Male: S&A Investor Radio looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on Main Street.
Frank Curzio: How’s it going out there? It’s Wednesday, November 7, and I’m Frank Curzio, host of the S&A investor podcast where I break down the headlines and tell you what’s really moving these markets. I wanna say congratulations to President Obama who won easily last night over Mitt Romney. I can’t believe how quick it was. Florida, the wonderful state I live in, still doesn’t know how to count.
I’m not joking when I tell you those stories here, guys. I’m really not joking. Some of those crazy stories I tell you and I get feedback and everybody laughs, I’m not kidding. Florida, the only state still doesn’t know how to count. They’ll figure it out. Final polling results still not in.
But, man, am I so sick of the election. I mean how many polls can we actually take? You have state polls. You have county polls. You have African-American employed in Virginia who are gonna vote Republican polls. You have Democrats who believe the economy is the biggest issue in Wisconsin poll, your voters from the age of 18 to 26 who work in Florida and don’t have health care polls. I mean over 65 that can’t walk without a cane poll. You have how many times Romney scratches his ass a week poll.
I mean seriously. I was watching the guy on CNN, and he was just breaking out numbers, and I’m a numbers guy. I love numbers. Believe me, I do. And it was just over the top. I mean he was going with this screen flipping it back and forth going to different age groups, showing the county how they voted the past five elections and how specific sectors of the county are not in. This is only 87 percent, and this is a Democratic – I mean it was going crazy over the top.
I mean the access to the numbers that we have now if you look at the polls, I mean I don’t wanna say they’re 100 percent accurate, the polls, but they knew. I mean we knew that Obama was definitely gonna win, other than a few Republicans that were just praying there. But I think it was kinda conservative saying, “Oh, it is gonna be close.” It wasn’t even close. Wasn’t even close at all.
I mean he lost Ohio. He was actually – Mitt Romney was campaigning in Pennsylvania because – why? Because he knew he was gonna lose Ohio. I mean he knew it three days ago. I mean just amazing.
So the polls are just accurate right down to the point where you don’t even have to watch it, but then when they really got detail into the numbers and the polls there it’s just crazy. It’s like enough’s enough. I mean seriously, just too many numbers. Just break it down by state, let me know who wins, and it’s easy. I mean maybe it was me. Again, I’m a numbers guy. I like it. It was just totally over the top.
Then on top of it – and excuse me about the rant here ’cause I’m a little pissed off at this. Haven’t had a rant in a while. People used to love my rants at street.com. But you have New Jersey Governor Chris Christie whose state is still recovering from Hurricane Sandy. There’s still people without power. It’s 30 degrees in New Jersey.
The people in New Jersey for begging for help. Some are still homeless. And the president immediately goes to Jersey, right? Basically shuts down a campaign for a day. Everybody shut down a campaign. Immediately goes to Jersey. Says, “Look, Governor, you can have anything you need because this is about the people, right?” That’s what – Obama goes there. It’s not really political. I didn’t feel like it was political, and he goes there and says, “Listen, we gotta do everything we need to do.”
And Christie then says publically to President Obama and he says publically that he’s doing a great job. He’s helping out a lot and we need it. And Republicans are getting pissed off that Christie said that. I mean really? And Christie’s one of the most outspoken politicians you’ll ever see. I like him ’cause I’m from New York. I could picture a lotta people not liking him. I kinda like him a lot.
One time I saw him on a show and a lady called in and said, “I don’t like what you’re doing with the teachers. Where do your kids go to school? They go to private schools.” And he just said, “Listen, ma’am, what’s your name?” And her name was like Barbara or something. He said, “Barbara, you know what? Mind your own business. I don’t ask you where your kids go to school. Don’t ask me where my kids go to school.”
And I love that because it was so true because I feel like everybody’s always involved in everybody else’s business, no matter what neighborhood you’re in. Everybody thinks they can raise your kids better than you. They always have an opinion about everything else, but yet when you look inside their house or their family usually things are crazy. The kids are on drugs. They’re telling everybody else how to raise their kids, right?
But when you have tragedy – which most of my friends in New York – for people listening if this is a first podcast I’ve lived in Florida for the last three years. I lived in New York for 37 years. I still have a lotta friends in New York still without power. My sister lives in Smithtown, Long Island, still doesn’t have power.
My brother lives in Staten Island. He’s one of the few people to have power because he doesn’t live on the water. A lotta his friends who lived on the water house is gone, washed away, destroyed. So he has power. He has a three bedroom house, nice house. He’s got 30 people going in and out of it, all of his friends, whether it’s to power their phones, they need a place to take a shower, because people don’t have homes. You don’t realize. It’s a tragedy. People don’t have homes.
Yeah, and when you have this tragedy you throw politics out the window. I mean how do you get mad at Christie for saying, “Thanks, Mr. President, for helping out”? Really? I mean that’s what our country has come to? Are you outta your mind? I mean just saying that might have lost a couple of states. Mitt Romney got wrecked yesterday. He got wrecked. He didn’t even have a shot.
Most of the people knew it. They didn’t tell you that ’cause they wanted to watch TV. He didn’t have a shot. He got killed. They could tell you what they want. It was close. I mean it’s funny. Mitt Romney was – didn’t wanna give his concession speech because he thought – well, just give it. You should have gave it at 9:00.
But what’s this country come to where a Republican who’s in tragedy is – has the president come over and says, “Thanks a lot for the help. We really need this.” People are – kids have died. Really? You’re mad at him for saying, “Thanks, Mr. President, for the help”? Are you kidding me? I mean they talked about that subject about 20 times on TV. Did Christie lose this election for the Republicans? Are you outta your mind?
Anyway, I’m just so glad it’s over. I was flipping back and forth. I watched CNBC for a little while, and I’m gonna tell you something. Man, don’t ever watch CNBC outside of stocks because their anchors – all of them – love listening to themselves speak, and they know nothing about politics. I mean they all talk over each other and I get – I had to change the channel three or four times. I’m not – yeah, I am picking on them a little bit, but I’m watching them and they had Maria Bartiromo, Jim Cramer, and they had four or five anchors talking over each other arguing, and the two guests who have 30 years of experience, election experience, are not even talking, but they’re yelling at each other back and forth. You can’t even understand.
I had to change the channel. I said that’s – I gave them three tries. I said, “That’s it. I’ll never watch this again, their politics.” I mean it’s bad enough they do that during their interviews when they interview whoever, Jim Rogers or whatever. It’s funny. They have Jim Rogers on for five minutes. They talk for four and a half. Jim Rogers talks for 30 seconds.
I mean that’s the way I should do my podcast. When I interview guys for 20 minutes I should talk 18 and let these guys get 2 minutes, yeah. Nobody will listen to this podcast ever. I mean you have to get it. Somebody gotta send e mails about that. You’re anchors; you’re to ask questions. I don’t wanna hear your analysis. There’s a big difference.
But basically on these TV programs watching every Republican tell me Romney was definitely gonna win. He’s gonna win. They had Lane Cohen on. “Oh, Romney’s gonna win big,” I think he said at 8:30. I was laughing. I mean you have your political challenges which are kinda funny. MSNBC, they’re like, “Obama, blah, blah, blah.” FOX is like, “Mitt Romney, Romney.” So just crazy.
I like to watch CNN, but almost every channel other than CNN wasn’t watchable. I mean based on – even CNN, too. I mean based on the massive amount of numbers you were throwing at people and literally thousands of biased opinions. I mean it was really – I feel like I wasted ten hours of my life. I was excited. I said, “Hey, let me take a look at this. It should be…” It wasn’t even close, and then all you’re doing is listen to opinion after opinion, and plus at CNBC the anchors are speaking over each other, just crazy.
But serious, just glad it’s over. I’d rather get stabbed in the eye with a pin than watch another election or a stupid commercial from the CEO of Interactive Brokers about socialism, which, by the way, were running at 9:00 in Florida even though the polls closed at 7:00. I mean I know the guy’s a millionaire and runs his own ads, but I guess he’s not too bright because they’re run – you gotta pay to run those ads to 9:00. The polls closed at 7:00.
He’s like, “In my country, it’s terrible. That’s why I’m voting Republican.” Whatever. At 9:00 when it’s over you’re telling me this? I mean I’m – just got so sick of everything. Anyway, here’s your rant for everybody who likes it.
I have a great show for you today. My guest is Todd Schoenberger. If you don’t know him, great guy. Probably seen him on TV, CNN, Bloomberg, CNBC, everywhere. Worked at Merrill Lynch, Legg Mason. Today he’s managing principal at the BlackBay Group, registered investment advisor, commodity trading advisor, also hedge fund, and, guys, Todd’s a real great guy.
You’re gonna see from this conversation we talk about everything from stocks to buy based on – and I’m saying, “Who wins the election?” because this interview was done Tuesday afternoon – that was the earliest I could do it – and this gets published Wednesday, so we basically estimated Obama was gonna win, but we just play it, so when you hear this interview just understand that it was done on Tuesday. We definitely knew that Obama was going to win, but just understand that it was done on Tuesday.
It’s a really great interview you don’t wanna miss, how to break down the markets. Now that Obama has won, what does that mean for stocks, and why this could be great news for stocks in 2013, although we’re not seeing that on Wednesday. Also talk about fiscal cliff concerns, and then in my educational segment I’ll tell you why this $2.00 stock may be a huge buy based on the deep analysis I’m going to do. But first, let’s get to my interview with Todd Schoenberger and here it is.
We are talking to Todd Schoenberger. You’ve probably seen on CNN, Bloomberg, CNBC. There’s been a lot of – and a lotta financial outlets. Worked at Merrill Lynch, Legg Mason. Today he is managing principal at the BlackBay Group, which is a registered investment advisory firm, also commodity trading advisor. Welcome, Todd, to the S&A investor podcast.
Todd Schoenberger: Thanks a lot for having me.
Frank Curzio: Well, we are doing this one day ahead of the election, and I’m not gonna ask you to predict who’s gonna win, although it seems like the polls are favoring Obama right now. From a stock perspective, does it matter who wins?
Todd Schoenberger: It does matter and I’ll tell you why. First of all, it doesn’t – the immediate short-term reaction is going to be very positive. The market should do well regardless of who the winner is. However, the question will be how are the markets responding going into 2013, and that’s where the key differences will really be set up, because you have – with Obama as president he actually ranks fifth right now for the best performance for the stock market, and where the markets have been up some 65 plus percent since he took office. Now I’m not saying that he’s responsible for that, but you have to give credit where credit is due.
Now with Romney the question will be if he’s president will stocks continue with that type of upward trajectory, and the answer is probably no, and I’ll tell you why. He has been very vocal about curbing federal government spending, and GDP, actually 20 percent of that, is comprised of federal government spending, so if you start cutting in that area you need to find a whip somewhere else, and that’s where the question comes into play because traders on Wall Street wanna know that, hey, if you’re not – if we’re not growing in the government side then – and nothing is growing organically for the U.S. economy without the Fed help then where do we stand from there? Where do we go? And therefore you’re probably gonna have some earnings pressure in the second half of next year. However, the long-term prospects are much better for the overall country and for the economy under Romney though.
Frank Curzio: It’s funny you say that ’cause I couldn’t agree more. I’m hearing so many people say, “Oh, we have the fiscal cliff. It doesn’t matter who’s gonna be elected or who the next president is.” But even from – like you said, from a commodity perspective, some commodity trading advisor, it’s looks as if if there’s a Romney win we could see a new Fed chairman. We couldn’t – we might not see the QE infinity, low interest rates forever. I mean what about commodities as well? I mean if we see a Romney win – and again we’re doing this Tuesday right before Wednesday – I would think it could be pretty good for the banks but not too good for maybe the material sector. Is that correct?
Todd Schoenberger: That is right, absolutely. First of all, for the financial services sector under Romney you’re gonna have a more regulatory friendly environment, so that’s good for banks, and it’s great for Wall Street. I mean let’s be honest. This is a sector that’s been decimated over the last few years with lower trading volumes and layoffs, and the hope is that moving forward we won’t have the overhead cost that – so therefore banks can go out and hire.
But then on the flipside of that when you start thinking of less accommodation from the Fed, less Fed action, then you can only suspect that you will see metals, including oil, actually drop, only because they’re dollar-denominated commodities, and that would help. It’s interesting to note that under Obama with incomes when adjusted for inflation, personal incomes have actually dropped 4.8 percent, and a lot of that when you start thinking of a – of higher commodity cost, greater inflation rates and that’s also a result of Fed action, and I think a lotta your listeners would agree with the fact that you have to wonder if President Obama’s economic policies were really working why would we need multiple rounds of Fed action? Why will we need to overlap with Operation Twist? And I think that’s where the question’s gonna come into play for a lot of Americans when they vote.
Frank Curzio: Well, as a registered investment advisor, how do you position your portfolio? Let’s go with the favorite here and say Obama does happen to win. Are you worried maybe about dividend-paying stocks? I mean we’re seeing commodities kind of – not commodities but utilities kinda break down a little bit here along with the rest of the market. Are you worried about those dividend hikes and how that could affect certain industries if he does win?
Todd Schoenberger: I’m remarkably concerned about it, and also I question publically traded companies that are increasing their dividends now. I mean you’re looking at tax rates for – on dividend tax rates starting January 1, some rates going from 15 percent up to as much as 43 percent, so why would you actually – you’re probably going to have a hit on valuations for companies that are paying – have increased their dividends. Now I get it. They have – banks are sitting on trillions of dollars in cash. It’s at the expense of human capital. They’re not going out to hire, and they’re trying to provide shareholder value, so what do you do?
Well, they’re not going into research and development. They’re not doing any M&A activity, so why not increase the dividend? And that’s all fine and good for the short term, but, wow, you’re really gonna start penalizing your shareholders at the first of the year because you’re hit with a heavier tax and you have to suspect – and you start thinking of those retirees on fixed incomes and they’re receiving their – and what they’re receiving. They’re gonna be hit with higher taxes as well, and that’s – it’s gonna trickle down in multiple directions for not just U.S. economy but small businesses, people hiring, and clearly stock market sentiment, so I am very, very concerned about those dividend-paying stocks.
Frank Curzio: It’s interesting what you say what they do with that money ’cause they’re hiking their dividend in the wake of something that could be not catastrophic but, like you said, it might not work, and then you have, well, maybe they buy back stock, and you know as well as I do is companies have a terrible history or a terrible track record for buying back their stock, especially large companies, and we’re not really that cheap here. I mean it’s not only expensive, not too cheap. It’s not the perfect time for companies to buy stock.
So you mentioned it before. What about M&A? I mean is this something that, hey, maybe we should start looking at small caps with cheap valuations where they have to do something with this cash. They have record cash on their balance sheet. I mean you wouldn’t know that by listening to election. Everyone thinks the economy’s absolutely horrible and terrible, but is this a good way to maybe say, hey, we might see increased M&A maybe 2013, 2014?
Todd Schoenberger: Brilliant point, and when you start thinking of inflationary environment, you actually are going to see companies trying to obtain additional cash flow, so one thing that we should all expect going forward, and this also – let’s just go with the hypothetical that Obama is reelected and, therefore, he’s gonna continue to spend. He’s gonna margin the U.S. government and, therefore, you’re gonna have further monetary policy move. Okay, so with all that said, you’re gonna have continued higher rates of inflation in years to come. You’re gonna have companies that are actually going to seek additional cash flow because of this inflationary concern.
The M&A model will actually change because it used to be that you would have M&A activity to try to obtain additional market share, but in this case you’re looking – you’re having companies that are looking for or obtaining additional cash flow share, and that’s gonna be critical, so when you’re trying to figure out which companies are likely to be taken over, look for the companies that (1) don’t have a lotta debt and (2) are on this cash rich company, great cash flow. I always think of one company. It’s a REIT. It’s Public Storage. I own the company.
Here is a company that has done sensationally well. They have very little debt, but it’s mostly a cash business. They have these climate-controlled facilities for storage, and what’s unique about the company, they have a dividend of over three percent, but if you think of a great takeover target, especially in the real estate sector, why wouldn’t a company like Public Storage be taken over? Because it’s great cash flow, very little debt, and that could only enhance the balance sheet of the acquiring company. So you’re gonna see a lot of that in the next couple of years, I believe.
Frank Curzio: Yeah, it does make sense. That’s actually a good pick there. I like that idea. Now what are your expectations for next year? We just talked about a lotta stuff in terms of politics, which sector is gonna do good, but what are your expectations next year where you see a lot of economists are calling for a recession, and yet we have two percent growth right now, near record profits, although they’re obviously slowing, and record cash on the balance sheets, and what are your thoughts how the U.S. is gonna perform?
’Cause I’m – I always drop my pain out there and review it later on whether we could learn from it. I’m a believer that we’re probably gonna have a pretty good year next year, and it might be wise to rotate in cyclicals. What do you think though? I mean do you think that we could hit recession next year?
Todd Schoenberger: Well, to answer that question the answer is probably not, and the only reason why is because you have the Fed involved. Ben Bernanke has been very vocal about saying that he will or the FOMC would do, quote, “whatever it takes to keep the country out of a recession.” So that says to me that they’re just gonna do whatever. They’re just gonna continue to expand the balance sheet. They’re gonna keep printing money, and they’re gonna make sure that the U.S. economy does not fall into a recession.
Because let’s be honest; if you have a growth rate of two percent, and this was a first read on GDP, so it’s a very preliminary number, but you have a two percent – say we did finish at two percent for the year. That’s still awful. I mean the Fed – you have the Fed involved and you still are only growing at two percent, which is pretty pathetic, but you have – that still keeps us out of recessionary territory, so that says to me that next year you’ll continue to see that from the Fed.
The other side of this, too, is that eventually you’re gonna hit a brick wall, and you’re gonna – if you look at how government debt – that’s been a kitchen table topic during the campaign, but when Obama took office the U.S. government was actually borrowing 20 cents on the dollar for what they were receiving on tax rolls to cover its overhead cost. Today it’s 40 cents on the dollar. We can only suspect that under an Obama second term that these ratios are going to continue to increase, so you’re probably seeing the U.S. government having to borrow more, and with that, and then obviously the monetary easy policy for the Fed, and most likely a Ben Bernanke – he’ll have – oversee another term in January 2014. With all that said the U.S. government is just gonna continue to get further and further into debt, and therefore you will hit a brick wall, but the short term for 2013 is probably pretty good for stocks only because you have the Fed that’s involved and history is the Fed does act and, whether you like it or not, it is good for the stock market.
Frank Curzio: We’re talking to Todd Schoenberger, a managing principal at the BlackBay Group. I wanted to get to a few of your picks. One of the things I saw that was interesting that I read about you is defense companies you’re kinda bearish on them. A lot of – I mean you’re looking at it. It seems like you know all the risk that’s gonna happen and they seem cheap; however, under that formula a lotta times that – it’s a formula for a value trap. How do you see the defense sector right now?
Todd Schoenberger: Well, the defense sector, history has shown us that in the first term following a Republican in the White House when you have a Democrat that takes over the first term defense contracts should do well because what happens is in the defense sector you have to – you go through the contract process, the procurement process, and a lot of those contracts are already locked up, so the money that’s being received is – for those defense companies, you see that stocks do relatively well in that first term. It’s the second term when you have a Democrat that’s reelected that defense stocks take a hit because there’s always going to be a cut in defense spending, and obviously this fiscal cliff mess really accentuates that. I mean you’re gonna have a – or enhances that.
You’re gonna have possible cuts in a defense sector that are not only going to probably put the country at risk from a security point of view, but also you’re looking at massive layoffs. Tens of thousands of Americans will receive pink slips, so because of that the defense sector will take a hit to its bottom line. Probably not a good area to be in, but even with that, even if Romney takes over and occupies the White House, it’s gonna take some time for the defense sector stocks to really bounce back, and even with all the geopolitical issues that are in the world that you would think that they would be more in favor, and they probably will be, but it’s not gonna be until 2014 at the earliest that you really wanna look at that sector.
Frank Curzio: And what are some of the picks you like here, Todd? What do you like right now? I mean, again, the election’s gonna be over by the time people listen to this, hopefully. I hope it doesn’t last three or four days. I think that would be terrible for the markets. What are some of the things you like maybe to end the year? Also into 2013, the end of 2013. What are you looking for right now?
Todd Schoenberger: Well, I like consumer discretionary, and I mean it seems like it’s one of those areas that you might wanna stay away from, especially if the country ____ right in to go into a recession. The thing about it though is the Fed is – there’s two purposes of any type of QE program. One is clearly to obviously keep rates low and we know that, but another one is to manufacture wealth and people feel wealthier. They feel wealthier because the stock market is rising ’cause there’s no other place to put your money, so when you open up that 401k statement you feel a little bit wealthier.
Well, generally when you look at the past two rounds of QE we actually had – consumer discretionary stocks did quite well, and you can look at companies like the Walmarts, the Targets. I mean you’re leading into the holiday season, but even the dollar store, the more specialty ones, companies that emulate the U.S. economy. Family Dollar is my favorite. I own it. Here’s a company that actually opened up 750 new stores this year. They’ve met their plan. They saw their square footage increase five percent year of year, whereas Walmart and Target are flat, so that says to me that’s a growing company. That’s probably a company you wanna look at.
The other side is travel and leisure. In my opinion travel and leisure stocks should do very well. I’m looking at the – Delta Airlines, Hyatt Hotels, Marriott Hotels. They should do well. If Romney’s elected you’re looking at a business friendly White House. That encourages travel, business travelers – that’s good – and all joking aside, but if Obama is reelected I’m sure people will wanna get outta Dallas, so I mean that can also help the sector.
Frank Curzio: Yeah. No, that definitely makes a lotta sense. Interesting that you say Family Dollar, too, how their square footage is growing. It seems like going to these stores right now – it’s a sector I’ve been following for the last two years – they’re actually getting into food. They’re getting into whatever Walmart sells, and there’s people who took a – there were some analysts that actually did a price basket and found out that the Family Dollar store and a lot of those 99 cent stores it’s actually cheaper to shop there than Walmart.
Of course Walmart’s a much bigger place. You got more to choose from. But on your way to Walmart it seems like you’re passing five, six, seven of these stores. It seems like they are gonna take a little bit of business away from Walmart. Not that it’s gonna impact Walmart too much, but it seems like that’s a pretty good sector to be in. Is Family Dollar the only name that you like there?
Todd Schoenberger: Well, Family Dollar. Dollar Tree is another one that’s a winner. The thing about the Family Dollar stores though is years ago with any of the dollar stores they were typically located in very rural areas. I mean in some places you’d have to go down a dirt road to actually get to one of these dollar stores. Now the locations are in much – they’re in prime spaces now. Family Dollar is actually winning the battle of all the major dollar stores, so I love the growth story with the dollar stores.
The thing about a Family Dollar you have the ability to get items – you can do grocery shopping there. Granted, like you said, you’re not going to have as many products. You won’t have as many choices for the consumer, but considering that – how the household balance sheet has been decimated, Americans, because of inflation, have actually had to dip into further debt just to cover their overhead costs. If that’s the case when I look at all that I start to suspect that that’s going to lead into – you want to look at a company that is growing, that continues to grow, but also emulates the U.S. economy. Family Dollar is the big winner in that sector.
Frank Curzio: And last question here before I let you go, what about commodities. Are you looking at gold, silver? Do you like them? Do you like bullion? Do you like the stocks? What are you doing with the commodities sector? And say Obama does get elected.
Todd Schoenberger: Well, within my blended strategy, I am long precious metals right now, and I’m long because it tends to be a trade that I do trade off and I might do two trades a week in that sector. The thing about it is that I’m going long only because we still have all the geopolitical insurance. We still have the Fed involved. If Obama does win, that’s actually gonna be huge for the gold sector. You really just can only assume we’ll get further into debt, further Fed accommodation, everything I was saying before, and therefore you really wanna look at gold because chances are gold will end up shooting higher and really should go back to dancing with $2,000.00 an ounce again.
If he loses, still in the next couple of months gold would still be in favor, but in 2013 I would probably stay away from it only because Romney’s been very vocal, like I said, about curbing Fed’s – government spending and obviously will be leaning on the Fed to turn off the faucet to printing money, so gold – right now over the next couple of months still a good place to be, but under Romney you will wanna get out of it in 2013. Under Obama you wanna stay long.
Frank Curzio: That sounds great. Todd, I wanna thank you for your time, for being on S&A Investor Radio. I know you’re running around. You’re doing this interview from a cell phone. I really appreciate that you’re running around, so hopefully you’ll join us again soon. I really enjoyed this conversation.
Todd Schoenberger: Likewise. I appreciate you having me on. Take care, now.
Frank Curzio: All right, take care. Bye. Okay, guys, e mail me, [email protected]
That’s [email protected]
I didn’t get too many questions in this week. I’m only gonna answer two or three because I know the election was pretty crazy for everybody and Hurricane Sandy, but still send those questions in. I like answering them, helping you guys out as much as I can. Let me know what you thought of this interview.
I thought it was fantastic, not only because I agree with everything that Todd said or mostly, but it was great because you know how it is when you have guests where you could just talk about everything, where you go anywhere with it. It’s really cool. I mean for me when you have a 20-minute interview and you have a guy specifically talk about oil, I mean oil’s pretty exciting right now, but sometimes a specific topic gets a little dragged out, but we can go anywhere and he had ideas and short ideas and stuff like that on the economy. I thought Todd was a great guest.
So again, this show’s about you, not about me; [email protected]
Let me know what you think, even the people in Colorado and Washington if you’re still awake because now you’re allowed to smoke pot legally, no matter for what, which is fantastic, I guess, for people who live in Colorado and Washington, but even if you’re stoned in those states, feel free to e mail me. If you haven’t heard, those two states just legalized marijuana.
Now let’s get to the markets. Obama wins and serving his second term. I think personally it’s gonna be good news for stocks. You’re not seeing that Wednesday much better than if Romney wins, at least in the short term, because Romney has a plan to basically stop spending, which I think is good in longer term.
I think we’re gonna see QE infinity forever. Obama loves to spend, as we see. He’s gonna take money from the rich and distribute it. I think would be later on after the fiscal cliff. Guys, a fiscal cliff is just everything coming out, the Bush tax cuts January 1, where they’re gonna take money from, the health care, what they’re gonna cut, the taxes on the rich and they’re gonna – where they’re gonna be, so the whole fiscal cliff and everything that’s gonna go on is gonna affect ratings, and people are worried that it’s gonna be so bad that it could push us into a recession.
It’s gonna be interesting to see because I actually think Obama is gonna be a fantastic president this time around. I do, and I vote Republican, letting your know. I think that they’re gonna get a lotta things done. I’m hoping, and so are a lotta Republicans hoping, that both sides can come together because that’s what everybody wants. Seriously, whether you’re Democrat or Republican, that’s what everybody wants.
I’m not trying to hold everybody’s hand and be friends here. I’m just saying we need this. We have a lotta risks to our future for our kids. Hopefully we get a lotta stuff done where everybody could sit down. Enough with the politics again. I just can’t believe yelling at Chris Christie because he said the president did a good job helping us out in a time of crisis. That’s how terrible it was in all the commercials and everything. Hopefully we’ve put that behind us and we get things done.
A lotta stuff’s gonna happen over the next few months starting January, and that’s the whole fiscal cliff, but we’ll see. I mean for stocks in general I think we’re gonna have a QE infinity policy which almost – I don’t wanna say guarantees we won’t have a recession in 2013, but as soon as growth slows and they see it coming, we’re gonna announce some crazy measures. We’ve done it in the past. We just announced QE3 with profits near record highs, balance sheets all-time record highs, and the economy growing two percent, so we’re announcing QE initiatives when things aren’t that bad. Think about when things are bad what we’re gonna do here.
Think about what China is gonna do, what Europe’s gonna do if things get worse, and especially worse in China. Think about what they’re gonna do. So 2013 I think is gonna be a pretty good year for stocks. We got a lot to take care of with the fiscal cliff – I understand that – but I think in terms of – I don’t agree with it but it’s there. It’s gonna be there under Obama, which is probably good for stocks. My job is to tell you how you can make money on stocks, how you can make money doing that. I think right now in the short term it’s probably good – it’s a good stock market under President Obama.
I think material stocks are gonna be a huge buy. Talked about that with Todd a little while ago, gold companies especially which have underperformed gold prices by – what? – 25 percent, and now you’re looking at oil down sharply. If you’re looking at the oil market, oil is coming down a ton. Remember, I did – I had that whole entire trip to the Eagle Ford shale with the guy who’s drilled a thousand wells in his life, over 30 years of experience. We’ve see – it’s amazing how much oil is being produced. Demand is slowing and we’re producing more oil than ever, and it’s gonna get even – it’s gonna increase much, much further.
So we could see prices come down further, and as they’re coming down, there’s one good thing. Usually when oil prices come down you could see the economy slow, stock prices come down. They usually follow oil price. It’s just the way it is, but if you’re looking on margins and mining costs, oil accounts for 25 percent of mining cost, so they have – they’re gonna increase margins. The gold companies have significantly underperformed gold prices, and based on QE3 we’re gonna see probably gold prices move higher, precious metal prices move higher, I think.
So if you’re looking at gold companies start looking at them. I’ve been looking at them. We’ve recommended two or three for my Phase 1 newsletter. I have two great gold picks that are doing well in my Small Stock Specialist newsletter which I know a lot of you listening to us are subscribers. If you wanna subscribe, [email protected]
I’m not pitching anything here. It’s up to you.
But I just think you’re looking at interest rates. Everybody could kinda agree they’re gonna be low for the next two to three years. That’s good for housing also. It’s gonna make gold a much better alternative compared to keeping money – just keeping cash in money market accounts, Treasury, simple checking accounts earning no interest. I mean you’re losing money after inflation. That’s why gold is a good investment right now and even a lotta the biggest hedge fund managers, even Bill Gross, is telling you to buy gold, and I think those conditions are gonna get even better. Under the Obama administration gold prices will probably go higher.
It’s gonna be interesting to see if Obama lets the dividend cuts expire, which he said he will. I think it’s gonna be terrible news for utility companies, which are incredibly overvalued. They just broke through that 200-day moving average on the downside. Did some research on this. They usually trade at a 20 percent discount to the S&P 500 historically. Today, even after this downfall, they’re trading at a premium, and it could be expected, right? I mean people looking for that interest. They can’t get it anyplace else. They’re looking for that yield. It makes sense.
However, if you’re looking at this from a fundamental point of view, they’re crazy expensive. From a technical of point of view, again they just broke through 200-day moving average, and you have the dividend cut possibility. I would be careful with utilities. Doesn’t mean you want to get rid of all dividend-paying stocks. Maybe you want dividend-paying stocks with a little bit of growth. And, again, I’m not even talking about the hurricane and Con Ed, and Con Ed’s been getting killed lately. I’m not even talking about that.
I’m just talking about utilities you may wanna rotate outta that sector and buy – who knows? I mean some of the other high-yielding stocks. I have a couple in my portfolio. One of them is shooting higher, Steel Dynamics. I love steel companies right now. Prices are finally starting to rebound in steel. There’s a company that got nailed. You’re getting good yields on some companies. You have to do your research.
I don’t like all steel companies. I just like Steel Dynamics. They have the newest technology which provides better margins, which means that if the steel industry gets a lot better this is a company that’ll definitely taken over, I believe, by a bigger player. So these are some areas that I’m looking at.
Be careful with dividend cut. Be careful with utilities. I do like material stocks going forward. Again, let everything settle. We’re getting killed on Wednesday, and let’s see how the market plays out. Let’s see what the plan is for the fiscal cliffs. It’s gonna be interesting, but I think overall by the end of 2013 I think people will be pretty happy if they’re going long stocks in January, February of 2013.
But moving on, I do think stocks will pull back a little bit to the yearend, so I’m talking about January 2013 to the end, but right now again just a little uncertainty. For me I’m seeing massive amount of opportunities in the small cap space, even tech companies. I was researching semiconductor stocks, and this industry has gotten murdered. There’s really not too much of a catalyst there for semiconductors. They’re just dirt cheap to the point where they’re down 50 percent, and I’m seeing some companies where insiders who haven’t bought in ten years are buying.
Okay, that’s a real big buy signal when I have three or four insiders that haven’t bought shares in four or five years of maybe since 2009 when these companies collapsed. They’re buying, and they’re not buying a couple of thousand shares. They’re buying millions of dollars’ worth of shares. I may recommend one, but again, it’s gonna be long-term holding. You don’t have a massive catalyst for semiconductors, but they’ve gotten absolutely murdered; one of the sectors that I am looking at.
Banks, I’m hoping for a pull-back. Lotta people believe banks aren’t gonna do good under Obama, more regulation. They’re probably right, so if you do see these banks get killed you might be able to find a few, and I just saw Goldman Sachs. Goldman Sachs is up a lot. It’s in the 120s now, but a lot of the insiders are cashing out, so it’s gonna be interesting. I think the banks I’d wait on. Maybe there’s an overreaction to the downside now that Obama gets elected, something I will look at, but again, like I said earlier, material stocks are one of the main sectors that I do like, and you’re probably gonna see a few recommendations in my newsletters coming up.
Now before I wrap up this section I just wanna take a few of your questions, and it’s only gonna be three questions here ’cause – due to time constraints, but the first one is from Jacob and he says, “I know you don’t talk about stocks you don’t cover in your portfolio, but when would you think about revisiting MEA?” And that’s Metalico. “I know that we got stopped out before; however, it doesn’t seem like the price is right.” He says it does seem like the price is right and may be some value there. Well, I’m looking at Metalico, and again, I really don’t comment about stocks like this, but Metalico is a company that we got nailed on because I decided to buy it. I thought it was a fantastic buy. We got in at a good price, I thought, and scrap prices came down. I expected them to rebound.
Over the next nine months scrap prices got absolutely murdered. Every company in the industry got killed. Now we stopped out, and we were like, “Okay, that’s it.” And it was one of the – I don’t know if that was this year. I think it might have been earlier this year, so there’s two scrap companies that we got stopped out of. It may have been two, maybe three companies that we did bad on the whole entire year. We’re having a very good year for our newsletter, but I like going over my losers more than my winners, and Metalico does seem like a buy here.
I haven’t done the research. I like it, and one thing I do like is scrap prices are finally rebounding, and these companies are so depressed that they can easily top 25, 30 percent off their lows, so it’s something that I am looking at. I just saw scrap prices and steel prices ’cause I just wrote a report on Steel Dynamics and saw that a lot – scrap prices are rebounding. Metalico might be a good play. I’m not telling you to buy; I’m not telling you to sell. But I am going to start to research it. I like what you’re thinking here, Jacob, so you’re probably ahead of me, and let me know what you think after you do your analysis. I’m gonna start doing mine over the next week.
The next request – the next question is – actually it’s not from anyone specifically, but I got four or five of these because I signed up a lotta people to my newsletter, Small Stock Specialist, and in my presentation I gave away two stocks that have 1,000 percent upside potential in my presentation which was done at Sea Island, Georgia, at Alliance conference, so I had a lotta people ask – say, “Frank, what are those two stocks. Is there any…?” And these are a lotta friends that e mail me all the time, and, unfortunately, I can’t give those stocks away because we charge $5,000.00 for Phase 1.
I’m trying to get a huge discount to people who are interested. It is a lotta money. It’s not for everybody. Most of these people are credit investors. They are credit investors, hedge fund managers. We travel the world to find the best ideas, ideas that no one’s ever heard of, so it’s very important when it comes to Phase 1 that we keep a lotta confidentiality behind those picks, so we can’t really give them away, but I will say that of the two picks it not necessarily that I think they’re gonna go up 1,000 percent.
I think they’re at least 300 to 500 percent winners, but one has a CEO that has a history of having 1,000 percent winners who two of his companies are up tremendously, and the guy’s a young CEO that’s probably the best in the mining industry to start a new company, and another one is the biggest investor in another small company which is fantastic that’s gonna go into production. It has to do with China hoarding a specific metal.
But these two companies – these – from them – from the large shareholders, I mean they – just from knowing these people and having good contacts, they really believe that these stocks are gonna go up. Unfortunately, I’m sorry, I’m bringing up this question because we’re trying to work out a promotion. We don’t really discount Phase 1 often ’cause it’s one of the most expensive newsletters I wanna say in the industry, so I’m gonna try to offer a discount. If anyone’s interested, [email protected]
Again, I’ll see what I could do, but normally we don’t discount that newsletter, but, again, I’ll try, but I can’t give away those picks on just – we have to have some confidentiality behind Phase 1.
Now, next question is from Mike and he asked about EOG Resources. Blow out quarter; is it a buy? I don’t know if EOG is a buy here I have to tell you. I think it’s a fantastic company, and the reason why I took this question is because when I went to the Eagle Ford with my buddy, Cactus, this is one of the companies that he likes the most. He said they have the best technology. They have technology to almost double the recovery rates when they frack a well for oil.
I think it’s fantastic. The company’s trading at 20 times earnings. It’s generated a ton of cash, so it’s a big company. This is a very, very big company, almost the best in their industry when it comes to fracking. However, they are – they’re drilling for oil and oil prices are coming down, so it looks like oil prices could push past the $80.00 level and maybe even fall further, and if they do go $75.00, $70.00, it’s gonna impact their margin, so I would be careful.
It’s an expensive stock. It should be expensive ’cause it’s the best in the industry. Doesn’t mean you shouldn’t buy expensive stocks; it just means that they’re better than everybody else. That’s why they’re expensive. Sometimes it’s a good thing from a growth perspective. They are growing. It’s fantastic. You saw a lotta oil companies and natural gas companies miss. These guys blew out their numbers. They went up five percent, and now they’re probably pulling back on Wednesday. I haven’t looked, but something to take a look at if it pulls back.
I just wanna tell you that they are the best in the industry. They’re fantastic, but I do worry because they’re levered to the price of oil and natural gas, and I think natural gas prices are gonna come down hard pretty soon. I’ll be surprised if they break 4, 425. We just can’t store anymore. People are absolutely just burning gas to burn it to get rid of it right now. That’s how crazy it is in the Eagle Ford. I’m hearing the same thing in North Dakota. There’s just no place to store it, so the people who think it’s gonna go higher, pray for a cold winter ’cause if you get a warm winter you might get them to 2, 250, so I mean I’d probably short natural gas prices here, especially if they went to 4, but so again, these companies are tied to underlying commodity, and that’s the only thing I worry about for EOG Resources, but by far – by far – the best company in the industry.
Okay, guys, last part here. I wanted to get to my educational segment. It’s gonna be a really good educational segment today, and I get a lot of e mails from you asking how I do my research on certain companies. We think it’ll be a great educational segment if you just go over how you analyze each stock and different tools you use, so I want to do that today and go over some metrics data that I look at, which is not the same for every stock.
And this week I’m gonna tell you about a very small company that most people think is probably gonna go bankrupt and is in a lotta trouble, and I wanted to show you a little research behind it ’cause I just saw some interesting points that I wanted to bring up, and it happens to be Clearwire. Clearwire provides high speed 4G service, actually the first company to build a 4G network. However, the company has been going through terrible times, accumulating massive debt in order to service 130 million people in 80 cities. Now the company’s technology is good. It’s real good or it would be outta business by now.
However, it’s operated horribly. Management’s been doing bad and been losing money forever. They just feel like they could build out forever and ever and ever and everything will be fine and eventually they’ll generate money. It hasn’t happened, and people are worried that they can go under.
Now Clearwire is trading at about $2.15, $2.00 or in that level. They lost almost $5.00 a share last year. The company has $1.2 billion in cash, but $4.2 billion in debt. They’re not generating any cash flow, and it seems like the company’s absolutely horrible. However, I feel like the company may be a buy. I know, pretty crazy, and I’m a fundamental guy.
So here, let me try to explain this to you. Now looking at a company like Clearwire, it’s not about earnings or sales. People will look at this in one second. It’ll never come up on the screen ’cause people are like, “Let me see earnings growth. Let me see companies trading near book value.” They put all this stuff on their screens, making money over the past five years, good management team.
Clearwire wouldn’t make that list ever, and that gives people like me opportunity. That’s why I like doing what I do in small caps. I try to find companies that people really, really hate. A lotta people hate this stock. It has a high short position. But hear me out first ’cause it’s not about earnings or sales. It’s more about technology book value. It’s how much the company’s assets are worth and also cash burn, how long it’s gonna take for this company to burn through its cash before it actually makes money.
Now, again, you look at the company. Technology is solid. The technology’s definitely solid or they’d be outta business. As for cash burn, Clearwire wants to deploy LTE, the 4G technology across all of its cell sites. In the past couple of years that was costing more than $400 million, and which is $400 million a year. It’s not a good thing when you only have $1.2 billion in cash and not generating any cash flow. So that gives you what? Maybe like two years before you’re done. Maybe like a year and a half when you include interest payments on the four-point whatever of debt.
Now Sprint owns 51 percent of Clearwire now. They used to own 48 percent but SoftBank just came in, gave Spring a huge cash infusion and which included them owning more than 50 percent of Clearwire, so they – everybody thought that Sprint was gonna buy Clearwire outright. The stock went up, and they’re like, “Why would we buy it when we have the voting right? We own 51 percent. That’s good enough.”
The thing is Clearwire owns massive spectrum that is very important to Sprint, especially if they wanna compete with AT&T and Verizon. Clearwire in the past, just to show you how good the technology was – this was in the past – they’ve seen massive billion-dollar investments from tech giants Google, Intel, Comcast. It tells you the technology’s good. It’s still good.
Now fundamentally the company looks like it’s in huge trouble. Looks like it’s in big trouble. However, investment firm Mount Kellett, pretty big guys, owns seven percent of Clearwire. They were crunching the numbers about Clearwire’s spectrum. I know. People don’t really talk about spectrum every day. It’s very important, especially in the cell phone industry. And these numbers that Mount Kellett were calculating for Clearwire and when it comes to spectrum the numbers were based on spectrum acquired by AT&T when they bought NextWave, and NextWave was a distressed seller of spectrum.
So, okay, I’m not gonna get too crazy with you. I’m not gonna go into too many numbers here. I’m just gonna explain something to you, that AT&T bought NextWave for their spectrum which was a – which – under distressed sales, which means they were getting very, very cheap price, whether it was 20 cents or 30 cents on the dollar, so prices were real cheap. Now this firm, Mount Kellett, is using those estimates that AT&T purchase NextWave’s spectrum – again, depressed price – and said Clearwire, based on all the spectrum they own, is worth $6 billion to $9 billion. I saw that note and I thought it was insane.
I don’t know if it’s true. I have to look into it a little bit more. Now the enterprise value for Clearwire is $4.5 billion. They’re saying the spectrum, based on depressed asset sales that AT&T got from NextWave, are worth anywhere from $6 billion to $9 billion. They could be worth even more. That’s why Clearwire is not bankrupt with $4 billion of debt.
People are saying, “Wow, I look at this company. It looks absolutely horrible.” There’s a reason. There’s a reason why Sprint’s hanging around. There’s a reason. Yeah, you look at this company and you go, “Wow, this is so crazy. Why would anybody invest in Clearwire?” Well, it’s a real risky stock, and the company is burning through cash, but the good news is – and I started doing a research on – is it looks like Clearwire’s gonna look to sell its spectrum, which is great. They’re gonna be generating cash to pay off their debt because they’re choosing not to build out its LTE network as fast.
They had this plan spending $400 million or $500 million. Just keep going and going and going. Eventually you’ll make money. And now they’re like, “Okay, hold up. This is what we’re gonna do. We’re only gonna spend $100 million to $150 million a year. Let’s see if we can sell some of our spectrum. See how much we can get for it.” Maybe you can get the highest price in history. Who knows?
But the thing is there’s a big difference between – when you have $1.2 billion in cash and you’re spending $400 billion a year and you have $1.2 billion in cash and you’re spending $100 million to $150 million a year. That gives you like three years, not one year, one and a half years, so when you’re looking at it you’re saying, “Wow. The company may believe or may start selling its spectrum which would add cash to its balance sheet.” Again, it’s a speculative idea. There’s a lot of numbers. It’s absolutely crazy.
I’ve seen number crunching like this when Bill Ackman went over General Growth Properties, and I didn’t even understand some of the stuff. It was very detailed. Some of it I did and I was like, wow, this sounded like a pretty good idea, but I just didn’t get it. No one in their right mind would have invested in it, and a lot of that was under distressed sales and he’s up 1,000 percent in General Growth Properties. So you make 1,000 percent by buying companies like this that are absolutely terrible, that look like they’re gonna fail, and you say, “Wow, look how much their assets are worth.”
From a common sense point of view Clearwire is not bankrupt because of their spectrum. It’s worth a lot of money. People just don’t know how much it’s worth, and maybe they’re in a distressed position where they might not be able to get as much, but they do have the backing of Sprint, which Sprint owns 51 percent, so they’re not gonna let this company go under. They need that spectrum to compete with AT&T and Sprint. Just something to think about when you’re analyzing stocks. If you look at it on paper it looks like a horrible situation. I’m not gonna recommend this in any of my newsletters.
I don’t know if I’m gonna buy it personally. I wanna crunch the numbers. I wanna talk to a couple of specialists. If there’s anyone out there that knows about spectrum, e mail me, [email protected]
I’ll publish your research if you’re okay with it, if you’re a professional in the industry. Not only that, I’ll give you a free subscription to Small Stock Specialist if you give me some great research that I could basically go over the situation. This is something that I’m looking at, but if that spectrum is worth as much money or even more, you’re looking at an easy double, maybe a triple for Clearwire. Who knows?
But it’s just something to look at, and this is just one company of how to – I analyze it. When I’m looking at earnings and I’m looking at sales and I’m looking at cash or return on capital, we’re just looking at debt things. We’re looking at how much cash burn they have, cash flow, when it’s gonna be generated, how much they’re spending. There’s different – I try to explain this to you. It’s not easy, but every stock should be analyzed in different ways. I mean retailers are same as store sales.
When you’re looking at oil there’s different metrics you wanna look at. How much are they – even gold companies. How much does it cost to pull this gold outta the ground? I mean then they generate – or when you’re mining for gold usually you find copper. They take that copper, sell it, and they’re able to lower their cost of gold equivalent ounces. So there’s different companies you have to analyze in different ways.
This is just one that has a lot to do with their debt, but, remember, General Growth Properties, people looked at it and said Ackman was absolutely crazy. He had no idea what he’s talking about. And he made 1,000 percent for his clients, so just take a look at this stock. Let me know what you think, especially if there’s any professionals, but it is a speculative play, something worth looking at. Again, you won’t see it come up in my newsletter. It’s a little too speculative, but it was something I just wanted to go over you with in terms of looking at my research process.
Anyway, I’m gonna say thanks again for listening. If you have any questions or comments, e mail me, [email protected]
That’s [email protected]
Also be sure to go to stansberryradio.com and catch replays of all my interviews. Also get transcripts of past shows. You see the pictures of people, interviews. I don’t know if it’s a good thing to see all the pictures of all my guests. I don’t know if that’s good or bad. Anyway, it’s a pretty cool site, stansberryradio.com.
As for my sports bite which I always do at the end of the show, I think Michael Vick is gonna call another player’s meeting this week and remind everyone that the Eagles suck. He called a meeting and said, “We’re ready to make a playoff run,” before they played New Orleans and got killed, but I do have to say poor Michael Vick. He literally had one second to throw against the Saints on Monday night on almost every single play. It’s like people weren’t even blocking, coming in untouched. I’ve never seen anything like it.
Anyway, I wish I was a Green Bay fan or a San Francisco Giant fan in baseball because being an Eagle fan or a Mets fan is just painful, very painful. But my Kansas Jayhawks start the season, too, and I can’t wait, and they are ranked in the top five, should have a pretty big year. So that’s it for me, guys. I will see you in seven days. Take care.
Female: The information presented on S&A Investor Radio is the opinion of its hosts and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility.
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