Saturday, April 18, 2009
The government has done everything in its power to lower borrowing costs, pushing mortgage rates to the lowest in more than 30 years and cutting banks' borrowing costs to nearly zero. The government's actions spurred mortgage activity and created a perfect lending environment for banks... the spreads are huge.
We're making money for our readers by recommending mortgage finance companies like Annaly (NLY). We hope you've profited from our work.
We're bearish on newspapers. We made a considerable amount of money for PSIA subscribers last year by recommending a short sell on Gannett (GCI), the publisher of USA Today and 80 other U.S. daily newspapers, when the stock was still trading above $15 per share.
We were moved to act when we saw the CEO saying the company's huge writeoff of goodwill was merely "accounting" and wouldn't hurt the stock. He then promised not to cut the dividend (which the company couldn't afford to keep paying). He sounded like a finance minister on the eve of devaluation. It was easy money.
The stock has rallied over the past several weeks. And unlike many of the other companies we've shorted over the past two years, Gannett still has positive cash flow. That is, it's making enough money from its operations to pay for its debts. That's attracted deep value investors.
I think the stock could rally significantly – back to more than $10 perhaps. If you believe the $250 million or so Gannett is earning in cash each year is sustainable, you might pay 10 times that amount for the business, or $2.5 billion. The stock is currently worth less than $1 billion.
One thing is for certain though: The economics of newspapers are never going to get any better. They will only get worse. Gannett owes creditors nearly $4 billion – money that will be impossible to repay and difficult to refinance. And therefore, it's only a matter of time before Gannett's share price reaches zero.
Another big government deal was announced this week. This time, the plum went to Uncle Sam's best pals at Chase Home Finance, Wells Fargo, CitiMortgage, GMAC Mortgage, Saxon Mortgage Services, and Select Portfolio Servicing. They're the lucky mortgage servicing companies that'll get $9.9 billion of taxpayer booty to modify home loans and avoid foreclosures.
Ten mortgage servicers control 66% of the market. Three of them (Bank of America, Chase, and Wells) control about one-fifth of it. If we were talking about beer, software, oil, or aluminum instead of mortgages, the Justice Department would be all over them.
Despite Obama's foreclosure moratorium and the billions of dollars in mortgage modifications, foreclosures are soaring... 803,489 properties received a default or auction notice or were seized in the first quarter. This is a 24% jump from last year. There were 341,180 default filings in March alone.
It doesn't matter how much money the government throws at bad mortgages. Home foreclosures won't stop until people stop losing jobs... No mortgage modification is enough if you've got zero income. Continuing jobless claims rose to more than 6 million last week, the highest level since recordkeeping began in 1967.
Jim Rogers is publishing a new book, A Gift to My Children: A Father's Lessons for Life and Investing, on April 28. So he's hitting the media circuit to promote it. He did an interview with BusinessWeek on Tuesday. And to no one's surprise, he's still wildly bullish on commodities.
Rogers said he believes we "have further to go" before the market recovers, but commodities' fundamentals are already improving.
Farmers can't get loans for fertilizers [which is constraining crop supply]. It takes 10 years to open a new mine. Stocks peaked in October 2007 and commodities kept going up until July 2008. If the world economy is going to revive, commodities are going to lead it back up.
Even if the economy doesn't revive, commodities are still the place to be – says Rogers – because the government is printing so much money and there are supply constraints. He recently bought all commodities, but he's buying more agriculture than anything else.
Date Range:4/9/2009 to 4/16/2009
Date Range:4/9/2009 to 4/16/2009