorial in big words with screed and demeaning… I was quite pleased to learn a new word (screed)." – Paid-up subscriber Jeff Persson

We wrote it, Bill Ribblett bought it: "I bought 167 shares of WYNN @$93.09. I sold it after the dividend @$92.34 and got paid $1,002 dividend. Thanks for the tip. Not a bad Christmas present. You are the best." – Paid-up subscriber Bill Ribblett

"Loved your comment re congressmen. Newspapers both here and in Philippines have published data on U.S. congressmen re number of bankruptcies, assault charges, and other court convictions, etc. Many are repeat offenders. Their ‘mis’-management of our country is not conducive to a good night’s sleep." – Paid-up subscriber Gene Nordell

Too Many Big Deals for Comfort

Our friend Dennis Gartman made a good point in his daily letter this morning:

"The more we consider the fact that Sam Zell has been the seller and that other-people’s-money in the form of The Blackstone Group has been the buyer, the more certain we are that we are seeing private equity’s last days culminating in yet another Bubble."

According to Forbes, 2006 will be the biggest year ever for corporate deals, with total deal volume exceeding $3.4 trillion. The second highest deal year on record, 2000, saw mergers and acquisitions totaling $3.3 trillion.

The pace of the deal making, the high prices investors are paying, and the total size of these deals has many experienced market watchers nervous. You can count us in with the "nervous" camp. As Warren Buffett advises, we feel fearful when others are greedy.

But there’s nothing to fear, claim the lawyers earning fees from these deals.

"I see no reason to think this is going to end," says James Morphy, the head of Sullivan & Cromwell’s merger and advisory practice. (For those of you who don’t keep a Rolodex of Wall Street law firms, Sullivan & Cromwell is one of the largest law practices servicing Wall Street firms.) He further explained that it is "different this time" because these deals are being financed with debt, not with inflated equity, like back in the 2000 bubble.

The brokers, too, aren’t worried.

"We don’t think we’re in a speculative bubble," says Paul J. Taubman, head of Morgan Stanley’s mergers and acquisitions group.

I’m worried because more and more private investors are being sucked into these huge – and hugely overpriced – acquisitions via their investments in private-equity funds. The Wall Street Journal reports private-equity firms had already raised more money through October of this year ($177 billion) than they did in all of 2000, the last peak. At this rate, private equity will raise more than $225 billion this year. Including the debt in their deals, private-equity firms have invested $682 billion this year alone. The pace of deals has been accelerating since 2005… in fact, 15 of the 20 largest private-equity deals ever have occurred since 2005.

Isn’t it interesting that back in 2002, nobody wanted to merge or acquire? In October of that year, I wrote in my newsletter that the market had bottomed and it was time to buy. Private-equity buyers could not be found. But today?

Well… I can tell you from first-hand experience that the folks running private-equity firms don’t know what they’re doing and are flinging money around like it’s worthless paper…

A private-equity firm we met late last year was prepared to give us $70 million to buy out a publicly traded competitor… after spending less than an hour with us! Why were they so eager to give us so much money? The returns on these kinds of investments are fabulous, as long as the public remains gullible (that’s a good bet) and interest rates remain low.

Of course… sooner or later, this breaks down. Either interest rates go up, right when no one expects they will, or the market loses interest in paying far too much for undead, debt-laden, zombie companies that private-equity firms foist back on the public through overly hyped IPOs.

In the past, a top in private equity (1989, 2000) has also signaled tops in the stock market. It’s a good bet it will again.

Regards,

Porter Stansberry

Cockeysville, Maryland

December 14, 2006

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