Weekend Edition
The Best of The S&A Digest
December 8, 2007
The best idea from the S&A Alliance Conference last week? "Little, baby pine trees."
12% Letter editor Tom Dyson has figured out how to make a killing on the Mountain Pine Beetle. British Columbia's forest will be wiped out over the next several years. As timber companies try to harvest all the trees before they die, they'll have to plant millions more pine trees than normal. Tom's favorite investment grows "little, baby pine trees."
Poor Victor Niederhoffer. Last summer, when this famed speculator's portfolio suffered a huge drawdown, we thought he might be on the verge of another complete wipeout. Back in 1997, Niederhoffer had to sell the family silver (literally) and mortgage his enormous Connecticut mansion to avoid bankruptcy. We predicted that Niederhoffer would soon "blow-up" again, because his trading strategy is based purely on the notion that risk equals reward.
Niederhoffer actively seeks to take huge risks, buying plummeting assets using large amounts of leverage. He's like a knife-wielding juggler: If his timing is off at all, he'll lose an arm. And if he makes a real mistake, he's dead.
According to The New Yorker magazine, Niederhoffer has once again wiped out the investors in his funds. Has Niederhoffer learned anything from his repeated spectacular failures? Nope. "My basic ideas about the creative power of the market, buying in panics, buying on weakness – I don't think what has happened has anything to do with that stuff... I am going to keep going, for better or worse."
There's a big difference between buying value and buying on weakness. I hope, for his sake, Niederhoffer eventually figures that out.
Given the panic in the market, it's not surprising to see that insiders are heavily buying.
Our own Inside Strategist editor, Graham Summers, reports: "In November, insiders bought $297 million worth of stock. This is close to the $330 million they bought in August before the 8% market rally. Insiders only sold $3.8 billion worth of stock in November. That's the lowest November amount since 2002. The top industries for insider bulls are homebuilders, regional banks, and oil & gas explorers and producers."
Buffett on the move: Berkshire Hathaway bought $2.1 billion of utility company TXU junk bonds from Goldman Sachs. Buffett said they're the only junk bonds he's interested in because some recent issues give new meaning to the word "junk." Private-equity group Kohlberg Kravis Roberts bought TXU earlier this year in a $45 billion leveraged buyout. Buffett calls the deal a bet on the utility sector.
Why bet on the utility sector now? It's a great hedge against inflation. We made the same bet recently in my newsletter, PSIA.
You will recall that we have been very skeptical that Goldman Sachs would be able to avoid the mortgage market disaster. Well, we may be wrong...
As it turns out, according to a company spokesperson, Goldman Sachs "routinely shorts the securities it underwrites." We'll leave you to ponder the ethics of this admission. Meanwhile, we'll ask the obvious question: Why would anyone do business with these firms, under any circumstances?
How bad are things? We were shocked at the price of two recent deals – the large land sales and the fire sale of ETrade's $3 billion in asset-backed securities. First, Lennar sold 11,000 lots to a Morgan Stanley real estate fund for $0.40 on the dollar. In the ETrade situation, the company was forced to liquidate a $3 billion portfolio of asset-backed securities for only $0.27 on the dollar to a hedge fund (Citadel).
These are Great Depression-type prices. Consider the analysis Andrew Sorkin, of The New York Times, did on the ETrade deal. Sorkin says only $450 million of ETrade's securities were risky stuff – like second liens and subprime mortgages. The rest of the securities – $3.6 billion – were investment-grade assets. And according to an October SEC filing, $1.35 billion of these securities were prime, first lien, residential mortgages.
Assume that only these prime mortgages have any value at all. Give the rest of the package a zero. Even in this extreme circumstance, Citadel bought $1.35 billion worth of prime mortgages for $800 million. That's more than a 40% discount. Assuming you hold a prime mortgage on your home, would you sell it for 40% less than its appraised value? I doubt it. Savvy financial investors are going to clean up, eventually.
Sean Goldsmith recently recommended the most conservative, best-funded mortgage company we know in his S&A Dividend Grabber. This company has little subprime exposure, a pile of cash, and it's waiting for the time to pounce on cheap securities... This is the perfect environment.
Regards,
Porter Stansberry
