Meeting with Peter Churchouse

Meeting with Peter Churchouse... 100-year Treasuries... A Goldman Sachs check card?... Gross says stocks are overvalued... New York real estate market getting worse...

Goldsmith comment: Porter is meeting with Peter Churchouse in Hong Kong today. Churchouse, as some of you already know, was Morgan Stanley's man in China for nearly 20 years. Few people know more about Hong Kong's real estate and stock markets.

At the S&A Alliance Conference this week, Churchouse explained: "Hong Kong has almost never been cheaper. More than 97% of the time Hong Kong's stock market trades above book value. It's at book value now. And on a dividend-yield basis, Hong Kong has never been cheaper..." Says Porter: If you're bullish on U.S. stocks based on valuation (and you should be), you ought to be wildly bullish on Hong Kong.

What do you do if you have accumulated so much debt that you will likely never be able to pay it off? If you're the U.S. government, you create a new debt instrument. At least that's what BlackRock Managing Director Peter Fisher thinks it should do. Fisher, who co-heads the mutual fund's fixed-income portfolio and is a former undersecretary of the Treasury, said the government should considering selling 100-year bonds to ease borrowing costs as the budget deficit nears $1 trillion.

"If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that's coming up," Fisher told Bloomberg.

In 1993, Walt Disney became the first company since at least 1954 to issue 100-year bonds. In 1997, Ford sold $500 million of 100-year bonds. Demand was so high it sold out in 25 minutes. "There are a lot of investors, pension funds, endowments, who would love to get a long-term annuity like that," Fisher said. "They love to get an interest-only stripped off the 30-year, and they'd love to get something even longer. I think there would be a lot of demand from investors for that."

This should really put the severity of Wall Street's troubles into context for you... Goldman Sachs, the super-secretive and elitist white-shoe firm, is considering a foray into Internet banking to broaden its sources of funds. The once-mighty institution may be reduced to offering certificates of deposit to mere commoners, a far cry from the massive leverage and risky proprietary trading of its glory days. Goldman Sachs is also soliciting deposits from its wealth-management clients and large corporate customers.

Nearly 16 million square feet is currently listed as available in large blocks (generally 100,000 square feet or more) in 68 office buildings in Manhattan, according to Colliers ABR, a commercial brokerage firm. That is almost twice the number of blocks and total square footage listed as available a year ago. And Colliers says those numbers are headed up.

Subleases represented the biggest increase. At least 16 large Manhattan blocks are being marketed for subleasing, up from only three a year ago. In addition to higher vacancies, rents are also falling... in the neighborhood of 20% to 30% to around $80 a square foot in Midtown. Higher vacancies, lower rents, more problems in the future... may be time to short REITs.

Bond King Bill Gross, manager of the world's biggest bond fund, said stocks aren't as cheap as they appear to be given that low borrowing costs, deregulation, and tax cuts are a thing of the past. "Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates," Gross wrote in a PIMCO update. "That world, however, is in our past not our future."

Gross said equities may appear cheap according to price-to-earnings multiples and the Q ratio (which compares prices with the replacement cost of net assets), but the new economic environment negates traditional measures of value. He didn't give an outlook for equities, but said corporate bonds are better investments.

"More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to," Gross said. "That and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner."

New highs: none.

In the mailbag... A positive review of the conference and less enthusiasm for our social lives. Send your notes here: feedback@stansberryresearch.com.

"The conference was excellent: entertaining, informative, well-organized and catered, in a classy venue on a beautiful day. I signed up for my first newsletters a year ago and then joined the Alliance in April. Being able to attend the conference was a bonus because we live in China – only a one-hour ferry boat ride away from HK. It was fun to meet the editors and others whose names appear in our inboxes every week. The presentations and viewpoints were varied but also consistent with what often gets written. There were no surprises (other than the mystery guest) but solid reinforcement regarding taking care of one's savings (gold) while taking advantage of the present chance to invest in high quality companies, sell covered calls and naked puts and buy bonds. Finally, meeting fellow subscribers was also just as rewarding – many of whom live in Asia but also more than a few who flew from the U.S. to attend." – Paid-up subscriber Don Thayer

"Enough already about how you're spending millions. I, for one, am tired of reading about you eating in 3-star restaurants and staying in Ritz Carltons. You can eat there all you want, I just don't want to hear about it. I have lost more than 40% of my invested money and while I don't blame you for that, given the economic crisis, I don't need to hear about your cavorting. We poor investors are cutting back on things like eating out and travel. I did like your chart showing the cost of the current bailout compared to all the others." – Paid-up subscriber Joann

Goldsmith comment: Don't worry, Joann. It's not all champagne and caviar around here.

Regards,

Sean Goldsmith

Baltimore, Maryland

December 3, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame