You must be getting tired of hearing this, but... well... Extreme Value World Dominator pick Wal-Mart reported comparable sales were up 5% in April.
Apparently, that's a bad thing. Wal-Mart expects first-quarter sales to come in at $93 billion. But analysts say they expected more than $96 billion. Whoever these analysts are and why I should care what they say, I don't really know. But that's what it always says in the paper.
There's no such thing as a recession-proof business, but I think Wal-Mart can be expected to do OK. Costco, also not recession-proof, posted flat comparable sales last month.
You know you're watching Mr. Market going manic when a big, fat failure of a business says it just lost $6 billion in 90 days amidst a 47% sales drop... and the stock price still goes up.
That's General Motors. It lost $5.98 billion and burned $10.2 billion in cash for the quarter. Revenue fell 47% to $22.43 billion.
Why the insane rally in GM's worthless common shares? Because the results were – ready for this? – "better than expected." I am not making this up.
Demonstrating a keen insight uncommon among car company executives, GM CFO Ray Young told reporters, "The concern about bankruptcy is having an impact on our sales." Young noted the government didn't step in with warranty guarantees until March 30. Nevermind the subpar quality of GM's cars and the mini welfare state it's been running for years. GM is surviving on a $15.4 billion federal loan and has said it needs another $11.6 billion to continue operating. It has until June 1 to restructure.
At the Value Investing Congress in Pasadena, California yesterday, Scott Klein of Beach Point Capital Management, which manages billions worth of credit instruments for pension funds and other large investors, showed us a photo of a tombstone with two giant letters etched on it: GM.
Despite the awful condition of the auto industry, the S&P 500 Automobiles and Components group is the best-performing sector this year, up 54.19%.
So much for my MetLife short... It's among the six institutions the stress-test results indicate won't need to raise new capital. The short is pure pain at the moment, but I think we should hang on. If you're in the trade and can't stand it, perhaps you could lighten up and reduce your exposure to it. Of course, the price action has already reduced your exposure, so as long as you keep your position small, you should be OK.
Why MetLife rallied is beyond me. It's holding more than $30 billion in commercial real estate exposure – half of all its loans are commercial real estate.
Commercial real estate deals are defaulting at a rate of more than $200 billion a year. And get this: Subprime, the straw that broke the banking system's back, was about a $1.3 trillion market when it started blowing up. Commercial real estate loans total more than $3.5 trillion and are probably in even worse shape. The worst is yet to come.
I find it difficult to believe MetLife will remain untouched. And by passing the stress test, it'll probably get complacent and not raise the capital it'll need once the commercial deals start becoming OTTI: "other than temporary impairments." That'll take time because nobody wants to sell at current prices, which indicate impairments of 50%-65%. They'd rather hang on as long as possible and be forced into bankruptcy.
On Tuesday, I watched a scary presentation by Igor Lotsvin of Soma Asset Management. Igor says 25% of commercial real estate in Nevada is impaired... and when 25% is impaired, the entire market is impaired.
The Fed will release the "official results" of the stress tests for 19 big U.S. banks today, having already leaked out some of the winners and losers.
At least six institutions won't need to raise additional capital: JPMorgan, Goldman Sachs, American Express, MetLife, Bank of New York Mellon, and Capital One. The Fed told seven other banks to raise a combined $65 billion. Bank of America – which needs to raise around $34 billion – is both the largest and most severe-looking disaster. Wells Fargo needs around $15 billion, and Citigroup needs $5 billion.
The capital needs of six of the 19 banks are still completely unknown. I'm betting there'll be a big regional bank that'll be even more severely in need of capital than Bank of America, a bigger loser than the biggest loser of all, if you will.
At the Value Investing Congress yesterday in Pasadena, Whitney Tilson and Glenn Tongue of T2 Partners said they think Wells Fargo actually has slightly negative tangible book value... but they're still long the stock because they believe it can earn its way out of whatever losses it's taken through asset writedowns.
Last week in Omaha, Buffett said if he had to put all of his net worth into one stock, Wells Fargo would be it. Berkshire Hathaway is already Wells' largest shareholder, with around 7.2% of the company.
Buffett told CNBC, "I apply my own stress test, and they [Wells Fargo] pass it with flying colors." Buffett says Wells is financially sound because it acquires its money cheaper than everyone else. He compares the situation to a copper producer (excerpt from Newsmax)...
Say you're a copper producer, he says, and copper is selling for $2 a pound. If "you want to measure the stress of copper going to $1.30, for a guy whose production costs $1.50, he's got a problem," Buffett says.
"If his cost is $1, he doesn't have a problem. Wells Fargo, in terms of its raw material costs, is better situated than any large bank by some margin."
The government wants to assure investors, again, that banks being told to raise capital are not being told to do so because they're in trouble, but because regulators think, according to the Wall Street Journal, "they don't have a big enough buffer to continue lending if the economy worsens in coming months."
Investing 101 For Elected Officials Only: Common equity capital, as the residual claim on assets and earnings, is by definition a big enough buffer to absorb losses. If you don't have a big enough buffer, you're in trouble... big trouble.
Nevertheless, bank stocks soared yesterday on the "good" news about stress-tested banks, even though those banks and dozens of others are clearly insolvent.
At the conference yesterday, two brilliant young analysts from a small investment firm called M3 Funds put up a slide showing their prediction that 150 banks will fail this year. That's about 120 more than have already failed.
The guys at M3 spend 100% of their working day analyzing mid- and small-cap bank stocks. They drive around the country, talking to bank executives, real estate brokers, and others. They also haunt county recorders' offices, researching who lent what to whom. They made lots of money in 2008, investing solely in bank stocks (on the long side, too).
They say another 120 banks will fail this year. I don't believe the government. I believe the guys who have done their homework.
In the mailbag: We read all your letters. Send 'em here: feedback@stansberryresearch.com.
"OK. After reading the comments from some of your half witted subscribers, I am convinced this country is doomed. Do these people actually believe what they write? Do they even have a clue. A friend recently commented that when there's more people in the wagon than there are pulling the wagon we're doomed. I think we've finally reached that point with the election of Obama. God help 'Amerika' we had a great run for over 200 years. God help my children and grandchildren." – Paid-up subscriber Mike Riley
Ferris comment: I wish we had more half-wits in high places. It's the zero-wits who are killing us. But beware invoking future generations... The "for the children" ruse is used primarily as a justification for limiting freedom and seizing wealth.
The latter is exactly what the government is doing right now in Pennsylvania. It's stealing over 2,000 acres of land from seven landowners so it can build a monument on the site of the 9/11 Flight 93 crash. If I had relatives on that plane, I'd be livid at the desecration of their memory through an act of theft.
In total, the federal government has seized more than a fourth of the U.S. land area. The wealth destruction is incalculable. Our national parks are a national disgrace, a monument to our submission to thieving busybodies and crybabies.
I don't worry about future generations any more than previous generations ever worried about me. We have no idea what their world will look like, and it's foolish to waste time thinking about it. The best thing we can do for future generations is show them a good example of how to live. The rest is up to them.
If we really had enough rule of law, contracts, and private property (which we kinda don't all the time), future generations wouldn't be a concern of the social engineering mentality that underscores so much poor thinking today.
Regards,
Dan Ferris
Medford, Oregon
May 7, 2009