May 7, 2014
- Fubar at Bank of America, but Warren Buffett doesn’t care
- Buffett’s sweet deal… and how, finally, you can get one just like it
- Made-in-China success story comes stateside: What you need to know about the Alibaba IPO
- Where did the made-in-America success stories go? A disturbing chart…
- Gold miners get their act together, but what will it take to move share prices?
- Political assassinations, crowdfunded with Bitcoin… Social Security as a tax… two winners in two days… and more!
Oh, to be a fly on the wall today at Bank of America’s shareholder meeting in Charlotte.
Strap in for a hair-raising tale of stupidity and greed… along with a chance to recoup some of the money you, dear taxpayer, lost in the bailouts of 2008.
Last week, BofA disclosed an “error” in its capital planning, resulting in a $4 billion shortfall. Even for a megabank, that’s not chump change — it’s more than 2.5% of BofA’s market cap. To make up the shortfall, BofA shelved previously announced plans for a share buyback and its first dividend increase since 2007.
So what was the “error” exactly? “The bank overstated its capital,” says the Financial Times, “as a result of its accounting treatment of certain structured notes acquired as part of the 2009 acquisition of Merrill Lynch.”
Boy, the hits keep comin’ from the star-crossed shotgun marriage between Merrill and BofA during the financial crisis.
To refresh your memory: Bank of America (BAC) got not one but two federal bailouts. The second came when it turned out Merrill had racked up a quarterly loss of $15.8 billion, even as it paid bonuses of $3.6 billion.
BofA’s then-CEO Ken Lewis conveniently “forgot” to mention those losses at the time of the acquisition, which he’d called the “strategic opportunity of a lifetime.” BofA got a $150 million slap on the wrist from the feds, and another $15 million from the state of New York.
Back to the present fiasco: Two big BAC shareholders — the California state-worker pension plan CalPERS and the California teacher pension plan CalSTRS — have promised a revolt at today’s shareholder meeting. Both say they’ll vote to kick out PricewaterhouseCoopers as BofA’s auditor… and to oppose the re-election of a board member who was on BofA’s audit committee at the time of the “error.”
“The auditors are the dogs that didn’t bark,” says Anne Simpson of CalPERS.
But another big BAC shareholder sounds much more sanguine…
“That error they made does not bother me. You do the best you can,” says Warren Buffett. “It doesn’t change my feeling about Bank of America or its management.”
Does Buffett simply not care about good corporate governance anymore? First he opposes a cushy executive pay plan at Coca-Cola, but refuses to vote against it… and now he shrugs off the accounting blunders at BofA.
Then again… Buffett’s Berkshire Hathaway has no ordinary stake in BofA.
In August 2011, he plunked down $5 billion. But he didn’t buy ordinary shares. He lined up “Executive Dividends” paying a fat 6% yield. (BofA’s regular shares yield a paltry 0.3%.) Further, he has the option between now and 2021 to buy as many as 700 million regular shares for $7.14 each.
At last check this morning, BAC trades at more than twice that figure — $14.82. Sweet deal, huh?
Buffett has several similar arrangements with the too-big-to-fail banks. During the 2008 crisis, he plunked down $5 billion on Goldman Sachs in exchange for preferred stock yielding 10%.
Before you get mad, know this: Believe it or not, you can line up a play very much like the ones Buffett does.
“When the feds bailed out the banks back in 2008,” says our Chris Mayer, “they gave them a special deal.”
This is where “Executive Dividends” come in. “Few investors outside of Wall Street have even heard of it,” says Chris. “In fact, it’s so profitable you could make more than five times your money over the next four years.
“That means for every $18 you invest, it could give you back $94. Show me a mutual fund that’s doing that for you now.”
Best of all, you can buy these plays in your plain-old brokerage account. Let Chris walk you through the whys and wherefores — and the lucrative gains to be had — from “Executive Dividends”: Click here to get started.
On Wall Street, blue chips are flat, and everything else is getting flattened.
As we write, the Dow is slightly in the green and the S&P 500 is slightly in the red. The Nasdaq and the small-cap Russell 2000 are getting slammed.
“The Russell fell below its 200-day moving average yesterday for the first time in almost a year,” says Greg Guenthner of our trading desk. “In a strong market, we expect small caps to lead — not lag. It’s clear that bigger, safer stocks are the place to be right now.”
Still, the Street is buzzing about the plans for Alibaba Group — “the Amazon of China” — to go public in the United States. The firm filed the paperwork this morning.
“Alibaba’s story is the kind of story we should be hearing more of in the U.S.,” says our investment director Paul Mampilly.
The story begins 15 years ago. “Founder Jack Ma went from being a teacher to an entrepreneur. Ma was laughed out of venture capital firms when he asked them to invest. Ali what?”
But Yahoo founder Jerry Yang and SoftBank founder Masayoshi Son didn’t laugh. They took substantial stakes in the early days. Today, the firm generates $248 billion in annual sales.
While Yahoo has parted with about 40% of its initial stake, SoftBank has held on tight. “With this IPO,” says Paul, “SoftBank’s shares are going to be worth about $40 billion. Can a calculator handle the percentage gain that SoftBank has generated on this investment?
Hmmm… Masayoshi Son put in $20 million. That’s — holy Moses — 199,900% in 14 years.
“But you have to wonder if Alibaba’s days of super-turbo growth are ahead of it or behind it,” Paul muses.
“No one should bet against Ma building a great, well-run company that endures. But Alibaba won’t IPO at anything near the valuation that Son received when he made his investment in 2000. Or that Yang got when he put Yahoo’s money into Alibaba in 2005.
“Even if Alibaba lives up to the expectations that people have, you won’t have the pop that comes with a young company growing 200-300% a year.”
Meanwhile, the “kind of story we should be hearing more of in the U.S.” is being heard less and less.
The Brookings Institution just finished crunching some Census data and concluded American entrepreneurship stands at a three-decade low.
New business creation fell by half from 1978-2011, the most recent year of the figures. And from 2009-2011, businesses were collapsing faster than they were being formed.
If the trend holds, the study avers, “it implies a continuation of slow growth for the indefinite future.”
Especially when coupled with other research that shows the self-employed — the job creators of the future — now make up the smallest share of the workforce in post-WWII history.
Gold began tanking in electronic trading before the Comex open in New York this morning… and by the time the bleeding stopped, it was down nearly 1%, and $1,300 was history.
At last check, the bid was $1,296.
About the gold stocks: “We can be patient — our time will come,” says one of Canada’s most successful small-cap resource investors.
This high-powered gentleman — we’ll keep him anonymous for our purposes today — sat down last week in Toronto with our Byron King. He said the first-quarter earnings of big-name miners like Goldcorp and Agnico Eagle look promising: “They’re all making progress on the cost side of the ledger.
“But lowering internal costs doesn’t recreate the momentum of 2011 and earlier. That momentum is still lacking, I’d say.
“Looking ahead, for big share price moves, we need to see firm, upward, sustained movement in gold prices. That’s probably a function of big, macroeconomic issues, perhaps world politics and the broad investment cycle turning.”
That time, our insider says, will come: “Right now, the market loves tech, tech and more tech. That and biotech. Or dividend plays. Tech and yield, basically. But if enough people get burned? Another tech pullback or crash? A big, unexpected bankruptcy by a dividend payer that runs short of cash? Well, it’ll be back to gold, which can go down, but never down to zero.”
[Ed. note: It is, to be sure, a “challenging” time in resource investing. But you also want to be ready whenever the cycle turns. That’s why our friend Rick Rule at Sprott USA is organizing the Sprott Vancouver Natural Resource Symposium 2014. Rick will be there. So will Byron. And U.S. Global’s Frank Holmes. Legendary names like Doug Casey and Adrian Day will also be on hand.
This four-day event will take place in the locus of small-cap resource investing — Vancouver. And it’s during a week when the weather in that city is optimal — July 22-25. If you’ve been to our own symposiums there, you know what we’re talking about. And if you haven’t, you really should check out Sprott’s event.
Either way, Sprott has graciously arranged an exclusive registration discount for Agora Financial readers. But it’s available only for the next eight days. For details — including a full speaker lineup — read on at this link.]
“Anonymous, safe, secure, crowdfunded assassinations,” promises a website called Assassination Market, found only on the so-called “dark Web.”
Think of it as a Kickstarter for assassinations. Donors can contribute Bitcoins toward the assassination of any public official the donor designates. Like Bitcoin, it’s the brainchild of a someone or someones going by a Japanese-sounding name, in this case Kuwabatake Sanjuro. Whoever he, she or they are, they say they’re motivated by “a deep-rooted hate against oppressive regimes.”
Who exactly is supposed to carry out the hits and collect the loot we can’t quite figure out. In any event, it appears the highest amount to date — $125,000 — has been put toward a hit on someone who no longer holds office — former Federal Reserve chief Ben Bernanke.
Hmmm…
Should one of these crowdfunded hits ever come about, it will be a very quick and decisive test of Bitcoin’s touted anonymity, no? Imagine dozens or even hundreds of people charged with accessory to murder…
“Hate to add fire to the Social Security debate,” a reader writes…
[That’s OK. We knew what we were getting into.]
“…but Social Security is a tax. That is how it passed constitutional muster. Therefore, you paid in a tax. Are you really entitled to receive something that is a tax?
“I believe I read somewhere that the Supreme Court already addressed this issue in the 1960s, and they said that the government could make adjustments to Social Security as they needed to. [Yes, it’s Flemming v. Nestor.] The way I read that is they can adjust your payments whenever they want.
“Now, from a political perspective, that might be suicide for the party that does that. There are somewhere around 70 million folks getting Social Security (hint: They are voters). Therefore, I believe they will go after the wealthy (everybody loves that, and there aren’t enough of them to worry about the vote) and people who have pensions (they will say you don’t need it). I also believe they will raise the minimum age you can collect and the maximum age for the highest payment.
“To anyone who thinks there is any way out of this, I have a favorite saying: ‘Assume the position.'”
The 5: Usually, you should never assume anything because — well, you know. But in this case, it sounds about right…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Chalk up another winner for readers of Real Wealth Trader.
Matt Insley has been busily spotting lucrative short-term plays in America’s shale energy patch. Yesterday, he recommended selling half a position for 96% gains in less than six weeks. Today, on the back of a positive earnings report, he recommended selling another position for more than 50% gains in about three months.
Yes, there’s more where that came from — because Matt says we’re still in the middle of a once-in-a-century opportunity. But as he makes clear in his latest presentation, if you wait much longer, you risk getting left behind.