Growth Report : jim rogers

Paulson Asset Management, LLC

Ian Wyatt — Wed, 24 Sep 2008 19:43:00 GMT

Paulson Asset Management, LLC

So now the Treasury has a massive $700 billion bailout plan on the table. The idea is to create a government agency to deal with bad mortgage related debt, sort of like how the Resolution Trust Corp. (RTC) dealt with $394 billion in assets of failed banks during the S&L Crisis in the 80s.

You probably recall how regulators would swoop in on troubled banks, close them down and turn their assets over to the RTC, who would then dispose of them, sometimes for pennies on the dollar.

It was like free money for some savvy investors as they were able to buy assets on the cheap from the RTC. Still, many shareholders in failed banks like Silverado and Lincoln never recovered their money.

That’s got me curious as to how Paulson Asset Management, LLC (PAM) will deal with the mortgage-related assets it takes on. Clearly, some of those assets, like the credit default swap derivatives, are essentially worthless and will remain so.

However, there’s certainly a fair amount of mortgage-backed securities that have been written down to near-zero out of necessity, because no one will buy them now, but will probably regain some value in the future.

After all, why else would PIMCO’s Bill Gross say that he’s expecting to be called by PAM (Paulson Asset Management), to help manage the mortgage-backed assets it buys?

Economic Socialism: Puttin It Mildly

My point here is that we’re seeing much more than economic socialism, or the economic communism that Jim Rogers alluded to recently. This is more akin to Valdimir Putin’s hostile takeover of Yukos Oil.

Politics aside, there’s a profit-motive here. Think about it. The Fed and Treasury lent AIG $85 billion. AIG can either pay up (with 11% interest) or the Fed and Treasury get an 80% stake in the company. And from what I understand, AIG has a matter of days to come up with the loot.

At $5 a share, AIG is worth around $13 billion right now. At the start of the year, it was worth around $130 billion. As of June 30, 2008, AIG had $67 billion in tangible assets, down from $95 billion a year earlier.

Obviously, those tangible assets are worth less than $67 billion now. Nobody will buy them.

But what will they be worth a year from now, after most of the bad debt out there has been exposed and investors can make informed decisions about what’s got value and what doesn’t?

That’s OUR $85 Billion

I suspect that PAM’s stake in AIG could be worth a decent sum in a few years. Same goes with whatever assets PAM’s $700 billion buyout fund targets.

It seems to me, since PAM is using taxpayer money to fund its investments, the American people should be considered shareholders. We should share in the spoils.

Now before you think this suggestion is like investing social security in the stock market, there’s a very important distinction here. For instance, PAM can change the rules anytime it wants to. Stock price going down? No problem. Just make it illegal to short.

The more I think about it this idea, the more I like it. And for the record, I have no problem with Bill Gross as the Chief Investment Officer.

What Will Congress Do?

Now I want to be clear about something. I might sound a little flippant with my suggestions here. But this financial mess is very serious. It’s a massive fraud, and the government’s bailout plan doesn’t mention even the slightest slap on the wrist for the offenders or deal with homeowners problems.

Of course, there will be new regulations. There always are. But they never seem to do what they’re intended to do.

As the panic from last week’s market rout eases a little, and Bernanke and Paulson testify before Congress, Congress seems to be taking a harder line on the bailout plan, which is good.

Because, again, I want to know how PAM intends to dispose of billions in impaired assets.

And what’s more, Bernanke apparently wants to buy impaired assets from banks at a premium to current value, and hasn’t really talked about what he’ll do with them. That’s a problem.

If you remember the S&L Crisis, you’ll recall that there was a lot of criticism as to how the RTC disposed of its assets. Much of it was real estate, and in less than desirable markets, as well. Still, many felt that the RTC sold at prices that were way too low to compensate investors for their risk. (The New York Times reported about a resort with an $8 million book value selling for 695K.)

If Bernanke and PAM buy impaired assets at a premium with no realistic plan of how to monetize them, then they’re simply seeking to recapitalize failing banks at taxpayers expense. If so, this PAM shareholder has to vote no.

So what Should We Do?

I’d tell you to call your Congressmen, but they’re busy. Plus, judging by the tone of yesterday’s Q&A following Bernanke and Paulson’s testimony, I’d say they’ve got the message. Taxpayers are not wild about bailing out banks.

Why not expand the powers of the FHA and let Americans with mortgage problems refinance to a lower rate? At least that would address the “real” problem, which is default and foreclosure.

As far as investing goes, my advice hasn’t changed from last week:

“There’s one asset class I like a lot right now. It’s something of a defensive play, mainly due to the high dividend yield. But there’s also a case to be made for some capital appreciation.

It’s MLPs. Master Limited Partnerships. These companies own and operate pipelines for oil and natural gas, mostly in the Southwestern U.S. These companies have pretty stable revenue streams because they sell capacity in advance. MLPs are required to pay 95%+ of their income in dividends to maintain their tax exempt status. And they rely on credit to expand their operations, and hence, revenue.

Many MLPs are currently trading at 52-week lows. I believe this is because their ability to expand has been impaired by the banking liquidity problems. But these companies have stable revenue and they pay dividends of 6-11%. That alone makes them a good place to park your cash until the markets get better.

Plus, as the lending situation improves over the next few months, you could see as much as 30% gains for the stocks as investors anticipate revenue expansion.”

Here’s the link I posted last week to get my favorite MLPs. Most of these stocks have jumped 10+% since lows last Thursday.

Best Regards

Ian Wyatt

Editor

Big Idea Investor

A Yacht, Greenspan and Uranium Stocks

Ian Wyatt — Wed, 10 Sep 2008 01:51:00 GMT

On Monday, in a CNBC Europe interview, Jim Rogers wondered if the US was “…more communist than China.” He was referring to the Fed’s bailout of Freddie Mac and Fannie Mae, and to a lesser extent, the bailout of Bear Stearns back in March. “Socialism for the rich” he called it.

“This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents," Rogers said. "I’m not quite sure why I or anybody else should be paying for this.”

That’s great stuff. And when you consider that the Treasury is on the hook for something like $50 billion (assuming the entire portfolio of mortgages doesn’t go non-performing), it does seem a bit like the taxpayer is, to quote the license plate of my home city, experiencing taxation without representation.

As a counterpoint, Warren Buffett applauded the move as the best deal available. But even Buffett admits that this outcome was made somewhat inevitable when Freddie Mac and Fannie Mae were chartered as quasi-government entities.

There’s a lot of “coulda, shoulda” going on these days.

But to get to the best of them, we need to throw a couple more names into the discussion: Bill Miller and Alan Greenspan.

The Line Up

Bill Miller is the once-legendary manager of a few Legg Mason mutual funds. Miller beat the S&P 500 16 years running. It should be noted that the same year his streak was stopped, 2006, was the year he bought the 9^th biggest yacht in the U.S, the Utopia.

Many wondered at the time if this purchase was the ultimate “sell” signal. Well if that wasn’t, Miller’s early-summer admission that he doubled down on Freddie Mac should have been.

As of July 31, he owned 80 million shares of Freddie Mac. Ouch. So certain was Miller that he was sitting on a value goldmine, he added 30 million shares this summer, even as Freddie’s stock was getting pummeled.

You have to look at Miller as some kind of tragic hero. King Lear perhaps, who thought he was “…more sinned against than sinning.”

Miller apparently took Bernanke and Paulson’s pledge to keep Freddie Mac “in its current form” as gospel. And so it was either greed or ego that made him think averaging down on Freddie Mac was a good idea.

I’m guessing Miller was the only one who took Bernanke at his word. Now he’s found out how much sharper than a serpent's tooth it is to have a thankless Fed!

(I’ll certainly never forget my senior analyst Benson George’s warning to stay away from any mortgage-related stocks, but that’s a different article.)

Heads on a Platter

Bill Miller may be the sacrificial lamb, albeit of the same species as the homeowners who bought more house than they could afford. But what of the “crooks and incompetents” that Rogers spoke of?

It’s not as if Freddie Mac CEO Richard Synor and Fannie Mae CEO Daniel Mudd (could that name be more ironic) had no idea what was going on.

Freddie Mac’s chief risk officer David Andrukonis told Synor in 2004 that the bad loans it was buying “would likely pose an enormous financial and reputational risk to the company and the country.”

Syron got the warning in writing that “shoddy” underwriting standards were exposing the company to losses, according to Andrukonis. Demands to raise its capital cushion went mostly unmet. Even when they came directly from Paulson and Bernanke.

Well Syron’s out of a job now. But of course, he was paid $38 million in the last five years -- $38 million to make $80 billion in shareholder equity disappear.

Freddie Mac’s bond holders will get paid. That’s what Rogers means by “socialism for the rich.” Syron’s mess will get cleaned up. Eventually. It remains to be seen what happens to homeowners in over their heads and Bill Miller. I expect they won’t be the beneficiaries of any socialism.

Playing for the History Books

I remember thinking back in 2005, after Greenspan had announced his retirement, that he was playing for the history books. Using low interest rates to prop up a weak economy so he could go out in style. (Sort of like how gas prices have dropped as we head into the election.)

And even now, Greenspan seems to be trying to re-write the books.

"Much as we might wish otherwise, policymakers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances," Greenspan recently said.

He went on to say that governments and central banks probably could not have altered the course of the once high-flying housing market.

Oh man. This is just too easy. I don’t even need a narrative. These comments speak for themselves:

· ''history has not dealt kindly with the aftermath of protracted periods of low-risk premiums (interest rates).'' 2005 Greenspan

· ''American consumers might benefit if lenders provided greater mortgage product alternatives (read: no interest loans and adjustable rates) to the traditional fixed-rate mortgage.'' Greenspan 2004

· "There do appear to be, at a minimum, signs of froth in some local markets," Alan Greenspan said. June 10 2005

· "…the apparent froth in housing markets may have spilled over into the mortgage markets." June 10, 2005

On July 19, 2005 chief economist for Standards & Poor's, David Wyss offered up some solutions to Greenspan. He said that the Fed could control mortgage rates by increasing interest rates, and could also place restrictions on banks to get them to stop providing mortgages with no money down.

Wyss said these types of loans place risks on the economy by providing owners with houses "that they can't afford." "What do you do when [the owner] mails the key back to the bank?"

Well, we’re finding that out right now. And it’s not good.

On August 29, 2005 Paul Krugman wrote in a New York Times editorial what Greenspan apparently couldn’t see “…we're going to have an economic slowdown, and possibly a recession.”

Wyss could see it. Krugman could see it. Benson could see it. Why not Greenspan or Miller?

Uranium Stocks

Now, on a completely different note, I hosted a forum chat here at Investor’s Insight last Friday. It went really well and I’d like to thank all the readers who came out to ask questions and leave comments.

You really helped that chat with informed questions and insightful comments. Thanks.

The transcript of the discussion is still available under Discussion Forums.

One person inquired about a couple uranium stocks. Here’s my response:

Uranium prices peaked in Spring of 2007 and have been pretty much downhill ever since. There appears to be plenty of supply and little increase in demand.

With a rising dollar, commodities in general have been headed lower. Until there is some stability in the dollar, price pressure will remain on commodities in general.

Uranium is a bit of a special case, as its price started falling well before most other commodities. That’s probably not a good sign. Though it may be worth noting that sentiment on uranium couldn’t get much worse at the moment.

There doesn’t seem to be much talk about new nuclear plants coming on line here in the U.S., and that makes me think that uranium prices may stay low for a while.

However, if you don’t mind waiting for a while, uranium stocks may be OK. But you must buy big companies, with plenty of cash, and, preferably, other sources of income, like gold mining.

For the record, I can’t believe Bancroft Resources (BCFT:OTC:BB) isn’t “bankrupt resources.” Granted, it’s only in the exploration stage, but with virtually no cash, I don’t see how this company stays afloat.

At least Uranium Resources (Nasdaq:URRE) has revenue and a decent cash position. But institutions are dumping and no insiders are buying, despite the stock price sitting at nearly all-time lows. In fact, the stock’s down 17% today on no news. That’s usually not a good sign.

I always advocate waiting for signs of buying before taking a position in a stock. That’s what my stock-picking machine TRIGR is engineered to do, and that’s the way I like it. I don’t want my money sitting around for months or years waiting for a stock to move.

There are plenty of trends moving stocks higher right now that you can profit from. Opportunity cost, while not an outright loss on your capital, is still a cost.

Best Regards,

Ian Wyatt

Chief Investment Strategist

Growth Report