While many investors are on vacation, big money is on the move.
It’s fleeing the jaws of what’s likely to be the most traumatic corporate bankruptcy of modern times.
It’s rushing out of the U.S. dollar.
And it’s running toward resource-based investments, especially gold mines.
These money flows are so powerful they are happening despite pressure to flow in the opposite direction. Here are just three examples:
Example #1
General Motors Plunging
To 23-Year Lows Despite
Rally in Dow and S&P 500
They say the rising tide of the stock market lifts all boats. But right now, regardless of the tides, the shares of America’s largest automaker are sinking like the Titanic.
Just last week, GM crashed through its November low, touching down to its lowest level in 23 years.
Why?
One factor was billionaire investor Kirk Kerkorian. Earlier in the year, he had propped up GM shares by accumulating nearly a 10% stake.
But 12 days ago, he started bailing out: In two large transactions, one on December 15 and the other on December 19, he dumped 12 million GM shares, according to his firm’s SEC filing.
Estimated losses on those shares alone: $120 million. Open losses in the balance of his GM holdings: Probably four or five times more.
I warned that Kerkorian was making a huge blunder and was going to get burned. Now that’s precisely what’s happening. But there’s a lot more to this than meets the eye …
GM’s Investors Smell Bankruptcy.
So They’re Running Away – Fast!
Back in May, S&P lowered its rating on GM bonds to “junk” and has been downgrading the company step by step ever since, culminating in still another downgrade – to a single B two weeks ago.
But a 40-year veteran of bankruptcy forecasting, Professor Edward Altman of NYU’s Stern School of Business, says that even GM’s already-low B rating is overstated. He believes GM’s bonds actually merit a rating of CCC+ – “currently vulnerable to nonpayment,” according to S&P’s definition.
I agree.
The precise reason S&P may be overstating GM’s rating is unclear. But we know that major rating agencies often delay downgrades.
Their formulas may have built-in “stabilizers” which prevent drastic changes, even if merited. And they routinely give companies the right to appeal the downgrades before they’re published, another factor that can cause delays.
Bottom line: GM may be closer to bankruptcy than the latest S&P rating implies.
Plus, here’s another factor S&P may not be recognizing: Many GM analysts are now saying that a GM bankruptcy would actually be a “reasonable” way to release the company from its burdensome pension costs.
To the degree that management agrees, that adds a new element of danger for investors. It means that the natural incentive GM would normally have to avoid bankruptcy may be offset by the perverse incentive to actually seek bankruptcy in order to renege on employee pension obligations.
For investors, it smells … and for the employees that would get shafted, it stinks.
But while GM’s decision-making regarding bankruptcy is still obscure, the marketplace is already speaking loud and clear: Kirk Kerkorian is jumping ship. So are other investors. And they’re already losing money hand over fist.
To give you a concept of just how much has been lost, consider this fact:
Only two and a half years ago, General Motors was worth seven times more than Italian automaker Fiat. Today, Fiat is actually worth more than General Motors!
Can you believe that? A once-snubbed, second-tier auto manufacturer in what was recently one of Western Europe’s shakiest economies is now worth more than the largest auto company in the world’s largest economy!
This illustrates, again, the massive amount of money on the move – a shift that is bound to accelerate in the early part of 2006. Among other money flows, you can expect: 1. Big money moving not only out of GM shares, but also out of GM bonds … not only at GM, but also Ford and similar companies.
2. Big money on the move into natural resources, especially gold and gold mines, which leads me to …
Example #2
Royal Gold (RGLD) Surging to
New Highs DESPITE Pullback
In the Price of Gold Bullion!
Most investors think that when gold bullion prices retreat sharply, the price of gold mining shares invariably do the same.
But that has definitely not been the case here.
While gold bullion has retreated to the $500 area, shares like Royal Gold have gone through the roof.
One reason is that many mining shares are just now catching up to gold’s dramatic rise of the last few months.
Another is that a lot of cash is now pouring into gold mines.
Last week, Sean told you about the larger mines that are buying up juniors and start-ups. That alone is big money on the move.
Plus, Wall Street, which traditionally shuns gold, is finally realizing that gold mines are immensely profitable, even if gold stays around $500 per ounce. That’s still more big money on the move.
So ask yourself: If this is what’s happening even while gold bullion has suffered a setback, what can we expect if gold surges to new highs?
Example #3
Shares in Enerplus (ERF) Have
Made – and Held – New All-Time
Highs Despite the Pullback in Oil!
Crude oil has so far failed to recover after its post-Katrina correction.
So you’d expect a company like Enerplus, dedicated to producing royalties from oil properties, to follow a similar pattern.
But again, that’s not what’s happening, thanks to big money moving into these kinds of stocks.
Indeed, in the last few weeks, Enerplus shares have bounced back sharply and made new, all-time highs.
Plus, they are holding firmly well above their previous high made in late September, another sign of continuing strength.
Why? The stock gives investors nearly double-digit dividend yields plus the potential for substantial capital gains, a combination that a growing number of large institutions are finding hard to resist.
Barclay’s, for example, has issued new exchange-traded funds (ETFs) including a solid weighting to Enerplus. Other mutual funds are following a similar path.
Again, ask yourself: If this is what’s happening despite a decline in oil, what’s the potential for companies like Enerplus if oil makes new historic highs?
No matter what, the evidence is overwhelming:
Big Money is Moving Into
Stocks at the Vortex of the
Natural Resource Boom!
It’s about time!
Commodities have been in a roaring bull market since early 2003.
That’s close to three long years of a virtually nonstop run that’s steadier and steeper than the rise in stocks.
But the big Wall Street money is just NOW beginning to wake up to the trend.
And their belated awareness is helping to usher in Phase II of the natural resource boom that Larry and Sean have been telling you about.
Separately, big money is also on the move in the housing market, where we’re beginning to see signs of a panicky flight.
So I’ve asked our real estate specialist, Michael Larson, to bring you up to date with the latest developments …
New Home Sales Plunging!
Glut of Unsold Homes Growing!
Speculators Starting to Panic!
by Michael Larson
With all the holiday prep work going on, you might have missed the bombshell the Census Bureau dropped on Friday. But I didn’t. In their latest update on the housing market, they announced that:
- New home sales plunged 11.3% between October and November – the biggest drop in almost 12 years, after adjusting for the fact that November is typically slower.
- Without that seasonal adjustment, the November drop was a whopping 22.7%, the worst since November of 1988, seventeen years ago.
- What about October, when sales were up sharply? I suspect that was mostly because consumers were anxious to close deals before mortgage rates rose or lending terms tightened. But now that blip is over.
- Meanwhile, the supply glut just keeps on growing. The number of new homes on the market ballooned to 503,000 from 487,000 in October. That’s a fresh all-time high, based on data that goes back to the 1960s! Compared to a year ago, the supply has jumped 20% - more than triple the rise in sales for the 12-month period.
- The most telltale indicator of all is the reading on the months of supplies in the market. That tells you how long it would take to exhaust all the unsold homes, assuming sales stay at the same level they’re at right now. In October, it was 4.2 months, which was already worrisome. Now it’s 4.9 months, the worst in almost nine years.
Look. Last Wednesday, I told you I don’t buy the “soft landing” argument Wall Street is trying to make for the U.S. housing market. I said, “lenders are pulling in their horns. Speculators are starting to get burned. And the market is cooling fast.”
Now, here we are with the worst sales decline in over a decade. Plus, we have new home prices falling for three straight months.
With many people paying 4% to 6% mortgage rates (depending on the loan type) plus maintenance costs, taxes and insurance, you can see why I think they’re going to start losing money on their homes.
That may not be an issue to you if you just own a home to live in – and you’ve decided to stay put for a long time.
But up to 25% of the national housing market is being driven by speculation. And in some hot spots, like the Miami condo market, speculators may be responsible for as much as 80% or 90%!
Rental income hasn’t gone up nearly as much as costs. So all too many of these investors are already suffering negative cash flow. For many months, they’ve been counting on pure price appreciation to bail them out and help them turn a profit. But now, even that incentive to hold is fading away.
My view: We’re at the critical juncture in the boom-bust cycle when you’re going to see speculators starting to panic, builders dumping inventories to avoid rising financing costs, and many local markets suffering sharp price declines.
Already, big money is on the move – exiting the shares of mortgage lenders, home builders and other real-estate-related companies. Now, expect that move to accelerate.
Our Recommendations
First, if you’re still hanging on to shares in companies like General Motors and Ford, what are you waiting for? Take advantage of short-term rallies. Then just get out, salvaging your remaining capital.
That’s what Kirk Kerkorian is doing. And he’s reaping the additional benefit of a hefty tax write-off. If you can do something similar, don’t hesitate.
To determine which stocks are most vulnerable, register at www.WeissWatchdog.com for up to three instant free ratings on the stocks of your choice, plus e-mail follow-ups regarding any changes.
Plus, for alternative investments that deliver high yield and relative safety, follow the recommendations in our Safe Money Report.
Second, if you still don’t own gold mining shares, you could be missing the boat. The next time there’s a correction – either from these or higher levels – jump on board with companies like Royal Gold.
Royal Gold is especially attractive because it has such a diversified portfolio of properties generating a continuing flow of royalty revenues.
Will its shares continue to go straight up? Of course not. But when it retreats, welcome the decline as a buying opportunity.
Always remember, though: Jumping on board is one thing. Going overboard is another. Invest strictly the amount you’re comfortable with so you can hold on firmly during the inevitable setbacks.
Third, do the same with companies like Enerplus. The dividend yield is virtually unbeatable. And the capital appreciation has been a consistent extra bonus.
Can Enerplus retreat from its current levels? It’s always possible. But right now, we see no sign of anything but continuing firmness.
Fourth, for money you can afford to invest more aggressively, the small-cap mining companies Sean has uncovered are already moving up. The profit potential is great. Your capital exposure is small. And given the big money on the move, the timing is ideal. Click here for his latest report.
Best wishes,
Martin Weiss and
Michael Larson
P.S. Special reminder to all subscribers: Our 2006 rates go into effect January 1. So if you want to beat the increases, renew before December 31. Call 800-236-0407.
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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