Motley Fool Hidden Gems Investing - Motley Fool Money: 05.22.2009

Episode Date: May 22, 2009

Uncle Sam seizes and sells Florida’s BankUnited. The dollar continues its decline. And the SEC takes a closer look at just how, exactly, Bernie made off with billions. In this week’s Motley Fool Money we tackle those questions, discuss whether U.S. stocks really are cheap, air some beefs, and offer up three stock ideas.  Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Hartigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie... Do you want to step up the ladder? I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren.

Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. Welcome to Motley Fool Money. I'm Chris Hill, and I'm joined by Motley Fool Senior Analyst James Early, Tim Hanson, and Shannon Zimmerman. Guys, happy Friday. Happy Friday to you, Chris.

Wow, that was almost in unison there. That was nice. We practiced it. All right, we've got a lot to get through this week, including a big bank seizure, the falling dollar, and the latest twist in the Bernie Madoff saga. So we'll talk about all that, share three stock ideas, and air a few beefs.

Shannon, let's kick things off with you. This week, the FDIC seized Florida's Bank United and sold it to a group of investors who agreed to inject $900 million into the new bank. Bank United has around $13 billion worth of assets, so we're not talking about chump change here, but I've got to ask, why should investors care about this? Well, so they have about $13 billion in assets and then another almost $9 billion in deposits, and I think they should care about it because it could be, or at least maybe it should be, the shape of things to come. We finally had a real stress test as opposed to the mock exams that were out a couple of weeks ago. So basically what you have is the largest regional bank in Florida failing, and there is some good news. I guess you could look at this and compare it to IndyMac, the largest bank failure that the FDIC had participated in, and say, well, you know, it took them five months to find a buyer for IndyMac. They had a buyer almost immediately, well, really immediately, for Bank United.

So that could be good news because private investors are willing to step up to the plate and say, hey, you know, I'm willing to put something at risk for this troubled bank in anticipation of profits. But the price had to be right. And the FDIC was definitely in Monty Hall or Howie Mandel mode. And they were wheeling and dealing. And basically, if you take a look at the book value of Bank United and compare it to what the investors had to put in, they're paying less than a nickel on a dollar of book value. So, if that is the shape of things to come in terms of other banks that have, as this bank does, substantial exposure to the subprime market, investors should be, in financial stocks in particular, quite concerned.

Well, not just the subprime market, but the non-resident alien subprime market. I was going to leave that to you. I was a little shocked. I read in the article that Bank United specializes in making loans to non-resident aliens who want to own property in Florida. So these are largely Latin Americans who decided they wanted a vacation home in Miami. So not only did they see the vacation home value plummet, and then maybe their own economy suffered, but then they had their own home currency drop 50% against the dollar. So now they're underwater on the loan.

They're underwater another 50% on the currencies. And they're 2,000 miles away. How is anybody going to go get this money back from these guys? You don't want to be a loan officer for Bank United? I think you're in trouble. Well, maybe they'll probably sell to some sort of strongman to go down there and look into it. But I would say the likelihood of any of these things getting back is low. And a broader point is that if you're listening in Dubuque or in Boise or someplace thinking,

oh, I'm not in Florida, what do I care? Well, maybe you should care because the lesson learned here is real estate is going to burn these small banks. We had the big banks have all their garbage aired, and that's over with. But a lot of the smaller banks, the community banks, the state banks, are exposed to commercial and residential real estate, and that's going to be the next shoe to fall, especially the commercial real estate. So you might want to check your 10-Ks on those. Well, James, let me ask you a question as a follow-up to that. So, there's still this issue of the bigger banks having toxic assets as well, and the public-private partnership, which I beefed about and will beef again this week.

Nice. Beef is a verb now? On this podcast, yes. Absolutely. Is this a test case for what might happen there? So, there's a kind of public-private partnership that's happening with the FDIC taking a substantial part of the risk out of the equation in the same way that the federal government will for the bigger banks. Is this maybe the shape of things to come? I think so. You know, to be honest, I read about the public-private partnership, and I sort of understand it, but then again, I don't.

I mean, it's a weird thing. It requires sort of a self-inflicted gunshot wound from banks in order to get medical help. So, you know, I'm not sure how that's going to play out. But, yeah, I mean, I think in terms of proportions, the magnitude, I mean, hopefully this is more severe than we'll see there. But it's not a good start. Well, you know, at the end of the day, the only thing that matters is the assets on the books, right? I mean, you know, if you've got outstanding loans to people 2,000 miles away who have no chance of paying,

I mean, it's going to end up costing the taxpayer a lot of money, regardless of whether it's a public-private partnership or, you know, regardless of what the plan is. There's really no upside or limited upside. Just one final question. You had said that this could be a sign of things to come. I mean, is it because the FDIC basically just made this so available and so easy for a buyer to step in? I think so. I think that the deal was too good to resist.

Now, the investor group, it was a three-headed monster. It was a pretty savvy group of guys. Smart guys. And at least one of the representatives, his organization had been looking at this bank for over a year and wanted to wait until the valuation was rock bottom. well, given what they paid relative to what they're getting, you know, if they managed the bank, the deposits part of it correctly, this is a cash cow for them with virtually no risk. Okay, James, it was a rough week for my favorite piece of paper, the U.S. dollar. Treasury Secretary Tim Geithner made positive comments about the economy, and the dollar fell.

Standard & Poor's threatened to cut Britain's credit rating, and the dollar fell. So my question to you is, other than it sounds just like an inherently good thing to have a strong dollar, Why should investors – what does it mean for investors that the dollar is falling? First of all, it is kind of funny that we can't win for trying. I mean, good news is bad news, and bad news is bad news. I think we had two things happen. First was a flight away from safety when Tim Geithner said things are doing better than we thought. You know, people thought, okay, it's good for the global economy.

We don't need to huddle as close to the quality, i.e., the dollar, as we have before. Then again, Standard & Poor's got nasty with the U.K., putting them on a negative credit watch, and the implication is they might do something similar for the U.S. So the question is, is the U.S.'s quality as we thought? Yeah, so we've got those two forces, but they are what they are. So if you're an investor, I think the key point is to look at the exposure in your companies. If you have a company that exports a lot, that gets more of its revenue from outside the U.S. than from inside the U.S., you actually want a weak dollar because it's going to mean more sales for that company.

And when those foreign currencies come over and they translate back into dollars, they're going to convert into proportionately more dollars. So that's good. It's less good for just plain old domestic companies. It's less good for the U.S. in general. Although it does make it to the extent that it makes domestic goods more attractive, it makes imports less attractive. So there's at least a marginal impact on the domestic side as well.

Yeah, forced savings. Right. I was going to say, the weak dollar, the dollar could probably stand a week in a little bit. Absolutely. And no one should really be concerned about that. It's strengthened enormously over the past six months as people fled other currencies for safety, as James said. And as people re-evaluate their risk tolerance, the dollar should fall quite a bit and makes it more expensive to go travel in Europe. But a lot of benefits, as you guys pointed out.

Yeah, I think I'm the podcast resident conspiracy theorist, but I think this is all orchestrated. Everything that seems like a gap or a rhetorical pratfall on Geithner's part, it's part of a grand master plan. Boy genius, Tim Geithner. I was just going to say, so he's like the Peter Sellers character in Being There. He's just – So bad he's good. It's so beautifully choreographed, it looks like chaos. All right, moving on.

Profound. Tim, let's talk about Bernie Madoff. The Wall Street Journal is reporting that the SEC is investigating some of Madoff's clients, clients who allegedly told Madoff how much in returns they wanted. So does that mean that we actually had a bunch of people driving the getaway car? What is your take on this? I think this is fascinating because I got to thinking about this while I was watching The Negotiator on Bravo a couple nights ago. How deep does this conspiracy go?

Because a lot of these Madoff clients. This is Sam Jackson. Bravo's come a long way. Turned into a pretty solid network, yes. All-star cast. These were savvy investors for the most part, Kevin Bacon aside. But these were generally savvy investors at the Madoff Fund. And you figure over this 15, 20-year charade, someone somewhere got a little suspicious about these returns that were coming in,

maybe went to Bernie Madoff and said, you know, what's going on? And at that point, like any great criminal kingpin does, maybe he cut him in on the deal. And instead of ratting out Madoff or his fraud, they, you know, if not took part in it, were implicit in it or complicit in it. And I think it's fascinating to see how deep this goes because it's starting to look like it goes pretty deep. And I should just say, the word allegedly should just be spread out. We should open and close the podcast with that word. Exactly, particularly with this word. Rampant speculation, though, is entertaining.

But that's really what the SEC is looking into. So here's what I don't understand. I mean, if I'm an investor and I suspect a Ponzi scheme is going on, presumably I'm going to want to withdraw my money. So it would appear to me that these guys had to think that maybe it wasn't so much a Ponzi scheme, but he had some sort of dirty scam going on that was still profiting illicitly. Well, you know, some of these guys, if you look at the withdrawal records out of the Madoff Fund, there's some very interesting withdrawals.

I mean, there are certain people who withdrew every year. Right. And maybe that was just their policy, or maybe they were told to be withdrawing every year, and there are other people who let it roll for the whole 15, 20 years and were entirely wiped out. So Kevin Bacon had all the money, yeah. My understanding is that Keira Sedgwick actually runs the family finances. You know, with those footloose royalties, right? Well, she plays that tough cop, right?

Yeah. Whatever that show is. Is that on Bravo, too? No, it's on TNT. The Closer. The Closer. Oh, that's right. She's the drunk, right?

She doesn't play an investor. No, wait, that's Holly Hunter. I've got it all confused. You're getting all of these tough women cops. It's a big mashup. All right. All right, let's move on. It's time for What's Your Beef?

Time to go off on a stock, a person, a company, a concept. And Shannon, we'll start with you. Is the cow louder this week than it's been in the past? It's a loud cow. Sorry. Sorry. Well, my beef, I'm going to re-beef about the public-private partnership. Complained last week that there appeared to be some kind of news blackout.

Well, apparently our podcast has subscribers at Treasury because, lo and behold, Geithner's been talking about it again. And it turns out... Talking about the podcast? No. Perhaps. The right cocktail party. Who isn't talking about the podcast?

Here's what I'm worried about. I'm worried that if Tim Geithner starts talking about our podcast publicly, that our numbers are going to go down. But our exports will be, you know, that much more attractive. Exactly. What was I saying? Can I get the cow again? Public-private beef. Public-private beef.

Oh, that's right. Reheat the whole beef. Good. Okay, good. That's the reset button for me. So they are now talking about it. It turns out that they are claiming now that it's going to be about six weeks before the program is fully up and running and that they have had 100, count them, 100 fund managers to express interest in participating in

the program. A, it's a bit of a surprise to me that it's taken this long and will take a month and a half more before the program is really fully implemented and you can sort of vet whether or not it's working in the way that they claim it will. And then who knows what the yield is going to be on those 100 interest expressors. I would imagine it's not going to be that high. And again, to circle back around to where we started, if what happened with the Regional Bank of Florida is any indication. There's still that yawning chasm that exists between toxic assets, what investors are willing to pay. That problem is never going to go away, not even with the deal sweeteners that the Treasury public-private partnership plan is dangling in front of investors.

James? Chris, I've beefed about China in the past, and here I am to beef about it again. I mean, I'll caveat this. As I said the other week, I love China. It's my go-to source for pharmaceuticals, pirated DVDs, and baby food, things like that. Oh, my God. I know, I know, it's slow. But there's two things that I noticed here. I'm trying to get a Chinese visa, James, so we can tone this down a little bit.

I don't know how far this podcast goes. Clean it up in post. China wants developed countries to adhere to very specific emissions control requirements while developing countries can kind of play it by ear. And presumably this is just an opening gambit on their part, but come on, I think that's a little bit cheesy. And not that the U.S. is any saint in this regard. I think we all need to be in this together, China and the U.S. included. Second beef, China and Brazil are trying to buddy up to create an alternative currency to the U.S. dollar.

Now, I'm a patriot and an American, et cetera, so it kind of bothers me. And much as I don't like the idea, I can sort of understand the idea of wanting something other than the dollar. But China, I mean, their currency is kind of a joke. I mean, they don't free float it. It's not a real currency. I don't see how it's going to gain any sort of real credibility. I was going to say, Putin suggested not too long ago that the ruble become an alternative to the dollar, which prompted laughing worldwide.

All right, Tim, what's your beef? My beef is with the implication that I've seen in the papers recently that U.S. stocks remain really cheap. And while that's true, if you compare them against sort of where they were in 1999, if you actually look at where U.S. stocks are today versus every other country's stocks, U.S. stocks are pretty darn expensive. They're trading about nine times EBITDA. And if you're willing to go to India or Japan or down to – if you're willing to really risk it and go down to South Africa and hang out with new president Jacob Zuma, who's an interesting character in himself. With a couple of wives.

More than a couple. Alleged. Allegedly. You can get South Africa companies that are selling for six times EBITDA, India eight. So if you're buying U.S. stocks right now under the presumption that they're cheap, you might want to look at some other countries. All right. as we head into a short trading week with Memorial Day weekend. Shannon, give me a minute.

Don't say short. One stock on your radar. It's Chesapeake Energy, ticker CHK. Been doing some work this week with the Fool's resident natural gas expert, Michael Olson. Looking at an entry that's been beaten down hard over the last 12 months. It has been ticking up so far this year, both in terms of the commodity price and some of the companies that specialize in it. But still a long way to go relative to how beaten down Chesapeake in particular looks.

Right now, natural gas is trading below the cost of new production. So that's an imbalance that will be addressed either through supply reductions or as the economy heats up, demand heating up as well. So either way you look at it, there's some simple math that argues that that's an industry to be focused on right now. And I think that as you look at the players, Chesapeake Energy strikes a very attractive profile. All right, James? Chris, if you've had enough fun and want something kind of boring and stable, my stock is you. I'm having way too much fun. Is Florida Power and Light, or now FPL.

They wanted to go by the abbreviation because it sounds cool. Nobody wants to be associated with Florida anymore. Exactly. So this is a $22 billion market cap utility. I like it because it combines two worlds. One is good old boy southern utility with favorable regulatory relations, favorable demographic growth. But they're also a leader in wind power, which I think is actually pretty cool. We have wind farms all up and down the East Coast, including West Virginia, where I go to, to ski and hike and rock climb a lot.

So these are some pretty huge things. And they're not, you know, it's not a big force yet, but I do like it. So FPL. All right, Tim. Well, this isn't a stock that's for everybody. But if you believe that emerging frontier economies are cheap today, but you want to find a sort of stable way to play them, I think there's no better stock out there than Philip Morris International. And it's just, you know, they're selling cigarettes at different price points pretty much everywhere except the United States.

We're not talking about Altria. No, no. This is the spinoff Altria had a while back. Just the cigarette assets outside the United States. So these are Eastern Europe, China, Indonesia, Mexico, the rest of Latin America. Just a powerhouse company, huge balance sheet, massive cash flows, real growth opportunities in these countries. But you get the benefit of a big company in very exciting places. James Early, Tim Hanson, Shannon Zimmerman.

Guys, thanks for being here. Sure thing, Chris. Thanks, Chris. Thanks for listening to this edition of Motley Fool Money. You can check out past episodes at MotleyFoolMoney.com. As always, people on the program may have interest in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. Do your homework and make your own decisions. And remember, the conversation continues 24-7 at Fool.com. I'm Chris Hill. We'll see you next time.

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