Saturday, August 29, 2009
This week, Eldorado Gold, an international gold miner, offered 0.55 shares per share of Sino Gold, the most successful publicly traded gold miner in China. As of recent closing prices, that's a 20% premium for Sino shareholders.
Our commodity expert Matt Badiali called the takeover in his S&A Resource Report... His readers are up 30% in about six weeks. But that's not the last big gain they'll see from this trend...
In recent years, the Chinese government has become a rabid gold bug. From 2003 to April 2009, China quietly increased its gold reserves by more than 75%. Today, it's the fifth-largest sovereign gold holder at nearly 34 million ounces. But the Chinese aren't just buying bullion. The government has also partnered with an elite group of precious-metals miners. Sino Gold was one of the "chosen," and its longtime shareholders made more than five times their money.
A handful of other China miners are set to see similar gains. Matt put together a report on the ones to buy – and the ones to avoid – for his Resource Report readers. To get the details, click here.
Here's something most people who invest in initial public offerings (IPOs) don't understand: Only two people get rich from an IPO – the owners and the underwriters. After all, if you owned a valuable business that was growing and poised to explode in value, why would you sell?
This quarter, around 17 companies are trying to raise a combined $8.1 billion by going public – up from zero companies last quarter. The reason? Buyout firms spent a record $1.6 trillion on takeovers between 2005 and 2007. Now, they're taking advantage of the market's rally to recoup some of their investments.
Take the most recent IPO announcement, private-equity giant KKR's attempt to sell $750 million of Dollar General stock to the public... If the deal is successful, KKR will immediately pay itself and investors a $200 million dividend. But why is that good for the company? Or for the investors? Where are the customers' yachts, we ask.
As if we needed another reason not to do business with Wall Street firms... According to the Wall Street Journal, Goldman Sachs has been disseminating important trading information to its favored clients before releasing the information to the masses. Hedge-fund giants like SAC Capital and Citadel – who are responsible for several percent of the market's daily trading volume and pay Goldman huge brokerage fees – receive calls from Goldman every week about stocks the firm thinks will rise or fall...
And some of the information is contrary to what Goldman sends other clients. Goldman's proprietary trading desk also uses the privileged information to profit. Days later, Goldman will release its report to the rest of its clients, often after the stock in question has advanced...
This, of course, is front-running clients, plain and simple. Goldman spokesman Edward Canaday told the Journal, "We are not in the business of serving thousands of retail customers."
I doubt an investment bank has ever issued a truer statement. These banks aim to first make billions for themselves and then make sure their biggest clients are happy. The little guy is an afterthought. Again, where are the customers' yachts?
According to legendary investor Jeremy Grantham's firm, GMO, the market is now past its fair value of around 880, based on earnings estimates and historical P/E ratios. GMO sees "seven lean years" of a sluggish market ahead...
"The past 12 years have seen two bubbles that were really good for corporate profits," says Ben Inker, GMO's director of asset allocation. "Now things are unlikely to be anywhere near as good as people have gotten used to, because we're not going to have a bubble to help us."
While we greatly respect the bright guys at GMO, we would argue with them about the idea that there's no bubble. In fact, we would argue the bubble we have today – in U.S. government bonds – is not only the biggest bubble of the last 20 years, it's the biggest bubble of all time.
Bankrupt countries don't normally pay less than 4% interest on their 10-year fixed-debt obligations. And sooner or later, all of our foreign creditors are going to realize the U.S. dollar isn't immune from inflation and the U.S. government doesn't walk on water. The government's money printing creates inflation, the values of commodities, real estate, and stocks will steadily rise.
I believe one sector, in particular, will produce the biggest gains. And I recommended my favorite way to play this trend in my latest issue of PSIA. To learn more about PSIA, and access my most recent recommendation, click here.
Date Range:8/20/2009 to 8/27/2009
Date Range:8/20/2009 to 8/27/2009