A subscriber reprieve of sorts

A subscriber reprieve of sorts... Fine wines... GM spared, for now... Buffett makes 100% on a deal gone "bad"... Ferris in Barron's... Holy cow, we have a new high... Nothing but "lies"... A lesson in bankruptcy... How to make 720% selling puts...

You'll get a break, of sorts, over the holidays. There won't be any new ranting from us here at The Digest. But don't worry. We're not going to leave you completely alone. We will publish a series of "greatest hits" from past Digests starting next Monday, December 22, through January 2. We'll resume our regular diatribes on Monday, January 5.

While virtually every stock fund is down over the past year, funds that invest in fine wines are smashing the market. The Vinum Fine Wine Fund in Guernsey – which buys rare bottles like Petrus and Chateau Margaux – climbed 12% in September, another 15% in October, and 2% in November. Investors buy shares in the fund, which are backed by physical bottles. These funds have seen a huge increase in interest as investors look for "things they can touch," according to one hedge-fund adviser.

Our advice? We believe nearly all of the older vintages are fakes. (Read Billionaire's Vinegar.) If you're going to invest in wines, buy the highest quality you can afford directly from the vintners. And the best way to pick wines, like stocks, is to specialize. Pick your region and stick with it.

Merry Christmas to the automakers... President Bush today agreed to a $17.4 billion bailout for GM and Chrysler. The White House will make $13.4 billion available this month, with GM receiving $9.4 billion and Chrysler getting $4 billion. As part of the deal, Bush said the companies must come up with a business plan for survival within three months. If not, GM and Chrysler must repay the debts – which should surely push them into bankruptcy. As expected, the latest bailout spurred Hank Paulson to request the next $350 billion of TARP money. The bond market, at least, is convinced GM will still go bankrupt. Here's how its bonds with January 2011 maturity dates have been trading – still below 20 cents on the dollar:

Source: FINRA

Even when Warren Buffett loses, he wins. In September, Buffett-owned MidAmerican Energy agreed to buy Baltimore-based Constellation Energy and inject $1 billion to keep the company from folding. Wednesday, Constellation turned down Buffett's offer to accept a $4.5 billion bid from French power company Electricite de France for 50% of Constellation's nuclear-generation assets.

Sure, Buffett didn't get the investment he wanted, but he turned his $1 billion investment into $2.1 billion in just three months. For breaking the deal, Constellation will pay MidAmerican $600 million in cash and hand over 9.9% of the company valued at $530 million. In addition, Constellation will give MidAmerican a $1 billion note earning 14% a year that matures at the end of 2009.

Kudos to Dan Ferris. He was quoted in Barron's lead story today, Microsoft: Like a Utility Stock. Dan has long been bullish on Microsoft. The company is a basic monopoly with enormous free cash flows and $21 billion in cash. Despite its strong foundations, the stock is down some 46% this year. Below is an excerpt from the article:

As explained in a recent issue of the Extreme Value newsletter, Microsoft could spend its cash, take out a loan for the other $160 billion worth of stock, and still have enough free cash flow to pay billions in dividends even after paying interest charges.

That's merely an intellectual exercise, but it shows the enormous scope of Microsoft's fiscal flexibility in a time of extreme capital scarcity.

"To have a company of this caliber be cheap enough to buy itself is a rare occurrence," says Dan Ferris, editor of Extreme Value.

New highs: At long last... Extreme Value pick W.R. Berkley (WRB).

Don't forget to send us a note or two over the holidays: feedback@stansberryresearch.com.

"Porter – your subscribers can now officially disbelieve any claims made in your endless marketing materials. When you were pimping your 'Put Strategy' the headlines blatantly said 'America's Next Major Bankruptcy Happens this FRIDAY at Midnight'. It didn't say 'could happen', 'may happen', or 'might happen'. It said 'that's when one of America's biggest businesses will undoubtedly declare bankruptcy.' Didn't happen. Not only did the company (GGP) not declare bankruptcy, they got an extension on their debt and their stock is up. You flat-out lied in your story – led new subscribers like me to believe you knew something was sure to happen. Your copy guaranteed it, claiming this bankruptcy event would trigger a rash of declines in other REITS, including the one you urged us to sell puts on. Thanks to your misleading information our puts have declined substantially in value. Your credibility is shot. Either you blatantly lied just to get new subscribers – or you failed to adequately research GGP's possibilities... As for me, I'll never believe your hype again." – Paid-up subscriber Larry Herbst

Porter comment: I'm relieved that you don't have confidence in me anymore, Larry. In fact, I humbly suggest you ought to be a tad bit more skeptical in general. I'm not a fortuneteller or seer. I hope I didn't come across that way. I make honest, well-reasoned predictions about the future, but I can't tell you exactly how every small detail will unravel. It's like Yogi Berra says: "Predictions are tough, especially about the future."

In this case, GGP did in fact default on its $900 million in bonds on Friday. That's why its bonds are now trading at 30 cents on the dollar. The banks didn't force the issue (though Citigroup didn't relent until the following Wednesday) because they're afraid of how little they can collect on these debts. They're looking at 70% losses.

So technically, GGP did not go bankrupt. But that's like saying you didn't win the race when the other guy didn't show up. The banks don't want to foreclose because they don't want to face the reality of the commercial real estate market. They're hoping and praying that conditions magically improve next year. In the meantime, no one is going to refinance commercial real estate debt. And without additional credit, lots of commercial real estate companies are in big trouble, including the firm we've recommending buying a put option on.

By the way, it might interest you to know the other company's bonds are now trading for less than 50 cents on the dollar, close to where GGP's bonds are trading. GGP's shareholders seem to recognize the jeopardy they're in (GGP is trading for around $1.50). Meanwhile, the other company's stock is still trading near $20. So either its bondholders – mostly institutional investors – are criminally negligent or the people who own the stock – mostly individual investors – are about to learn a painful lesson about who comes first in bankruptcy.

Am I allowed to make a prediction about what will happen, Larry? The shareholders are going to get killed.

"I'm a new subscriber to your Put Strategy Report. I like it and bought a Put on [the company discussed above]. I see I'm up a little... Regarding the selling of Puts, my broker, Scottrade, will not accept orders for selling of Puts which puts me in a dilemma. I either cancel your subscription with you, have a showdown with him, or change brokers – which for several reasons would be difficult. I would appreciate your input." – Paid-up subscriber Ron Dickinson

Porter comment: I would at least call a few other brokers set up to work with options – like TradeKing, E*Trade, or Interactive Brokers. It's worth the hassle because using a 20% margin to sell naked puts can be incredibly lucrative. For example, last month we sold December $10 puts on Starbucks for $1.20. These puts will expire today either right at $10 or very close. Thus, we'll keep all, or almost all, of the premium we received. If you were using 20% margin, you put up $200 to make this trade. And you made $120 in one month. That's a 60% return in one month. On an annualized basis, that's something like 720% a year.

It doesn't take a rocket scientist to figure out that even if you're only putting a modest amount of capital to work in a trading program like this, and even if our average results are only half this good, you can make a lot of money selling naked options with a margin account. If that's simply not possible for you for whatever reason, you can always simply do covered calls on my recommendations. Covered calls have exactly the same risk-to-reward profile as selling puts. The only difference is you have to put up all of the money to do the trade. So in the case of our Starbucks recommendation, you would have had to buy $1,000 worth of stock to earn the $120 in call premium. Your ROI would been "only" 12% in a month, not 60%. But making 12% in a month is nothing to sneeze at.

"I don't know where you get off saying no one pays attention to you, I'm sure there are a few of us out here that invest with your suggestions. We have bought our gold and silver, paid off our mortgage's, cut up the credit cards, invested in farm land and timber and are buying market dominators at the present time. All with out listening to you...? Get real, just cuz you don't want to be 'the voice' don't belittle yourself... You have many of us that have listened for years." – Paid-up subscriber William

Porter comment: Thank you, William. I do my best.

Until next year... Have a safe and happy holiday.

Regards,

Porter Stansberry

Baltimore, Maryland

December 19, 2008

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