Goldsmith rocks

Goldsmith rocks... More layoffs... Why Freeport-McMoRan did the right thing... Bill Miller calls a bottom in stocks...

Goldsmith comment: I'm on Digest duty for the rest of the week. Dan is flying back from Hong Kong today and won't be able to contribute. Porter's heading back tomorrow. He should be ready and recovered by Monday.

Several more companies announced layoffs today... Credit Suisse, Switzerland's second-largest bank, will cut 5,300 jobs, 11% of its workforce, and withhold bonuses for its top executives after nearly $2.5 billion of losses in the past two months. Private-equity giant Carlyle Group said it will lay off 10% of its workforce, or 100 employees – the first large U.S. private-equity firm to do so. They are also the first layoffs in Carlyle's 20-year history. State Street, a large-cap regional bank, announced up to 1,800 job cuts.

Even the nonfinancials are cutting jobs. AT&T announced 12,000 layoffs and chemical company DuPont will axe 2,500 employees.

Three hedge-fund giants, all managing more than $30 billion, are halting or limiting redemptions – the stigma is clearly gone. Publicly traded Fortress Investment Group will temporarily halt redemptions after receiving $3.51 billion in requests for its $8 billion flagship macro fund. D.E. Shaw, the largest of the three with $36 billion under management, capped redemptions at two funds. And Farallon Capital Management did the same with its largest fund after investors asked for 25% of their money back. Of course, these funds are halting redemptions so they don't have to liquidate positions at unfavorable prices. With the world's largest hedge funds locking up capital, we should see at least a short-term reduction in volatility.

Yesterday, Freeport-McMoRan, the world's largest publicly traded copper producer, cut its dividend (which was around 11%), halved capital spending for the next year, and reduce projections for output and sales for the next two years.

The company's struggling because it's highly leveraged to copper. And prices for the metal are down about 60%. Shares fell 17% on the news. S&A Oil Report editor Matt Badiali, a trained geologist and our in-house natural resources expert, says this about Freeport's moves:

Freeport-McMoRan is doing everything right... and the market hates it for it. Take the latest "atrocity," Freeport announced it is suspending the $2-per-share dividend and cutting planned capital spending in half. The market responded by selling the company's shares.

But here's the reality of the situation: The stuff Freeport sells – copper and molybdenum – fell in price by 53% and 72%, respectively. Instead of flying the corporate jets to Washington, D.C., with their hands out, Chairman Jim Bob Moffett and his team did the responsible thing – they cut spending.

Those two simple measures – cutting the expenses and suspending the dividend – will save the company $1.25 billion. It will also reduce metal production, which will mean reduced earnings over the next few years. I don't look at this as lost revenue because it still has the metal in the ground. But what's the point of expanding production when you can only get 50 cents on the dollar for it? Freeport is smarter than to try and "make it up on volume."

Imagine if you lost half your salary. You'd put the home renovations on hold, suspend payments to the retirement account, and stop eating out for a while. That wouldn't make you very popular with the family, but it would get you through the lean times without resorting to the local loan shark. That's exactly what Freeport-McMoRan is doing.

Freeport CEO Richard Adkerson reminisced this morning on CNBC about the last time he appeared on the network. Then, they were "popping champagne and high-fiving"... Perhaps a sign of the top?

Adkerson said his company is struggling because the financial markets aren't working. Companies can't get credit, and people aren't consuming. Freeport shares are down 50%, but it's selling all the copper it produces, just at a lower price. Adkerson acknowledged people are upset about Freeport cutting its generous dividend, but gave another option for people who still want exposure to the company while collecting a huge yield... You can buy Freeport's convertible shares, which are yielding close to 20% with a 38% premium to conversion.

At Legg Mason's annual media luncheon Wednesday, fund manager Bill Miller said "the bottom has been made" in U.S. stocks. Miller, best known for beating the S&P 500 for 15 straight years, doesn't have much credibility left. His Legg Mason Value Trust is down 60% this year and lagging 99% of peers. He pounded the table on Bear Stearns right up to its collapse. He bought Fannie and Freddie all the way down, and he lost a bundle on Yahoo. So now, he's just guessing.

Good investors don't care about tops or bottoms because they're impossible to predict. Instead, they take advantage of falling prices to start building positions in excellent companies.

Capital One Financial today announced plans to buy Chevy Chase Bank for about $520 million in cash and stock. On Monday, we mentioned you'll probably see major consolidation in banking as the bigger banks buy smaller ones to shore up deposits. We also mentioned the KBR Regional Banking ETF was the best way to play the trend... It's up 15% since our mention.

New highs: none.

In the mailbag, a Goldsmith lovefest... Anything you'd like to add? feedback@stansberryresearch.com.

"Goldsmith, you rock dude! the fort is in good hands." – Paid-up subscriber Tommy King

"Goldsmith... you're getting better at this." – Paid-up subscriber Ignorant Dupe

Goldsmith comment: Wow, Ignorant Dupe, that's quite a turnaround from your last comment about me.

"Where do I get the specific information to short REITs? Do I need to subscribe to any of your publications? (that I haven't yet?) What about the distressed real estate fund in N.Y. you wrote about... (will they take 500.000 investment?) Can you connect me to the right party?" – Paid-up subscriber Ruth Fischl

Goldsmith comment: We don't have any publications dedicated to shorting REITs, although Porter outlined a way to short one of the biggest players in the industry in his Put Strategy Report.

We all know that when Porter finds a theme, he sticks with it until the very end. I would imagine this one is no different. We'll hash out the details on the distressed New York real estate fund when Porter returns...

Regards,

Sean Goldsmith

Baltimore, Maryland

December 4, 2008

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