November 25, 2014
- Turn $2 into $12… assuming the courts don’t foul it all up
- Hooray? Home prices recover to early 2005 levels
- Hagel gets the hook: What the Pentagon chief’s departure means for military investments
- Swiss snit: Central bank chief takes to the pulpit over gold referendum
- Small caps shine… stupid lawsuit tricks… more (in)glorious moments from New York Times history… and more!
“The urge to bet $2 to win on a long shot is a recurrent thing,” money manager Martin Sosnoff once wrote, “and you give in, sometimes.”
Sosnoff is one of those investing gurus maybe one rung below the legends like Buffett and Seth Klarman and Joel Greenblatt. His 1975 book Humble on Wall Street is a favorite of our Chris Mayer. And his long-shot quote is what sticks in Chris’ mind this morning with the idea he sets forth.
The idea has attracted some other second-rung gurus like Carl Icahn, Bruce Berkowitz and Bill Ackman — who at age 48, oversees a $17 billion hedge fund. “I heard Ackman talk briefly about it,” says Chris recalls of a recent conference in New York. “I had long ignored the drama around this idea, but his comments piqued my interest again.”
We won’t keep you in any more suspense…
“The idea is to buy shares in Fannie Mae and Freddie Mac,” says Chris.
[We’ll give you a moment to pick yourself up off the floor.]
[We’ll give you another moment if you’re one of our longtimers who heeded our warnings of a housing bubble — warnings inspired by a document that Fannie Mae scrubbed from its website — back in 2004-05.]
“These government-sponsored enterprises (or GSEs) provide guarantees on trillions of dollars of mortgages,” Chris reminds us.
“It’s like insurance. The GSEs get money upfront in exchange for a promise to pay on any credit losses. It’s a simple business that does not rely on fancy derivatives. And historically, this was a super-profitable business for a long time.”
Until the Panic of 2008. “The GSEs have been in conservatorship since September 2008,” Chris goes on.
“They reported large losses in 2009, 2010 and 2011. However, a large part of those losses came from unconventional and subprime mortgages. These markets have essentially disappeared.”
Which means today, “the GSEs are once again minting money,” says Chris.
“Credit losses have receded. The guarantee fee the GSEs earn is now higher. It used to collect about 20 basis points (or 0.2%) off every mortgage. This is like an insurance premium. And it was not adequate to cover the losses. Today, Fannie gets 60 basis points. That’s a tripling of the price of its product.
“Revenues way up. Losses way down. Profits are fat again.
“However, the GSEs have been in this penalty box where they pay 100% of their earnings to the U.S. Treasury. But the government owns about 80% of the stocks.
“Thus, a legal opportunity emerges,” Chris explains.
“Ackman et al. contend — and have sued in federal court — that this is illegal taking without just compensation, in violation of the Fifth Amendment. The GSEs have paid back the cash that the Treasury put in and then some. It seems logical, then, that it is time for shareholders to get something.”
Ackman’s math finds the GSEs earning $17 billion in profits. Were they allowed to retain those profits, they’d have a price-earnings multiple of about 14… and instead of trading for barely $2 a share, they’d be more like $12. Fannie’s ticker symbol is FNMA. Freddie’s is FMCC.
“Here we get to what happens if the legal coin flip comes up tails,” says Chris. “In other words, what happens if Ackman and the gang lose their lawsuit? I have no idea. If you can handicap this complex lawsuit and how long it will take, you are smarter than I. To me, it seems obvious that the shareholders should get something. But laws bend as the powers wish them to bend.
“That’s why I look at this as a binary bet. If you win, you’re going to win big. If you lose, you’re going to lose everything.”
[Ed. note: If that’s not the risk level you’re willing to take, we direct your attention to one of Chris’ most valuable investing tools — an “almanac” that indicates precise days when a small number of stocks are set to soar in price.
Typically, the almanac reveals 30 or so of these shares each year — made possible by an SEC glitch in public filings. “It’s the ultimate cheat sheet,” says Chris… who explains the lucrative strategy in detail at this link.]
Major U.S. stock indexes are flat this morning. The Dow and the Nasdaq are slightly in the green, the S&P 500 and small-cap Russell 2000 slightly in the red.
“Small stocks are quietly finding their mojo,” says Greg Guenthner of our trading desk. “Yesterday, the Russell jumped 1.25%, easily outpacing the major averages. Simply put: You do not want to bet against small-cap stocks right now.
“The market is entering the holiday trading season. More often than not, that means stocks will drift higher. In fact, low-volume rallies during the week of Thanksgiving and the week between Christmas and New Year’s Day tend to shell out some pretty impressive gains to anyone paying attention.”
Traders who not getting a jump on their holiday travels are chewing on several economic numbers this morning.
The Commerce Department issued its latest guess on third-quarter GDP. It’s an annualized 3.9%, up from the first guess of 3.5%.
Meanwhile the Case-Shiller home price index notched a 0.3% gain in September. The year-over-year increase works out to 4.9%. Which means home prices are still rising, but at a decidedly slowing rate.
On a longer time horizon, we see home price levels have recovered to… um… about where they were 10 years ago.
Hey, that’s right around the time we were warning about a housing bubble, wouldn’t you know…
Back to the present: Among the metro areas tracked in Case-Shiller’s 20-city gauge, Charlotte and Dallas are the only ones where price increases are accelerating.
Hmmm…
The departure of Defense Secretary Chuck Hagel “is a big story, certainly if you follow military developments and invest in mil-tech,” says our Byron King — who has hundreds of readers doing just that.
As you might have heard yesterday, Hagel is resigning. Or as the saying goes, he “got quit” after only 21 months on the job.
“Hagel did exactly what President Obama wanted him to do,” says Byron — namely, oversee the withdrawal from Afghanistan and make do with the budget “sequester” that put a crimp on planned spending increases at the Pentagon.
But that was so 21 months ago. Last Friday came word the president had issued a secret order — U.S. forces will still have a combat role in Afghanistan next year after all. And with the war on ISIS slowly escalating, maybe the belt-tightening will go by the wayside too. (Especially, as Byron pointed out to us recently, with Republicans controlling both houses of Congress.)
Whoever replaces Hagel, “the Defense Department is shifting tech and acquisition efforts toward new threats from rising powers” — a trend Byron is tracking regularly in Military-Tech Alert.
Five days left before the Swiss gold referendum… and the head of the Switzerland’s central bank, the SNB, is in full-on freakout mode.
“The initiative is dangerous because it would weaken the SNB,” said Thomas Jordan — speaking on Sunday from the pulpit of a church in the city of Uster.
The proposal would forbid the SNB from selling its gold… require it to build up its gold stash to equal 20% of Switzerland’s foreign exchange reserves… and bring back all Swiss gold held in New York and other overseas locations.
Put together, the referendum “would very greatly restrict our monetary policy room for maneuver.”
It would also throw the gold market into a frenzy. Gold currently makes up 7.7% of Switzerland’s forex reserves. Amping that up to 20% would force the SNB to buy 1,500 tonnes of gold over the next three years.
“This would deliver both a demand shock (in terms of requiring new purchases) and a supply shock (in terms of depleting the gold in New York used to manipulate the market),” our Jim Rickards warned his subscribers back on Sept. 30.
[Program note: Jim’s next live Q&A with Agora Financial readers is already on the books — Monday, Dec. 8. The most recent event yesterday was well received: Jim delivered a comprehensive update on the state of play going into the Swiss referendum this coming Sunday. If you don’t already subscribe to Rickards’ Strategic Intelligence… you can join up here and gain immediate access to the archived Q&As — including yesterday’s.]
Who says the court system is a lost cause? It worked splendidly in the case of New Jersey resident Thomas Hickey.
We’re quite serious: Some time ago, Mr. Hickey sued the law firm of Wolff, Helies, Duggan, Spaeth and Lucas. He was in the firm’s office during a deposition, leaned back in a reclining chair, and fell to the floor.
Last week, Monmouth County Superior Court Judge Dennis O’Brien dismissed the case.
“Hickey’s lawyers had argued that the law firm as owner and maintainer of the chair was negligent not to check its settings for safety before each use,” explains the enlightening website Overlawyered.
“The court found that whatever hazards might inhere in the chair’s low-tension setting, Hickey had been sitting in it for 90 minutes, which was ‘sufficient time for him to learn the chair was designed to tilt and to appreciate its tension setting.’”
Which makes us wonder…. What if he’d been sitting there for only an hour?
“Per your report that New York Times columnist Joyce Wadler was taken in by an Onion-like website,” writes one of our regulars, “I’m confused.
“I thought the NY Times was The Onion? Y’know, the newspaper of record… for the likes of Walter ‘I don’t see no stinkin’, starvin’ gulags’ Duranty, Jayson Blair’s soaring works of fiction and all those fawning stories about Nobel Prize-winner Rigoberta Menchu, which ended up having even less validity than one of Al Gore’s fake drowning polar bears.
“And that was all in the days when they were actually slightly reputable.
“Anyhow, just checking. Maybe I missed something.”
The 5: Don’t forget Judith “Saddam has weapons of mass destruction” Miller. Smoking guns, mushroom clouds — those were the days.
We’ll also note the Gray Lady still hasn’t returned the Pulitzer Duranty won for his whitewashing of Stalin’s terror famine.
“You at Agora should buy The New York Times,” another reader suggests, “and call it The Daily Reckoning, New York Times Edition.”
The 5: That sounds like a really good way to go out of business quickly…
“I envy your reader who can’t discern the difference between a perfectly serviceable bottle of Gabbiano Chianti and a bottle of 2007 Il Poggione Brunello di Montalcino Riserva,” writes a reader, as our cost-of-Thanksgiving dinner thread goes completely overboard.
“If I shared that trait, I could save a lot of money that could be spent at ‘Whole Paycheck’ on GMO-free, organic, free-range, guilt-free, etc.
“Back to the wine: The former, and many others in its price range, make great ‘daily drivers,’ but the latter is for a special occasion, as suggested. For some, I suppose wine is like chained CPI… steak = hamburger = beans. It’s all protein.
“Happy Thanksgiving, and hoping that all of your pies are homemade, your turkeys Monsanto-free and your wine choices meet that perfect intersection where your taste buds and wallet agree.”
The 5: Well said…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Just got word: We’re shutting down discounted access to Real Wealth Trader at midnight on Thanksgiving night.
In part, that’s because the ideas Matt Insley picked up from his recent attendance at the “Houston Millionaire’s Club” have a limited shelf life. They could indeed triple your money in 60 days… but the window of opportunity will close very soon.
Thus the deadline for access to what Matt calls a “once-per-generation moneymaking opportunity.” Check it out while there’s still time.