Don't Make This $100,000 Mistake

By Mike DiBiase

Saturday, November 21, 2020

Editor’s note: Today, we’re sharing a warning from our friend Mike DiBiase, lead editor of Stansberry Research’s distressed-debt newsletter, Stansberry’s Credit Opportunities.

Mike joined Stansberry Research after nearly two decades in the world of finance and accounting. He’s an expert at analyzing vast amounts of data and understands complex accounting issues and how to read and interpret SEC documents better than almost anyone we know.

In today’s essay, Mike notes that the pandemic has caused cracks to appear in major U.S. corporations… And the longer that these companies struggle to cope with the current economic climate, the worse things will get.

But as Mike explains, you can take advantage of this setup to make huge – and safe – returns. Read on for the full story…

With just one mistake, Dennis Buchholtz lost a quarter of his life savings.

Today, I want to share Dennis’ unfortunate story with you.

That’s because many honest and hardworking folks just like Dennis are about to make the exact same mistake again right now.

But the good news is, you can avoid it.

By learning about Dennis, I hope you’ll never fall into this trap. And I believe this essay will serve as a timely warning for everyday investors like yourself in the coming months.

For more than 30 years, Dennis worked as a diemaker in the auto industry. He spent countless days and weeks turning sheet metal into fenders, roofs, and hoods. Finally, in 2005, Dennis retired to spend more time with his wife, Judy. Although he didn’t have any pension or retirement plan, he managed to save about $400,000 in his life.

Like everyone, Dennis wanted to find a safe way to earn income in retirement. And after spending decades in the industry, Dennis believed the biggest automakers would always survive… no matter what happened in the world. So he put about $100,000 of his savings into a “safe” bond from the largest automaker at the time – General Motors (GM).

Every year, the retired couple received around $7,000 in interest from the bond. They used the income to pay their property taxes and utility bills, as well as for groceries.

At the time, after more than a century in business, GM was one of the most important U.S. industrial companies. On the surface, it seemed like a safe investment to Dennis.

But in reality, it was a highly speculative bet on a company with a massive debt load that it could never repay.

I’m certain that Dennis didn’t spend a single minute studying GM’s financial statements before making his big bond purchase. If he had, he might’ve wondered how the company planned to pay back $455 billion in liabilities when it stopped making profits in 2005.

At the time, it was easy for average investors to make mistakes like this. Stocks were rising, and banks were lending. And that’s simply not the kind of deep analysis that most investors do when times are good and credit is flowing.

Back in January 2007, Stansberry Research founder Porter Stansberry first started warning folks about GM’s dangerous financial situation. At the time, no one thought GM would go bankrupt – no one, that is, except Porter. As he put it very clearly in the Stansberry Digest e-letter on January 11, 2007, “GM is already bankrupt… shareholders just haven’t realized it yet.”

Porter noted that GM’s total debt had doubled over the previous 10 years as its market share and profits plummeted. Said another way, for roughly a decade, the company had been burning the family furniture just to keep the furnace running.

Given its mounting debt and shrinking profits, Porter knew GM was running out of time. That’s why he recommended selling the stock short in the February 2007 issue of our flagship Stansberry’s Investment Advisory newsletter. In that issue, he warned subscribers that “GM will be bankrupt within three years – or perhaps sooner if the economy slows.”

Then, starting in March 2007, Porter penned a series of letters to shareholders in the Digest as the “Chairman of General Motors.” The series included everything that Porter would write if he were GM’s chairman. And unlike the overly optimistic and difficult-to-read letters from GM’s actual chairman, Porter’s versions were easy to read, entertaining, and brutally honest.

In reality, GM’s investors only needed to read the last line of Porter’s first letter on March 14, 2007…

As I hope you can understand, unless something radical happens to free us from our employee obligations, there is no way I can honestly tell you that GM will not go bankrupt.

If Dennis had read that letter when Porter originally wrote it, he could’ve sold his GM bonds and avoided nearly all of his losses. But maybe I’m giving Dennis too much credit. After all, some folks did read Porter’s warnings on GM at the time and still refused to see the dangers.

One subscriber named Herb M. mocked Porter, saying, “GM… isn’t going [bankrupt] – Uncle Sam will step in.”

Of course, we now know that Porter was exactly right. GM declared bankruptcy in June 2009, a little more than two years later. Stockholders were completely wiped out. And investors who owned the $27 billion worth of GM’s “safe” unsecured bonds – including Dennis – only got around $0.10 on the dollar of their initial investments. The massive loss wrecked Dennis’ grand retirement plans.

To be fair, Herb was partially right… Uncle Sam did step in.

The Big Three automakers – GM, Ford Motor (F), and Chrysler – were protected by lawmakers in Washington, D.C. These lawmakers would never let the automakers go out of business and shut down operations, costing thousands of jobs for everyday Americans.

But here’s the important point that most investors miss: While the government made sure GM survived, it didn’t stop the company from going bankrupt first.

President Barack Obama referred to GM’s unsecured bondholders as “profiteers” as the government then used its powers to step in front of the company’s creditors in the bankruptcy. Politicians mainly wanted to protect GM’s union employees and their massive pensions.

The government invested around $50 billion in GM to get the company through bankruptcy. And unlike Dennis and other unsecured bondholders who were mostly wiped out, the government eventually ended up recouping the vast majority of its investment.

Sadly, inexperienced investors like Dennis make this mistake all the time. These folks believe the government will protect regular investors with bailouts the same way it protects vital businesses like the Big Three automakers. But the truth is… the federal government couldn’t care less who owns GM’s stock or who’s holding its debt.

In other words, the government doesn’t have your back as an investor.

And yet, more than a decade after GM went belly-up, many investors still haven’t learned this lesson… They still believe the government will step in to save businesses and their investors. Many people are about to make the mistakes that Dennis made back in 2005.

The stock market is near an all-time high. And the bonds of the least-creditworthy companies yield just 5% today, on average. But despite the calm in the markets today, the U.S. economy and most businesses are in serious trouble. To put it simply, U.S. corporate debt has never been more burdensome than it is right now.

Nearly one in five U.S. companies can’t afford their debt.

The truth is, many companies have only been able to pay their bills during this pandemic by borrowing more money and kicking the can farther down the road. But you can’t borrow yourself out of a crisis… Even if a COVID-19 vaccine became widely available tomorrow, this debt won’t go away. Eventually, it must be repaid or refinanced.

And with lower sales and profits for many companies, the prospect of that happening is looking less likely with every passing day. For many companies, the shift to a remote and digital economy means their sales and profits will never recover to pre-pandemic levels.

In short, much of this enormous, ever-increasing pile of debt will never be repaid. The only way it will be cleared off the books is through bankruptcy. That’s why I believe a massive wave of bankruptcies is coming in the months and years ahead.

In fact, it’s already getting started… According to credit-ratings agency Standard & Poor’s (“S&P”), 124 U.S. companies have defaulted on their debt so far this year.

The default rate has steadily climbed from 3% at the start of the year to around 6% today. That means 6% of all U.S. corporate borrowers have defaulted over the past year.

But it’s going to get much worse… S&P currently predicts that the default rate will rise to 12.5% by next June. That would be the highest default rate since the Great Depression in 1932. A 12.5% default rate means that another 240 companies in the U.S. will go bankrupt over the next year.

However, I believe that’s a conservative estimate. It likely will be even worse than that, closer to S&P’s pessimistic forecast of 15.5%. A 15.5% default rate means more than 300 companies will go bankrupt over the next year.

By my estimate, a default rate of 12.5% to 15.5% will translate into somewhere between $100 billion and $250 billion in defaulted debt – and billions of dollars of credit losses for unsuspecting investors. It would be the worst period for corporate defaults that we’ve ever seen.

The good news is, you don’t have to be a victim of this coming credit collapse.

If you’re prepared, you could make a killing. And you can do it while keeping your money completely out of the stock market, using a much safer type of investment: distressed corporate bonds.

The coming wave of bankruptcies will open the door to tremendous opportunities in bonds. Not risky, expensive corporate bonds like the GM bond Dennis bought… I’m talking about safe bonds whose prices have collapsed.

When the default rate soars, investors panic and dump their bonds. When they do, it causes bond prices to collapse. Bond prices and bond yields move in opposite directions… so the cheaper the bonds get, the more they yield.

But not every company with a bond whose price collapses will default. In a crisis, investors even beat down the bond prices of companies that can easily fulfill their debt obligations.

The key to success with this strategy is knowing which bonds are safe to own. That’s where my colleague Bill McGilton and I come in. We do all the work for you. Each month, in our Stansberry’s Credit Opportunities newsletter, we tell you which distressed bonds are safe to invest in.

Bill is a former corporate lawyer. He pores through the key debt agreements of the companies we’re interested in. And I analyze whether we’ll get paid all of the interest and principal with our bonds. I’ve been analyzing financial statements for more than 25 years, including around 20 years as an auditor and corporate finance and accounting executive.

Over the past five years, we’ve put together a track record that we’re very proud of. Since launching Stansberry’s Credit Opportunities in November 2015, the average annualized return of our closed positions, including our losers, is 21.8%.

That’s more than 2.5 times the 8.6% return you would’ve earned if you had instead just invested your money in the overall high-yield corporate-bond market in that span – as measured by the iShares iBoxx High Yield Corporate Bond Fund (HYG).

As you can see, when you’re able to buy safe bonds at bargain-basement prices, you can make equity-like returns… with far less risk than investing in stocks.

The next crisis will bring some of the best opportunities of our lifetimes. I get it, though… If you’re like most folks when they first hear about bonds, you’re probably still skeptical while times are good. Fortunately, you don’t have to take my word for it…

One of our longtime subscribers came to us to share his own experiences with our corporate-bond research. I guarantee you won’t want to miss what he has to say…

Listen to his message right here. And remember, everyone who signs up today – at the lowest price we’ve ever offered for this research – will get instant access to our new report.

I hope you’ll join us for this ride… Your retirement could depend on it.


Mike DiBiase
November 21, 2020

Editor’s note: There are plenty of reasons to be bullish today. But Mike says a massive crash is coming… and it’s the biggest story in finance that no one’s paying attention to.

But you don’t have to be on the losing end. The last time something similar happened, a small group of readers saw gains as high as 772%. In fact, it helped one reader retire early at 52… and even helped his retired parents buy a condo overlooking the ocean. To start preparing right now, get the full story right here.

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.