Day Three: Love Trades and Low-Grades

July 26, 2013

  • Don’t invest in the DHS: Chris Mayer on how to invest in companies that grow and avoid those that flounder…
  • Bash banks all you want: Richard Lashley on all the opportunities you may be missing out on…
  • It’s all about the sentiment: EverBank’s Chuck Butler on what drives currency these days…
  • Gold’s bottom and Ramadan… a private equity partner for farmers… Doug Casey on the Antichrist… and more!

  “Invest in companies that refuse to operate like the Department of Homeland Security.”

Chris Mayer’s guidance to the crowd here in Vancouver this week didn’t come out exactly in those words… but the DHS example is surely timely.

  The new DHS headquarters is behind schedule and over budget, BusinessWeek informs us.

It was supposed to cost $3.5 billion. The projected cost now is $4.5 billion. And who knows what it’ll be by the time the thing is supposed to be ready… in another 13 years.

Bonus points: The building site used to be a mental hospital

DHS is a perfect example of a fossilized, top-down, beyond-hope bureaucracy where no one knows anything except how to take orders.

100  Not unlike a lot of Fortune 500 companies, when you get right down to it. They are environments of “personnel,” not “people.”

People or Personnel was the title of a 1963 book by the New Left author Paul Goodman — and as it happens, a fount of investing insights for Chris.

Goodman favored small-scale, decentralized structures in society in which initiative is rewarded and individuals can flourish. The book was a cri du coeur against top-down bureaucracies, whether in the executive branch or the executive suite.

Here again we see the “Tale of Two Americas” that we’ve been unpacking all week at the Agora Financial Investment Symposium — bumbling power structures on the one side, paradigm-smashing innovators on the other.

Chris’ point is that you’ll get better results investing in companies that emphasize people and not personnel. And how can you tell the difference?

  Absentee ownership feeds the “personnel” mindset, says Chris.

“Not long ago,” he explains, “it would have seemed strange to have a person or group of people control an enterprise without significant ownership. One of the most defining features of late American capitalism is diffusion of ownership.”

Professional managers, to put it another way, are in it for themselves — not for their shareholders, and certainly not for the long run. “Entrepreneurial instinct,” said the legendary investor Martin Sosnoff, “equates with sizeable equity ownership.” Chris’ longtime readers will recognize this owner-operator arrangement as the “O” in the CODE screen he runs on every stock.

Owner-operators simply perform better for their shareholders. Their interests are aligned with yours; a wealth of research bears this out. The Horizon Kinetics ISE Wealth Index, for example, shows that companies with wealthy insiders outperform the S&P 500.

They’re also more tax-efficient: Remember all those special dividends that companies paid in late 2012 ahead of federal tax increases? The average insider ownership of those firms was 25%.

Chris identified six of his favorite owner-operators during his talk yesterday. Frankly, if that was all you got from the recordings of the sessions here at the last-ever Agora Financial Investment Symposium, you’d get your money’s worth. But in fact, you get every session that took place yesterday, and all week. High-definition video or high-quality audio — it’s your choice. Choose here.

  “If I had my own money in this bank,” said the banker to Richard Lashley, “we’d have to make a lot more money.”

Not the sort of thing you want to say to Lashley, since he owned 10% of the bank.

But that goes to show not all bankers have that owner-operator mentality Chris talks about. Mr. Lashley’s firm, PL Capital, invests in banks with an eye toward changing bankers’ mindsets, getting a seat on the board if that’s what it takes (and it usually does). The aim is — as that perennial expression goes — “unlocking shareholder value.”

Bash banks all you want, but Lashley says you’re passing up potential opportunity if you do: The percentage of U.S. banks that turn a profit is nearly back to 2006 levels… and the size of the banking system relative to the rest of the economy still looks tame compared with Canada, Japan and Europe.

What’s more, he says now is one of the three best times to buy bank stocks in the last 30 years. The current rally is three or four years old, but he figures it has another four to go.

One of his favorite ways to play it? Warrants on a handful of the biggest banks. Warrants, as you may know, trade like options — except you can buy them in your plain-vanilla brokerage account. Lashley named four of them in his talk. If that’s too out-there for you, he also identified an ETF made up of the kind of banks he likes to invest in.

Our production team is already furiously processing the audio of this week’s talks so they can be delivered as MP3 files to your inbox one week from today, give or take. To make sure you get them as soon as they’re ready, follow this link.

  Stocks are slumping as the week approaches its close. The S&P is down about half a percent, to 1,681.

All’s quiet in the precious metals, with gold at $1,326 and silver at $20.02. Crude is at $104.24.

Treasury rates have bumped up a bit, the 10-year currently 2.57%.

  “I’ve been through all this before,” says EverBank World Markets chief Chuck Butler — who’s hearing a chorus of voices saying King Dollar is back.

We pause here to note that while Chuck is fond of citing long lyrics in his Daily Pfennig dispatches, he seldom does so in his talks with investors. But yesterday, he led the crowd in a brief singalong of Trini Lopez’s “Lemon Tree.” (Don’t fret if you order the recordings; we’re pleased to report Chuck sings in tune!)

“Fundamentals used to drive currency values,” he said — and one day they will again. “But right now,” he concedes, “it’s all about sentiment.”

Chuck called the long-term decline of the dollar relative to other fiat currencies in 2001. The trend has paused — the dollar index is now at 81.6, after touching a low near 72 in mid-2011 — but he’s confident it will resume.

“The dollar’s fundamentals were not good then, are not good now and won’t be good in the future,” he says, “until there’s the political will to deal with the national debt.”

Which, judging by the DHS headquarters, there’s not.

Bottom line, says Chuck: Foreign currencies remain an attractive way to preserve your declining purchasing power alongside precious metals.

  Funny thing about gold hitting bottom at $1,172 about a month ago: It coincided almost exactly with the Muslim holy month of Ramadan.

That’s the “love trade” in action — U.S. Global Investors chief Frank Holmes’ description of Asian cultures’ affinity for gold. Later this year comes Diwali and Indian wedding season… followed by Chinese New Year.

That said, the Chinese aren’t waiting for a holiday to buy gold. Frank shared this chart with the crowd that we first showed in The 5 on July 8. China now consumes nearly 100% of world gold mine production.

Once again, we see demand for physical metal is robust, even if the “paper” price is beaten down.

As for the gold stocks, Frank said they’re undervalued… and he threw out two facts that might come as a shock: First, the mining stocks’ dividends have been rising faster of late than the gold price. And second, most of the big gold stocks now throw off yields higher than a 5-year Treasury note.

[Ed. note: Frank’s presentations are always rich with vivid charts like the one above, and it never seems as if he has enough time to do them all justice. That’s the beauty of having access to high-definition video of all the presentations this week — you can linger over anything that catches your eye, really let it sink in. Sign up here and you won’t miss a thing.]

  “We’re like a private equity partner to farmers,” Symposium veteran Brad Farquhar said yesterday.

As mentioned in Tuesday’s 5, Farquhar’s latest venture went public this week — Input Capital, trading as INP on the Toronto Venture Exchange. He came to Vancouver to make his best case.

We described the lucrative opportunity within agriculture yesterday with the help of Steve Yuzpe from Sprott. Mr. Farquhar has long invested in farmland, and now he’s going one better — affording investors the chance to partner up with actual farmers.

But don’t get the wrong idea; Input Capital does not invest in farmland. Nor does it lend money to farmers. Instead, it ponies up a payment to a farmer — who’s typically asset-rich and cash-poor — and in exchange it gets the right to buy his canola crop at a deep discount long into the future.

It’s a good deal for the farmer because he doesn’t take on debt or give up ownership of the farm. And it’s a good deal for investors because there’s instant cash flow. Farquhar’s presentation is well worth your attention…

  Face it: You felt vindicated when Amazon stock tanked in 2000-01 as the dot-com bubble burst.

Funny thing’s happened since: It’s run up sixfold in the last 4½ years.

Which illustrates a point the Laissez Faire Club’s Jeffrey Tucker was keen to make. “Bubbles are real and they can destroy your portfolio, but a technology, product or service is not automatically discredited by a bubble-based run-up.”

Jeffrey knows the Tale of Two Americas well: His Austrian economics background makes him all too aware of government’s threats to your wealth… but he’s also jazzed by budding entrepreneurs reinventing the Internet yet again.

With that in mind, he identified a baker’s dozen of websites helping people find the articles and videos that will interest them the most… creating niche social networks for folks fed up with Facebook… even making Bitcoin as simple to use as a credit card (and safer).

Every one of these sites is privately held and needs capital, by the way.

Not exactly a mainstream place to put your money, but hey — Amazon delivered a big fat earnings “miss” yesterday. In fact, there were losses, not earnings. So get the recordings… Who knows, you might end up with a piece of the next Amazon.

  “I’m writing a novel,” declared the inimitable Doug Casey.

The hero starts out as a speculator and ends up as the Antichrist.

Seriously, we can’t convey it properly ourselves; you have to hear the whole thing.

Apart from his novelist ambitions, Doug is certain we’re in the eye of an economic and financial storm that reached hurricane strength in 2008-09… and the backside of the storm will be much worse. A default by the U.S. Treasury is inevitable; alas, the feds will likely try to inflate their way out instead of outright defaulting, “which would be more honest.”

Outright default has several advantages, he says — among them, it will be impossible for the government to borrow again for a very long time. Besides, “I don’t want the next generation and generations after that,” he says, “to be serfs paying off the debts incurred by their profligate fathers and grandfathers.”

But because that won’t happen, Doug suggests a three-part preservation plan — one that’s not new, but that’s well worth repeating:

  • Build up your savings, preferably in gold
  • Diversify yourself geographically
  • Learn to speculate… “because more bubbles are coming.”

Savor the moment. It’s our last-ever Symposium, our final “big event” and your last chance to hear Doug unload in this one-of-a-kind forum. The package of Symposium recordings wouldn’t be complete without a quality Casey rant, and it can be yours by following this link.

  A random question from north of the border, where dollar bills were done away with more than 20 years ago: How do strippers collect their tips?

The question comes to mind because we see that in Washington, lawmakers are floating yet another bill proposing to abolish the greenback.

A reporter from the Beltway insider rag The Hill recalled that when the idea was last bruited in 2011, the owner of a D.C. strip joint objected. “I think it would be very awkward for everyone involved,” said Daniel Harris. “How much more would a coin weigh than a dollar bill? It would be very hard.” More to the point, “You can’t put a coin in a garter belt.”

The reporter presented this predicament to the bill’s current sponsor, Sen. John McCain.

His reply? “Then I hope that they could obtain larger denominations.” He turned to walk away and said, “Fives, tens, one hundreds!”

Glad they’ve got it all figured out…

  “Just after I hit my submit button on my diatribe about how readers of The 5 couldn’t have possibly been investors in Detroit city bonds,” writes a reader following up from two days ago, “I saw a news broadcast of a former Detroit city police officer that was now going to have to go out and attempt to find a full-time job, because his pension was going to be worthless and they didn’t get Social Security.

“He went on to explain that they had time and again given in to pressures to not get higher pay, but were promised better and better pension promises.

“Please forgive me, as I meant no disrespect of any Detroit city employees that have been given the same raw deal. This is really appalling, and it sounds like more and more cities across the country are falling into this bankruptcy trap. SHAME ON ALL OF THEM!

“These stories of employees that forgo raises with a promise at the end of their careers for a nicer pension: I’m not arguing whether their pensions are right or wrong. What I feel is that these hardworking city employees (YES, most do work hard), and for that matter, city, municipal and state employees, are not compensated like their equals in the private sector. Most have forgone higher pay for enhanced benefits and, yes, pensions. Shameful!”

The 5: “We’re going to see more Detroits,” Ron Paul told CNBC this week, “and eventually the government of the United States will be somewhat similar to Detroit, because people will give up their confidence in us, they’ll give up confidence in the dollar and eventually they’ll give up confidence in our military. And then you’ll see some real, real changes in this system, which has been built on a fiat dollar for the last 40 years.”

It’s both heartening and disturbing to see the good doctor so eerily echo our own forecast in this same vein…

Regards from Vancouver,

Dave Gonigam
The 5 Min. Forecast

P.S. “I promise,” says Symposium roving reporter Jim Amrhein: “No more pictures of my legs.”

Your editor apologizes for linking to Jim’s dispatch earlier this week and failing to give you proper warning. Today’s dispatch, we assure you, is all business… and covers considerable ground for which we didn’t have time in our own 5 Mins. Check it out…


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