Grant's in New York

Grant's in New York… More layoffs at Merrill… $50 oil… The Franchise 16… GM and Chrysler raising capital… Hedge funds and pot…

Goldsmith comment: Porter's on a train up to New York, so he won't have time for The Digest today. He'll return on Wednesday.

Porter, Ferris, Eifrig, and I will be in New York for the Grant's Interest Rate Observer conference tomorrow. The lineup of speakers for tomorrow is outstanding. The two best known are Seth Klarman of Baupost Group and Jim Chanos of Kynikos Associates. We'll also hear from Leon Cooperman, Ivy Zelman (an analyst covering homebuilders), and several others. Once again, if you're in attendance, please say hi. We'll include some highlights from the conference in Wednesday's Digest.

Merrill Lynch CEO John Thain said he expects "thousands" of job cuts as part of the bank's $50 billion takeover by Bank of America. The majority of the cuts will come from IT, operations, and finance. The banks are trying to save $7 billion as a combined company.

We've repeatedly covered the massive layoffs in New York City in The Digest and presented it as an opportunity to buy real estate. As we pointed out earlier, sales are down 25%, inventory is up by one-third, but prices have been holding steady. Until now…

Walking around the city over the weekend, I saw one-bedrooms in some of the most desirable neighborhoods selling for less than $600,000 – still a lot of money, but down probably 15% to 25% from peak prices.

JPMorgan Chase recommended 16 companies it expects to perform well during the "global recession." The so-called Franchise 16 (compiled by 78 of the bank's analysts) is a list of companies that are currently profitable, have low debt, and return cash through dividends or buybacks. The companies are: 3M (MMM), Baxter (BAX), Colgate-Palmolive (CL), CA Inc (CA), Devon Energy (DVN), General Mills (GIS), Gilead Sciences (GILD), Google (GOOG), Hewlett-Packard (HPQ), McDonald's (MCD), Merck (MRK), Monsanto (MON), Nucor (NUE), Philip Morris (PM), Union Pacific (UNP), and Visa (V).

Traders are piling into bets that oil will fall to $50. Options contracts to sell 1,000 barrels of oil at $50 a barrel by December jumped 50-fold to $500 since October 3. Goldman Sachs and Merrill Lynch predict crude will probably drop another 44% if we enter a recession. To stop the freefall – oil is already down more than 50% from its July highs – OPEC will probably cut production when it meets on October 24 (three weeks earlier than planned). Merrill's head of commodities research Francisco Blanch doesn't think OPEC can stop the bleeding. "OPEC is going to try to prevent some of the price decline," he told Bloomberg. "It's going to be very difficult to stem a price fall."

These sovereign wealth funds can't catch a break… CITIC Pacific, the Hong Kong arm of China's biggest state-owned fund, said it may lose $2 billion from unauthorized currency bets. The group already lost around $100 million after closing some leveraged currency contracts, and it's sitting on $1.8 billion more. The potential losses equal nearly half of CITIC Pacific's market cap.

Last week, news broke that General Motors and Chrysler were considering a merger. The two companies are trying to raise capital, pitching a combined company that will deliver cost savings of up to $10 billion, an immediate boost in revenue, and make more cash available to the merged firm.

But they need outside money to fund the buyouts and severance packages for the thousands of soon-to-be-laid off employees (cuts could reach 40,000 if the deal goes through). And GM is already burning more than $1 billion in cash every month. If investors continue to shun the deal, GM and Chrysler will probably turn to the U.S. government. "It is still early days, but to make people feel more comfortable or to get investors to buy in, you have to think a government role would be important," said one insider. "That role could take a lot of forms, but it would be very important. The government may need to make it happen."

Another hedge fund, the $80 million Lahde Capital, is closing its doors. The 37-year-old Andrew Lahde returned 827% to investors last year shorting the credit markets. But he thinks this market is too unpredictable, so he's quitting while he's ahead. In an outrageous letter to investors, Lahde explained his decision… and plead for the legalization of marijuana…

I was in this game for money. The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns, and Lehman Brothers and all levels of our government… I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

Lahde concluded:

Hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The evil female plant – marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country.

Lahde said the only reason marijuana is illegal is because the government can't tax it.

New highs: none.

It's all conference calls and selling puts in today's mailbag. And we address your worries below. What else is troubling you… feedback@stansberryresearch.com?

"Porter, thanks for setting up the conference call on Friday. It was great to hear 'real-time' opinions and analysis from four of my favorite editors!

"Next... PLEASE STOP TELLING FOLKS ABOUT SELLING PUTS! I normally sell covered calls; but that has not been working too well lately, because the long stock leg gets clobbered. So I've switched to selling naked puts, and it has been working great. Then you come along, and tell the whole world about it. Stop it already, will ya?" – Paid-up subscriber Dave Derry

Goldsmith comment: Dave, glad you enjoyed the call. And good luck trying to shut Porter up about selling puts. When he has a good idea, he lets people know.

As you mentioned, the strategy is working incredibly well right now. The VIX, the market's fear gauge, has been hovering around 70, and put and call premiums are enormous. This could be a once-in-a-lifetime opportunity to capture this kind of income. If you're interested in learning more about his Put Strategy Report, click here.

"I was regisatered for your webcast but unfortunately an hour before you were to start I had to leave home and missed the great event. I thought you were recording it for those who missed it. Did you record it? Where can I find it?" – Paid-up subscriber William Brake

Goldsmith comment: You can listen to a replay of the conference call here… Just enter your e-mail address when prompted, then click the provided link, and you're all set. The call will be available until this Friday.

Note: Since it's a replay, you will not be receiving the e-mail Porter refers to in the conference call.

Regards,

Sean Goldsmith

New York, New York

October 20, 2008

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