March 19, 2013
- Strange days: how the Cyprus farce will drive one class of wealthy investors deeper into gold
- “Watch what they do — and don’t believe everything they say”: an update on China’s gold disinformation campaign
- “Indexes aren’t companies”: Neil George with a powerful reminder as the Dow dances with all-time highs
- Not all buybacks are created equal: Chris Mayer on how many companies do it wrong and how to spot the ones doing it right
- The Great Missouri Toilet Paper Crisis, over before it began… why one American reader would feel better off in Cyprus… final hours to claim your “loyalty rewards”… and more!
How’s this for irony: Two decades after the collapse of the Soviet Union, it’s now easier for a Russian to open an overseas bank account than an American.
That’s one takeaway from the crisis in Cyprus… where last we checked, parliament was supposed to vote today on the rip-off of, er, tax, er, “stability levy” on bank accounts… or maybe revise the terms for small depositors… or maybe just say “screw it” and work on their NCAA tournament brackets.
At least the protests now number in the “hundreds”…
Meanwhile, the Cypriot finance minister is flying to Moscow — perhaps in hopes of getting better bailout terms from the Russians than from the European Union.
“Since the end of the Cold War,” explains Byron King, “Cyprus has become a haven for offshore cash — ‘hot money’ — out of Russia. That is, the former KGB ‘oligarchs,’ with their arms full of lucre, have stashed large amounts of cash in Cyprus.”
Heck, an entire industry in Cyprus is based on serving Russian clients. “You don’t need to actually go there,” Moscow-based tax lawyer Andrey Goltsblat tells the BBC. “A Cypriot-based financial adviser will offer you a full package and the customer gets an online password to access the account.”
A galling arrangement, indeed, if you’re an American trying to park assets overseas.
As we’ve chronicled for years now, few foreign banks want anything to do with U.S. customers — lest the banks get tangled up in IRS reporting requirements.
Your only hope is Canada… and only if you show up in person. “Be prepared to show your passport,” advised Casey Research’s Terry Coxon in The Daily Reckoning last year, “and to give the bank an original utility bill that confirms your place of residence.”
Now it’s Russians who are set to pay the lion’s share of the “stability levy” — more than one-third of the 5.8 billion euro total, by one account. Maybe more, if the bailout terms are revised to spare small depositors.
President Putin in Russia has labeled the arrangement “unfair, unprofessional and dangerous.” No wonder the Cypriot finance minister is high-tailing it to Moscow.
“Something tells me that we have not seen the end of this mess,” Byron King concludes.
“At the very least, I believe that we’ll see Russia — both its central bank and rich oligarchs — step up purchases of gold, versus depositing their cash in offshore banks. Other nations in which wealthy people tend to… umm… move money offshore will also likely step up their gold buying.”
Like, maybe… China? Recall Byron’s account from last November of how $3.8 trillion illegally exited the Chinese economy from 2000-2011 — $602 billion of that in 2011 alone.
Hmmm…
Gold clings to the $1,600 handle it regained when Cyprus kicked the safety trade into gear over the weekend. At last check, the bid was $1,611.
“When it comes to China’s gold reserves,” writes David Baker of Sprott Asset Management, “watch what they do — and don’t believe everything they say.”
We’re heartened, though not surprised, to see the Sprott Group in accord with our own assessment of a claim last week that the People’s Bank of China would limit gold to 2% of its foreign exchange reserves.
“If the Chinese government were to buy too much gold,” said deputy governor Yi Gang, “gold prices would surge, a scenario that will hurt Chinese consumers.”
“Disinformation” was the word we used. “Extremely hard to believe,” writes Mr. Baker, with a bit more circumspection.
“If Yi’s comments are to be believed, he is implying that the Chinese government has not added a single gold bar to its reserves since 2009 — which was the year the Chinese government officially announced its gold reserve increase to 1,054 tonnes.”
Meanwhile, China produces 400 tonnes a year… and imports as much as 600 more. “Extremely hard to believe,” indeed.
“Mr. Yi’s comments,” Baker goes on, “stand in stark contrast to earlier comments made by Chinese government officials.”
We’ve chronicled some of those comments ourselves…
- “No asset is safe now,” said the central bank’s research director in late 2011. “The only choice to hedge risks is to hold hard currency — gold”
- China’s gold reserves are “too small,” in the estimation of an official with the Department of International Economic Affairs last November
- And in 2009, a State Council adviser known as “Ji” described the work of a special task force: “We suggested that China’s gold reserves should reach 6,000 tons in the next three-five years and perhaps 10,000 tons in eight-10 years.”
“Ten thousand metric tons of gold,” muses Byron King “– that’s more than double the amount of gold reported to be held in Fort Knox!”
Byron’s been on the case of China’s own Fort Knox for months now. His conclusion: Gold has the potential to hit $2,600 within a matter of weeks.
And once China gets around to disclosing how much it’s accumulated since 2009… well, you want to hold on to your seat for that one. For sure, you want to be positioned in the metals investments that Byron says logically follow from everything China’s doing. Check out his comprehensive research for yourself, right here.
Major U.S. stock indexes are all in the green this morning, though not much. The Dow is about 40 points off its all-time closing high last Thursday.
Stocks might well remain in suspended animation while the Federal Reserve’s Open Market Committee meets today and tomorrow. This is one of those extra-special meetings where Ben Bernanke holds a news conference at the end, tomorrow afternoon. Yes, we can hardly contain our excitement either.
The only number of note this morning is housing starts — up less than 1% in February. Permits — a better indicator of future activity — jumped 4.6%.
“Indexes aren’t companies,” cautions our income specialist Neil George, unimpressed by indexes’ near record highs.
“Investing always should be about companies. This includes the businesses, the assets, the income statements, the balance sheets and — most important for me — the resulting revenues that pay for ample dividends.”
Consider Dow component Procter & Gamble. “The company’s sales have been sluggish, rising only 1.4% over the past year. And with the company writing down some of its business assets by some 4.4%, the overall value of the company should be falling, or at least remaining flat. After all, with a dividend yield of only 2.9%, investors aren’t being paid enough to be patient.”
No matter: P&G is up 13% year to date — a touch better than the Dow itself.
“I’m not suggesting that P&G is slated for trouble,” Neil clarifies — “but the recent improvement of its stock price isn’t a reflection of its business situation.”
Neil is much more interested in plays like one of his recent picks: Revenue is up 40% in the past year, and its asset value is up 44%. It pays a handsome yield of 7.6%. “I’m looking for businesses that not only justify today’s stock price, but a much higher price. And along the way, a stock that pays you a real dividend.”
“Don’t let the bad examples take away from the wisdom of the concept,” writes Chris Mayer, revisiting the subject of buybacks.
In November, Chris passed along research showing how companies that buy back shares outperform the market as a whole.
“Many companies are doing buybacks these days. In a slow-growth to no-growth economy, this tactic is becoming a more important driver of earnings-per-share growth.”
But not all buybacks are created equal. To unlock value, says Chris, “you have to actually shrink the number of shares outstanding.
“Since 1998, the 500 largest U.S. companies have bought back about one-quarter of their shares in dollar value, yet the actual shares outstanding grew 7%. This is because they hand out the shares in lavish incentive packages to greedy and stupid executives.”
One example of a company that did it right: AutoNation. When Eddie Lampert took a stake in 2000, AN began steadily repurchasing shares. “All told, 65% of the shares have been retired. That’s 8.4% per year — just from stock buybacks.”
Result: AN stock is up 520%. “Annualized, that’s better than 15% per year — for 13 years!”
Chris has a handful of companies in his Capital & Crisis portfolio retiring shares, unlocking value and delivering impressive gains that spank the S&P. “In a way, these companies become more valuable by losing shareholders. It sounds strange, but in essence, this is what’s happening. The victors are those who simply hold on.”
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“We have a lot of good things going on in our little town,” carps Windsor, Mo., mayor Justin Brown, “and this is the topic.”
“This” is the lack of toilet paper in the men’s room at the municipal barn. Supposedly, the workers blew the TP budget and had to start bringing their own. The subject came up at the city council meeting a week ago.
How it came up is a matter of some dispute: The resident who proposed a fundraising drive to buy more tissue (seriously) said she was told of the situation by the city administrator. No way, says the city administrator, who’s blaming it on the public works department.
Whatever the case, the city council voted to restore TP funding for the men’s room at the municipal barn.
How Windsor ended up in such dire financial straits we’re not seeing in any of the news accounts we’ve come across. Maybe the fact a town of 2,893 has both a mayor and a city administrator has something to do with it…
“Really, which is worse,” writes a reader of the Cyprus situation, “taking 7% off the top of a citizen’s deposit account or keeping savings interest rates close to zero for over five years, with no end in sight? This near-zero interest rate, combined with the true inflation we are experiencing in America, makes a one-time charge of 7% look like a better deal.
“In Cyprus today, an account with $100,000 had $7,000 removed as a tax paid to the state. Here in America, a similar $100,000 account has not been taxed (not yet), but we have forfeited the normal interest we should have earned over a five-year period, which prior to 2008 was around 5%. I don’t know what the interest savings rate has been in Cyprus for the last five years, but anything over 2% and their citizens have suffered less than we have.
“Both governments are supporting their large banks, one directly and the other with a method they hope most will not understand.”
“The evil side of the ethanol question seems to be missed,” writes a reader following up on a theme from last week. “With major crop shortages in North America and the breadbasket of Europe, substantial price rises are inevitable, probably placing the cost of basic foodstuffs beyond the means of many in the world.
“By some estimates, the corn being diverted into ethanol in the USA could feed as many as 40 million people for up to a year. So how many men, women and children will starve to death in the coming years so that the STOUTCD (slime that oozes under the Capitol dome) and the sheeple poop in the Offal Office can keep the pork barrels full? Have we degenerated from incompetence and greed to evil?”
The 5: “Driven in large part by government biofuel mandates on oil refineries,” writes William Shughart of The Independent Institute, “U.S. farmers converted more than 1.3 million acres of grassland into corn and soybean fields between 2006-11, according to a newly published study by scientists at South Dakota State University…
“This pasture destruction not only will almost surely lead to higher beef and milk prices, but to serious environmental harm” — including groundwater contamination from fertilizer and pesticides.
Oh, and it turns out grassland soil captures carbon better than cropland. “If farmers are digging up these grasslands to grow more corn,” Shughart writes, “ethanol production thus loses its carbon advantage over gasoline.”
As Chris Mayer is wont to say, you can’t make this stuff up…
Best regards,
Dave Gonigam
The 5 Min. Forecast
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