Your roving Whiskey reporter just came back from the Big Apple last week after a short afternoon's jaunt to the Japan Society. Lest you think I'm going to tell you to invest in kimono (like carry trade sweethearts did a few years back), don't be fooled.
Here's an exclusive peek at the portfolio holdings of John The Man Who Made Too Much Paulson. In case you missed it, this shrewd investor (no relation to Hanky Panky Paulson) made the bet of a lifetime against subprimes. His take-home pay netted out to $3-4 billion. While other funds were collapsing, 2007 handed his fund a total gain of $13 billion. So you'd expect this contrarian has something to say - because nothing cements guru status like a big win...
But is he really a contrarian? In part, he's walking in lock step with the gangster-banksters and paper addicts. But that could be a fine bet, given that the most powerful geek on the planet Ben Shalom Bernanke is on Dec. 28's Time magazine cover.
While I'm sure John Paulson agrees 100% with Paul Volker that America needs to produce more and finance less, it's not the bet he's willing to place dollars on.
Biggest Bet: Bank of America
Let's talk equities for a minute. Paulson is long. Longer than he's ever been in the history of his fund, which means he's doing very little hedging of his bets with shorts. Instead, he's piled into the likes of Comcast and gone non-U.S. with HeidelbergCement AG. But his largest equity bet is Bank of America.
How can this be? He sees an excellent 2012 ahead for BoA and wants to get in while it's cheap. When it comes to providing cushion against bad loans, Paulson thinks they have more than enough cash, with the worst behind BoA as of Q2 2009. When it comes to earnings, it's steady ahead. He sees per share proceeds at $2.79 in 2012. So he's calling for a 2012 share price of $27.99. You could join that bet today for around $15.20 per share.
Willing to get behind him? You may be comforted by the fact that BoA paid back TARP - including the $20 billion it got for buying bundle of trouble Merrill Lynch. How's it doing so? Some cash, but also $19.29 billion in securities are being put up for offer.
What do you get when you buy in? The biggest consumer lender in the land. And you get the largest debit card issuer. You really don't want to know how many foreclosed houses it has on the books. And when it comes to credit cards, BoA holds the dubious distinction of highest default and delinquency rate of them all: 13%.
Discover and JP Morgan Chase, ever the optimists, see these defaults peaking early next year. Any consumer trying to pay for Christmas could tell 'em different.
Here's another monkey wrench: Former dealmaker darling Ken Lewis no longer cuts the mustard after snapping up Mother Merrill. Head of consumer banking Brian Moynihan and chief risk officer Gregory Curl were racing neck and neck take the post. Moynihan just won out. Will Wall Street like him enough to merit a two-handle stock price? Anyone's guess. We'll suppose everyone's happy that croniedom evades the influence of Congress and the Treasury.
But don't take my word for it; try Dan Amoss', head of Strategic Short Report. He read my notes and ranted away. He's got a pretty stiff case against BoA, and I added to the arsenal.
3 Reasons Paulson Should Get Stuffed
1. Beware What Bearish Treasuries Can Do
Nobody talks about how a bear market in Treasuries could tank the banks. But a bearish Treasury outlook (which Paulson agreed to in his Q&A) spells hefty write-downs ahead for its held-to-maturity securities portfolio.
2. Don't Underestimate the Damage of Countrywide
Don't forget those festering Countrywide-vintage mortgages, second liens, and credit cards. The government's Making Home Affordable program isn't making a dent, and it'll only delay the inevitable. Only 160,000 out of 1 million of BoA's borrowers who were potentially eligible have so far qualified. The rest? Just treading water that may well swell over their heads any quarter now. About 48,000 Bank of America borrowers are among those at risk of losing their loan modifications by the end of the year. The foreclosure backlog of around 7 million should re-accelerate in 2010.
3.Who Will the Fed Sell Mortgage-Backed Securities To?
The government's quantitative easing campaign helped banks write mortgage-backed securities back up. But when the government tries to sell and no buyers come forth...time for re-write-downs.
But here's the thing, while Paulson may not be using shorts to protect his fund, he's found a better vehicle to short the entire stock market. You can bet Paulson knows that Bernanke is no Volker. He's already made 28% on his anti-Fed bet since Oct. 31.
A Paulson Position YOU Can Get Behind
Paulson showed us beautiful slides about money supply, inflation, and gold price. One after the other focused down on the rough-and-tumble economic years 1971-1974, when gold started to do great things. Here's the easy pattern to remember: When the money supply shoots up, inflation follows up about two years later. Don't think I have to tell you that when inflation grows, gold gains, but here's the proof: Gold gained 67% and 72% in 1973-1974, respectively.
And Paulson's put his money where his slides shine. Our monetary base has shot up 135% since Lehman Bros. failed, so he sees inflation ahead. And he's starting a new gold fund come January 2010 to profit.