- Big gains when there aren’t enough shares to go around
- Crude grabs the headlines, but watch one sector flying under the radar
- The hottest — and most compact — real estate sector
- A deal in Washington (Uh-oh)… when changing the law is easier than changing a sign… the “New Feudalism”… and more!
The tale is market legend, more than a century old… and its lessons could nearly double your money now.
“It’s called a corner,” says our Chris Mayer by way of background. “What happens is that someone, or some group, gets hold of almost all the shares of a stock. They corner the market. This can create a problem for people who are short the stock. (If you are short a stock, it means you borrowed shares and sold them with the idea that you’ll buy them back later — or cover — for a lower price and pocket the difference.)
“But if there is a corner, then the shorts can get in big trouble because they can’t get shares to cover their short. And when that happens, the stock can skyrocket.”
The classic instance is the Northern Pacific Corner. Recalled Warren Buffett once, “I first read about the Northern Pacific Corner when I was 10 years old.
“When I opened my office on Jan. 1, 1962, I put on the wall a framed copy of The New York Times of May 10, 1901, describing the fateful prior day.”
Rail titans James Hill and E.H. Harriman were fighting for control — gobbling up all the available shares. Nothing was left for short sellers. “The short sellers cornered themselves in,” wrote Bruce Wasserstein in his book Big Deal, “having pledged to sell 100,000 more shares than had ever been issued.”
The stock went from $140 to $1,000… in a day.
And yes, a corner can happen in the present day. Look back no further than the Panic of 2008.
For a brief moment, Volkswagen became the biggest company in the world — “the Leper King during the worst of credit epidemics,” as noted here in The 5.
Out of nowhere, Porsche announced it had bought 74% of Volkswagen shares. The German state of Saxony owned another 20%. That left 6% for everyone else… but 13% of shares were sold short.
The share price quadrupled in three days.
“Could the same kind of setup,” Chris muses, “be playing out today in… Sears Holdings (SHLD)?”
Could be, Chris concludes after seeing a recent presentation by Nicholas Snyder of Snyder Brown Capital Management. “Snyder is an investor but also a history major,” says Chris — and Snyder dutifully recounted both the Northern Pacific and Volkswagen episodes.
As you might know, Sears the retailer is in deep trouble. But SHLD comprises both the retailer and a reinsurance company that owns the retailer’s good assets.
The setup is simple: Five major players own 86% of SHLD shares, and they’re adding to their holdings. Because SHLD is a component of major stock indexes, index funds own another 7% of shares.
That leaves only 7% for everyone else… but 15% of shares are sold short.
“When Snyder did his presentation,” says Chris, “SHLD was $33 per share.” It still is this morning. “His target is $60 in six months.
“Yes, extraordinary things occasionally happen,” Chris concludes. “And sometimes you can make a lot of money when they do.”
[Ed. note: In a few days, we’re taking the wraps off a project Chris has had in the works ever since he joined Agora Financial 10 years ago. We’ve invested countless man-hours and hundreds of thousands of dollars to back it up.
And after 10 years of real-time testing, we’re ready to reveal one of the most powerful investing strategies our firm has ever come across. Keep an eye on your inbox later today.]
Crude is moving ever closer to the $60 level the Saudi Arabian government said last week was something it could live with.
At last check, a barrel of West Texas Intermediate is down nearly 5%, to $60.78. Brent, the world benchmark, is down nearly as much, to $63.88.
Around midmorning, the Energy Department said U.S. crude inventories grew last week. Earlier, OPEC forecast demand for its crude next year will be the weakest since 2003.
Energy shares are dragging down the major U.S. indexes this morning. As we write, the S&P 500 is off more than three-quarters of a percent, to 2,043.
Yesterday was a wild day — down big at the start, but the S&P broke even by day’s end… and the small-cap Russell 2000 ended the session up 1.8%.
“It’s becoming clear to me that smaller stocks are in the early stages of reclaiming their leadership role,” says Greg Guenthner of our trading desk. For most of the year, small caps have underperformed the broad market. But no more: “The Russell has been flat out crushing the S&P since Oct. 13,” says Greg — “that’s the week stocks bottomed out and began their big fall rally.
“This newfound strength is your signal to grab onto these smaller stocks now,” Greg concludes, “before they really begin to blast off into the final weeks of the year.”
Whoopee: Congressional leaders have come to terms on $1.1 trillion in spending to keep most of the government funded through September of next year.
That means the “partial government shutdown” that loomed as of midnight tomorrow has been averted. Well, for now anyway: The debt ceiling, currently suspended, comes back into effect next year, and Uncle Sam is due to bump up against it next summer.
A few details of this deal are still up in the air — including the one we mentioned on Monday about a taxpayer backstop for big banks’ high-risk derivatives trades.
But whatever the outcome of the budget discussions, they bode well for one asset class we’ve discussed of late: Click here to take advantage of the next big run-up.
“Over the past decade, one sector of the real estate market has absolutely crushed the S&P 500,” says our income specialist Neil George, “turning in a performance three times better than your average stock.”
It’s not apartment complexes or office space or factory floors. Rather, it’s the self-storage business. Real estate investment trusts (REITs) specializing in self-storage have more than quadrupled in value over the last 10 years…
“Companies in this sector are almost the perfect cash machines,” says Neil. “Building them isn’t very expensive — just install a few prefabricated structures and you’re in business. Operating costs aren’t too bad either. A few lights, a handful of employees, maybe a security system if you’re feeling generous.”
And then there’s the customer base: “One of the reasons self-storage companies are booming is because Americans are in love with ‘stuff.’ But pack rats aren’t the only customers a storage facility can count on. Every year, 14.19% of U.S. households move from one residence to another. And many of those folks need to temporarily store their stuff while the new home is being prepped.
“All told, 11 million folks pack a new storage unit each year, and that number is expected to continue climbing at an ever-rising clip in the years to come.”
Neil has pinpointed one player in the space paying 3.63% — a yield that’s growing every year — and added it to the Lifetime Income Report portfolio.
How government really works: Many versions of this sign were posted recently around the town of North Hempstead, New York…
Just one problem: The fine is actually $25, not $250.
But with all the sunk costs of the signs having been posted in the first place, city fathers are now pondering… you guessed it: raising the fine from $25 to $250.
“Your reply to the person who was making excuses for the chokehold death was right on target,” writes a reader.
If you haven’t been reading daily, we waded into the death of Eric Garner this week, examining it from the tax-collection standpoint.
“This is no longer a free country and has not been for some time,” today’s reader continues. “Where we were once citizens of an independent republic. We are now subjects of an empire.”
“The only thing relevant,” writes a reader who would beg to differ: “Garner resisted arrest. Period. End of sentence.”
The 5: We had trouble formulating a response. Then we stumbled upon a speech Samuel Adams gave a few weeks after the Declaration of Independence.
“If ye love wealth better than liberty,” he said, “the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsel or your arms. Crouch down and lick the hands of those who feed you. May your chains set lightly upon you. May posterity forget that ye were our countrymen.”
“So now the Republicans are taking control of Congress,” an 80-something reader writes, “and, if the auguries are correct, of the presidency in 2016. (Though neither party has yet mentioned any candidate I would vote for.)
“What difference is it going to make for the ‘man (or woman) in the street’? Basically, nothing. Reps or Dems, they are all politicians, and the only care they have for the average voter is ‘What do I have to give these fools to convince them to vote for ME?’ As little as possible, of course, especially after over $18 trillion in national debt.
“The pols’ real care is for those in the penthouses who support them with moolah. The almighty buck, after all, is the real source of power. Without enough dollars, no politician is going to be elected to anything, and they are not dumb enough to believe otherwise.
“Thus, we are moving rapidly into something like a New Feudalism, under the control of those in the top 0.1%, who have that kind of ambition, abetted by the rest of the top 10%, who get enough wealth and power to (hopefully) not upset the apple cart.
“Question: What of the divisions that must exist among the 0.1%? Are they all actually in agreement with one another? If not, who is going to pay the price of their internecine strife? Remember Europe in the Middle Ages. Vladimir Putin may be at least a would-be 0.1%, by the way.”
The 5: New Feudalism. We like that. Rings true with Jim Rickards’ recent thought experiment.
“Well, I just couldn’t resist putting in my 2 cents on ‘the boots,'” writes a reader. Our L.L. Bean thread has legs, wouldn’t you know…
“I grew up in northern Canada. We grew up wearing these boots as kids. You either had the ones you have been talking about, known as ‘felt packs’ or ‘leather tops,’ or you had snowmobile boots. There weren’t many other options back then.
“Lumberjacks do wear these boots. I was a third-generation logger, and I used to wear them in the bush. They do come in a steel-toe version. They also came in ‘corks,’ which meant they had steel studs sticking out of the soles. This gave you good grip on ice or wood, but was terrible on frozen steel. (The equipment you operated was made out of steel. It was slippery when frozen, and it was frozen all winter.)
“Thank goodness there are better boots made today. They were OK, but when it was minus 40 degrees, your feet would get cold.”
The 5: We weren’t sure if you meant Fahrenheit or Celsius. But it turns out when it’s that cold, they’re the same!
Best regards,
Dave Gonigam
The 5 Min. Forecast
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“Every spasm of new stimulus seems less and less effective in boosting the [Chinese] economy.” — Anne Stevenson-Yang, interviewed in Barron’s
For the past few years in The 5 PRO, we’ve chronicled the folly of China’s bubbles and central planning. So we are not surprised to see new symptoms of China’s bubble regularly inflict pain upon speculators.
But we were surprised to see such a harsh critique of China’s economy in a mainstream publication: last weekend’s Barron’s.
In the issue, Jonathan Laing interviewed Anne Stevenson-Yang. Stevenson-Yang is research director of J Capital, a firm that specializes in Chinese companies and economic trends. She’s well connected, with a network of government officials, Communist Party leaders and business leaders.
Stevenson-Yang thinks China “has entered the early stages of slowing expansion, severe credit problems and potential instability.” Here is a key quote from her interview:
“I’d be shocked if China is currently growing at a rate above, say, 4%, and any growth at all is coming from financial services, which ultimately depend on sustained growth in the rest of the economy. Think about it: Property sales are in decline, steel production is falling, commercial long-and short-haul vehicle sales are continuing to implode and much of the growth in GDP is coming from huge rises in inventories across the economy. We track the 400 Chinese consumer companies listed on the Shanghai and Shenzhen stock markets, and in the third quarter, their gross revenues fell 4% from a year ago. This is hardly a vibrant economy.”
You can find the entire interview at this link.
In short, investors are still too complacent about the fallout from China’s unraveling economic model. Exposure to the hissing real estate bubble is stuffed in every nook and cranny on the shadow banking system. And the shadow banking system, which includes the repurchase, or “repo,” market, is showing signs of stress…
The Chinese authorities have grown concerned about rampant speculation in their stock market. They are under the illusion that they can reinflate one part of the bubble while relieving pressure on another part.
But central planners may get much more than they bargained for, because they just tightened the screws on speculators: The China Securities Depository and Clearing Corp. (CSDC) announced that only corporate bonds with ratings above AA could be used for collateral in the bond repo market.
You don’t have to know the inner workings of the repo market to know that this is a liquidity tightening action, plain and simple.
More than 1 trillion yuan of corporate bonds are on deposit at the CSDC. According to analysts cited by Reuters, around 500 billion yuan worth of those bonds will be excluded from the repurchase market going forward. Demand for the excluded bonds should fall, lowering prices and boosting yields in the process.
Renewed stress in China’s bond repo market is one symptom of the slow-motion destruction of central planning. Tomorrow, we’ll review the implications of China’s unraveling economic model for the global steel market…