As fire sales go, this one’s taking forever.
In early 2012, our Chris Mayer declared “the biggest fire sale in history” was underway in Europe. The banks there needed to raise cash to stay afloat. So they were starting to sell off assets — especially real estate — at fire sale prices.
His way to play it? Kennedy Wilson Holdings (KW) — which was snapping up some attractive European real estate. To date, it’s up 156%.
But the story still hasn’t played out. Consider that in 2008, the value of European stock markets briefly exceeded that of the U.S. by $1 trillion. Today, the value of the U.S. stock market exceeds those of Europe by $10 trillion.
That factoid emerges in a report from fund manager David Marcus. Here’s another: The European Union has only 7% of the world’s population… but it accounts for 20% of global trade.
“It’s a large sandbox,” says Chris — who brought the Marcus report to our attention. “But it’s barely growing. And there is a lot of uncertainty about monetary and fiscal affairs.”
For sure. As we write this morning, Greece is looking for a six-month extension of its bailout loans… because it doesn’t have the money to make its payments due at the end of this month.
“Yet the macro outlook is not the most critical factor here,” says Chris.
More important is how individual companies are adjusting to all that uncertainty: “There are lots of opportunities to restructure, to spin stuff out, to bring in new managers, to sell assets — to do all those creative and value-enriching things that drive share prices higher.”
Marcus’ report bears that out: European mergers and acquisitions rose 55% last year compared with 2013. What’s more, says Chris, “there were 32 spinoffs in Europe last year, more half of the total worldwide. This is when one company spins off a division as its own stock. Spinoffs are often winning investments.”
How to play it? KW is above Chris’ buy-up-to price right now. But Marcus manages the Evermore Global Value Fund (EVGBX) — which has high exposure to Europe. “Returns have been underwhelming so far,” Chris tells us, “but his portfolio has loads of potential. It is also a safe portfolio with not much downside.”
For access to Chris’ favorite ideas right now, look here.
Major U.S. stock indexes are drifting down as we write this morning. Traders await the minutes from the Federal Reserve’s January meeting, which they will read much as a witch doctor reads entrails — hoping to divine clues about when the Fed will start to raise interest rates. The minutes are due for release around the time this issue of The 5 hits your inbox.
In the meantime, the S&P 500 is off about a third of a percent at 2,093. And traders have a clutch of gloomy economic numbers to contemplate. None of them will light a fire under the Fed to raise rates anytime soon…
- Wholesale prices: Down 0.8% in January, according to the producer price index. The year-over-year change is now negative — down 0.1%
- Housing starts: Down 2% in January, worse than expected. “The bottom line,” Bloomberg sums up, “is that housing is not adding to economic activity”
- Industrial production: Up 0.2% in January, less than expected. And December’s numbers were revised down. Bloomberg again: “Manufacturing is still sluggish although on a barely positive uptrend.”
In the commodity complex, gold is again languishing a few bucks above $1,200. Crude is again all over the place — $52.95 at last check.
The mighty American consumer is struggling to keep up with student loan and auto loan payments. Delinquency rates are up in both categories, according to fourth-quarter figures from the New York Fed.
The percentage of auto debt that’s more than 90 days overdue is now 3.5% — up from 3.1% the previous quarter.
But that pales next to student debt — 11.3% of which is now at least 90 days in arrears, up from 11.1% the previous quarter.
Those indebted graduates are supposed to be the first-time homebuyers of the future. But the New York Fed report turns up an interesting fact: Before the “Great Recession” got cranked up, 30-year-olds with student debt were more likely to have mortgages than those without student debt — because their education levels brought in more income.
Now? 30-year-olds with student debt are less likely to have mortgages.
China is due for “the greatest unwind in modern economic history,” says our Jim Rickards — maybe even this year.
“China is likely to join the global currency wars now raging in Europe and Japan,” Jim wrote yesterday in an exclusive dispatch for Agora Financial Reserve members. “A devaluation in the yuan will help Chinese exports relative to competition from Japan, Korea and Taiwan. Since 2012, China has been quiet in the currency while its Asian trading partners and competitors have engaged in repeated devaluations. Now China has had enough and is ready to shoot back.”
Confirmation comes from this morning’s Wall Street Journal: “Pressure Builds to Weaken the Yuan.”
But the story doesn’t end there…
“China is at risk of seeing multiple markets in real estate, stocks, corporate loans and commodities all crash at once,” says Jim.
Jim says when you look at China’s torrid GDP numbers, you have to factor out all the waste from empty skyscrapers and such. “Adjusted for waste, real Chinese GDP growth is more like 4% than the 7.5% claimed until recently… Growth will no longer be sufficient to service the mountain of debt on which the growth was built.
“Rail and sea cargo shipments are declining, producer prices are crashing and loan growth has hit the wall. Chinese officials can see this house of cards collapsing but are determined to prop it up as long as they can.” Expect easy-money measures from the People’s Bank of China to keep credit flowing a little while longer.
But eventually, it all falls apart. You’ll want to be ready when it happens.
The clock is ticking on federal prosecutors: Departing Attorney General Eric Holder has given them “a 90-day deadline to assess whether they have enough evidence to bring cases against individuals linked to the 2008 financial crisis,” says the Financial Times.
Heh… We weren’t even aware such a clock existed, much less that it was ticking.
As we chronicled in real time, Holder brought shame on himself in 2013 when he told Congress that “too big to jail” was more or less formal U.S. policy.
Or as he put it, “I am concerned that the size of some of these institutions [banks] becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”
Now Holder is leaving office and he’s worried about his “legacy.” So if the banks can’t be prosecuted because justice would tank the economy, maybe a few bankers’ scalps would suffice.
But that’s also problematic. More from the Financial Times: “The bar for bringing cases against individuals as opposed to companies is higher, partly because individuals usually fight back and are less likely to settle.”
It gets even more tragicomic: Holder says the final call on any prosecutions will probably fall to his likely successor, Loretta Lynch.
That’s rich. Lynch went straight from Harvard Law School to the New York law firm of Cahill Gordon & Reindel — whose clients included Bank of America, Merrill Lynch, Barclays, Citigroup, Credit Suisse, JP Morgan, Wells Fargo, etc.
After years of going through the revolving door of the Justice Department and white-shoe law firms — with a stop at the New York Fed along the way — Lynch became a U.S. attorney in 2010. There, she distinguished herself by arranging the sweetheart deal that got HSBC off the hook for its money-laundering on behalf of Mexico’s Sinaloa drug cartel.
Recalls Rolling Stone’s Matt Taibbi: “Yes, they issued a fine — $1.9 billion, or about five weeks’ profit — but they didn’t extract so much as one dollar or one day in jail from any individual, despite a decade of stupefying abuses.”
Lynch also arranged a cost-of-doing-business settlement for Citigroup’s issuance of skeezy mortgage-backed securities — even guaranteeing Citi immunity in cases pursued by state attorneys general.
Hell, with a record like this, we won’t even bother checking back in 90 days to see if she brings any cases…
Small business or large, one of the first rules of customer relations is this: Think like your customer.
The editors of the Lewiston, Maine, Sun-Journal failed to follow this rule when the forecast of a blizzard last weekend didn’t pan out. On Monday morning, they presented their readers with the following front page…
Dozens of readers called the circulation desk to ask if their subscriptions had been cancelled.
The editors then took to the paper’s website to ed-splain: “The word was used as a graphic element to ‘cancel’ the underlying headline ‘Blizzard on the Way,’ indicating as boldly as possible that the much-unwelcome storm never materialized in our primary readership area of Androscoggin, Franklin and Oxford counties.”
Just swell… Confuse your customers first and then talk down to them. What’ll you guys do for an encore?
“My memory of adolescence in the San Francisco Bay Area,” a reader writes after yesterday’s episode, “is that The North Face opened sometime in the ‘flower power’ era of the late 1960s.”
[You are correct — 1968, per Wikipedia.]
“They sold really high-end down sleeping bags, etc., in the early 1970s. VF’s acquisition in 2000 likely was a shrewd appreciation of demographics by the VF management, who took a brand known to aging 50-ish consumers and turned it into a 20s brand.
“Forgot to mention — Pivetta hiking boots and goose down parkas. That whole pre-grunge outdoor look, which the suburban kids could afford, was big in late ’60s-early ’70s. Very first down parkas hit California circa 1962 and in some ways competed with the emerging surf culture (not yet an industry back then).
“I guess the takeaway is that fashion comes in many guises and indeed can provide strong stock gains, but it is ‘fashion’ and therefore at least as fickle as ‘tech.'”
“Hmmm,” a reader writes, “after looking at the picture of London Mayor Boris Johnson in yesterday’s 5, I wonder if he’s related to Gary Busey?”
The 5: [Insert rimshot here…]
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. This just in: Between now and Saturday, we’re looking for as many people as possible who’d like to use a few predictable stock market patterns to start pulling down hundreds of dollars in extra income every week.
Jonas Elmerraji of our trading desk will lead a series of training sessions. Participation is free — it won’t cost you a thing. But we do ask that you sign up in advance so we make sure we have enough bandwidth to serve everyone who wants to take part.
We’ll send you a link to the sign-up page later today, so watch your inbox.
