Saturday, February 23, 2008
The big news today was about inflation...
Consumer prices (at least as they are measured by our government) are now increasing 4.3% annually. Considering the yield on our government's two-year bond is only 2.1% annually, lending to the government guarantees you a loss in real terms.
The same is true, to some extent, all the way out to the so-called yield curve. Ten-year government paper is only yielding 3.9%. Who, we wonder, would lend to the U.S. under these terms?
You probably don't spend much time thinking about the real rate of inflation... or about the consequences of a paper money regime that's unable to withstand the size of its outstanding obligations. You probably have much better things to do with your life. At least, I hope you do. On the other hand... perhaps you, like us, have an endless fascination with human folly. How long will people believe in the nonsense of central banking and paper money?
The whole idea that the Fed is attempting to save the value of our currency is absurd. Not only is the Fed the cause of inflation, our system will inevitably require more and more inflation. Inflation has the twin effect of both raising taxes (more wage-earners will end up in higher brackets) and silently eroding the value of the debts our government owes. It is the perfect political solution to our country's vast economic problems. Like all political solutions, all you have to be willing to do is ignore the terrible long-term consequences.
And so... the real question is not whether or not inflation will increase – of course it will – but instead how long the charade will be allowed to continue. How long will America's creditors tolerate the never-ending abuses of our Treasury and central bank? As we remind you regularly, God does not whisper in our ear. It is not given to us to know the future. All we can do is watch carefully for signs about how the tides might be changing. And one slowly growing – but very powerful – change is people's interest in gold as an alternative to paper money...
"WHAM!" Lehman Brothers drops shoe No. 5: commercial real estate loans. Of $90 billion of debt on Lehman's books, $39 billion is from commercial real estate loans. Lehman was quick to cut its residential lending in the face of the subprime crisis, but it did what so many in the finance industry do: It made up for lost volume elsewhere. Lehman aggressively lent to commercial buyers. The bank expects to write down $1.3 billion for the quarter, up from a recent $800 million estimate.
"Expectations" from big financial companies are obviously pure B.S. Merrill Lynch wrote down almost $8 billion after expecting losses only half that size. Citigroup wrote down more than $18 billion last month – again, double its expectations. If your mechanic did this to you, you'd sue him. Will it surprise us in the least when Lehman's $1.3 billion turns into $2.6 billion?
It's become obvious that nobody knows how much any bank has really lost until after it's lost it. However, banks also know that investors can be hoodwinked over and over by putting out a number and adding to it later. They'd rather try to preserve some of their stock's value than tell the truth – that a $1 billion expected loss could be $5 billion or $20 billion... They don't know and won't know for... who knows how long? Not me.
All kinds of banks, from the smallest to the largest, are still getting blindsided. Anyone who says they know what anyone's losses will be is either a bona fide clairvoyant or a misguided fool.
Professional help companies will keep you sane. As long as you hold on to them, they'll do the right things with capital, the things most investors can't seem to do... like be patient and avoid hyperactive trading. Disciplined investors with long-term track records of successfully outperforming the market run these companies. These investors buy assets at bargain prices and hold them for the long term - or they don't buy at all.- Extreme Value January 2008
Dan Ferris is talking about the holding companies for investment legends, like Buffett's Berkshire Hathaway. These companies are the perfect way to profit in a shaky market. It's like investing in the world's greatest hedge funds without the exorbitant fees. Dan has recommended several of these plays in Extreme Value, and the most profitable, Icahn Enterprises, is up close to 500%. We should be seeing more gains shortly... Extreme Value pick Icahn Enterprises (NYSE: IEP) sold the Stratosphere and three other Nevada casinos this week to Whitehall Street Real Estate Fund for $1.2 billion. Icahn made a pretax profit of more than $700 million. Dan recommended another professional help stock last month that is run by one of the truly great investing families in America. This stock has returned 16% a year since 1970- a 13,200% cumulative return. And it's trading at a 30% discount to intrinsic value. This stock is set to explode. To learn more about Extreme Value and access Dan's research on professional help stocks, click here...
Date Range:2/14/2008 to 2/21/2008
Date Range:2/14/2008 to 2/21/2008