Because if we have to deal with constant and increasingly more ridiculous BS out of Europe over and over and over, it is only fair to get an update from the bears, if for no other reason than pure comedic enjoyment now that the world has been taken over by the Banana Onion.
Friday, November 18, 2011
Kyle Bass Un-Edited: "Buying Gold Is Just Buying A Put Against The Idiocy Of The Political Cycle. It's That Simple!"
If the abridged summary from BBC's Hardtalk interview with Kyle Bass that we published yesterday was not enough for those seeking sense, truth, and direction, then (as promised) the full 24'30" interview will quench that desire. Reflecting on the similarities of his subprime perspective, he provides a crucial context for the debt-laden world of sovereign debt that he is now hedging. Shrugging off the somewhat snarky 'nefarious short-sellers' angle of questioning (and insuring the uninsured prod), he simply and elegantly points out how massively asymmetric the bet was, how the asymmetry in Europe has disappeared now, and all the asymmetry lies in Japan. From the 14-minute mark, describes the demographic disaster, destroys the savings myth of the land of the rising sun, and brings into focus how Italy's rapid demise should be a forewarning for the debt-servicing of Japan.
Ending up on the Fed's printing and the need for guns and gold, there's a little here for everyone!
"Buying gold is just buying a put against the idiocy of the political cycle. It's That Simple"
Citi Chief Economist Willem Buiter: A Spanish Or Italian Default Could Happen In A Few Short Days
Citi's Willem Buiter whose succinct analysis a few weeks ago sealed the coffin of the worthless EFSF, has just come out with another knock out punch this morning after telling Bloomberg TV what everyone else knows is true, but is terrified to say out loud: namely that, "time is running out fast." He adds: " I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now." In sum - a rehash of the Deutsche Bank pitchbook to the ECB we posted earlier, only in Mutually Assured Terms that would make even Hank Paulson blush. At this point Germany has an option: tell Europe to take a hike, or go balls to wall in bailing out 250 million European's early retirement packages. The ball is in Merkel's court, who unlike Citi, JPM, DB, and everyone else, has to worry about this fickle, and potentially pitchfork bearing, thing called "voters."
Full transcript via Bloomberg TV
Buiter on Europe's crisis:
"Time is running out fast. I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now."
"The only two guns in town, one is only theoretical, and that is increasing the size of the EFSF to 3 trillion. It should happen but it can't for political reasons. The other one, the only remaining share is the ECB. They may have to hold their noses while they do it, and if they don't do it, it's the end of the euro zone."
On why the ECB hasn't acted yet:
"Because after the error of the Bundesbank, they consider central banks purchasing sovereign debt outright to be like swearing in church. It's just not done. This has been in fact to a certain extent embedded in the treaty which forbids the ECB from lending directly to governments or buying stuff in the primary market. But there is no restriction at all on them buying any amount of sovereign debt at any time in the secondary market, so they can do it."
"This crisis is the result of the failure to provide the minimal institutional underpinning for a monetary union in the euro area and also a result of the ECB unfortunately being the heir of the Bundesbank and therefore not understanding and rejecting the role of central bank as lenders' last resort to sovereigns. They certainly are a central bank. They just are a central bank that prefers to fight with both hands behind their back. If they just let go of one hand, that would be enough."
On Italy’s situation:
"This is already challenging. If this was the rate at which they are going to fund themselves, even over the medium term, that becomes an explosive debt deficit spiral…This is clearly unsustainable. You can live here for awhile, they're not going to keel over tomorrow, but this is not sustainable…The only way they can get back there is for the ECB to provide the liquidity while Italy does the hard work for years, in fact for the rest of the decade quite possibly, of restructuring their economy and tightening the budget in a major way."
On whether he's concerned about France:
I think France definitely has its work cut out for itself. It has a government budgeting problem which is structural to a large extent. And then they have a large banking sector. Do not forget that the U.S. banking sector balance sheet is less than 100% of GDP. In Europe and France, it is 300%. Their banks are under fire and so their sovereigns are under fire. I do not think the sovereign will keel over, but they have their work cut out for them.
On what he'd like to see in Europe to get the fiscal house in order:
Clearly some minimal federal fiscal structure would be desirable, but it is completely unrealistic. They best they can hope for is that the ECB will indeed ring fence the euro area sovereigns in exchange for basically glorified IMF programs. So that they will temporarily transfer a significant amount of fiscal sovereignty to some super-national body, but then when they get restored to health, they regain this. That is not a long-term solution. Ultimately there will have to be some form of fiscal union that creates a federal solution, but that's for the next crisis, not this one.
On whether Europe is an AIG waiting to happen:
No for several reasons. First of all, AIG happened and everybody learned from it. Whereas the sovereign CDS, the regulators by and large know who wrote it, who issued it and who holds it. Unlike quite a bit of the CDS written by AIG. This stuff is all collateralized. So nothing is ever completely safe, even sovereign debt, but I think it's a lot safer to trigger them and use their insurance value than to kill the market."
On the quality of the German economy right now:
"It is a mixed bag. It has a very productive manufacturing exporting sector. Much of the rest of it is not very efficient at all, including the services sectors. Germany had the world's largest corporate takeover in 1999 when West Germany took on East Germany. That has not been fully digested yet. It is a country that is very much a dual economy. It is very strong at the moment strong at the moment as an export-oriented economy, which of course is vulnerable to cyclical slowdowns...it is structural and cyclical. The German demographics are terrible, even by European standards."
On whether the U.S. should use its currency to help with exports:
"No, I think to pursue competitiveness policies by manipulating or steering down the nominal values of the exchange rate is a loser's game. In the limit, it gets you to Zimbabwe, which didn't exactly become a hub of competiveness. It's a gross misalignment for historical reasons…I think we shouldn't get too upset about the Chinese manipulating their currency. There's also no reason to attach great importance to the ability of the U.S. in manipulating its currency. Both are second order instruments."
Mobius: The next financial crisis will be hellish, and it’s on its way
"There is definitely going to be another financial crisis around the corner," says hedge fund legend Mark Mobius, "because we haven't solved any of the things that caused the previous crisis."
We're raising our alert status for the next financial crisis. We already raised it last week after spreads on U.S. credit default swaps started blowing out. We raised it again after seeing the remarks of Mr. Mobius, chief of the $50 billion emerging markets desk at Templeton Asset Management.
Speaking in Tokyo, he pointed to derivatives, the financial hairball of futures, options, and swaps in which nearly all the world's major banks are tangled up.
Estimates on the amount of derivatives out there worldwide vary. An oft-heard estimate is $600 trillion. That squares with Mobius' guess of 10 times the world's annual GDP. "Are the derivatives regulated?" asks Mobius. "No. Are you still getting growth in derivatives? Yes."
In other words, something along the lines of securitized mortgages is lurking out there, ready to trigger another crisis as in 2007-08.
What could it be? We'll offer up a good guess, one the market is discounting.
Seldom does a stock index rise so much, for so little reason, as the Dow did on the open Tuesday morning: 115 Dow points on a rumor that Greece is going to get a second bailout.
Let's step back for a moment: The Greek crisis is first and foremost about the German and French banks that were foolish enough to lend money to Greece in the first place. What sort of derivative contracts tied to Greek debt are they sitting on? What worldwide mayhem would ensue if Greece didn't pay back 100 centimes on the euro?
That's a rhetorical question, since the balance sheets of European banks are even more opaque than American ones. Whatever the actual answer, it's scary enough that the European Central Bank has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut, even in the form of Greece stretching out its payments.
That was the preferred solution among German leaders. But it seems the ECB is about to get its way. Greece will likely get another bailout — 30 billion euros on top of the 110 billion euro bailout it got a year ago.
It will accomplish nothing. Going deeper into hock is never a good way to get out of debt. And at some point, this exercise in kicking the can has to stop. When it does, you get your next financial crisis.
And what of the derivatives sitting on the balance sheet of the Federal Reserve? Here's another factor behind our heightened state of alert.
"Through quantitative easing efforts alone," says Euro Pacific Capital's Michael Pento, "Ben Bernanke has added $1.8 trillion of longer-term GSE debt and mortgage-backed securities (MBS)."
Think about that for a moment. The Fed's entire balance sheet totaled around $800 billion before the 2008 crash, nearly all of it Treasuries. Now the Fed holds more than double that amount in mortgage derivatives alone, junk that the banks needed to clear off their own balance sheets.
"As the size of the Fed's balance sheet ballooned," continues Mr. Pento, "the dollar amount of capital held at the Fed has remained fairly constant. Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet.
"Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out."
Mr. Pento's and Mr. Mobius' views line up with our own, which we laid out during interviews on our trip to China this month.
Farmland Boom (and Brewing Bubble) Continues as Midwest Land Jumps 25% Year over Year, Led by Nebraska's 40%
We've been highlighting the opportunity in farmland for the past 3+ years. I've called it the best 'long term' investment I can see. That said, the move in the past few years, and especially this year has been astounding and feeling 'bubble-licious'. In Nebraska, farmland has risen 40% year over year according to the latest data... in Iowa 31% - that doesn't make much sense, aside from he fact so much easy money has been created and it's starved for a home. The Midwest region as a whole is up 25% year over year, which is actually an acceleration over levels seen last we heard in May. Like all good Fed induced bubbles, this one will end badly - let's look for the typical signs.... in this case a Ferrari dealership opening in Omaha should be a good one.
Via AP:
Full survey here.
Via AP:
- The average value of farmland in several Midwest and Western states soared 25 percent over last year in the third quarter.
- Nebraska farmland values increased the most with a roughly 40 percent jump over 2010.
- The Federal Reserve
Bank of Kansas City, Mo., said Tuesday that bumper crops and strong farm income in northern Plains states, like Nebraska, helped the region overcome drought and flooding. - The Federal
Reserve says this new survey of 243 banks showed the largest annual increase in land values since the survey started in 1994. - The 10th Federal Reserve District covers Kansas, Nebraska, Oklahoma, Wyoming, Colorado, northern New Mexico and western Missouri.
Full survey here.
2 of the Cheapest Stocks You'll Ever Find: BRK, MET, HIG
"Insurance is sold, not bought." This old saying may be true from the consumer side. From the shrewd investor's point of view, however, it's an entirely different story. Legendary value investor Shelby Cullom Davis, for instance turned $50,000 into a fortune of $800 million dollars by buying the stocks of deeply undervalued insurance companies during the dull markets of post-World War II. And if you're a Warren Buffett stalker, then no one has to tell you about the obscene wealth he has created for himself and fellow Berkshire Hathaway (NYSE: BRK-B) shareholders through the company's ownership of auto insurer GEICO and other insurance operations.
Despite the fact that Davis had a bit of an edge, since got his chops when he served as deputy superintendent of insurance for the state of New York, the pattern with insurance companies and successful value investors is clear. And the common denominators for a winning investment in the insurance segment are cash and patience. Well-run insurance companies have the cash, while a successful investor supplies the patience.
With this in mind, I went looking for undervalued insurance companies that have the potential to turn the money of patient investors into small fortunes. My search led me to two companies MetLife Inc. (NYSE: MET) and Hartford Financial Services Group (NYSE: HIG). Both are staid names in the U.S. insurance industry, both tracing their roots back to the 19th century.
When the housing bubble burst and the wheels of the financial system fell off in 2008-2009, most financial companies took it on the chin. MetLife and Hartford weren't spared. Hartford shares tumbled more than 90%. MetLife outperformed, breaking through $12 during that time, though shares also took a sharp hit.
But both stocks have recovered nicely since then. MetLife trades for about $32 a share, while Hartford is knocking on $18 a share. And their price-to-earnings (P/E) multiples are still priced for the bargain basement. How cheap? How do 30–40% discounts to the S&P 500's P/E multiple of roughly 16 sound? At these levels, the patient value investor could be rewarded handsomely.
Here's a more detailed look at each of these insurers...
MetLife
Market cap.: $33.8 billion
P/E multiple: 6.0
Leveraging its brand association with everyone's favorite beagle, Snoopy, MetLife has a sturdy ship to sail through the uncharted waters of today's market environment. While MetLife's property and casualty business (P&C) contributes only $3.6 billion(about 7%) to the company's $52 billion revenue mix, the life and retirement product business is much more important to the company's bottom line. As a result, MetLife has decided to focus on capturing a greater share of the retirement-savings business, thanks to innovations in its fixed and variable annuities, as well as other investment products. The company is also expanding its core business through acquisition. Most recently, it purchased the life and annuity business of The Travelers Cos. Inc. (NYSE: TRV).
The company is also tightening up internally. Owning a federally-chartered bank helped MetLife through the dark days of the panic of 2008 (allowing them access to the Federal Reserve's discount window to ensure liquidity), but things have improved now and it doesn't make much sense to hang on to such a low-return, high-risk business. As such, MetLife has announced the sale of MetLife Bank's depository and forward mortgage businesses.
MetLife is also sitting on $17.4 billion dollars in cash. Eventually, it'll have to do something with all that money. The three best choices are returning it to shareholders in the form of a dividend increase, buying back shares or using it for more acquisitions. I'd like to think the first two are the most probable options.
MetLife's shares trade at about $32, with a forward P/E ratio of about 7 and a 2.2% dividend yield. EPS in 2012 are projected to be $5.15. With a mere 15% P/E expansion to just eight times 2012 earnings, a 12-month price target of $41.22 is reasonable. Adding in the dividend, this comes to a 27% total return.
Assuming the stock hits this conservative target, shares would still trade at an 8% discount to book value.
Hartford
Market cap.: $7.8 billion
P/E multiple: 7.6
Hartford is one of the nation's largest commercial insurance writers (44% of $22.3 billion in total revenue), which includes P&C as well as group benefits. Owning its own niche seems great, but when its reserves are taking hits due to P&C losses, well, it doesn't look so great any more. Hartford has taken accident and catastrophic losses of $127 million for the current year. This has put a constraint on capital going forward, although the company has the necessary reserves to cover this beating.
At the same time, Hartford has many factors working in its favor. The most notable is the high level of institutional ownership of the company's shares. About 89% of all outstanding shares are held by mutual funds and other institutions, with the largest being hedge-fund wizard John Paulson's firm -- Paulson & Co. -- with a 9.1% stake.
Another strength of this stock is Hartford's penetration into small businesses. The company plans to ramp up its cross-selling efforts to increase distribution of its wealth-management and retirement products to its commercial customers. Wealth management comprises 20% of the business, but Hartford wants to see this contribution grow. Analysts also suggest that a likely scenario would be for Hartford to either spin off or sell its P&C business outright. This means there is value just waiting to be unlocked.
Shares are already just plain dirt cheap, trading at a 35% discount to their tangible book value. Hartford shares trade at a forward P/E ratio of 5.6 and a dividend yield of about 2.2%. A 12-month price target of $23 is achievable with a 20% P/E ratio expansion. Factoring in the dividend would bring the total return to 33%. Again, like MetLife, shares would still have a low single-digit earnings multiple and trade a 46% discount to their tangible book value.
Risks to Consider: The macro risks to Hartford and MetLife are the usual suspects: rock-bottom interest rates that hamper the performance of the companies' substantial investment portfolios, turbulent and uncertain financial markets and economies, and an even more unpredictable regulatory environment. Specifically, the large commercial mortgage-backed securities position in Hartford's portfolio is low-quality, which leaves the company vulnerable to further credit writedowns. The specific risk MetLife faces is due to stubbornly low-interest rates which hinder its ability to maintain attractive rates on the living benefits of its annuities and retirement products.
Action to Take --> Beat-up insurance stocks with low single-digit P/E ratios won't scream up to double-digit territory overnight. Deep-value investing, especially in the insurance sector, is a waiting game in which only the very patient investors are likely to win.
Hartford is the more aggressive pick, as its headwinds are a bit stiffer than MetLife's, but the company has turned in consistent return on equity of 11%. This combined with the potential sale of its P&C business and other assets would serve as a catalyst. Of the two, MetLife looks to be the stronger contender.
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