Urgent: The most important Digest of the year so far...
Urgent: The most important Digest of the year so far... Wall Street has never been so wrong... The next Enron?... The corporate-bond crisis could be starting now...
Tonight, we begin with a warning...
Please read carefully. Something critical happened today.
Never have so many of the smartest people on Wall Street been so wrong. And what happens next could send ripples throughout the entire market.
But first, a little background...
Until last year, most folks had never heard of Valeant Pharmaceuticals (VRX).
That all changed when a Wall Street Journal report made the company a "poster child" for an outrageous new trend: companies buying the rights to existing drugs and treatments, then immediately jacking up their prices.
The report earned the company widespread criticism and even congressional inquiries, but it didn't stop the stock from hitting an all-time-high of $264 per share last August.
Unfortunately, Valeant's problems were just starting...
Last fall, questions began to surface about the company's accounting and business practices.
The details are beyond the scope of the Digest. In simple terms, it appears the company may have tried to hide its relationship with a smaller, specialty pharmaceutical company in order to increase insurance company reimbursements. All you really need to know is that these were serious allegations.
Several short-sellers published reports alleging outright fraud. One in particular – Andrew Left of Citron Research (who spoke at our event in Los Angeles in 2014 and will be attending the Stansberry Alliance meeting this year) – went so far as to call the company a "pharmaceutical Enron."
The news got even worse last month...
On February 23, Valeant finally admitted it might have to restate prior-year earnings after an internal review "raised questions about its accounting practices."
The following week, the company officially announced it was under investigation by the Securities and Exchange Commission ("SEC"). But that wasn't even the worst news of the day. From a February 29 article in the Wall Street Journal...
News of the SEC probe capped a dizzying 24 hours in which Valeant scrapped its previous financial guidance without explanation; abruptly canceled a call set for Monday to discuss its fourth-quarter earnings; and first scheduled, and then canceled, a separate, private call with analysts.
It also disclosed that Chief Executive [J.] Michael Pearson would resume his post after a two-month medical leave; said it would take the chairman's role away from Mr. Pearson; and indicated one of its key drugs was under assault from a competitor.
The company also said it would be unable to file its 2015 "Form 10-K" – an annual, audited report of financial performance required by the SEC – by that week's deadline, and that it didn't expect to be in a position to file it within the SEC's 15-day extension period.
That brings us to today... when shares of Valeant Pharmaceuticals crashed an incredible 50%.
You see, today – March 15 – marked the end of that extension period. And as predicted, Valeant has now officially missed the deadline to file its 10-K.
The news should not have come as a surprise... but it seems many of Wall Street's best minds were caught off-guard. And there could be even bigger trouble ahead for many more unsuspecting investors.
In short, there is now a very real chance that Valeant could default on its $30 billion in debt... and set off the next phase of the global credit crisis Porter has been warning about for months.
As we mentioned, SEC rules require companies to file a 10-K within 60 days of year-end. If companies can't meet that deadline, they're granted an additional 15-day extension to do so.
Failure to meet this extension means Valeant is now in breach of its bond agreements, or "covenants." Bondholders can now legally deliver a notice of default. According to the Wall Street Journal, the company now has until April 29 to file the report or it will officially default.
This may seem trivial... Surely, the company can complete the filing in another month and a half. But it's not so simple...
If the company's previous financial statements are particularly questionable – or worse, outright fraudulent – it may be next to impossible to produce an audited 10-K report at all.
After all, why would any auditing firm be willing to sign off on questionable financials for a company as scrutinized as Valeant? There may simply be no way the company can produce the report anytime soon.
Worse, even if the company can somehow meet the April 29 deadline, it still may default.
According to its bond covenants, the company must also maintain an "interest-coverage ratio" of at least three times. This means its EBITDA – earnings before interest, taxes, depreciation, and amortization – over any 12-month period must be at least three times greater than what it pays to service its debt.
Per the company's conference call this morning, Valeant's interest-coverage ratio was just 3.6 times for the 12 months ending September 30. This was before the allegations of last fall and the subsequent SEC investigation began... meaning the company's earnings may have already deteriorated enough to trigger a default.
The company has not produced audited financial statements for the fourth quarter, so there's no way to know how much money it is actually earning.
Frankly, we have no way to know for sure.
But this is exactly why we've been begging you to take some simple precautions to protect your portfolio... and why we've been warning you again and again to avoid overpriced stocks and most bonds at all costs.
While we can't know exactly what will happen if Valeant defaults on its $30 billion debts, plenty of signs warn the "contagion" could be massive.
Let's start with Valeant shares...
As we mentioned, the stock plunged more than 50% today. It has now fallen 87% from its all-time highs last August.
But you may be surprised to learn that despite clear warning signs for weeks that the company would likely miss today's deadline... Valeant was still one of the most widely held stocks on Wall Street.
Believe it or not, an incredible 88% of Valeant shares were held by hedge funds, mutual funds, and other institutional investors. The list of top shareholders reads like a "who's who" of Wall Street...
Bill Ackman of Pershing Square Holdings... John Paulson of Paulson & Company... Viking Global Investors... Lone Pine Capital... Jana Partners... JPMorgan Chase... T. Rowe Price... and Ruane, Cunniff, & Goldfarb's Sequoia Fund, just to name a few.
Valeant shares are also still a popular holding in many large mutual funds.
Again... many of these top firms and funds – and a long list of others – lost more than 50% of one of their largest positions today. There's simply no telling what kind of ripple effects could be created if these holders are forced to raise cash and sell other positions to meet margin calls or investor redemptions.
For example, billionaire investor Bill Ackman is the largest hedge-fund shareholder of Valeant. His Pershing Square Holdings owns more than 21.5 million shares of the company, according to the latest data available.
Pershing Square's portfolio was already down nearly 20% year-to-date, after losing more than 20% last year – its worst year in history.
Estimates suggest Ackman lost nearly $1 billion more today during Valeant's plunge... bringing his yearly loss to more than 25%.
Hedge funds rarely recover from these kinds of losses... Don't be surprised if you hear Pershing Square is closing its doors. If so, this means the fund's other holdings could be sold, too... causing the selling to spread.
This same scenario could happen at any number of other funds... and it could still get much worse before it gets better.
If Valeant does default – particularly if the SEC finds wrongdoing – it could easily spiral into bankruptcy... meaning shares would be worth nothing.
But it's not just Valeant shares that are concerning...
Valeant's debt is also a major holding in some of the world's most popular bond and leveraged-loan funds and indexes, like the iShares iBoxx High-Yield Corporate Bond Fund (HYG), the SPDR Barclays High-Yield Bond Fund (JNK), the PowerShares Senior Loan Fund (BKLN), and the S&P/LSTA U.S. Leveraged Loan 100 Index.
Valeant bonds were also some of the most common corporate debts "securitized" into collateralized debt obligations ("CDOs") last year... meaning many of these bonds are likely hiding in supposedly safe triple-A-rated securities right now.
This debt is not yet trading at "distressed" levels. But if these problems continue, it's only a matter of time before it is. And this could be a much, much bigger problem for the markets. Porter has explained many times that credit-market problems are much different from stock market problems. As he wrote in the September 25 Digest...
Credit-market troubles are "contagious" and are amplified by leverage. Companies funded with equity go bankrupt and nobody notices. But when companies (or countries) funded with huge amounts of debt go bankrupt, it triggers a chain reaction. Institutions that would otherwise be sound can end up in default because they've invested in toxic debt.
That's what's about to happen all around the world. Far, far, far too much money – mind-boggling amounts – has been borrowed by people and countries that are not creditworthy. These debts are going bad. The chain reaction is starting. And nobody knows exactly what will happen next because the world has never seen so much bad debt before.
A Valeant default would send ripples through the corporate-bond and leveraged-loan markets. There's no telling where it could end up.
Today, a new and massive risk of "contagion" has appeared in the credit markets. If you still haven't taken our advice to prepare your portfolio for crisis – or worse, you still have money in corporate bonds – this could be your last chance to act.
Tonight is your last chance to take advantage of the special offer on our friend John Doody's excellent Gold Stock Analyst service.
If the news surrounding Valeant is as bad as feared, it could be one of the big "dominoes" that sets off the crisis Porter has been warning about.
Regular readers know we view gold and gold stocks as a critical portion of any "crisis" portfolio. The reason is simple: Gold prices tend to rise during times of crisis... and gold stocks can absolutely soar.
For example, during the last financial crisis from 2008 to 2010, the benchmark S&P 500 Index rose 48%... while gold prices were up 94%... and the NYSE Arca Gold BUGS Index (the "HUI") was up an incredible 278%.
But John's gold-stock strategy did even better... It returned an astounding 1,070% over that same time period.
As regular readers know, John's track record is second to none. He has every penny of his eight-figure fortune invested in gold stocks. And for more than a decade, he has made an average of $750,000 every year... regardless of what gold prices or the stock market have done.
Today, we could be in the early stages of a big run higher in gold and gold stocks. If we are, nobody stands to profit more than the subscribers to John's Gold Stock Analyst.
Until midnight Eastern time, Stansberry Research subscribers can sign up for Gold Stock Analyst at a 45% discount to its normal retail price. Get all the details here.
Time is running out to claim your FREE OneBlade razor. Get the details on this incredible offer right here.
New 52-week highs (as of 3/14/16): Coca-Cola (KO) and Public Storage (PSA).
More subscribers share their thoughts on reader P. Thompson's cancellation request. What's on your mind? Send your questions, comments, and criticisms to feedback@stansberryresearch.com.
"Mr. Stansberry, P. Thompson has lost his mind. But age and blindness can do a number on someone. I've made strong returns as a business owner and investing in some alternative investments... but that was because I knew exactly everything I needed to know going in: the risk, the reward, the macro elements at play, and what protections I could put in place to make an impossible investment work. This was all prior to the stocks/bonds/options education I have been getting from your company. The value is clear, that's why being a lifetime member is a [no-brainer] decision.
"The weather is constantly changing in my businesses, as in the stock market. It sound like P. Thompson thinks it's always sunny in Florida... and he'll be the only one without the storm shutters when the hurricane comes." – Paid-up subscriber B. Deehring
"Porter – I don't remember when I became a subscriber, but think it was very soon after you started [Stansberry Research]. I enjoy your work now more than ever. I will admit that I have been late to the game with respect to trailing stops and too frequently cherry-picking only one or two reco's, falling in love with more than a few of them, then riding them all the way down (refusing to believe it was possible), or after a small gain, grabbing it and scampering away.
"What was missing for me in the early years was the view of the macro forces at work, an understanding of which is useful in withstanding the whipsaw gleefully embraced by market makers, et al. Keep talking macro, because the market cannot escape these forces! That is where the truly powerful learning originates.
"And kudos for your monthly Stansberry Radio Premium program. The candid comments from your team add a tone of richness to the conversation not represented in print. Please continue this feature and keep the faith. I will be with you for a long time to come." – Paid-up subscriber Mike B.
"Porter, please remind Mr. Thompson of your recommendation of Novagold last year. After your recommendation I bought .75% of my 401 K of Novagold. A few weeks later, I bought another .75%. As of Friday of last week, that 1.5% of my 401 K is up 109%. Enough of those doubles on top of my 15% allocation into gold coins, both junk and numismatic, and I will be properly insured against the coming market correction. Keep up the great work, some of us are learning." – Paid-up subscriber K.M. Kelly
"I want to comment on Friday's Digest. One thing the disgruntled investor may fail to realize is that gold is actually 'affordable' if broken down into 1/10th ounces. I know $1200-$1500/oz is a lot to come up with at one time (depending on actual price + spot), but most coin stores also sell smaller coins (0.5 oz, 0.25 oz, 0.10 oz). I was able to pick up a couple of 1/10 oz gold pandas from Gov Mint for no extra over the rough estimated asking price of gold (~$1200/oz at the time, so I paid $120 each). I've also purchased gold and silver at Bullion Direct, to add some variety to my collection. There are ways to secure wealth with the metal if you think about position size, and gradual accumulation. Thanks." – Paid-up subscriber Deb Parker
Regards,
Justin Brill
Baltimore, Maryland
March 15, 2016
|