An old friend comes to town

An old friend comes to town... You should sell REITs... Why bankruptcy and liquidation is the best option for GM... You rich bastards...

On Tuesday morning, I got an unusual call from my friend and colleague Steve Sjuggerud. "Porter, I know you just got back from Miami, but an old friend wants to see us in New York tomorrow morning... He'll be at the Intercontinental on Lexington... Yes, that old friend... Can you make it?"

Twenty-four hours later – Wednesday morning – I was walking south on Lexington Street in New York City with Steve. Just as we approached the hotel, a heavily armed motorcade, sirens blaring, blew down the street. Traffic melted. There were at least three black Suburbans filled with heavily armed men. The last truck had its rear window open. A huge man wearing a black flack jacket and Oakley sunglasses peered out at us. He was carrying the largest machine gun I've ever seen, with rounds of belted ammunition spilling out of the side. Was this really New York City? It seemed more like pictures of Baghdad.

At the hotel, security was tight. All of the doors were sealed, covered by police and tall, silent men wearing long coats and sunglasses. Only one entrance was available on the far side of the building. All bags went through an X-ray machine. Steve was frisked. Once we were inside the lobby, everything was pretty normal, except for the dozens of tall men in long coats, standing in small groups of two or three around the room. Earpieces all around. No smiles.

We had to wait about 20 minutes. Then our old friend came over. He is one of the wealthiest and most powerful men in the world – probably one of the top three or four landowners. He is a former partner of George Soros. But he is as humble and friendly as your favorite grandfather. All genuine warmth and smiles. He introduced his new partner to us. They sat down. He never mentioned the security. He acted as though everything was completely normal. We caught up on the usual stuff – kids, families, investments.

Then we shared what we knew of the world with each other. Steve and I talked about the unusually wide spread between bullion and the spot market price of gold. We swapped stories of unusually cheap and irrationally priced stocks. Finally, the conversation came around to the point of the meeting...

"I'm moving to New York. It's time to start again. I know what's about to happen. I know all the bankers. I know what they're going to do," he said. "Everyone is too leveraged. Dozens of the largest and best property companies are going broke. The banks will need someone to take the assets off their hands. They'll give me fixed-rate convertible financing – and then inflation will soar. This is what always happens. But this time it will be five or 10 times bigger than the last time..."

Did we want to be involved? Could we spread the word to our friends that this kind of opportunity would be coming? Yes. And we have the perfect venue for getting word out...

"We're meeting with our very best subscribers next month, in Hong Kong," I explained. "Peter Churchouse, the best real estate investor in Asia, will be there. You two would have a lot to talk about. And you could talk about your plans to start a new distressed asset fund in New York. The meeting is Monday, December 1, at the Four Seasons Hotel in Central Hong Kong. Can you join us?"

"I'll have to ask my wife, but I'll try to make it happen. I haven't been to Hong Kong since the 1980s..."

I promised not to disclose our friend's identity. He needs time to put this deal together. He doesn't want anyone to know he's moving back to New York or that he's going to start a new distressed asset fund. If you're an Alliance member and you haven't signed up for the meeting in Hong Kong yet, a chance to meet our friend and learn about his plan is a good enough reason to come. He will confirm with us next week... and, of course, if he does, he'll reveal his identity in Hong Kong. If you haven't signed up yet, it's not too late. Please contact Kristen Kossuth at kkossuth@stansberryresearch.com.

And whether you're an Alliance member or not, when very serious guys like this are setting up distressed property funds, it's time to be incredibly cautious about any business that's leveraged – especially real estate investment trusts (REITs). I saw one page of his notebook. He had a chart of every single large American REIT, organized by debt to equity...

Trying to avoid the vulture investors like our friend... a group of companies including American Electric Power (AEP), Textron, Home Depot, Honda, Dow Chemical, and Nissan is pushing the Fed to buy their paper, i.e. bail them out. The coalition wants the Fed to go beyond top-rated paper and buy debt with the second-highest grade. AEP CEO Holly Koeppel said the group is looking to add more members.

Every time the government bails out another business, the stock market craters. And then more and more companies line up to be bailed out. Where will it end? Nothing scares me worse than this trend. It's what caused the Great Depression. And we seem hell-bent on repeating all of those mistakes.

Wilbur Ross agrees General Motors needs a bailout, saying bankruptcy would "be a total mess." His views run counter to Bill Ackman, who said GM should enter a prepackaged Chapter 11. Ross, dubbed the "King of Bankruptcy" by Fortune in 1998, said if one of the Big Three carmakers restructures, it would destroy its peers and force its weakened suppliers to close shop.

"If we were in a different overall economic environment, one of them going down wouldn't necessarily kill" the industry, he said. But our weak economy and frozen credit markets make an automaker bankruptcy impossible. A Chapter 11 filing would result in liquidation, Ross said. "It doesn't add up that they are letting GE and American Express become banks to get aid, but they won't save the car industry," said Ross.

(Keep in mind, Ross' views may be biased somewhat by his ownership of auto-parts manufacturer International Auto Components.)

The Big Three auto companies haven't been truly profitable in more than 20 years. Their problems are immense and complicated – as I've gone over with you probably a dozen times in the last two years. But one factor I haven't mentioned is overcapacity. Ross says we shouldn't allow the Big Three automakers to go into bankruptcy because they'll be liquidated – they won't survive.

Exactly! They shouldn't survive. They haven't been competitive in two decades, or more. They have failed. If we give them more money, they'll still fail. It will only take longer and cost more money.

Bankruptcy wouldn't lead to mass unemployment. Other entrepreneurs would buy these assets and use them more wisely, putting people back to work and making better cars. Meanwhile, if you don't allow GM to fail, you'll end up crowding out the better companies, who have made better products and brought them to the public at a better price. If you never weed the garden, how can your flowers survive?

Realogy Corp., owner of the Century 21 and Coldwell Banker real estate brands, may default on its loans. A drop in home sales and prices "will negatively affect the quarterly calculation of our senior secured leverage ratio," Realogy said in yesterday's filing. "There can be no assurance that we will not violate this or other covenants." Leon Black's private-equity firm Apollo Management bought Realogy for $6.6 billion in April 2007 – right at the top.

At least one good thing has come from this recession... cheap lobster. Seafood shops in Maine are selling lobsters for as little as $3.89 per pound (less than a pound of cold cuts). The demand for lobster is way down and the catch in Maine and Canada has increased between 10% and 20% since last year. "Consumers started pulling back from going out to eat as often and pulling back on discretionary spending," says John Norton, president and chief executive of Cozy Harbor Seafood, a seafood processor in Portland. "To a certain extent, lobster is a celebratory item and people weren't feeling celebratory in October."

Tomorrow – November 15 – is a big day for the markets. That's the deadline for investors to ask for their money from hedge funds. Forced selling by hedge funds to meet redemptions has been a major driver in the market's downswing. If things turn out rosy after Saturday, the extreme volatility we've seen could end. But if investors decide to ask for their money back en masse, watch out...

Freddie Mac announced a third-quarter loss of $25.3 billion, or $19.44 a share – not quite as bad as Fannie. Still, the losses forced Freddie to request government funds, which it expects to receive on November 29.

New highs: Our short recommendation on Gannett (GCI).

In the mailbag... On Monday, I described a "strange recession" – where the good hotels and the nice restaurants were still full. I asked subscribers to tell us what they were seeing. Hundreds of you wrote to us. The results were mixed. But in general, we heard two things from our readers. First, you told us that you're seeing weakness in the low-cost retail and restaurant spots, but plenty of strength at the high end of the market.

And... many of you told us you didn't appreciate hearing about the nice places we'd visited. The venom and the envy genuinely surprised me. Nobody gave me a penny in my life. But perhaps you'd rather take investment advice from someone who's poor? As always, send your bon mots and bile alike to: feedback@stansberryresearch.com.

"Rich people always have money, (that's why they're rich) and can keep going to these places. Waait a minute... Mercedes... highend restaurants... luxury beachfront hotels... upscale nightclubs, OH MY GOD PORTER! YOU'RE ONE OF THEM. Speaking of rich people, has Stansberry & Associates produced any millionaire subscribers?" – Paid-up subscriber Poor Ignorant Dupe

Porter comment: Yes, I know we've helped lots of people become millionaires. One guy, for example, told me he made $5 million on ID Biomedical, one of our biotech picks from the early 2000s.

"Porter, If you and your buddies didn't have to consume $20 drinks, could settle for a Bud Light and a room at Motel 6 instead, you'd be able to substantially lower the prices of your services." – Paid-up subscriber Robert Richardson

Porter comment: I've stayed in plenty of cheap motels in my life. But now I go where I can meet people who have the information we need. Hosting a dinner at Applebee's wouldn't attract the people with whom I need to build relationships to get the information you need.

Lower our prices? We've had hedge funds offer our analysts more than $1 million a year for the same information we sell to you for $49. If you can't afford our newsletters, you probably don't have any money to invest.

Regards,

Porter Stansberry

Baltimore, Maryland

November 14, 2008

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