Ferris from Hong Kong

Ferris from Hong Kong... Careful buying money... States want a bailout... $4.6 trillion... The best tailors and restaurants in Hong Kong...

Goldsmith comment: This morning, Dan sent in highlights from his speech at the Alliance Conference...

(1) I told everyone to be careful buying money and money-like instruments because they're expensive: 13-week Treasuries, for example, have yielded as little as 0.01% recently. After inflation, you're just giving money away.

Also, I'm at once concerned and interested in muni bonds. I'm concerned because defaults are at record highs, over $6 billion this year. I'm excited, though, because I think if general obligation bonds start defaulting, for example, they'll experience good recoveries. (General obligation bonds are backed by the full faith and taxing power of the municipality.)

[Goldsmith comment: On the topic of buying money and money-like instruments, yesterday, Fed Chairman Bernanke said he has "limited" room to lower interest rates below 1% and may use less conventional actions – like buying Treasuries. Yields on the 30-year Treasuries touched 3.1825% yesterday, the lowest since the U.S. began regular auctions of the securities in 1977. The 30-year Treasury has returned 27.8% this year, including a 15.6% gain in November.]

(2) I told everyone to buy great stocks with great conviction. My big names for conference-goers were Microsoft (MSFT), Berkshire Hathaway (BRK-A or BRK-B), and ExxonMobil (XOM). I was trying to get people to understand that, when stocks are this cheap, there's nothing to do but buy them. So I focused on great businesses, businesses it's obvious will be around 10 years from now.

(3) I tried to show that, in terms of historical trendlines and past bubbles and busts, it's reasonable to assume the S&P 500 is near a bottom, or perhaps, may have bottomed. But by the S&P 500's ratio of price to reported earnings, stocks aren't cheap at all, so it's not reasonable to assume the bottom is in. The S&P is trading at just over 16 times reported earnings – its 100-year average.

My guess is still that bottoms don't feel this good. Porter said, and I totally agree, that we won't get a bottom until the current generation is entirely disabused of the notion that it's easy to get rich in stocks.

I should have but didn't recommend reading the introduction to Lawrence Cunningham's book, How to Think Like Benjamin Graham and Invest Like Warren Buffett. The introduction is an important little essay called "The Q Culture." Q stands for quote, as "in price quote," with which the great unwashed herd of "investors" is utterly obsessed.

When that obsession turns to revulsion, perhaps we'll see a bottom. Until then, the road to the bottom will unfortunately be paved with the misplaced and ultimately dashed hopes of those who are naive enough to think the market is an easy mark. The joke's on them. They're the all-too-easy marks, and they're about to give away what little they haven't already lost.

Here's the point: You won't know the bottom on the day it hits. You won't know it the week it hits. Nor will you know the month of the bottom. And if you think you'll know the year, just remember years like 1930 and 1973, when everyone thought the bottom was in and found themselves down another 50% within a year or so. Forget about the bottom. It's a fool's obsession. Instead, be a lifetime buyer of quality equities and buy them based on valuation. When the valuations on stocks like Coke, Microsoft, UPS, Altria, and other great businesses get this cheap, you don't waffle about bottoms. You buy them and hold on to them with great conviction.

(4) I quoted Peter Lynch twice. I'm sure long-time readers are quite familiar with the first quote: "The key to getting rich in stocks is not to get scared out of them." I told conference-goers the key to not getting scared out of stocks was buying great companies like Berkshire, Microsoft, and ExxonMobil when they're cheap. The other Lynch quote I shared with them was: "The stock market requires conviction as surely as it victimizes the unconvinced."

I also told everyone I thought Lynch's One Up On Wall Street is every bit as good as Ben Graham's The Intelligent Investor.

(5) I had the great pleasure of meeting Rahul Saraogi, an India-based portfolio manager. He came up with a great-sounding stock idea: EID Parry, one of the largest holding companies in India, with operations in sugar and chemical fertilizer production. Also during the afternoon panel discussion, Rahul agreed with me that you must learn to hold with great conviction during ups and downs to really milk the value out of a good stock. That won't often be easy, though it can be well worth the effort.

(6) Finally, I'd like extend my apologies to Extreme Value readers for letting a 15-hour plane ride and a massive time change throw me off so much that I spaced on our weekly update. You can expect one on Monday. If you've got questions you'd like me to address, let me know here.

Taking a cue from Paul Tudor Jones, JPMorgan's Highbridge Capital Management is halting redemptions. Highbridge, one of the world's biggest hedge funds, said investors have asked to withdraw 36% of the assets from the firm's flagship fund. The decline in assets under management means JPMorgan would lose hundreds of millions of dollars in fees. The asset-management division typically accounts for 10% to 20% of the bank's earnings.

Now U.S. states are going to the federal government with their hands out. A group of governors asked Congress to pass an economic stimulus package for states, warning their collective budget shortfall could hit $140 billion by mid-2010. The stimulus proposal seeks at least $126 billion to help states rebuild infrastructure and bolster social programs and unemployment benefits. The governors said the plan will do far more for the economy than any other government bailouts, like the $700 billion TARP. "Not any of that help has produced one new job," Pennsylvania Governor Ed Rendell said.

As more and more come to the Fed begging for cash, the costs are adding up... According to Barry Ritholz, author of The Big Picture, total federal aid (including the Citi bailout) now equals $4.6 trillion – making the credit-crisis rescue the largest government project in history.

To put the cost in perspective, James Bianco of Bianco Research calculated the inflation-adjusted costs of other large government programs throughout history. The current bailout is bigger than the following nine programs... combined.

New highs: none.

We're getting plenty of recommendations for Hong Kong attractions, but no feedback from the conference. How was your experience? E-mail us here: feedback@stansberryresearch.com.

"Sorry that timing wouldn't allow attendance at the alliance conference, but please do pass along the recommendations on best tailors and restaurants. I travel through hong kong frequently, and appreciate the travel notes." – Paid-up subscriber Paul Medvedo

Goldsmith comment: We received tons of e-mails recommending tailors. A few of the names: Raja's Fashions, DuPont Plaza, Maxwell's, ROMAN, and Sam the Tailor.

On the subject of restaurants, incidentally, the Michelin Guide released its debut Hong Kong edition today. Two restaurants earned three stars, Michelin's highest rating. One is Robuchon a Galera in Macau, by French chef Joel Robuchon. The restaurant serves European cuisine. Porter, Doug Casey, and I ate at Robuchon's restaurant in Las Vegas – the only three-star restaurant in Vegas and Robuchon's only in the States. The tasting menu was good, but very fussy and fancy.

The second is Lung King Heen – meaning View of the Dragon – which serves contemporary Cantonese food with an emphasis on seafood and dim sum. The restaurant is on the fourth floor of the Four Seasons, where we hosted the Alliance Conference. If anyone dined there, send us a note: feedback@stansberryresearch.com.

"So, Porter goes to Hong Kong and young Goldsmith gets to stay in the resort city of Baltimore. Do you at least get a T-shirt when he returns?" – Paid-up subscriber John Fritchey

Goldsmith comment: I would much prefer a blazer from any of the above tailors. I know I'll miss out on the bespoke experience, but I fit an off-the-rack 46R almost perfectly.

Regards,

Sean Goldsmith

Baltimore, Maryland

December 2, 2008

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