Crimes Against Sanity

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/08/2013

* * * Another riddle for you. Why do mirrors reverse right and left, instead of up and down? Answer Monday.

* * * This from the wise man of the market, Richard Russell: "Robert Rhea, the genius Dow Theorist of the 1930s, wrote, ‘when the Averages [the Dow Jones Industrial Average and the Dow Jones Transportation Average] disagree, it’s almost always a sign of distribution.’ What is distribution? Distribution is a process whereby stocks move from strong hands to weaker hands. And that’s what bothers me about this market. I’ll say it again; the Averages are refusing to agree. In fact, it’s one of the widest divergences I’ve ever seen."

* * * True story about Richard Russell... Just before I launched this business, I was searching for a new publishing company to work for. I must have sent letters to two or three dozen publishing houses. Richard Russell is the only person who wrote back to me. He sent a hand-written note, saying he’d enjoyed my work on The Fleet Street Letter with Bill Bonner. He wished me luck in my career. That’s class.

* * * S&A editor Christopher Hancock wants to cover to global stocks. He got an MBA from the Hong Kong University of Science and Technology. He loves to travel. And he’s got friends from college living all over the world. The 22-hour flight to Australia? That’s a good time to Hancock. He once flew to Hong Kong, for the weekend. He’s nuts. But he might be on to something: U.S. equity investors continue moving money offshore… 88% of the money invested in U.S. equity mutual funds this year has been allocated into funds investing in overseas companies.

* * * My problem with global investing? I’ve tried several times to publish letters about foreign stocks. They don’t seem to work. In fact, Steve Sjuggerud’s first letter was called World Money Analyst. We dropped the title back in 1997, when a consultant told us only one in 10 Americans has a passport. They don’t care about the world, nobody likes to talk about money, and everyone hates analysts. As he told us, to your customers, your title reads: "Death, Death, Death."

* * * Hancock also tells me something I know from my travel to Nicaragua. The world’s "emerging economies" are getting wealthy, fast. The average income of people living in emerging economies is growing at 5% a year. Meanwhile, wages for workers in the 10 wealthiest countries continue falling. Since 2001, real weekly wages for middle-income Americans have fallen 4%. Do you think Michigan autoworkers will soon be smuggling their families across the border in Mexico to get high-paying manufacturing jobs? If they did, I bet they’d change their political position on that fence, wouldn’t they?

* * * Fall is beginning to peek out from under the cover of summer. My backyard looks like something out of a Rockwell painting. The trees along the back property line – big locusts, oaks, and maples – have just started to turn yellow and red. The old brown shingle barns, which are backed up among the trees, match these colors better than the green of summer and spring. My new puppy, Ruby, matches the colors, too – she’s a golden red. And she’s convinced that the leaves falling off the trees are toys from heaven. She chases them to the ground or picks them out of the sky and tears them up.

* * * I won’t be writing tomorrow. I’ll be driving up to State College, Pennsylvania, to visit with my wife’s family. My wife was surprised by how enthusiastic I’ve been about this trip. I haven’t told her that a colleague from the Motley Fool has two extra tickets for us to go to the Penn State vs. Michigan football game there this weekend…

* * * * * * * * * * * * * * * * *

Only very long-time readers will remember the July 2002 issue of my newsletter, "The Next Wall Street Scandal Will Dwarf the Rest."

I recommended shorting shares of Maxim Integrated Products (Nasdaq: MXIM, $29). The company’s founder and CEO, John Gifford, was pillaging his shareholders, granting options by the tens of millions to himself and his cronies. Most shareholders simply didn’t know the scope of his actions or the ramifications on the company’s share structure. I thought what was happening was criminal, and I knew Gifford, sooner or later, would get caught.

In the issue, I made this prediction:

"The most respected – and once the most profitable – company in Silicon Valley will soon find itself in the middle of the next national scandal. A man hailed as the best CEO in Silicon Valley will see his reputation destroyed… as his true colors come to light. Investors in a company that once posted a 9,000% return to shareholders will see their investment wiped out."

I remember our lawyers asking me what basis I had for saying these things about Gifford. They were sure we’d get sued.

That is, until I showed them the facts.

In 2001, the year before I wrote my first article about Maxim, Gifford exercised $57 million of options, worth more than 25% of his company’s profits. He put the third baseman of the L.A. Dodgers on his board of directors – thumbing his nose at the idea of board accountability or oversight.

My article was picked up by Barron’s. A few days later (July 24, 2002), Warren Buffett wrote his now famous op-ed piece in the New York Times, finally bringing shareholder attention to the options-abuse madness that had swept through Silicon Valley. "When a company gives something of value to its employees in return for their services, it is clearly a compensation expense. And if expenses don’t belong in the earnings statement, where in the world do they belong?"

You’d think that as one of the all-time biggest abusers of stock options, John Gifford would have changed his ways in the face of Sarbanes-Oxley, shareholder lawsuits, Enron, and Tyco. Nope. According to Forbes, since 2000 Gifford has taken an average of $26 million per year in compensation, almost all of it in the form of stock options. Far from retreating on the issue, Gifford became a leading opponent of efforts to reform stock-options accounting. He even sponsored a website – www.expensingisbadaccounting.com – and recruited professors, economists, and congressmen to stump for him on the issue.

As disgusting as it is to stack your company’s board with friends and swipe for yourself ludicrous amounts of money from the corporate trough, these actions are at least logical. And there’s a veneer of legality that covers up the raw greed of it all.

The crazy part is, making hundreds of millions of dollars wasn’t enough. Hundreds of companies in Silicon Valley (115, at last count) have now admitted that the options their firms granted were "backdated," typically to the lowest closing price of the entire year.

For example, look at Steve Jobs, the founder and CEO of Apple computer.

Almost no one enriched himself more at the expense of his shareholders. Jobs granted himself (with his handpicked board’s approval) 10 million stock options in 2000! The grant – one of the largest ever given by any corporation – was made on the single-lowest closing price of the month in Apple’s shares. This grant was almost certainly fraudulent (backdated). Jobs certainly knew it was a fraudulent grant. Apple admits Jobs knew about fraudulent grants and was awarded a fraudulent grant, but says he did not "benefit" from the practice.

What? Jobs received a 10 million-share, backdated-options grant, but he didn’t benefit? Are they kidding?

I think Steve Jobs will go to jail.

There’s no difference between what he admits to doing and embezzling hundreds of millions of his shareholders’ dollars. He was taking something that didn’t belong to him, from the people who entrusted him to safeguard their interests. It’s absolutely despicable.

I’m sure some of you, reading that I believe Steve Jobs is going to jail, will dismiss the analysis out of hand. There’s no way Steve Jobs is a criminal, you’re probably thinking.

And I’m sure my subscribers thought the same thing back in 2002 when I warned them about John Gifford and his options-printing company, Maxim.

But, four years later, almost to the day – on July 3, the U.S. Attorney for the Northern District of California requested documents from Maxim regarding its stock-option grants for the last decade. There is now an ongoing criminal investigation of grants John Gifford received over the last 10 years. And, as a result of this criminal investigation and the board of directors’ own investigation, Maxim is unable to file its annual report. The company could soon be delisted from the Nasdaq.

There are two useful things to consider now.

First, some of the companies that have come under suspicion (and seen their share prices suffer) aren’t guilty of any wrongdoing or will be able to quickly dismiss the wrongdoers and void the illegally granted options. Second, since the mere suspicion of wrongdoing will damage share prices, once a company admits there was a problem and takes action, its stock will rebound strongly.

I’m following one such situation.

On September 6, the company’s corporate secretary and general counsel resigned suddenly, without explanation. Then on September 26, the founder and CEO was dismissed for "good reason" – but that reason wasn’t disclosed. Although the company denies any impropriety, I’m sure there’s scandal brewing, about backdating or some other options scam.

The market thinks so, too. The stock is down 40% this year, and it’s trading for only six times cash flow. Although I can’t tell you the name (not until tomorrow, when my subscribers will get my report), I can tell you that this is both the safest and fastest growing recommendation I’ve found all year.

Get into this stock now, and you’ll double your money as soon as the company announces that there was a problem and it’s cleaned house. And there’s more upside from there: This company’s closest competitor is worth four times more in the stock market, even though its revenues are only 19% higher.

Regards,

Porter Stansberry

P.S. New feature for our Digest – the Stansberry Top 10. It’s a list of our 10 best current "open" positions. As I’ve been telling you, our Extreme Value product is by far our best performer. I’ll comment on the list from time to time, when we add a new position.

Stansberry & Associates Top Ten Open Recommendations