I watched the HBO movie Too Big to Fail last night. Too Stupid Not to Fail might have been a better title. The script didn't make anyone look all that smart. For example, the seizing up of credit markets after the Lehman bankruptcy appears to come as a shock to then-Treasury Secretary Hank Paulson.
Nobody looks like a hero in the film. At one point, JPMorgan CEO Jamie Dimon appears to be trying to save Lehman Brothers, but his effort quickly fizzles. No one in government or on Wall Street seems to know exactly what he's doing. Everyone is angling for attention or defending turf, no matter how badly he's screwed up.
Paulson, then-President of the New York Federal Reserve Bank Tim Geithner, and Fed Chairman Ben Bernanke are all portrayed as terrified, desperate, and ill-informed. The bankers don't look much better. Numerous times in the film, various characters ask, "How did they not know this would be a disaster?"
These guys didn't seem like masters of the universe… just a bunch of people caught with their hands in the till. Now, they're scrambling to put the money back.
Few human beings behave well when standing next to an extraordinarily large pile of money. It's simply too much to ask of all but a few exceptional individuals.
At least one person with the discipline and good sense to steer clear of what the herd is buying is Bill Gross, manager of the biggest mutual fund in the world, PIMCO Total Return. His fund has around $240 billion in assets, more than twice as much as the second-largest fund (the Fidelity Cash Reserves, at about $115 billion).
Gross says U.S. Treasurys are terrible investments. In a Twitter message today, he said five-year Treasurys at 1.79% offer a negative return after inflation. He refuses to hold Treasurys in his fund.
Low interest rates mean there's plenty of demand. Somebody must be buying this stuff or it would be yielding 17%, not 1.7%.
Gross also said on Twitter he didn't know if interest rates would rise or fall after the current round of quantitative easing (QE2) ends in 37 days (June 30). He won't have to wait long to find out.
Jim Chanos, founder of the short-only hedge fund Kynikos Associates, is making headlines for his well-publicized "Chinese short." Chanos' thesis is simple... The country has built too much real estate. Some 60% of China's gross domestic product (GDP) comes from construction.
Chanos also says China's ability to regularly hit GDP numbers is a sign of fudged accounting. He claims the books are cooked at almost every Chinese company his firm has researched, making it a "short seller's dream."
The China bulls say the country's growing middle class will accommodate all this construction. Chanos calls that a myth. According to him, 900 million Chinese already live in cities. And only 400 million live in rural areas. If more Chinese move to cities, nobody will be left to farm. Plus, he says only about 3%-5% of the population can afford the majority of the urban developments.
Chanos believes the bubble will pop when China moves to cool its real estate market. Chinese inflation is soaring. According to the latest Grant's Interest Rate Observer, it's rising much faster than the government reports. And the government is moving to curtail property speculation by raising interest rates and limiting transactions.
The truth is, Chanos isn't really shorting China. With $3 trillion in foreign reserves, it can paper over many problems. In reality, Chanos is shorting commodity producers. China is the world's largest consumer of commodities. And as its demand for commodities wanes – as it must – these stocks will get crushed. Soaring input costs will also squeeze margins.
While Chanos is wary of China's economy, casino mogul Steve Wynn is more bullish than ever. Wynn says so much of his business is in Macau (the "Chinese Las Vegas"), he considers his company, Wynn Resorts, a Chinese company.
Gambling revenue in Macau is expected to surpass that of the Las Vegas Strip this year – only nine years after Beijing opened the territory to Western casino operators. At Hong Kong-listed subsidiary Wynn Macau Ltd., net profits more than doubled in 2010 to $568.7 million. Wynn now flies to Macau at least once every six weeks. And he plans to open a second casino there by 2015.
World Dominator Intel, the world's largest computer-chip manufacturer, is moving one of the company's top executives to China. Sean Maloney, a possible successor to CEO Paul Otellini, will assume the new position of chairman of Intel in China. Intel believes China will soon become the world's largest market for personal computers.
"It's an unprecedented move for Intel to place one of our senior executives in China," Chuck Mulloy, an Intel spokesman, said. "It underscores the importance of that market going forward."
We've written several times about how cheap gold stocks are compared to the price of gold (most recently in yesterday's Digest). According to Steve Sjuggerud, gold stocks are "nearly as cheap as they've ever been in 40 years."
He uses the "gold-to-gold stock ratio" to prove it. It's a simple method... You buy when gold stocks are cheap compared to gold. And you sell when they're high. The 40-year chart below shows how cheap gold stocks are today…
Gold stocks have been this cheap three times in the past 40 years. And each time, they've soared. You can play the trend several ways... You can buy junior miners and hope they skyrocket. Or you can buy the large-cap miners (which are the cheapest of all gold stocks). Or, like S&A Short Report editor Jeff Clark, you can buy options on gold stocks.
Jeff found "one of the best-looking setups in the sector" in one of the world's top gold mining stocks. Several of his favorite indicators are showing this stock will break to the upside soon. He expects this trade could return around 150% by July. To learn more, click here...
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New 52-week highs (as of 5/23/11): Dreyfus High Yield Strategies Fund (DHF) and Sprint (S).
What are you doing between now and June 30? Are you scared? Do you think the Fed will start up "QE3" right away... or at all? Tell us what you're thinking and doing in anticipation of QE2's end: feedback@stansberryresearch.com.
"I spent many years as a martial arts instructor in Western Pa. The two most common questions I was asked were, 'What's the best style?' and 'If someone did this, (whereby the questioner would lunge, grab, attempt to choke, punch or kick me), what would you do?' The constant complaint of conflicting advice reminds me of these questions.
"Since you have hired experts across a broad range of subject matters, each expert has a different background and different techniques they use to assess the market and make recommendations. Just as a karate expert, a judo expert, and an MMA fighter would all recommend different techniques to defend an attack, so too your experts recommend different ways to attack the market.
"If the karate expert says 'I would punch here' or the judo expert says, 'I would grapple there,' the fighter receiving the recommendation must assess both techniques against their skills, preferences, and personal expertise. So when your experts recommend different stocks or one says 'Bull' when the other says 'Bear,' it is incumbent on the investor to weigh the recommendation against their own preferences for risk, investment objective and skill sets.
"Having said that, I think you must also remember some of your readers, myself included, are complete novices in the investing realm. When a new student, starts to learn techniques or defenses, the student will quickly become confused if his first three teachers all try teaching him different styles of martial arts. Perhaps, you could consider a beginner's guide to investing that would explain the different types of investing at a high level that align with your publications, and help the student select the style of investing most suited to him or her. Let the new investor know as well, there are many other areas of investing to explore but by choosing one style at first, they will be receive a consistent message. As the new investor grows, the multiple approaches to one problem, will cause much less confusion.
"Best of luck, you and your team do a spectacular job, and I appreciate the multitude of voices preaching the commone message of building and protecting the wealth of your subscribers. Each voice may have a different means to the end, but anyone who reads any of your publications knows they are all shooting for the same goal." – Paid-up subscriber SR
"The only real problem I have with the conflicting investment advice from your analysts is this: Sort of harkens to the old bookie scam where they would tell 100 of prospects that team A would win and 100 that team B would win. This insured that 100 people would be impressed with their picks. They would of been given the winning team. The prospect would then be more apt to pay for the next tip. I'm not saying that is what is happening here, but it does insure that at least one of your analysts would be right." – Paid-up subscriber Rob C.
Ferris comment: For this to be true, we'd have to issue a short sale recommendation for every long one. We're obviously not doing anything like that. The overwhelming majority of our picks are long. And now that other editors have discovered the World Dominating Dividend Growers, we frequently have the same stocks featured in several different publications (though usually for different reasons, via different strategies and techniques).
The conflict you describe doesn't exist. It's simply impossible to have a diverse group of people study financial markets individually and not arrive at different opinions. The world is complicated. If we all agreed all the time... that's when you should worry. Nobody ever complains when we all agree, though that is far, far less likely given our different backgrounds and approaches.
"In response to the business owner who is closing up shop, I face a similar issue in a different field and I don't blame you one bit. I've been a physician for over 20 years and planned to work at least part-time until age 70 or 80 if I'm lucky. Working in the public health sector for the past four years has been a true awakening to the horrors of democracy turned bureaucracy turned idiocracy. I can't take much more and will be returning to the private sector on a limited basis and downsizing my life so I can live on less and contribute less (tax) to an abominable, immoral government.
"I think it's a sign of things gone horribly wrong when hard-working, successful people in any field are no longer willing to contribute. Who's going to support this madness when enough of the 10% of us working hard and carrying the tax burden quit… Thanks for your newsletters, they've contributed enormously to my political awakening, and hopefully to future prosperity." – Paid-up subscriber PJ
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
May 24, 2011
Too Big to Fail... Gross on negative Treasury returns... Chanos' China short... Wynn likes China... Intel exec moves to China... Sjug: Gold stocks are cheap!... Clark's new gold trade... What debt ceiling?... Smuckers feels inflation...