The Lure of "The Corner", Continued

  “One of the most hated stocks in the world,” is how our Chris Mayer describes one of his favorite plays right now.
Nothing like running against the herd if it’s the big money you’re looking to make, right?
We first told you about it back on Dec. 10 — the potential for a money-multiplying event called a corner.
“What happens,” Chris explained, “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.”
Historical examples abound. There was the Northern Pacific Railway in 1901. Two of the era’s rail titans were fighting for control of the firm, buying up so many shares and cornering the shorts that the stock leaped from $140 to $1,000 in a day.
More recently, Volkswagen briefly became the world’s biggest company in 2008 when Porsche announced it had bought 74% of VW shares. The stock price quadrupled in three days.
  In the present instance, “the company may have the largest commercial property portfolio in the U.S.,” Chris tells us. “Yet people don’t normally think of it in that way.
“It has almost 200 million square feet of real estate, more than mall giant Simon Property Group. But the market values the stock at less than one-tenth of the value of the latter.”
Two weeks ago, Chris told his Mayer’s Special Situations readers about a huge catalyst on the horizon. “The company may partially convert to a real estate investment trust, or REIT.
“Investors prize REITs for their yield. A REIT escapes income taxes. But the form requires it pay out most of its earnings to shareholders. It is an efficient way to own real estate. REITs are also transparent. And if this company adopted a REIT, it would reveal the hidden value of its holdings.”
  This morning brought that “huge catalyst”… but the corner has yet to play out. It’s not too late to act.
Indeed, the share price tanked 8% as myopic traders reacted to a lousy earnings report.
Here’s the mainstream take from The Associated Press: “Sears recorded its fourth straight year of falling profit and revenue, even as cost cutting and store closures helped narrow its loss for the fourth quarter.”
Sounds terrible, right? And who shops at Sears or Kmart now anyway? Who’d want anything to do with Sears Holdings (SHLD)?
And yet one of the great investors of our time — Bruce Berkowitz of the Fairholme Fund — calls the real estate within Sears “a once-in-a-lifetime opportunity.” He’s one of the two major shareholders. Every time the stock falls, he buys more. So does the other major shareholder, CEO Eddie Lampert. Together, they control more than 70% of SHLD shares.
  And therein lies the opportunity. Throw in three other major shareholders and you have five owners who control 86% of outstanding shares.
Because SHLD is a component of various stock indexes, index funds hold another 7%. That brings us up to 93%.
“That leaves 7% left for the shorts to buy back,” says Chris. “But about 15% of the outstanding shares are short. In other words, more shares are short than are available to buy, assuming the five big holders don’t sell.”
The SHLD shorts have been squeezed before… good for gains of 186% in 2012 and 64% in 2013…

And if Sears goes bankrupt? Chris won’t dismiss the possibility. “But the key is to remember that SHLD is a holding company,” he explains. “It has two subsidiaries. One is liable for all the company’s debt. And the other is the nonguarantor subsidiary, which bankruptcy cannot touch.
“This subsidiary includes the 125 (presumably) most valuable real estate properties; the rights to the valuable DieHard, Kenmore and Craftsman brands; and the Sears Reinsurance business.”
All of those can be sold off piecemeal, bankruptcy or no — to the benefit of SHLD shareholders. Chris reckons they could be worth at four times Sears’ current market cap.
Could be another quadruple in three days, like Volkswagen in 2008. And with this morning’s sell-off, it’s back below his buy-up-to price of $36.
For access to all of Chris’ premium recommendations, look here.
  Another snoozer for the major U.S. stock indexes this morning: The S&P 500 has stayed within a 15-point range all week. As we write, it’s a hair below Wednesday’s record close of 2,114.
Gold is staging a modest rally, up $6, to $1,210. Crude is back to its volatile ways, down more than 3%, at $49.34.
  The big economic number of the day — inflation. Or deflation, if you take the official number at face value.
The consumer price index rang in this morning with a 0.7% decline for January. That’s enough to send the year-over-year change into negative territory as well. In theory, your cost of living has fallen 0.2% in the last 12 months. (Any resemblance between theory and your experience is purely coincidental.)
Even the real-world inflation number tallied by John Williams at Shadow Government Statistics is showing “disinflation” — that is, a falling rate of inflation. As a reminder, Mr. Williams calculates inflation the way the feds did it during the Carter presidency. The year-over-year increase works out to 7.5%… the lowest since October 2009.
  “Ebola headlines have nearly vanished… although they are still there if you look,” writes our Ray Blanco about a hot topic last fall.
“The Ebola novelty is wearing off. In the media biz, novelty brings eyeballs, and that brings revenue. Ebola isn’t such a new story anymore, so some of the bloom has come off the rose. Likewise, we aren’t seeing scenes reminiscent of zombie apocalypses in the streets of New York City and Washington, D.C.”
But while the threat is diminishing and the number of new Ebola cases is falling, Ray sees the potential for a resurgence: “New evidence suggests that it doesn’t just pass by direct physical contact with bodily fluids. Tiny droplets in the air could also transmit it. According to recently published research, aerosolized particles from the respiratory tract of an infected person can pass the infection. You can catch the flu that way.
“We need the drugs and vaccines to defeat this Ebola outbreak, just in case. We also need them for future outbreaks. That’s for certain. An outbreak will happen again. It’s better to be prepared.”
Bottom line: Ray sees no near-term catalysts for companies working on Ebola treatments. But the story isn’t over…
  The cashless society will have to wait. Despite the advent of debit cards, digital payments and mobile payments… during 2015, the Federal Reserve plans to print the most small bills ($20s and less) in five years.

Indeed, according to a firm called Convergex, the amount of small bills in circulation is little changed from 20 years ago, once you adjust for inflation and population growth. Using 2014 dollars, there was $661 for every person in the U.S. back in 1994. In 2014, it was $649.
Convergex’s chief market strategist Nicholas Colas offers up some intriguing explanations for the resilience of cash — including faster-than-expected growth in the underground economy.
Too, the millennial generation is more accepting of cash than you might think: Colas’ research shows 40% of people age 18-24 prefer cash. But among the 45-64 set, the number falls to 32% or lower.
Colas tells MarketWatch those numbers pose “a real challenge for online and app-enabled payment solutions to gather this most tech-savvy group into their fold.”
  “I think it is despicable that your editors recommend investing in companies that jail people for victimless crimes,” a reader writes after yesterday’s episode. “It would be nice if these companies collapsed.
“In fact, I lost the desire to read the rest of The 5 Min. Forecast. Investing in human misery and violations of individual rights isn’t my cup of tea. I’m surprised you drink from that cup. You know, there are honorable ways to earn profits.”
The 5: You rip into us even with the disclaimer we included, introduced in bold font?
We had this debate in the mailbag last summer. Then it wasn’t about private prison operators but about defense stocks. As individuals, many of us draw the line somewhere. But if we as a firm drew the line at any particular sector, we’d be curbing our editors’ independence. If we drew the line on the finance sector because of too-big-to-fail bankers, you’d never hear about this opportunity, for instance.
“Run down all 10 sectors of the S&P 500,” our fearless leader Addison Wiggin wrote two years ago, “and we find something objectionable.
“Health care? The government has totally co-opted the insurance industry and Big Pharma… or maybe vice versa. Telecom? All the big companies collude with the National Security Agency’s warrantless wiretapping. Consumer staples? Hope you don’t mind General Mills and Kellogg’s sucking up the corn subsidies for breakfast cereal (and adding to kids’ waistlines, which you’ll pay for years from now when they contract diabetes and go on Medicaid).”
  “Well done! You just lost half your readership,” reads the first of several emails after our take on Janet Yellen yesterday.
Hoo boy.
The story goes that H.L. Mencken, the Sage of Baltimore, once mused that his readers might better understand his sarcasm if a newspaper linotype could generate reverse italics.
We’re not sure that’s true, but here in the Internet age, the Sarcastic Font movement took up the cause in 2002. It hasn’t exactly caught fire. But if it did, then when I was conveying an admiration of sorts for how Yellen has mastered the art of obfuscation in less than a year on the job as Fed chief, I could have said…

Lacking such a device, our reader was left to say, “No wonder I can’t understand your writing. I’m 78!”
Oh, but the opprobrium didn’t stop with that fellow…
  “Dave Gonigam, you have displayed your ignorance in your comment about many people having checked out mentally at age 68.

“You also alienated a significant portion of your audience who haven’t checked out mentally. It doesn’t give me confidence that you will achieve big things later in life.”
The 5: Well done. My mom — long past 68 and sharp as a tack — would also appreciate the deft turn of my own phrase against me. Heh…
  “Having achieved that age some years ago,” writes a third, “I will suggest that ‘many’ have NOT mentally checked out. In fact, ‘many’ of much younger years have never checked in!
“Do you have any idea of the age makeup of your readership? I’m guessing more seniors than juniors.
“Remember, there are two ways to learn from experience — from your own or from others’; the latter (from others, to avoid confusing the youth) is actually the easier path, although it that may be too difficult for ‘many’ (from my experience).
“However, having read your collective satiric wit for some time, I’ll opt not to take offense. Or as Reagan put it: ‘I am not going to exploit… my opponent’s youth and inexperience.'”
  “I will be 68 in August,” writes a third. “I think I still have my marbles…….. not so sure about my knees.
“I’m smart enough to subscribe to, read and hopefully understand The 5 Min. Forecast. It is, by far, the best of the ‘Bonner World’ advisory services.
“I agree with some of your work and disagree with other parts. I like it that you encourage, and PUBLISH, reader feedback.
“I can remember back at least to 1954 when I attended my first MLB game at Yankee Stadium. 1954 was also, I believe, the season that the Baltimore Orioles started after relocating from St. Louis (Browns). Sixty years! Time flies.”
The 5: You are correct on the team’s move. And you are entirely too kind.
Best regards,
Dave Gonigam
The 5 Min. Forecast

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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