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Porter Stansberry

@porterstansb

Apr 24

Philip Morris ($PM) has created more profits for investors than any other company in the history of capitalism. Most people know why the company is doing so well now - Zyn - but they don't understand how $PM works.
Let me show you. 🧵👇

$PM has been one of my research company's top three picks since September of 2022. It's up over 100% in our portfolio; it's up over 70% year over year; it's up 40%+ year to date. Today it reported shipments of Zyn rose 53% (!) year-over-year as it expanded capacity.

Revs are up 5.8% and profits rose 16%, to $3.5 billion in the 1Q. $PM is transforming from a tobacco company in secular decline, to a nicotine branding business that's growing fast. That's why the company is doing well, but it's not how. And the how is incredible...

Read 13 tweets

Porter Stansberry

@porterstansb

Apr 8

Someone should ask Trump if he remembers the Irish Potato Famine. A 🧵to explain the dark side of tariffs. 👇

In 1845 roughly 1m Irish peasants died because their main domestic food source, the potato, was wiped out by phytophthora infestans, an algae that causes potatoes to rot and die. While the immediate cause of the famine was a pathogen, that's not why a milllion people died.

The famine was caused by tariffs. Irish peasants worked on British estates. Their wealthy owners ensured high prices for their crops with "Corn Laws" (tariffs) to restrict importing grains, while selling their production overseas. How'd that happen? See if this sounds familiar...

Read 22 tweets

Porter Stansberry

@porterstansb

Feb 25

@WarrenBuffett should retire and Berkshire must be restructured. A 🧵

You'll recall in Buffett's legendary speech about the SuperInvestors of Graham-and-Doddsville that, despite buying different companies, all of the value investors outperformed the market by a wide margin.

The SuperInvestors had a real edge: they had both informational advantages and a better mental model. And so, on average, they beat the market easily. Warren Buffett was the best of this generation of investors and, for decades, he too beat the market easily. But lately?

Since the GFC in 2008, Berkshire has made six major acquisitions: Precision Cast Parts ($32.7B), BNSF ($26.5B), Pilot Flying J ($14B), H.J. Heinz ($12.1B), Dominion Energy ($9.7B), and Lubrizol ($9.2B). Total initial invested capital: $104B

Read 14 tweets

Porter Stansberry

@porterstansb

Feb 21

Tomorrow is @WarrenBuffett Day -- my fav day of the year. To prep for tomorrow I'll tell you 2 things Buffett won't tell you in his letter, even though he should. First, I'll show you why his energy investments have been a catastrophe. And Second, I'll show you how to fix Berkshire. A 🧵

The free ride is over. As I first warned in a series of essays in 2018, Berkshire Hathaway is going to underperform the market going forward. Buffett underperformed in 2019 and in 2020. He underperformed in 2023, and I’m virtually certain he underperformed again last year. Why?

Buffett has wasted a HUGE amount of capital in energy investments. This started in 2000 with Buffett's $4.3 billion acquisition of MidAmerican Energy. Today that's called Berkshire Hathaway Energy (“BHE”).

Read 25 tweets

Porter Stansberry

@porterstansb

Oct 22, 2024

“Everyone has a plan until they get punched in the face”

That’s the situation Jerome Powell finds himself in, with the bond market punching back against the Fed’s best laid plans to lower borrowing costs

Following Powell’s move to cut overnight interest rates by 50 basis points on September 18, yields on long duration bonds like 10-year U.S. Treasuries have run screaming in the opposite direction - spiking by 50 basis points instead

This wasn’t supposed to happen…

In normal environments, when the Fed is in sync with the market, long-term borrowing costs follow the path of the overnight lending rates set by the Fed. But when the Fed makes a policy error – like cutting rates ahead of a Presidential election, even with inflation running hot – the market fights back

We’ve seen this movie before, and spoiler alert: it doesn’t end well

In 1971, despite inflation running at over 4%, Fed Chair Arthur Burns cut interest rates to boost Tricky Dick Nixon’s political prospects ahead of the 1972 Presidential election

By cutting rates with inflation running hot, the Fed allowed price pressures to become entrenched in the U.S. economy. American workers grew fearful of continued price increases cutting into their wages, and began demanding ever-higher pay increases

This fueled a self-reinforcing wage-price spiral that unleashed a decade of double-digit inflation, crippling interest rates and stagnant economic growth: a toxic brew known as “stagflation”

It took the Volcker Fed bringing overnight interest rates to 20% to finally quell inflation in the early 1980s

But in the interim, U.S. investors suffered a lost decade of negative inflation-adjusted returns in both stocks and bonds. The S&P 500 index ended 1979 at the price level as 1968… and after accounting for the rampant inflation that pushed prices up by over 50%, stock investors lost half of their money in inflation-adjusted (real) terms

Bond investors didn’t fare much better, with the 10-year Treasury logging losses of 3% per year after adjusting for inflation, or a roughly 30% loss in purchasing power over the decade

It was the worst decade of investor returns since the Great Depression.

In this thread, I'll explain why all signs indicate a repeat performance ahead 👇

Unlike stocks, which can often temporarily economic gravity during periods of rampant enthusiasm (like today), the bond market is a much tougher customer. For the fixed income investors, inflation is enemy number one - the silent thief that can transform positive nominal rates into a negative real (inflation-adjusted) return

By prematurely lowering short-term interest rates before taming consumer prices, Jerome Powell is repeating the fatal mistakes of the Arthur Burns Fed, and stoking fears of entrenched inflation

Bond investors remember the 1970s. And the growing fears of persistent inflation crushing their real returns mean they are now demanding a larger margin of safety, sending borrowing costs shooting on the long end of the curve, like the 10-year Treasury rate

The 10-year U.S. Treasury is one of the world’s most important lending benchmarks, which determines borrowing costs for a wide range of consumer and business loans throughout the global economy. This includes things like the standard 30-year U.S. mortgage rate, where yields were dragged higher in kind with the 10-year Treasury, spiking by 50 basis points in the wake of Powell's recent rate cut

This is a big problem because higher borrowing costs, paradoxically, contribute further to inflation. This is particularly true in the housing market, where higher mortgage rates feed directly into a higher cost of home ownership.

The average monthly payment to own the average-priced U.S. home is now $2,215. This means it now requires an annual household income of $106,000 to own the average home in America, up from $59,000 just four years ago in 2020

Unsurprisingly, shelter costs were one of the biggest gainers in the September inflation report, spiking by 4.9% year-on-year and running well ahead of headline inflation at 3.3%

Meanwhile, the Fed’s rate cutting campaign - which was supposed to support U.S. economic growth - is also backfiring. Instead of lowering borrowing costs and encouraging more lending, higher long-term rates in the real economy are doing the opposite.

We can see this in the fact that new mortgage applications just fell off a cliff, down 17% in the latest weekly data. Mortgage re-financings fell even harder, down a whopping 26% in last week’s numbers.

Higher borrowing costs aren’t the only factor contributing to sticky inflation. Insurance is another major culprit, where costs are rising across the board at rates well above the headline CPI

Insurance is a major cost of living for virtually every American adult, and one that’s often legally mandated. Just try filing your taxes without reporting medical insurance, getting a mortgage without homeowners insurance, or driving a car without an auto policy

Insurance companies took a major profit hit from the initial wave of post-pandemic inflation. That’s because they had priced their previous policies based on historical inflation rates of 1-2%. As a result, they were left nursing large losses on these policies when sky-high inflation sent their claims spiking well above their estimates

Now, insurance companies are exacting their pound of flesh from policyholders

Over the past couple of years, as old policies expired, insurers made up for lost ground with significant price hikes on new policies. Consider employer-sponsored health insurance plans, which are on pace for a 7% increase in costs for the second straight year - or roughly twice the rate of current CPI inflation. This is the fastest rate of cost increases in over a decade, and has added $3,000 to the average family health insurance premium in the last two years alone

Meanwhile, premiums for home and auto insurance policies are each increasing at double-digit rates, as anyone who recently renewed their policies knows all too well. And with two back-to-back devastating hurricanes that are expected to generate outsized losses for insurers, the industry will be raising rates further to recoup these losses

These and other sticky costs are the reason why - even after stripping out things like volatile food and energy prices - the Fed’s various measures of “core inflation” have all remained stubbornly stuck above 3% for the last 43 months following the CPI’s last sub-2% inflation reading. And if you analyze the median price in the CPI basket, inflation has remained stubbornly stuck around 4%

Notably, this was the same floor on inflation that the Fed was unable to breach during the 1970s stagflation:

Read 6 tweets

Porter Stansberry

@porterstansb

Oct 19, 2024

Here's the quiet part out loud. With 10-year yields at 4.08%, the losses on "Held to Maturity" securities at America's largest banks are going to have dramatically worse prices, leading to big losses that, thanks to ridiculous accounting rules, they are allowed to hide. So, who's hiding the most?

We know there's a direct and inverse link between the value of these roughly $2 trillion in securities and the 10-year Treasury yield because the Fed itself (!) conducted the correlation study, which I cited in an earlier thread.

The losses I estimate below are based on today's yields. However, if (as I believe is inevitable) we see yields pushing higher, especially if / when they reach the 4.5% range, the losses on these banks "Held to Maturity" or HTM portfolios could easily lead to more bank runs and failures, like occured at Silicon Valley Bank and First Republic.

Read 9 tweets

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