Dave Gonigam – February 15, 2012
- Cash-strapped states hook up with the “prison-industrial complex.” Will your town or state throw you behind bars just to raise revenue?
- Old news: Oil rises again after news from Iran. Untold story: U.S. admiral says carrier movement is “provocative”
- The fund manager who shares our belief that gold is due for a rest… and Jim Nelson with ideas about how to turn the metal into income
- Readers turn poetic… a suggested wager between Addison and Byron King… and more!
Last year, we spent a fair amount of time exploring how you’re threatened by the dire financial straits of local and state governments.
Increasingly, Americans are being nickel-and-dimed by “new taxes and weird fees.” These can be anything from a “wheel tax” on top of regular auto registration fees… to a “flush fee” tacked onto water and sewer bills.
But this morning we contemplate something far more sinister: Your cash-strapped locality might have an incentive to put you behind bars to help pay the bills.
“CCA is earmarking $250 million for purchasing and managing government-owned corrections facilities,” reads a letter from Corrections Corporation of America sent to officials in 48 states.
CCA is the biggest “private prison” company in the country. Until recently, it made its money by building new prisons or managing existing ones.
Last year, its business model began to shift when it bought a prison outright: the Lake Erie Correctional Institution. The state of Ohio got a $72.7 million windfall.
Now CCA proposes to do the same with a prison near you.
“We want to build on that success and provide our existing or prospective government partners with access to the same opportunity as they manage challenging corrections budgets,” reads the letter, obtained by Huffington Post.
Here’s where you come in: The deal in Ohio, and any future deal broached in the CCA letter, is contingent on CCA keeping a 20-year management contract… and a guarantee the prison will be 90% full.
Hmmm…
“It becomes a self-fulfilling prophecy,” says Shakyra Diaz of the American Civil Liberties Union of Ohio. “In order to have it at 90%, you need to be able to make criminals to fill it at 90%.”
Indeed, CCA lies at the heart of what critics label the “prison-industrial complex.”
Its rise to prominence coincides with a dramatic increase in the number of Americans in prison or jail. While the United States accounts for 5% of the world’s population, it accounts for nearly 25% of the world’s prison population.
“The company,” reports HuffPo’s Chris Kirkham, “capitalized on the expansion of state prison systems in the ’80s and ’90s at the height of the so-called ‘war on drugs,’ contracting with state governments to build or manage new prisons to house an influx of drug offenders. During the past 10 years, it has found new opportunity in the business of locking up undocumented immigrants.”
We pause here to note CCA stock is up 340% in the last 10 years; the S&P 500 is up less than 20%.
CCA is upfront about these, um, perverse incentives in its annual report. “The demand for our facilities and services,” it says, “could be adversely affected by the relaxation of enforcement efforts.”
“For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted and sentenced, thereby potentially reducing demand for correctional facilities to house them.”
You don’t have to be a drug user or an illegal immigrant to be concerned, however. Consider the case of Matthew Townsend — who was recently thrown into the Jefferson County, Colo., jail because he didn’t get a dog license.
Near as we can tell, the jail there is not privately managed. But imagine how many more people would end up in Townsend’s shoes if more jails and prisons were owned by CCA and similar firms with a 90% guarantee.
Sound far-fetched? Local governments everywhere are looking under the sofa cushions for every last nickel. You’d do well to consider living in a state where the situation isn’t completely beyond hope. We’ve compiled a best-and-worst list that goes out to every new reader of Apogee Advisory. Access here.
Oil is up again this morning to $101.72 — another one-month high. Once again, the move up coincides with headlines from Iran.
“Iran masters nuclear fuel cycle despite Western, U.N. sanctions,” declared a breaking news banner on Press TV, Iran’s state-run English-language news channel.
Scientists there have started loading fuel rods into a nuclear reactor that can enrich uranium to 20% purity — enough to use for treating cancer patients, but nowhere near enough for a weapon.
Then again, some days you wonder who’s really in charge there.
Press TV reported earlier today that Iran had halted oil exports to six European nations. Now the nation’s oil ministry is denying that to Reuters.
Meanwhile, the aircraft carrier USS Abraham Lincoln traversed the Strait of Hormuz today.
“This carrier and these [fighter] jets are more than just a show of force,” reports the BBC’s Jonathan Beale. “They’re here to send a clear message to Iran as to who really controls these waters.”
Added Rear Adm. Roy Shoemaker candidly, “The presence of this ship is provocative.”
Day by day, Byron King’s “New War” scenario runs the risk of quickly becoming ancient history.
U.S. stocks are again drifting nowhere today. The Dow and the Russell 2000 are down slightly; the S&P 500 and the Nasdaq are up slightly.
Gold is showing a little strength at the moment, up to $1,731. Silver’s stuck in neutral, however, at $33.59.
“I’m probably one of the few fans of [gold] who thinks it could actually decline quite a bit in the short term,” says our friend, Gaineswood Investment Management founder Bill Baker.
We were starting to wonder if we were standing alone in our call that gold is due for a rest this year. Bill comes to our rescue in an interview with Wall $treet Week.
Still, he sees a resumption of gold’s epic run-up as inevitable. Any short-term dip “doesn’t really stop me from thinking that it has an intrinsic value as a currency that can never be debauched. It’s got a very small market share of all currencies in terms of its total value. And that market share can only increase over time.”
“The question many [gold] miners have been facing of late is what to do with all this cash,” says Jim Nelson of our income desk.
Miners are, indeed, cashed up these days. While the price of their product has jumped dramatically in the last 10 years, their biggest cost — energy — has grown much more slowly. “The gold-to-oil ratio 10 years ago was below 10-to-1,” says Jim. “Today, it’s 17.5. Meaning, in general, gold miners’ margins have expanded 75%.”
“Obviously, many miners are piling into exploration of new mines and veins. But with all this money coming in, there’s still plenty left over. That leaves them three options.”
The first is takeovers — witness Pan American Silver’s recent acquisition of Minefinders.
Then there are buybacks. “After all,” says Jim, “mining company share prices have lagged the metal itself. Many — us included — think that is presenting some great opportunities in metal producers. A number of miners have already begun to buy back their own shares.”
And finally there are dividends — Jim’s bread and butter. “A number of mining companies have initiated or raised their dividend payments. But the way some have gone about it is what makes this recent movement so exciting.”
They’re linking their dividend payments to the price of gold. “For any gold bug out there, this must be one of the best moves they’ve ever seen,” says Jim. “You see, in the past, there were very few ways to collect both gold and income from the same investment. This policy is changing that.”
Newmont took the lead. Its yield has nearly doubled since. Eldorado and Hecla are following suit.
“For the average income investor, this is a positive trend,” Jim concludes. “But not too exciting. After all, what good is a 1% or 2% dividend yield? That doesn’t even beat U.S. Treasuries, which are at all-time lows right now.”
That’s why Jim has sought another way to squeeze more income out of gold miners. It works on any of 44 companies listed here. “In fact,” says Jim, “we’ve found a way to collect double-digit yields on one of these golden dividend payers. However, it takes a bit of money and a complete understanding of a fairly advanced income strategy.”
You can count on Jim to put it in plain English and walk you through the process step by step. To decide if this strategy is for you, look here.
“In response to Mr. Goolsbee’s somewhat bitter Valentine poem,” a reader writes after Monday’s issue: “Roses are red, violets are blue. Greenspan, Bernanke — SHAME ON YOU. Roses are red, violets are blue. Gold and silver — WE LOVE YOU. :)”
“I like your hypothesis that the U.S. is really defending the U.S. dollar as the world reserve currency when it attacks Iran.”
“Gaddafi also proposed gold as a replacement for the U.S. dollar. Saddam Hussein did demand euros for his oil, but didn’t he also have sanctions against him. Which came first, sanctions or his demanding euros?”
“Keep it up with The 5.”
The 5: The sanctions came first.
“While I agree that the future of the Middle East is not looking good,” a reader suggests we’re “talking about oil only as if human lives are worth nothing.”
“Besides,” he says, “your information is not true regarding armed Shia. No armed Shia attacks in Syria, for instance, just peaceful demonstrations faced down by bullets. No policemen were killed, or even injured — just eight young kids were killed in old blood.”
“The dictatorship should be denounced, and human rights abuses. Killing innocent demonstrators in cold blood should be unacceptable not just in Syria, but in Bahrain and Saudi Arabia. Double standards, and for the sake of oil the U.S. is willing to look the other way. No wonder U.S. foreign policy is heading the wrong direction.”
“Hoping for the support of dictatorships instead of people is not American at all.”
The 5: If you think that’s what we’re doing, then you clearly haven’t read The 5 for very long.
“I was interested to see Byron King’s take on compressed natural gas [CNG] for autos,” a reader writes. “Yeah, big problem with refilling stations right? Why not put refilling stations at every car rental facility at every airport in the U.S. and convert all those to CNG?”
“Most cars won’t use a whole tank, users get familiar with CNG, refill, etc…. and if nothing less, it is an easy, almost immediate start. Probably makes too much sense for the pinheads in charge, though.”
“When I went to Air Force pilot training,” another writes, “my roommate from Texas used CNG on a regular basis. He could and did use gasoline when CNG wasn’t readily available. This was in 1960. Nothing is as new as it seems.”
The 5: We had no idea CNG would inspire such passion among the readership. If you missed Byron’s original write-up in Monday’s Overtime Briefing, here’s the link. And to see how CNG might fit into the American energy renaissance Byron sees coming, look here.
“How about,” a Reserve member writes, “wagering compensation of heating bills for life from each other’s primary residences?”
The 5: Hmmm… Readers might recall last Friday Addison’s skepticism over Byron’s forecast. Addison even wondered if he should make Byron a friendly wager… but he was stuck on the stakes. From Nicaragua, Addison tells me he’ll have to think about it…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. There’s breaking news from the nutraceutical world… on top of the three major developments that Patrick Cox has clued us into over the last two weeks.
He didn’t have time to share many details in time for deadline today, except to say this could be a game-changer for the company pioneering a nondrug anti-inflammatory. Come back tomorrow and we’ll bring you the full story.
P.P.S. Aside from musing over his heating bill, Addison reports he’s having a good time at Rancho Santana. And why not? This was his view from the clubhouse as he enjoyed his morning coffee.
“Reserve members really owe it to themselves to come down here and check the place out,” he says.