Wall Street 'Justice' at Its Finest
Are the mainstream media reading the Digest?... Closing the book on Theranos... Wall Street 'justice' at its finest... Big news for small banks... Your last chance to claim a free year of Doc Eifrig's Retirement Trader...
Earlier this month, Porter published one of his most controversial Friday Digests to date...
In short, he took on a subject that even the most rigorous financial journalists have been unwilling to touch: the poor recent performance of Warren Buffett's beloved Berkshire Hathaway (BRK). As he wrote in the March 2 Digest...
Warren Buffett is the ultimate American business icon... His firm, Berkshire Hathaway (BRK), has made a tremendous amount of money for an incredibly long time. America loves a winner. And even more than that, Buffett has turned his plain-spoken, "folksy" public persona into a bulletproof public brand... a brand that nothing can stain. As good as Buffett is at investing, he's even better at PR.
And that's why no one has noticed...
Berkshire Hathaway is being badly mismanaged.
The strategies, structure, and brilliance that created capitalism's most perfect business have been abandoned, forgotten, or lost.
Worse, Porter said, Buffett has led the company into what "could become a massive trap, a problem that has already cost the company its competitiveness with the S&P 500 and will eventually lead the company to be broken apart." More from that Digest...
The heart of Berkshire still beats – it owns a collection of the world's best insurance companies. But this incredible asset is being overwhelmed by a series of disastrous investments, the damage from something which is being hidden from shareholders.
These results and Buffett's efforts to cover them up should lead shareholders to ask for him to step down as CEO. Berkshire should be split between its insurance companies and its wholly owned industrial firms, and most of the latter should be sold. Unless these steps are taken, Berkshire Hathaway will no longer beat a S&P 500 index fund.
It won't come close.
Again, as Porter himself admitted, this subject was extremely controversial...
So much so that we had seen virtually no one in the mainstream financial media even mention it in passing. But that could be changing.
In fact, after reading last week's issue of The Economist magazine, our first thought was, "Have they been reading the Digest?" From the March 8 issue – published under the headline "Warren Buffett loses his touch" (emphasis added)...
Some things about Warren Buffett never change, including his non-stop jokes, famous annual letter and his reputation as the world's best investor. What is less understood is that over the past decade Mr. Buffett's company, Berkshire Hathaway, has sharply altered its strategy. For its first 40 years Berkshire mainly invested in shares and ran insurance businesses, but since 2007 it has shifted to acquiring a succession of large industrial companies...
The industrial arm's operating performance is bog standard and, once you include the goodwill, its ROE is a weak 6%, down from 9% in 2007 before Berkshire shifted course... The industrial businesses' lackluster record mean they account for about 60% of Berkshire's sunk capital but have generated only about half of its look through profits, and 40% of its growth in book value over the past five years...
Since Berkshire cranks out an annual return of about 8-11% a year overall, the other area of its business, its financial operations, must have done much better... Why, then, is Berkshire making large industrial acquisitions?
Hmm, where have we heard that?
Of course, we're simply having a little fun here...
We certainly don't mean to imply that the author was knocking off the Digest. And the piece stopped well short of Porter's bold conclusion.
Still, we're glad to see someone in the mainstream financial media begin to acknowledge these issues. Now that the silence has been broken, we'll likely see others join in.
In the meantime, kudos to Porter on breaking what could be one of the biggest stories of the year. (And if you still haven't read that Digest, be sure to catch up here.)
Speaking of controversy...
Longtime readers may recall the saga of Theranos and its "Steve Jobs wannabe" founder Elizabeth Holmes.
We recounted the sordid details shortly after the company was accused of fraud in 2015. From the October 30, 2015 Digest...
The most entertaining thing about bull markets is the bullsh... ahem... the nonsense... that drives the stock market higher and higher through the soaring prices of popular "story stocks." After the market peaks and then recedes, we will look back on these companies and wonder why anyone ever paid anything for them. Do we have any Pets.com investors in the room?
Every bull market has its particular darlings. One of note just blew up. It's called Theranos. You might have heard about it recently. Here, a very attractive, young, tall, lithe blonde woman who dresses exactly like late Apple founder Steve Jobs has been peddling a "miracle" technology that can render hundreds of different blood tests from patients, at almost no cost, without using a needle.
These claims led to a private market valuation for her business of $6 billion. If she had been able to go public, that valuation number would have surely gone even higher...
There's only one slight problem: There hasn't been any "peer-reviewed" testing of the technology. Instead, many of her employees told the Wall Street Journal that it doesn't work. They say almost all of the testing is done with standard "venous" blood draws. Somehow, these facts and her Halloween-costume-like appearance didn't tip off any of the venture capitalists.
Yesterday, Holmes was officially charged with securities fraud...
The official statement from the U.S. Securities and Exchange Commission ("SEC") alleged Holmes and the company raised "more than $700 million from investors through an elaborate, years-long fraud in which they exaggerated or made false statements about the company's technology, business, and financial performance."
Not to worry, though... The SEC also announced that "justice" has already been served. Holmes and the company have agreed to a settlement. As Stephanie Avakian, co-director of the SEC's Enforcement Division, explained in the press release...
This package of remedies exemplifies our efforts to impose tailored and meaningful sanctions that directly address the unlawful behavior charged and best remedies the harm done to shareholders.
So... what were the onerous terms of this settlement? The Wall Street Journal reported the details last night (emphasis added)...
Company founder Elizabeth Holmes, widely hailed as Silicon Valley's first female billionaire startup founder, agreed to a settlement with federal regulators... [It] strips her of voting control of Theranos, bans her from being an officer or director of any public company for 10 years and requires her to pay a $500,000 penalty...
Ms. Holmes, 34 years old, and Theranos, which also settled the SEC's charges, neither admitted nor denied wrongdoing. In a statement, Theranos said it and Ms. Holmes "fully cooperated with the SEC throughout its investigation." Theranos' independent directors said the Newark, Calif., company "is pleased to be bringing this matter to a close and looks forward to advancing its technology." Ms. Holmes is still Theranos' chairman and chief executive.
In other words, Holmes is required to give up some of her shares... avoid holding positions she doesn't currently hold... and pay a fine equal to just 0.07% of the capital she fraudulently raised.
To be fair, Holmes' remaining shares are likely worth little of their former multibillion-dollar valuation. But that's likely little consolation to Theranos investors, many of whom lost everything. Meanwhile, the company continues to operate with Holmes at the helm.
This week did bring some good news for financials...
Back in December, we noted that the U.S. Senate had introduced a bill to unwind some key portions of the Dodd-Frank financial regulations passed in 2010. In particular, the bill would change how many smaller banks are classified.
Currently, any bank with assets of $50 billion or more is considered a systemically important financial institution (or "SIFI"). These banks are required to meet strict and expensive regulatory requirements that smaller banks are not.
In simple terms, the proposed bill would raise this threshold from $50 billion to $100 billion immediately, and then to $250 billion within 18 months. As we explained in the December 6 Digest...
Banks with assets below $250 billion would see regulatory costs fall dramatically in less than two years... And those with assets below $100 billion would be released from federal oversight immediately.
So dozens of small and midsize regional banks could soon see a dramatic increase in earnings. This could drive additional dividend growth and share buybacks. And it's likely to lead to a wave of mergers and acquisitions ("M&A") in the sector.
Remember, the more assets a bank holds, the more money it can lend... and the more potential profit it can earn. So banks with assets below $250 billion would now be incentivized to grow assets up to that threshold.
Yesterday, this measure moved one big step closer to becoming law...
The Senate passed the bill in a 67-31 vote, marking one of the few truly bipartisan agreements since Republicans gained a majority in 2016.
It now moves on to the House of Representatives. If passed there, the bill is expected to be signed into law by President Trump immediately.
Our colleague C. Scott Garliss of the Stansberry NewsWire has been covering this story for months...
He shared a list of banks most likely to benefit from these changes in that same Digest...
Regional banks stand to benefit the most from the proposed SIFI increase. You see, the current threshold of $50 billion comprises around 40 banks. Only 10 firms would remain above the SIFI threshold if it were raised to $250 billion. As banks fall below the threshold level, they would be free to buy up other banks until their total asset levels reach $250 billion.
The financial institutions that would be affected by a rising SIFI threshold (i.e. ones with assets between $50 billion and $250 billion) are:
The names toward the bottom of this list would be prime candidates to either go on an acquisition spree (increasing their assets and revenue potential) or would be likely to get acquired.
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In today's mailbag, feedback on our Digest Masters Series interviews... and the "legal marijuana" controversy continues. We'd love to hear from you at feedback@stansberryresearch.com.
"It's nice to read interviews of Stansberry analysts... I just finished reading the [Masters Series] interview with Matt Weinschenk [here and here]. These are the hidden treasures that only come once in a while. Since to some extent this is what I have to do because that is the joy of options trading for me. For that matter, reading the interview with Dan Ferris [here and here] had kind of the same effect. Thanks to you all for what you do. You have made me a good trader." – Paid-up subscriber Jeff Spranger
"I've seen that [you] have received flack about recommending marijuana stocks. While I am not nor ever have been a user or even a proponent of its use, I view these stocks as just another investment. As a result, if they are promising from an investment point of view, Stansberry Research services would be remiss and even acting as a censor, by not mentioning and analyzing individual investments or the industry as a whole. I feel sure that most of your readers are capable of self-determination regarding investments while using your services. Keep up the good work." – Paid-up subscriber RAS
"Just last week a family of three were killed on I-5 in Tacoma, Washington because the driver of the other car was high on Marijuana which is now legal in our state. A father and his 30-year-old daughter among the dead. I'm sure you're thinking if it wasn't marijuana it would have been alcohol. Maybe. Which proves my point, we already had problems with drunk drivers killing the innocent, why did we have to add marijuana too?" – Paid-up subscriber Penny T.
"There are probably a thousand times more people with cannabis tattoos than Harley-Davidson tattoos. That's some kick butt brand loyalty right there Homer. The mainstream media refuses to talk about the effect of the cannabis issue on elections. This has been going on since Jimmy Carter. Even more so in recent years. We saw what happened after what Hillary did to Bernie. Many Democrats stayed home. Now Trump is breaking his campaign promise on medical cannabis. Many Republicans are going to stay home. Eventually, the people get what they want. The personal feelings of investors, and politicians, be damned." – Paid-up subscriber R.B.
Regards,
Justin Brill
Baltimore, Maryland
March 15, 2018