"Where are the customers' yachts?" Starting in 2007, we began wondering how Goldman Sachs managed to avoid every market misstep and mint cash, year after year – despite how its competitors fared. (For a good recap, see the January 2, 2009, Digest). While every other bank on the Street was losing billions of dollars in subprime mortgages, Goldman remained untouched. We alleged Goldman was shorting the same mortgages it was peddling to clients. The government just recently accused the bank of the same thing...
The SEC alleged Goldman constructed a pool of subprime mortgages, then sold those mortgages to investors without disclosing full details. (Who was mainly on the other side of the bet? Hedge-fund heavyweight John Paulson.) We don't think the SEC will get far with this case. It's just making inroads to the larger issue... The enormous amount of fraud on Wall Street leading up to the mortgage crisis.
Regardless of how Goldman fares with the SEC, the media will continue bashing the bank. Today, Bloomberg published a story proving Goldman does much better than its clients (as if annual net income wasn't proof enough). While Goldman Sachs made money every trading day last quarter, clients who bought the bank's nine "recommended top trades for 2010" are down big. They've lost 9.4% buying China (the third-worst performing market this year), 14% buying the Polish zloty, and 9.8% trading the pound against the New Zealand dollar... Goldman probably needed to unwind all these positions. Over the same period, Goldman earned more than $5 billion. While we wouldn't take any investment advice from Goldman, the market opinion of the guy below is top notch...
"Given the recent run-up [in stocks], I'd be worried that we'll have another 10 years of zero returns." Hedge-fund manager Seth Klarman, founder of Baupost Group, made a rare (and super-bearish) speaking appearance in Boston yesterday. Klarman, who manages $22 billion, said he's "more worried about the world broadly than I've ever been in my whole career." Mind you, his career started in 1982 with $27 million under management. He's produced 20% gains annually since then. Klarman is currently holding 30% of his fund in cash (that's $6.6 billion of dry powder).
Klarman is looking for private, commercial real estate bargains – one notch below top quality. He said publicly traded REITs are overvalued. In fact, the entire market reminds him of a Hostess Twinkie because it's artificial. "[E]verything is being manipulated by the government," Klarman said.
He's also particularly worried about inflation. For "cheap insurance," Klarman's buying far out-of-the-money puts on bonds. According to Reuters, the puts will expire worthless "if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay."
Klarman is famously tight lipped about his specific positions. I've seen him speak three times, and I never recall him disclosing anything that wasn't readily available information. It's worth noting the two investments Klarman mentioned (private commercial real estate and out-of-the-money puts on bonds). It's also worth noting both investments will make money during inflation. We wouldn't be surprised to learn that Klarman also owns bullion.
And before you point out the consumer price index (CPI) fell 0.1% last month, go back and read the March 17 Digest. We explain the true definition of inflation. And it's not the numbers the government feeds us:
Inflation has one true meaning: the increase of the money supply above the savings rate. Inflation isn't caused by a shortage of wheat or corn or oil, it is caused by one thing and one thing only: central bankers shrinking their reserve ratios.
While market commentators are screaming "deflation," you should be stocking up on inflation-fighting assets. When the cries turn to "inflation," it will likely be too late.
New highs: none.
"Anonymous" is back. And this time, he wants a job. Despite what he thinks, our job is a tad more than a permanent vacation. Send your allegations to feedback@stansberryresearch.com.
"Wow, sounds like Anonymous needs to eat more grains." – Paid-up subscriber Rich Gustafson
"Please keep publishing letters like the one below, they are important as they give a taste of what people are potentially able to do in the near future (for the moment they are also amusing). As Marc Faber pointed out on CNBC, I think, before he was quickly interrupted, there are portions of the US public that are beginning to act in a violent manner. Will the US and Europe get their revolution and what will be the modern guillotine?" – Paid-up subscriber Humphry Hamilton
"Why did you waste space publishing that anonymous letter? We have to hear language like that if we watch movies and are bombarded by it on the street all the time. But I am angry at being confronted by it in one of the financial reports I always read. I am offended by it and don't like to see it in a financial report that I felt has integrity. If you intend to continue to give space to that kind of garbage, then you can quit sending your report to my in box." – Paid-up subscriber Larry Cummings
Goldsmith comment: Just remember... These are the people you're trading against in the markets.
"Any chance me getting a job with youse? always on the cutting edge, and always on vacation. what job could be better than yours? I'll work for free! just for the atmosphere – and some bennies. not much, just a pittence. I'D BE BLESSED WITH THAT – thank-you for your time and consideration in hiring me. I'll be the guy wiping your behind, or cleaning your hopper. what ever 'schourdge' (my word, like fiduciary...) you need done, I'm your guy!.....!!
"Where I am now is a subscriber, in effect I can make a play and hope to take a dollar on the hop. unfortunately you praise alot of loosers too. so actually following your – and probably any ones advertised recs will in short haste, make all us fleeced and broke. As such is your trade, in that you care more about catching more mice, than leading the ones you have to a better place. I can play the flute- or just hit the hearty ones with a club..." – The same "Anonymous" as yesterday
Goldsmith comment: No.
Regards,
Sean Goldsmith
Baltimore, Maryland
May 19, 2010