It's the dozen highly indebted companies I shared with readers of my investment advisory in December. I call these companies "Debt Traps."
In every case, the firm's debt exceeds the value of its equity. Many of them won't earn enough money this year to pay the interest on their debt. Without additional credit at low interest rates (which, as I explained yesterday, they won't get), these firms are heading toward a bankruptcy filing in 2009 or 2010.
Below, you'll see the name of the company, the amount of income it made from operations in 2007, the amount of its 2007 interest costs, and the return since I published the list:
Name
2007 Income
2007 Interest
Int/Inc
3-Month Return
Maguire
$162
$234
144%
-65.0%
JetBlue
$169
$182
108%
-30.8%
Macerich
$254
$250
98%
-34.0%
Wendy's
$65
$61
94%
0.7%
Post Prop.
$73
$55
76%
-36.0%
Cousins
$12
$9
72%
-44.0%
SL Green
$393
$265
67%
-37.6%
Continental Air
$700
$356
51%
-50.4%
MGM
$1,426
$708
50%
-74.7%
UDR
$370
$175
47%
-44.1%
CB Richard
$675
$163
24%
-26.7%
$ in millions
It isn't normally this easy to make money (unleveraged) in any market. These 12 firms on average have fallen twice as far (-40%) as the S&P
500 (-18%) in the same time. Their collapse shows exactly how profound the problems in the credit market have become. These 12 stocks have lost nearly $6 billion in market cap, in only three months.
I picked these 12 companies from a list of nearly 400 firms in a similar predicament, whose total market capitalization is equal to nearly $400 billion. My list is by no means all-inclusive. In fact, I didn't include General Electric, whose credit problems have seen the stock go from a market cap of nearly $500 billion all the way down to $100 billion.
GE's poor investors have lost more money than the owners of the 400 other companies on my list, combined. Although I don't have a firm number, I am confident the stock-market losses due to the poor availability of credit now exceed $1 trillion by a wide margin. And these are only the losses of public companies. The values of private companies have plunged, too. So has the value of all of these companies' bonds. The total losses must be more than $10 trillion.
Meanwhile, in an environment of collapsing home prices, mortgages are still available for 30 years at fixed rates less than 5%! This is absolute madness.We are essentially betting the credit of our country on the housing market finding a bottom... something that's very unlikely to happen for years, if not decades.
Does it make sense to save overleveraged homeowners at the expense of a huge swath of corporate America? Should we really invalidate centuries of law and tradition to save a bunch of deadbeat borrowers, who bought houses they couldn't afford and traded the equity in the homes for flat-screen TVs and GM SUVs? Should we really back most of the mortgages in the United States with the full faith and credit of the U.S. government?
I hope you can see diverting our entire supply of capital into the mortgage market isn't good economic policy, even if it's nearly nirvana for relatively sophisticated equity investors. Shorting lousy balance sheets has been a one-way bet for months because the mortgage market has become a giant black hole of credit. And thanks to Obama, that's very likely to continue for all of 2009 and probably 2010 as well.
While I don't enjoy making a profit at the expense of someone else's misery, it's better than not making any profits at all. It's better than going bankrupt.
So where should you look for opportunities to bet on the inevitable? First, read what I wrote on homebuilders back in January. Many of these companies are a lock to go broke in the next two years.
And make sure to check outairlines. Knowing that the airline industry has always been a loser for investors makes these stocks easy and safe to sell short in 2009. In fact, right now, you can easily find a half-dozen airlines that cannot afford the interest on their debts, suffer from plummeting revenues, and face huge losses related to commodity hedging.
Yes, there is madness in America right now... But as I've explained, it's created dozens of one-way bets you can make to protect yourself.
Good investing,
Porter Stansberry
P.S. If you need help finding the safest short sales, check out the latest issue of my investment advisory (out just a few days ago). The airline stock we're shorting is certain to go bankrupt in 2009... It's the closest thing toreal free money you'll see all year. Click here to get started with a free trial subscription.
One more "breakout" we're keeping an eye on... technology giant Intel (INTC).
Like Cummins and Dr. Copper, Intel is an easy-to-follow, real-world indicator of global economic health. Intel produces tiny "engines" for most of the world's computers. And in today's day and age, that's equivalent to saying Intel powers the globe.
Like most every other asset, Intel was slammed to a panic low in November 2008. It's wandered aimlessly between $12 and $15 per share since then. But a few weeks ago, it bounced off its low to approach a three-month high. Of course, INTC's rally could be fleeting... but a sustained turnaround would lead us to believe things are getting "less bad" in the world.
And remember this: The market always leads the news... not the other way around. What you see happen in the market today will be in the newspapers three to six months from now. If Intel "holds the line" and works its way above $15, you'll be reading things like "semiconductor demand falls less than expected" and "global economy showing tiny signs of life" in September.
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