February 5, 2014
- Gee, thanks for the warning: The ghost of Treasury secretaries past
- Why Chris Mayer says banks are still a good place to invest
- A shocker from enviro-friendly Germany… and a curious contrast with Canada
- Trouble in Rio, four months before the World Cup
- Taking the pulse of the biotech sector… aggrieved readers on Obamacare and cancer treatment… other suggested uses for the beer drone… and more!
“We don’t want to have to replay this movie,” says the former Treasury Secretary Hank Paulson. “We need to learn from our mistakes and clean up our messes.”
Mr. Paulson is getting some press in The Washington Times this morning, wringing his hands over the prospect of another financial crisis. He’s the central figure in a new documentary called Hank: Five Years From the Brink. Reviewers are comparing it to 2003’s The Fog of War, in which the former Defense Secretary Robert McNamara came clean (sort of) about Vietnam.
Of course, McNamara had 35 years to reflect on his folly and achieve a certain level of introspection.
But Paulson? How much religion can he have gotten less than six years removed from his every-Sunday-night press conferences in which he announced he’d just put out some financial brush fire (which he never saw coming)?
Remember this?
His declarations inspired so much confidence that usually the Nikkei would promptly tank 3%, followed by the European markets a few hours later, and then the Dow would sink 300 points on Monday morning. Week after freakin’ week.
So count us unimpressed when he tells the Moonie paper, “It’s obviously unacceptable for any bank to be too big to fail.” This from the guy who was running Goldman Sachs in 2004 and strong-armed regulators to allow his industry to amp up its leverage from 12:1 to 40:1.
We regurgitate this sorry history as prologue to an unlikely profit opportunity…
U.S. banks are “on pace to exceed the industry’s earnings peak in 2006,” says our recovering banker Chris Mayer.
For two years, Chris has been pounding the table about banks for anyone willing to listen. Few have… and too bad for those people. “I think the stocks were cheap. They were cheap because the financial crisis wreaked havoc on their profits and balance sheets. The effect of the financial crisis for banks was something like taking a baseball bat to a car. There was a lot of damage.”
Carp all you want about how the problems that led up to 2008 haven’t been fixed — we get it. But there’s a bigger force at work when it comes to investing in banks. “The stocks show a discernable pattern” when you examine their price-to-book ratios; book value for a bank is a rough proxy for net asset value.
Here’s that figure, plotted on a chart representing small and midsize banks and thrifts. “This chart is one of my all-time favorites,” says Chris. “It makes this point clearly.
“We are nowhere near anything resembling a peak by the standards of the past,” says Chris. His friends at PL Capital — who assembled that chart — point out that during the recovery from the 1980s-1990s savings and loan crisis, bank stocks as a class turned in a 1,023% gain until the next crisis — the collapse of the hedge fund Long-Term Capital Management — came along in 1998.
Since 2009, bank stocks are up 270%… and, PL figures, by the time it’s all over in another three-five years, will be up 500-700%. “That means we’re a little more than halfway to the low point.
“I still like bank stocks and may add another to our list soon.” In the meantime, Chris has sniffed out a backdoor way to banking profits in the current issue of Capital & Crisis that could make four-five times your money by 2018.
Major U.S. stock indexes are slightly in the red this morning. The S&P continues to oscillate around the 1,750 level, and thus, it is still “make or break” for that key index, as Jonas Elmerraji explained yesterday.
Among the economic numbers in traders’ sights this morning…
- Private-sector jobs: Up 175,000 in January — not awful — in the estimation of the payroll firm ADP. Traders see this number as a sneak preview of the Labor Department’s monthly jobs report, due on Friday
- ISM nonmanufacturing index: This survey of the service sector came in at 54.0 in January — up from the previous month and comfortably above the 50 dividing line between expansion and contraction.
Despite the losses in the broad stock market this year, “the Nasdaq Biotechnology Index is still up 5%,” says Breakthrough Technology Alert editor Stephen Petranek.
“Certain biotech stocks are holding their own nicely, including all of our recent picks. As the market keeps dropping, stocks will drop with it, but that can be beneficial because broad declines make good stocks cheaper. We will be watching for bargains in our portfolio and pointing them out.”
Gold is holding the line on $1,250 — the bid $1,258 at last check. Silver’s creeping back toward $20, currently $19.84.
In the energy patch, a barrel of West Texas Intermediate is fetching $97.47 — on the high end of its trading range so far this year.
Natural gas is down a bit, but still elevated by recent standards, at $5.21.
“Germany digs a lot of coal,” says our Byron King. He noticed this on a stopover in Berlin last year. “As the airplane was landing, I looked out the window and saw huge strip mine operations southeast of the city.”
Forget what you hear about Germany closing its nuclear plants and moving toward solar and wind. “Germany produces and uses large volumes of coal — especially low-grade lignite — to generate electric power.” Indeed, lignite is Germany’s biggest source of electricity. Lignite is the stuff that generates huge quantities of soot in addition to carbon.
“Lignite is the only traditional energy source that is, in the long run, domestically available in sufficient amounts and at affordable prices,” says a spokesperson for Vattenfall — a Swedish firm that operates a huge mine east of Berlin. “All the alternatives foreseeable today are more expensive, strengthen import dependency or drive away investments, value creation and jobs.
“Clearly,” says Byron, “Germany is faced with economic, social and environmental trade-offs in its quest for energy. Thus, Germany is leaning toward strip mining.”
“Things are different in, say, Canada and the oil sands operations of Alberta,” says Byron, illustrating an intriguing contrast.
“Mining oil sands is impactful, to be sure. At the same time, since the 1970s, when oil sands surface mining commenced in Alberta, the total surface area excavated is less than 300 square miles. How big is that? By comparison, the built-up area of Greater Los Angeles covers 4,825 square miles.”
And one “green” energy source — hydropower — can cover as much territory as metro LA. The massive dams of Quebec built in the ’70s flooded 4,400 square miles. “That’s not quite 15 times the amount of land disturbed by surface mining operations for oil sands in Alberta.
“The tale of two countries and their respective quests for energy highlights how there are no easy answers when it comes to keeping the lights on and the economy running. That, and how pretty much everything is connected to everything else these days.”
While the media are preoccupied with fouled drinking water and missing doorknobs at the Winter Olympics in Russia, a different — maybe bigger? — crisis is shaping up in Brazil.
From the AFP newswire: “Several Brazilian states, including three set to host June World Cup action, suffered power outages Tuesday, fueling fears over the country’s ability to keep the lights on.”
It’s been a hot summer in the Southern Hemisphere; as many as 3 million people were affected before the lights came back on.
Meanwhile, at ground zero in Rio de Janeiro, an “alternative currency” is springing up.
“The residents of Rio have had enough,” says The Guardian. “Fed up with high inflation and rip-off prices ahead of this year’s World Cup and the Olympics in 2016, they have set up a Facebook page called ‘Rio $urreal — Don’t Pay’ dedicated to ‘exposing and boycotting the extortionate prices being charged by bars, restaurants and shops.’ It has quickly gathered close on 150,000 supporters, and is growing fast.”
The World Cup? It’s true the Brazilian real buys less than it used to. But we’re fairly sure rising prices in Brazil have at least as much to do with the inflation Ben Bernanke has exported the last five years, touching off the “international currency war” Brazil’s finance minister acknowledged in September 2010.
Regardless, the “$urreal” idea caught on, to the point that the face of surrealist artist Salvador Dali now graces a mock banknote of that name…
“We can’t just act like typical Brazilians and agree something is wrong, make a joke, then swallow it,” TV host Andrea Cals tells Bloomberg. “We have to stop this, because it’s getting serious. It’s no joke when I’m spending much more than I earn.”
See how quickly the emerging markets are catching up with the developed world?
“If people like you guys,” an aggrieved reader writes, “would start proposing meaningful ideas to fix what Obamacare was supposed to fix until the Republicans purposely f***** it up royally, then maybe we could get a system that would work and fix the insurance industry abuses, which is why we needed health care reform in the first place.
“Stop spreading fear, and start spreading ideas.”
[We’ll spare you the reader’s all-caps and 10 exclamation points on that last sentence. You’re welcome.]
The 5: The president told us to go jump in a lake way back in 2009, during his health care address to a joint session of Congress. “There are those who argue,” he said, “that we should end the employer-based system and leave individuals to buy health insurance on their own.”
Yes! we thought. That’d be a great start. Then we could junk the whole rotten system of cost-shifting scams and a woman could deliver a baby for $500 — based on the inflation-adjusted cost of maternity services at California’s Santa Monica Hospital in 1952. With a private room, no less.
Moments later, he dismissed this notion, calling it “a radical shift that would disrupt the health care most people currently have.”
The following year, his own Department of Health and Human Services estimated half of all people with employer-provided insurance would be “disrupted” anyway and lose their existing plans. That’s a tsunami due to crest right around open enrollment time at the end of this year, we hasten to add.
And so we stick to our knitting. Policy prescriptions ain’t our bag. We settle for practical solutions. Events that are within your control. Things you can do to ease Obamacare’s sting close to home. Our recommendations — revised and updated for 2014 — are available here.
“Cancer is the biggest gold mine in the medical industry’s war chest — why would any cure work?” a reader writes after our exploration of a potential cancer treatment yesterday. We seem to have aggrieved many readers yesterday.
“What’s to cure? It’s making money for everybody from the top of the food chain on down. You go, cancer!!“
The 5: We hear where you’re coming from. And we hear the other reader who wrote in saying there’s “no way for food conglomerates and pharmaceutical companies to profit from prevention, so we continue to waste money on ‘disease care’ and drug research, rather than supporting true nutrition.”
We do investment research. We send our editors all over the globe in search of ideas that can plump your portfolio and generally make your life better. In a world where central bankers and connected plutocrats call the tune, we follow the money.
What you do with our findings is up to you. If some of the ideas we generate don’t comport with your values, well, we have other ideas more likely to meet with your approval.
That said, for the second time in a month, we dig up this quotation from the late Harry Browne: “The stock exchange isn’t a pulpit. If you want to promote a particular environmental policy, political philosophy or other personal enthusiasm, do it with the profits you make from hardheaded investing.”
“What a payload that picture of the octocopter was carrying!” writes one of our regulars, mercifully turning our attention to lighter matters — to wit, the beer drone from yesterday.
“That was a 12-pack of bottled beer, not aluminum cans. Of course, a look at my belly and you would realize that I am a consumer of suds in all its forms. What I do question is the choice of payload on an ice-covered lake.
“I would think you could increase profit margins with the delivery of coffee, hot toddies and Irish coffees. At least that would be my choice on an ice-covered lake. Summertime, I’d have a fleet of those things delivering ice-cold beer! But that’s the entrepreneur in me talking.
“Now, I’m just dreaming here, but wouldn’t finding a misdelivered 12-pack sitting on your doorstep be the closest thing to beer heaven?
“Damn the FAA for grounding them! Wisconsin, you’re missing out on a hell of a source for tax revenue.”
The 5: Don’t give the politicians in Madison any ideas!
“I keep seeing the reference to Lakemaid Beer as being brewed in Wisconsin,” another reader chimes in on the same topic.
“However, my information has it as being brewed by the August Schell Brewing Co. in New Ulm, Minn. I first saw it several years ago in Mankato, Minn. (home of Minnesota State University — known as quite a party school, and also having a superbly written, albeit patently false, Mankato website) and don’t know how far it has spread.
“However, clever marketing is the key. Drones are just another ploy for visibility. We like to think of the whole ‘drone delivery of beer’ as just a great skeet shoot with desirable prizes.”
The 5: The company is, indeed, based in Minnesota, but according to its website the product is brewed in Stevens Point, Wis. As well it should be: Why would a sensible Wisconsinite buy beer from Minnesota when so many fine local brews are available? (When visiting, your editor and his wife are partial to Island Wheat…)
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. 3D Systems Corp. (DDD) issued a profit warning today. As we write, shares are down more than 16%, dragging the rest of the 3-D printing sector with it.
We love the sector as much as anyone else, but it was due for a rest.
In the PRO edition of The Rude Awakening, Greg Guenthner urged readers to ride DDD up late last year and take profits on Jan. 7. Two weeks later, he said it was looking like “a strong short candidate,” and anyone who followed his guidance is sitting on a gain of 25.7% this morning.
For access to Greg’s daily trading guidance — you can get a sneak peek for as little as $5 — look here.