by Addison Wiggin & Ian Mathias
- CIT dodges bullet, others report super-sized earnings… are banks really on the mend?
- Greg Guenther with a safe way to play the volatile biotech sector
- California finally plugs its budget gap… with taxes, debt and accounting fraud
- Chris Mayer on a rising dilemma for miners of the world
- Plus, even the dead can’t dodge the recession… backyard burials booming
You can rest easy today… the financial crisis is over.
CIT Group, the new epicenter of systemic financial risk, got thrown a lifeline this week from its bondholders. As we reported Friday, the company needed $3 billion — fast — in order to stay afloat. It was rightfully denied a government bailout, but was able to strike a last-minute deal with holders of its debt. Of course, the market rejoiced… the S&P 500 rose 1.1% yesterday largely on the news.
But again, we’re calling the market’s bluff. Anybody read the fine print of this deal? The loan was secured by “substantially all unencumbered assets.” That lawyer talk means CIT will have no collateral left over for a similar deal in the future. What’s more, the company will have to pay 13% annually on the $3 billion loan… no small order.
But most importantly, the whole deal is an ugly microcosm of 2008-2009. No problem has actually been fixed at CIT. The business still finances loans to tens of thousands of small businesses by borrowing from the credit market. CIT’s business model is still broken. They are still massively in debt. All they’ve done is create another liability.
(Just as we were about to publish today, CIT filed a warning with the SEC, saying that their bondholder rescue might not keep them out of bankruptcy. Wouldn’t you know it – they’ve got more bills coming due! On August 17th they’ll have to cough up another $1 billion. And so the madness continues.…)
Nevertheless, coupled with the recent earnings surprises from JP Morgan, Goldman Sachs and Citi, “investors were encouraged to see that the financial sector can take care of itself, without government bailout funds,” as CNN put it. Heh… right.
“Anyone who takes this as evidence of a recovering economy should work for the government,” sneers Bill Bonner. “Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: Whom were they trading against?
“The banks’ core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back — out of earnings. If the borrower is counting on higher house prices… or higher stock prices… to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up… or they may go down. And if they go down, down goes the lender’s collateral too… and his hope of getting repaid.
“The banks made big mistakes in the bubble years. And now they’re paying the price. But so far, they’ve only made the first installment payment. Subprime loans started going bad two years ago. Then, people began losing their jobs… and loans of all sorts were in trouble.
“There is no sign that this process is over. Instead, it is merely proceeding in good order… just as you’d expect.”
The stock market rally has been tempered today. Ben Bernanke is testifying on the Hill — as good a reason as any for traders to sell a few shares. As we write, the S&P 500 is down 0.5%.
“Here’s a way to take some risk out of biotech investing,” says our small-cap adviser Greg Geunthner. “Check out the clinical testing sector. Companies in this industry oversee and review tests performed by the big pharmaceutical corporations, as well as biotechs. Usually, these firms offer full regulatory compliance, as well as laboratory services for a variety of clinical tests.
“Thanks to a regulatory environment that’s becoming increasingly difficult to navigate, drug companies large and small are outsourcing research and development spending more often. In fact, R&D outsourcing is increasing 17% per year. This puts clinical testing firms in prime position for tremendous growth.
“That’s why we’re looking at a virtually unknown clinical testing industry leader right now. It’s been in business for two decades, and it’s about to kick its business into high gear. It’s taking its newfound cash flow and investing it back in its business. Management has also laid out an aggressive plan, which includes the company completely paying off its long- and short-term debt by the end of the fiscal year, as well as growing its biomarker services division to meet growing needs in the industry.”
Want the ticker? Check out Greg’s Penny Stock Fortunes.
The California budget crisis has come to and end, but it looks like the whole mess is really just beginning. State lawmakers closed their $26 billion budget gap last night in a manner that will likely irritate every single special interest group in California and send shivers down the spines of the other states still facing similar crises.
So how’d the Governator and his brood pull it off? $15 billion in budget cuts, including mob-inducing measures like cutting health care benefits for underprivileged kids and cuts for welfare, education and municipal governments. Almost $4 billion will come from “new revenues,” aka higher taxes. $2.1 billion will be borrowed and the remainder will be “fixed” with good old-fashioned accounting fraud… no kidding. For example, the government will shift the last state payday of the current fiscal year into the next. Save that little problem for 2011!
No surprise, California’s faux budget fix failed to inspire a dollar rally. The dollar index found a new six-week low early this morning at 78.6.
When it comes to the fate of the U.S. dollar, “Two tsunami waves are crashing in to one another,” Rob Parenteau told us last night, “debt deflation on one side, and policy inflation on the other.” Rob delivered quite a speech at our first ever meeting of the Richebacher Society, amid the spectacular views of the hotel’s rooftop lounge. Our highlight came during a period of open dialogue between Rob and Riche Society members when he was asked how will we know when deflationary period is over and inflation — or hyperinflation — begins?
The answer, said Mr. Parenteau, is found in credit and wages. No matter how inflationary the government may be, true hyperinflation can’t be had until the consumer has access to excessive credit and his wages rise as the value of money falls. In the current environment, where credit is tight and wages are falling, rapid inflation would only be possible if there were a true crisis of confidence in the dollar. If that were to happen, he assured us, it’d be pretty obvious.
(We apologize to Rob if we hacked up his much more eloquently phrased explanation. Regardless, the first meeting of the Richebacher Society was a notable success. If you’d like to be around for the second, look here.)
Gold is holding steady after yesterday’s rally. The spot price hit $950 yesterday and has stayed put since.
“Around the world, miners are finding out that a mine is only worth something if you can keep it,” warns Chris Mayer. “And mining companies are finding it tougher to keep them as governments seize them or rewrite deals.
“Rio Tinto, for example, was knee-deep in a $6 billion iron ore project in Guinea. The government just stripped it of 50% of the mine. Guinea said Rio Tinto was moving too slowly.
“The problem is that as commodity prices have crashed, companies have cut back and slowed down new projects. But governments in these developing countries, which granted the rights to mine in their countries, were banking on getting all kinds of royalties and taxes. Plus, governments don’t want to see job losses, which in a lot of these countries could be seeds for unrest.
“China, for instance, is threatening to revoke a coal license from ArcelorMittal after the company warned it would cut jobs. In South Africa, the largest trade union wants the government to nationalize all the mines. In Zimbabwe, in Zambia and other countries, miners face all kinds of political threats.
“In short, political risks are on the rise. It’s fallout from the economic bust. Times are tight everywhere, but only governments don’t cut back. They just figure out new ways to grab money. So for now, focus on valuable resource companies in safer jurisdictions.”
Last today, a (little bit creepy) sign of the times: The depression has caused a revival of the DIY home burial. According to The New York Times, there are now at least 45 organizations around the country that help families bury their loved ones in their backyards, compared to just two in 2002. The rag says the average American traditional funeral costs about $6,000 and, naturally, families and the soon-to-be departed are looking for ways to save. The family the paper interviewed spent just $250 on their father’s burial.
Our favorite bit from the story was a fellow named Chuck Lakin. The humble old carpenter specializes in multipurpose coffins for home burial. After all, if you’re going to shell out a couple hundred bucks for a pine box to rot in, might as well have a place to store some of your favorite books while you wait for the hereafter.
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How morbidly convenient!
“We’ve been looking around in Florida at foreclosures/short sales,” writes a reader, “and talking to people and have come to realize that the housing stats y’all get grossly underestimate the direness of the situation. We came across an approximately 300-unit condo project in Panama City Beach that purportedly cost the builder (bank) $66,000,000. These units were being pushed by a realtor for less than $200K each (159-199K). This realtor led me to believe that there are very few of these available (as in these are being ‘released by the developer’). Another realtor told me they are a bunch of short sales. I later learned that 15 are owned by individuals (sold in the past year), 20 are owned by some company in New York and the rest are owned by the apparent developer in Texas. It was like a beautiful ghost town. These condos do not show up as foreclosures or anything close.
“Talking to another realtor in Orlando, he had stories of people living in their homes for at least 18 months without making a payment and not receiving foreclosure notices. These also do not show up in the distressed numbers. The banks are using very creative ways of keeping from flooding the market and propping up prices as much as they can just to get whatever they can. We’re going to rent and figure the whole nasty thing out. Buyer beware.”
The 5: Thanks for your note. You are likely the first person to ever accuse us of grossly underestimating the housing bust. Considering vintage promotions like this, we don’t know how we could have rang the bell much louder.
Cheers,
Ian Mathias
The 5 Min. Forecast
P.S. By the time you read this, our annual Investment Symposium will have officially begun. Addison Wiggin will kick off the event with opening remarks, and then we’ll have presentations from Dennis Gartman, Juan Enriquez, Rick Rule, Marc Faber, Chris Mayer, Eric Fry and finally Frank Holmes. Oy, that’s quite a lineup. Dr. Faber’s presentation intrigues us especially. For a man that famously authors The Gloom Boom & Doom Report, we feel like his presentation, titled Yes, There Is a Light at the End of This Tunnel! is some kind of intellectual setup. We’ll let you know…
Or you could listen for yourself! Full audio access to this year’s symposium can be found here.
P.P.S. Congratulations are in order for Resource Trader Alert readers. In the last 24 hours they’ve enjoyed two triple-digit winners… 200% profits after selling their Aussie dollar position and another 100% this morning when they sold half of their Canadian dollar calls. That’s two more big wins for editor Alan Knuckman’s “no-brainer” trading strategy… learn about it here.