Icahn's corny retreat...

 Carl Icahn is giving his investors' money back. Icahn filed a letter today with the SEC informing limited partners in his hedge funds that he'll be returning their capital.

Icahn said the losses incurred by investors in 2008 bothered him "a great deal more, in many respects," than his own losses. He says maybe it's because he's used to dealing with large paper losses for himself. He didn't prevent investors from withdrawing funds during the crisis, and many chose to do so.

Carl Icahn, dubbed "King Icahn" by one biographer's reckoning for all his ego and swagger, is a bit of a softy when it comes to other people's money. He acknowledged it in the letter, realizing "it may sound 'corny' to some" that he felt bad about his limited partners' losses.

Icahn's public company, Icahn Enterprise (IEP), sold off a little today, perhaps due to the bearish comments Icahn made in his letter... "While we are not forecasting renewed market dislocation, this possibility cannot be dismissed. Given the rapid run up over the past 2 years, and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis."

 Last November, hedge-fund manager Seth Klarman said he'd return 5% of the $23 billion he had under management at the time. Last May, Klarman said he was more worried than at any time in his career and he's afraid we'll have another 10 years during which stocks return zero.

This is how it happens. The first thing that happens before a big top is the richest, smartest investors get cautious and complain about not finding new opportunities. In November, Klarman said his "opportunity set" was smaller now in relation to its growing cash balances. Growing cash balances mean he's selling old investments and not finding new ones.

The great investors usually make bearish comments prior to the top, but not at the top. Warren Buffett famously told investors to beware in July 1999 at Herb Allen's annual Sun Valley, Idaho conference. The market didn't peak until early the following year.

 I wonder how many of your friends are as fearful or cautious as Icahn and Klarman? I wonder how many members of the thundering herd are worried about stock returns for the next 10 years. Or even the next 10 months. The average holding period of an NYSE stock is six months. No wonder the herd always stampedes straight to the slaughterhouse. The herd members can't see past their noses, while the best investors are focused on the farthest horizon.

 Yesterday's Wall Street Journal said Subway now has more worldwide locations than McDonald's. My first thought: I bet McDonald's is working on some kind of deli sandwich to help it compete with Subway. If McDonald's can sell lattes and cappuccinos well enough to take business away from Starbucks, it can come up with a deli sandwich sufficient to entice a few customers away from Subway. McDonald's is a tough, tough competitor. Look at its financial condition, and compare it with archrival Burger King's.

A friend of mine owns a few Subway restaurants around town. His wife, a well-known real estate agent in the Medford, Oregon area, insists her husband's Subways don't compete directly with McDonald's. I tried in vain to tell her otherwise, but she insisted they had different clienteles. (No mean feat in a town of less than 80,000 people!) I wonder what she'll say if my prediction comes true? I wonder if her husband will lose a customer here and there?

I never bet against McDonald's. I don't know what it'll be serving in 20 years, but I'm certain Mickey D's will still be in business, still growing and still serving what customers want… and probably doing so more consistently and cheaper than just about anybody else.

McDonald's has increased its dividend 33 years in a row, and by a whopping 26.52% over the last 10 years. If McDonald's can keep up that kind if dividend growth, it'll pay a double-digit yield over today's cost in less than five years.

We're not talking about some random energy trust, either. Nor is it a REIT, MLP, BDC, or some government-created income security designed to suck the masses into highly cyclical, levered investments. It's the World Dominator of the global quick-service industry.

 The federal government posted its largest monthly deficit in history in February... $223 billion. The Congressional Budget Office estimates the 2011 deficit will reach $1.5 trillion (we're up to $642 billion for the first five months of fiscal 2011). And today, the Senate will vote on competing spending cut proposals.

Surely, the proposed cuts will cover at least one month of the government's deficit... It takes sacrifice to make up a $1.5 trillion deficit. Well... Democrats already rejected GOP-backed cuts of more than $50 billion, and Republicans rejected the Democrats' cuts of less than $10 billion. Let's say, when Congress is all done, the cuts total $30 billion... That's less than one-seventh the February deficit. That wouldn't even cover one month's interest payment on outstanding U.S. government debt. (The government has spent $101 billion on interest through the end of February.)

 If not by cost-cutting, how will the government make up the deficit? Taxes? If we doubled today's tax revenue, we'd still have a deficit. Half of U.S. citizens pay zero taxes. The half that pays would leave if you double its taxes.

 What about cash reserves? Well, we don't have any to speak of. The government spent $81.6 billion of its reserves in the first four days of March. We're left with a paltry $108.9 billion (or five days' reserves if we continue spending at this rate).

 Everybody knows the answer is inflation. I hate to say that, because when everybody is sure of something, it tends to be well accounted for in the market price of the relevant assets. Gold is way up. Silver is way up. Sounds like the whole world already agrees with us. Printing money is the easiest way for the government to steal from its citizens without their knowledge, while devaluing its debt at the same time.

But no matter how popular gold and silver might look, they've got a long way to go, with silver perhaps the more attractive of the two metals right now...

 In his March 1 issue, our friend Chris Weber reiterated his call for silver to hit $187.50 an ounce. Chris got this number by dividing $3,000 (his forecast for gold) by 16 (the historical silver-to-gold ratio). The traditional silver-to-gold ratio has been between 15 and 16... That's what it was when the U.S. dollar was born in 1792 and at the peak of the precious metals bull market in January 1980. At the time of his writing, the silver/gold ratio was a bit more than 42. Chris wrote:

Yesterday, March 7, the silver-to-gold ratio dropped below the benchmark "40-to-one" number, hitting 39.32. The ratio hit 39.91 today. We haven't seen a silver-to–gold ratio that low since 1984.

To learn what Chris Weber is recommending now, click here...

 New 52-week highs (as of 3/7/11): Silver Wheaton (SLW), Virginia Gold Mines (VGQ.TO), CARBO Ceramics (CRR), Hershey (HSY), Paramount Gold & Silver (PZG), iShares Silver (SLV), SandRidge Energy (SD), Barnes & Noble (BKS).

 In today's mailbag, a further explanation of our tax ideas for The Project... Any other questions about our efforts? feedback@Stansberryresearch.com.

 "The nation's debt is truly daunting. As a country we have bought more 'house' than we can afford. So I appreciated greatly your effort to make sense out of the tax basis in this country which is simply too complex to be efficient and too costly to solve our problems. So 20% over $24,000 is a great idea. Unfortunately it is 10 years too late.

"As Michael Moore said in Madison – 400 wealthy Americans are worth more than 155 million of the lowest rung Americans (and that fact alone makes your plan not doable) because the Bush tax cuts and inheritance tax cuts could only exist to somehow prove that a country could go bankrupt if no one is willing to pay for its services. And when you add two wars to those tax cuts and those wars are not really on the books because no money is being collected to pay for them then I am forced to believe that the good ideas you have are already too late. If you disagree then good luck because unless you have a way to rebalance the equation of rich and working class in this country – working class means tax base in my thinking – then I see no fairness for you to now declare that everyone should pay an equal amount of taxes.

"My suggestion is that the 20% works up to $250,000 and then a tax basis of 50%, with no tax exemptions other than your $24,000. People making more than $250,000 will scream but they've had 10 years to put money in the bank and Wall Street while the middle class has been forced to deal with lay-offs and salary reductions. Put the fairness in your equation and I will support your effort 100%." – Paid-up subscriber Michael Diamond

Porter comment: 1. A tax on earned income (today's income tax) will never actually capture the rich, who shelter their income inside long-term investments and muni-bonds. That's why the 20% has to be on "all sources" of income.

2. Even if you double today's tax revenue, we'd still have a deficit. In other words, unless you can find a way to seriously cut spending, we will go broke within five years.

3. As long as half of U.S. citizens are paying nothing, you'll never cut spending in a democracy.

4. In regards to fairness, assuming you were taxing all forms of income, 20% would produce enormous tax revenue from the wealthy. Enormous. You're forgetting about how much income is sheltered now.

5. Meanwhile, median income in the U.S. is roughly $50,000 per household. After the $24,000 exemption, that household would pay $5,200 in taxes – total state and federal. That's probably less than what they're paying now.

 "Totally agree with today's 'Paid-up subscriber II.' Porter Stansberry has great courage and conviction. He's the Ron Paul of investment advisory services. A hero's quest is never easy." – Paid-up subscriber Andrew Reames

 "I strongly support your position and want to be part of a realistic plan to attempt a rescue of our nation from the downward slide we are on. I sincerely appreciate your patriotism and willingness to sacrifice your comfort zone to make your knowledge available to those of us who are extremely concerned but realize we cannot do this alone.

"Obviously our political leaders don't have a clue... they simply are ignorant of how our economic system works (should work). My nephew is a state legislator and is receiving this digest.

"I have forwarded your recent digest to a large number of friends and family. You will be surprised at how much support there is for your position as there are many of us quietly waiting for a voice of reason in the midst of the socialistic chaos our country is wallowing in. It may be too late to turn this mess around, but many patriots like you are ready to try. Please continue to be gracious in overlooking the critics who have already succumbed to the system.

"You are a rare voice of common sense and hope." – Paid-up subscriber Alran D. Sapp

Regards,

Dan Ferris and Sean Goldsmith

Medford, Oregon and Baltimore, Maryland

March 8, 2011

Icahn's corny retreat... Great investors and market tops... Subway v. McDonald's... Rejoice: housing is worse... Biggest deficit ever (again)... Weber: $187 silver...