Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Tuesday, June 15, 2010 A shortlist of "special situations" to look for - even in falling markets, What normally happens to an overspending, under-producing economy, Plus, Bill Bonner on necessary market imperfection and teenage shindigs... ------------------------------------------------------- Offer Expires in Three Days... Strategic Short Report Shows You How to Make Money From Stock Market Meltdowns Today you'll have a chance to try a month-long trial subscription to my Strategic Short Report research service for just $1. Why would I offer such a thing? Because I believe the next few months will be terrible for stocks...and I want to make sure you're in position to profit. Here's what you can expect in your one month, $1 trial subscription. The Relativity of Normal Musings on the concept of commonplace perception Joel Bowman Reporting from Taipei, Taiwan... Nuthin' but noise in the markets yesterday, fellow reckoner. The Dow fell 20 points; equal to about one-fiftieth of the infamous "fat finger" slip that saw the very same measure plummet 1,000 points inside half an hour a few weeks back. Did the feds ever find someone/thing to point their own fat finger at regarding that harrowing debacle, we wonder? No matter. After a few gut wrenching weeks of triple-digit daily swings, we bet traders were thankful for a day of relative calm. Speaking of calm, your editor ventured a ways off the trodden path himself today. We spent the morning hiking around Wulai county, a hot spring paradise an hour or so from the bustling center of Taiwan's capital city. A far cry from the moped-belching smog downtown, Wulai's scenery is breathtaking. It's been raining here for a few weeks now, so there was a strange kind of energy in the air. Soft, wispy tendrils of fog crept down the mountainsides. The lush vegetation looked like something from The Land Before Time and the gushing rivers collided in a torrent of greens below our trail. Ordinarily, your editor prefers the comfort of an indoor coffee shop (or lounge bar) to the pesky insects and non temperature-controlled environment outdoors. But we are hosting guests; guests who like to hike and explore. And, so, off we went... Somewhere along the trail we stumbled (almost literally) on a few ramshackle lodgings. The makeshift shantytown was a throwback to the generations of yore; to a time before Taiwan's engineering PhDs led the tech world in developing smart phones and mass-producing semiconductors. (Today, around 80% of this small island's economy is dependent on the semiconductor industry, in one form or another.) The residents, living deep in the mountainside, fish in the streams below and, from what we could make out, live more or less hand to mouth. There were backyard farm lots too, no bigger than a few bowling lanes. We've heard some of the villagers further out still don't use money, choosing instead to barter food and goods within their own communities. Arriving back at our apartment later this evening, a few blocks from the second tallest skyscraper in the world, we plugged back in to our "normal" world. We checked the news...scanned the global markets...listened to a couple of television neckties rattle on about things they couldn't possibly know the answers to. They announced what the weather will be decades from now and, more startling, what we should be doing about it today. They gave reason and rhyme to 20-point sneezes in the market, as if one single culprit, rather than the sum of a billion brains working around the world, can possibly be singled out. They all tell us that things - in the economy, that is - are getting back to "normal," too. But even amid the media noise, we couldn't stop thinking about those mountainside folk. Do they care if the Dow loses or gains 20 points...or a thousand? Maybe...but probably not. We started thinking about what is considered "normal" for them, and for us. Perhaps the mist has gotten to us, fellow reckoner, but we wonder whether we can really even know "normal" at all, given the limits of our own experience? Put another way, what does our own life, a blinking spark of existence, really allow us to know about what is normal? After all, in the wider, awe-inspiring context of geological time, we are "normally" dead. The entire experience of life, therefore, is a journey through the most abnormal of states. Many questions today, fellow reckoner...yet so few answers. But getting back to what is "normal" about an economy... Prosperous economies normally produce more than they consume. Otherwise, they normally die. When a government steps in as consumer of last resort, the economy is normally on its last legs. And when many people live at the expense of few people, the scales normally tip, sending the whole model crashing into the raging river below. In today's column, Chris Mayer takes a look at investing in "special situations." These somewhat abnormal opportunities offer the chance at better than average returns...even as failing markets trend the way they normally do. Please enjoy... BLAST Your Blue-Chip Gains HIGHER! When Cisco rose 18%, Options Hotline subscribers could have banked as much as 145%! When Bristol-Myers Squibb rose 12%, they could have banked as much as 300%! And when Qualcomm rose 41%...as much as 589%! So if you're interested in discovering a winning secret for making 5, 10, even 15 times bigger gains...click here now! The Daily Reckoning Presents Don't Buy the Stock Market...Buy Stocks Chris Mayer Special situations look like a particularly good spot to be in these days. Why? I'll explain below... But first, it may help to take a minute to explain what a special situation is. It's actually an old concept. The best definition may be that of the great Ben Graham - famed value investor and mentor to Warren Buffett. Back in 1946, Graham gave his definition of a special situation. "In the broader sense," he wrote, "a special situation is one which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance." In other words, a special situation is an investment in which some event - or catalyst -promises to make you gains in the stock, even if the overall market goes nowhere. This doesn't mean special situations are immune to market forces. Of course they aren't. But as Graham says, in the typical special situation, "the result depends upon corporate developments, and not on market price." More of your gains are tied to whether or not your catalyst comes through or not. Ideally, as Graham writes, you want to be in a situation where "if your deal works out, you are sure to make a profit, but if it doesn't, you may still make a profit." There are many such opportunities, but they are often difficult to find. I have identified a number of them for the subscribers of my investment service, Mayer's Special Situations. A few of these stocks have already delivered gains. Others are still in the wait-and-see phase. AEP Industries (NASDAQ:AEPI), for example, is the target of a large activist shareholder who has proposed that the company put itself up for sale. Clearly, a sale is not essential to make AEPI a profitable investment. Perhaps management will, as they've hinted, buy back lots of stock, instead. The point is that the something out of the ordinary is happening - something that could produce a sizeable profit for shareholders. Joel Greenblatt, a successful investor who devotes a lot of attention to special situations, wrote a book entitled, You Can Be a Stock Market Genius. This book is like a handbook of special situation investing. "The underlying theme to most of these investment situations is change," he writes. "Something out of the ordinary course of business is taking place that creates an investment opportunity." Again, the list of what those out-of-the-ordinary things are is long - spinoffs, mergers, restructurings, asset sales, distributions and more. "The great thing is," Greenblatt writes, "there's always something happening." As a result, special situations are a rich vein to mine. We don't have to cover the whole field. We just have to find one or two a month and we'll have plenty of ideas, probably more than we need. For me, many of the best special situations reside in out-of-the way stocks that are simply too small for me to recommend to my large base of Capital & Crisis subscribers. Getting back to Graham, he also makes an interesting historical observation about special situations that I think is relevant to our own market today. In the years 1939-42, the overall market was not so hot. As Graham put it, "During these years, the trend was unfavorable for those owning standard issues [the big blue chips]... By contrast, many bargain industrial stocks scored substantial advances - especially since the early war years brought proportionately greater business improvement to the secondary companies than to the leaders." The idea being that if the market is going to be sluggish and the economy tepid - as I think ours will be - then you don't want to own the elephants or the headline companies. Generally speaking, you don't want to own the biggest companies, because they are the market. They are most exposed to the economic winds. It is more difficult for a very large company to grow faster than the economy, for instance. The smaller companies that occupy some niche have less binding them. Doubly so for the special situation that has some future "event" that could unlock value embedded in the stock. Special situations, I like to think, come with their own onboard motors. And that's why special situation investing is particularly attractive right now. Chris Mayer, for The Daily Reckoning Joel's Note: Fresh from their tour behind China's Great Wall, Chris Mayer and Addison Wiggin will soon hold a conference call with a couple of our "China insiders" to discuss the ins and outs of investing in the world's fastest growing economy. The "special situations," as Chris calls them, abound. If you want in, please let us know here so we can add you to our contacts list. We'll let you know all the details - via email - before the call. Bulletin Board Elite Presents... Your "30-Day Retirement Plan" One Month and... Three "Flash Action" Market Moves Could Be... Your Chance to Turn $500 into $14 Million It's happened before. It could happen again - starting as early as next week... So will it happen to you...? Find Out Here. Bill Bonner Mortgage Market Mayhem Continues in the Economic Downturn Bill Bonner Reckoning from Delray Beach, Florida... Flip 'em on the way up... Flop 'em on the way down... Subsidize 'em on the way up... Subsidize the subsidizer on the way down... Bloomberg News: Banks Face Short-Sale Fraud as Home 'Flopping' Rises June 10 (Bloomberg) - Two Connecticut real estate agents found a way to profit in the U.S. housing bust: Buy low, sell fast. Their tactic was also illegal. Sergio Natera and Anna McElaney are scheduled to be sentenced in Hartford's federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed - known as a short sale - without disclosing that there were better offers. They then flipped the houses for a profit. There is always a way to make money. When prices were rising, unscrupulous speculators made money by pretending houses were worth more than they really were. Now they make money by pretending they're worth less than they really are. Trouble is, no one knows exactly what things are worth. They know even less what they'll be worth tomorrow or the next day. The theories about economics and markets developed in the last 100 years are almost all nonsense. Markets are not perfect. They do not reflect the actual value of things. There's no way of knowing what the actual value is. Instead, markets are always discovering value - in fits and starts - imperfectly. They reflect reality and fantasy...the future and the past...math and muddle. When the feds pushed down interest rates following the '01 mini recession, homeowners realized that they could own more home with the same monthly payments. Houses suddenly became more valuable. This pushed up prices and led homeowners to conclude that houses were a good investment as well as a good place to hang your hat. And because the value of their collateral had increased, it enticed the mortgage industry to lend more aggressively...and ultimately, recklessly. Prices moved up even more. Happy days were here. And then, the market discovered that houses weren't really worth so much after all. Because the mortgage industry had canoodled with Wall Street and Washington to inflate house prices far beyond what people could afford to pay. The average homeowner could no longer come close to buying the average house. Fannie and Freddie, for example, backed every crackerjack mortgage scheme that came along. And then, wouldn't you know it, people had mortgage payments they couldn't meet. Prices fell. Bummer. And now comes news that Fannie and Freddie need a bigger bailout: "Fannie Freddie Fix at $160 billion, $1 trillion worst case..." Up, down...down, up. Flip 'em...flop 'em. Subsidize them...then rescue the subsidizer. Even when markets are allowed to operate freely, they can never make up their minds. But at least it's an honest confusion. Imagine what happens when the feds deliberately distort prices by raising the money supply, holding down interest rates, and subsidizing borrowers. This week, Sheila Blair, chairwoman of the Federal Deposit Insurance Corporation, admitted that the US government was instrumental in causing the blow up in the housing market. The New York Times: Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers - a speech that got surprisingly little attention - Ms. Bair listed her three main recommendations to "put the mortgage industry on a sounder footing." The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership. "For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers," Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes. She tossed in Fannie Mae and Freddie Mac, the two "G.S.E.'s" (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers - and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses. She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be "unsustainable," Ms. Bair said. She concluded: "Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer." Like, you know, renting. We had no doubt about it. Anyone can make a mistake. But if you want to make a real mess of things, you need taxpayer support. And more thoughts... A newspaper from Victoria, Texas, reported that the Hispanic community decided to voice its displeasure with upcoming immigration law changes. How? By boycotting businesses owned by Caucasians. They then announced that the boycott was a success - reducing sales by 19%. The business community, however, claimed success too. It said shoplifting had gone down 77%. If those figures are correct, it suggests that Hispanics in Victoria buy 20% of goods sold but steal 3/4 of those that disappear from the shelves. *** "What?" Elizabeth and her husband (your editor) are both in Florida. Their youngest son, Edward, 16, was left in Maryland on his own for one night, Sunday, with careful instructions on what to do and what not to do. His brother would call him in the evening to make sure he was okay. His sister, not far away, would check on him on Monday morning. The family worried that he might be a little lonely in the house by himself. "I got there this morning," his sister reported. "He was outside with a whole group of his friends. They had the music blaring. It was only 10AM...and they were partying already. Then, I realized that some of them must have been partying all night. "I asked him what was going on... He said he had just invited a couple of friends over to celebrate the end of the school year. "He told me there wasn't anyone in the house. But when I went in I found another group of a dozen teenagers. And one girl was asleep on Henry's bed. "That was it; I shooed them all out... But at least they seemed to be pretty good kids. They didn't seem to be drinking or taking drugs..." "Oh my... We've turned into the kind of parents other parents hate," said Elizabeth when she heard the news. "We let our son turn the house into the neighborhood party central..." Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Japanese Debt Crisis to Mirror that of Greece? So, what is going on in Japan? The government has gotten by for the last 20 years by borrowing from its own citizens. It now has the biggest debt-to-GDP ratio in the world. As the private sector de-leveraged the public sector borrowed and spent – the same thing that is happening in America today. And maybe Richard Koo is right. Maybe this did prevent a deeper recession in Japan. Unemployment never rose over 5%. And the economy never actually suffered sustained negative growth levels. Government Spending and the Façade of a Successful Economy Recovery Flops! The Correlation Between Morons and Government Debt In case you were wondering, the average yield on the 10-year government bond since 1954 until 2009, from the 55-year period’s opening and ending lows of 3% and including the 15.32% high right there in the middle in 1981, is, according to these guys, 6.36%, which means that the current 10-year yield of 3.3% is about half of the long-term average! Who the hell would buy bonds now, except the mentally defective or government, as redundant as that is turning out to be? Insufficient Silver to Supply China’s Growing Demand Inflation Corroded Copper Coins Ron Paul: “Perverse” That Jobless Lose Both Paychecks and Health Insurance In his most recent weekly column, Dr. Ron Paul (R-TX) describes how there’s still a chance to squelch some of the worst parts of Obamacare. Specifically, his least favorite is “the mandate that forces every American either to purchase health insurance or face an IRS penalty.” Here’s what Ron Paul recommends instead, in his Texas Straight Talk column... Moving Away From Fiat Currency Dependency “Shepherds” of Major Currencies Don’t Get Lost Confidence in Paper Money The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor