Fannie/Freddie "bankrupt"

Fannie/Freddie "bankrupt"... Slim buys NYT... Cheap stuff rules!... Soros loses, Extreme Value readers win... Lehman's CEO plays whack-a-mole... Beginners should stick with Jeff Clark... My new No. 1 pick...

More Fannie and Freddie fallout. The Treasury's bailout is labeled a "conservatorship," but it's treated as a bankruptcy in the market for credit protection insurance, or credit default swaps (CDSs). One London banker estimates $200 billion to $500 billion of Fannie/Freddie CDSs are outstanding. That makes the Fannie/Freddie debacle many times larger than the next largest CDS default, auto-parts maker Delphi, which had $25 billion of CDSs outstanding in 2005. At a loss rate of 10%, insurers and banks could be on the hook for as much as $50 billion of Fannie/Freddie CDS losses.

Mexican billionaire Carlos Slim bought a 6.4% stake in PSIA pick New York Times Co., making him one of the media company's largest shareholders. Slim, the world's second-richest man, says his investment is purely financial. The New York Times Co. is struggling. Ads are down 14% this year and shares have slumped 32% in the past 52 weeks. But it's still a dominant brand. And Carlos Slim has proven he can make money with dominant brands. He made his fortune running the largest cellular and fixed-line telephone companies in Latin America.

When money gets tight, consumers tighten spending. They shop at discount stores like Wal-Mart, Fred's, and Ross (all of which are trading at new highs) instead of department stores. And if the discount stores get too expensive, they turn to thrift stores. The Salvation Army and Goodwill, which collectively operate 3,500 stores in the U.S., said sales have risen by double digits in the past months. Meanwhile, donations are drying up because people are holding onto clothes longer or trying to sell them on eBay and Craigslist for a small profit.

I know you'll be happy to hear this... The "devil," George Soros, may have lost at least $120 million on his stake in Extreme Value short pick, Lehman Brothers. His hedge fund bought almost 9.5 million shares of the struggling bank in the second quarter. Losses could be as high as $380 million. Soros' Lehman holding was a small chunk of his $20 billion hedge fund, which is down 0.13% in the first seven months of the year.

Today, the Wall Street Journal says Lehman CEO Dick Fuld has been calling other firms to see if they're still trading with Lehman and extending credit to it. Fuld says he feels like he's playing whack-a-mole because every day new "rumors" pop up about the firm's financial condition.

If you didn't cover your Lehman short already, now is a great time to do so. The stock is trading below $5 a share as I write this. Our short sale recommendation in the April issue of Extreme Value has returned 87%.

I'm going to tell readers my new No. 1 long pick and my pick for the next big bank failure in the September issue of Extreme Value, due out tomorrow after market close. To get access to Extreme Value, click here.

David Winters, manager of the value-oriented Wintergreen Fund, posted his semi-annual report this week. Like most buy-and-hold value managers, his fund struggled this year – though it still beat the S&P 500. In his most recent letter to shareholders, Winters outlined two stocks: Berkshire Hathaway, Warren Buffett's holding company, and Wynn Resorts. Winters argued Berkshire is a great place for cash because the business is so diversified (across retail, insurance, clothing, candy) and has a huge pile of cash for acquisitions. But shares are down more than 15% this year. Winters likes casino operator Wynn because it is a great way to invest in Macau...

The top drawer casino in Macau is the Wynn, and as you may know Macau is the sole gambling destination in China. Wynn has full participation in the growing wealth in China without the uncertainties of Chinese legal and accounting differences from American standards we all know. This company also has the poshest casino in Las Vegas. Like the rest of the United States, Las Vegas is having some challenges but Wynn is building for the long-term. If the past offers any guidance for the future, quality casinos and hotels very well may operate at healthy profits for many years.

Wynn is down 28% this year, and it bought back 6% of its outstanding shares at these low prices.

New highs: Wal-Mart (WMT) and Market Vectors Double Short Euro ETN (DRR).

In today's mailbag... questions about shorting and dipping your toe in the market... Send your e-mails here: feedback@stansberryresearch.com.

"We can definitely see that Lehman's in big trouble (excellent Stansberry short-pick). I'm trying to decide on whether to take a short position on Merrill... I know you don't like them, but how much don't you like them. Goldman Cracks is reporting earnings on Tuesday... it can't be good news, but they're the biggest sharks of them all and they have a way of doing magic with their books. As far as the Big 3 autos, if they get help from the U.S. government... would that boost their stock for Ford and GM or would it dilute it? I'm trying to decide whether I should be bullish or bearish on government bailout for them." – Paid-up subscriber Andrew

Ferris comment: Merrill doesn't seem like a potential zero to me, and that's the only thing I know how to short. As for GM and Ford, it's impossible to predict that sort of thing.

"Stay focused. If you continue to spew political drivel instead of the investment advice I thought I was paying for, we will part company... permanently... and very soon." – Anonymous

"I subscribed to True Wealth a couple months back when there was a special to try it out. Now it seems everyday I get a couple emails from S/A with another newsletter wanting to make me rich if I send in $500. I am new to investing and even though I have a decent amount to invest I am confused about what to do, being a novice. I have found that I get no help if I call the phone number to ask about all these programs. So it makes me sit on the sidelines since people in the past have promised me the moon and I ended up losing money. How can a beginner use your service if they have only ever bought stocks from an online service like Etrade or something? It seems like you have to have an actual broker in person to call and do some of this kind of trading? Is this best for people that have been investing for many years only?"

– Paid-up subscriber Steve

Ferris comment: In my opinion, beginning investors should be very careful and take their time if they move into trading. They shouldn't "trade." If you must trade, make sure you have someone like Jeff Clark around to help you. He's the only trader I know who not only doesn't seem destined for a blowup, but seems destined to make plenty of money.

Also, I highly recommend everyone who hasn't already done so go out right now and buy a copy of The Intelligent Investor, by Benjamin Graham. Skip straight to Chapter 20 and read it three or four times. Then read the section right after the A&P example in Chapter 8. Under the header "Summary" is the tale of Mr. Market, the most important thing you'll ever read about handling the ups and downs of the stock market.

Of course, Porter has also offered extensive advice on getting started as an investor. You can read some of his thoughts here.

"Wal-Mart was one of the last stocks I bought as an Extreme Value subscriber. Wish things were not so tight with the budget right now. Extreme Value will be No. 1 on the buy list when things get better. Great writer, great picks. Never once disappointed. Thanks again for the heads up on Wal Mart." – Paid-up subscriber John Henry

Ferris comment: Thanks, John. Wal-Mart was my old No. 1 pick. My new No. 1 pick comes out in tomorrow's Extreme Value after market close.

Regards,

Dan Ferris

Medford, Oregon

September 11, 2008

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