"Free Money"...

I spoke with a local furniture salesman recently. He works on commission for one of the biggest furniture retailers in the country. He confided that he made $46,000 in 2007, and only $22,000 in 2008. In the last 30 days, he made just $1,000, which he says hasn't happened since he started selling furniture eight years ago.

Right now, his employer is so desperate, the company is literally giving away free money: 0% financing with no minimum payment for 12 months. The catch is that, if you don't pay it off in 12 months, your interest rate goes to 21.9% – retroactive to the date of purchase. Imagine all the folks who'll spend $2,000 only to suddenly have a balance of more than $2,400 staring them in the face. They could wind up with a lot of scratched-up 13-month-old furniture coming back to them a year from now.

Sounds just like housing, doesn't it? Cheap financing suddenly gets expensive, resulting in a tsunami of defaults – subprime, teaser-rate, option-ARM furniture financing. This will appeal precisely to those who ought to avoid it.

I remember when I was a kid, everybody used layaway to buy big items they needed but couldn't afford to pay for all at once. Borrowing was generally frowned upon, except for a house. It made sense that you didn't take possession until you paid up in full. You didn't pay interest on the layaway. You just split the purchase price into payments. When the balance was zero, you got your item. Today, with no-interest, no-payment financing, we've gone 180 degrees. You take it home without paying a penny, possibly getting a year's use of the item for no charge.

Wal-Mart pulled out of Germany a few years ago because German discount chain Aldi was cheaper. Wal-Mart was more expensive because it sells well-known consumer brands at cheap prices. But 95% of Aldi's products are its own store brand. Aldi is building 25 new stores in the Dallas-Fort Worth area, plus a distribution center designed to serve Texas and Oklahoma. Aldi is going head-to-head with Wal-Mart on Wal-Mart's home turf.

As the economy gets worse over the next year or so, I imagine some people will start shopping at Aldi, if there's one nearby. If Aldi's strategy takes hold, Wal-Mart will adopt it and put it to work in more than 7,000 stores worldwide. More than 97% of the U.S. population lives within 25 miles of a Wal-Mart. It's the biggest retailer in the world, bar none, and the U.S. is by far its biggest single market.

Another big payoff in the medical field... Yesterday, Abbot Laboratories (ABT) paid $2.8 billion, or $22 a share, for Lasik eye-surgery equipment developer Advanced Medical Optics (EYE). If you owned shares of EYE, you made 143% on your money in one day.

Phase 1 analyst Rob Fannon assures us these big takeovers aren't an anomaly – we'll see tons of them this year. Big medical companies have more cash than they can spend, and hundreds of smaller medical companies need cash to survive. Rob is currently working on a list of companies with great drugs and debt problems that are likely to be bought out this year... Each company on this list could potentially double your money.

How likely is he to pick the companies that will be acquired? Well, so far this year, our biotech analysts have picked 70% of them... The two most recent takeovers produced triple-digit gains for subscribers. We're about to enter one of the largest biotech bull markets of our lifetime, and early investors will make outrageous sums of money. To learn more about Phase 1 and find out if biotech investing is right for you, click here...

Jeremy Grantham, manager of the GMO mutual funds, released his third-quarter letter to investors. Even though he's buying stocks, the "permabear" still isn't bullish. Grantham says that as of October 10 (with the S&P at 900), stocks were cheap in the U.S. – and cheaper abroad – and his funds will be "steady buyers at these prices."

But Grantham admits he's probably buying too early. It's not a value investor's job to pick the market bottom. No one can do that. It's impossible. Instead, like Grantham, they must identify cheap assets and invest steadily.

Grantham's letter also covers his theory of career risk...

Career risk is why CEOs, entrusted with our money, were still dancing late into the game. So late that the clock had already struck midnight and they had already turned back into rats, but just didn't know it. It's what I call the Goldman Sachs Effect: Goldman increased its leverage and its profit margins shot into the stratosphere. Eager to keep up, other banks, with less talent and energy than Goldman, copied them with ultimately disastrous consequences. And woe betide the CEO who missed the game and looked like an old fuddy-duddy. The Board would simply kick him out, in the name of protecting the stockholders' future profits, and hire in more of a gunslinger from, say, Credit Suisse.

You can read the full letter here.

Another respected money manager, Bond King Bill Gross, is also buying. Gross is taking advantage of the current deflation to load up on Treasury Inflation-Protected Securities (TIPS) on the cheap. Inflation-linked debt from the U.S. and Japan returned 5.77% since November compared with 1.55% for government bonds. Gross started buying in October.

TIPS due in 10 years yield only 0.58 percentage points less than Treasuries. (Since 2000, they've yielded an average 2.11 percentage points less than Treasuries.)

Of course, with
the trillions of dollars the U.S. government is pumping into the economy, inflation is inevitable, and Gross understands this. TIPS "can benefit if and when the government's efforts to reflate begin to take hold," Gross wrote in a note to clients. Breakeven rates suggest consumer prices will fall an average of 1% a year for 10 years, which he says is "possible, but not likely."

It's time to short Styrofoam cups... Yesterday, we received an e-mail from our parent company notifying us that it will no longer supply our office with paper and Styrofoam cups. Instead, we must use our "Agora-brand" coffee mug. Apparently, Bank of America is in the same boat. Dealbreaker received a tip that Bank of America will eliminate all plastic utensils, paper plates, and Styrofoam cups. All associates will receive "a BAC-branded coffee cup that is biodegradable in landfills over a five year period."

From time to time, we've mentioned the Federal Home Loan Bank system. The FHLB is the "other" government-sponsored enterprise (GSE). (Fannie Mae and Freddie Mac are also GSEs.)

Since it's a GSE, we don't understand how FHLB could possibly be managed any better than Fannie and Freddie. Well, last week, Moody's said eight of 12 FHLB banks would be undercapitalized if they were forced to recognize losses on mortgage-backed securities.

The Seattle FHLB's president, after reporting its capital has slipped under already low regulatory minimums, says the bank has plenty of capital... just like Fannie and Freddie told us before the government stepped in and bought 79.9% of each of them.

A Barclay's report says $227 billion of option-ARM loans will reset in 2010 and 2011. The resets are already starting to grab headlines. FirstFed Financial of California saw its ratio of nonperforming assets rise from 2.34% in November 2007 to 7.54% in November 2008, due largely to skyrocketing option-ARM losses. FirstFed is deleveraging its balance sheet, offering bondholders $0.33 per $1 of par value on $150 million of outstanding debt.

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New highs: none.

The masses are getting antsy for the Report Card. Add your voice to the chorus: feedback@stansberryresearch.com.

"You're always touting your winners – where are your losers? Where's the annualized performance record? Or any historical performance numbers? I'm talking just like the mutual funds, or a fund manager... As far as I can see, this is the same tactic used by all the other newsletters – don't you want to set yourself apart?" – Paid-up subscriber Chris

Ferris comment: As of yesterday's close, the average Extreme Value stock recommended since 2002 has risen 3.06% in an average holding period of 792 days.

Anemic. Inadequate. And measured after the worst market performance since the 1930s. My biggest winner in 2008 was my Lehman Brothers short, +82%. My biggest loser was Loews Corp, -45%.

So, Chris, what's your historical performance since 2002, as of yesterday's close? Everyone's always talking about historical performance numbers. As far as I can see, this is the same tactic used by all investors, pretending to know which past performance indicates which future performance. (If you think it does, keep an eye out for our annual Report Card. Porter's working on it now.)

Regards,

Dan Ferris
Medford, Oregon
January 13, 2009