'Mr. Buffit' in Hong Kong

'Mr. Buffit' in Hong Kong... A bank buying spree... Bloody Mary turns 75... Tudor Jones halts redemptions... Gold $2,000...

Goldsmith comment: Porter is recovering from a 16-hour flight to Hong Kong and a full day of meetings and presentations at the Alliance Conference. He'll have updates and stories for you on Wednesday.

According to the Wall Street Journal, Morgan Stanley may go on a regional bank buying spree to increase its deposits after converting to a bank-holding company two months ago. Goldman Sachs and American Express also converted to bank-holding companies and also need to shore up deposits. This should lead to an onslaught of regional bank takeovers in the coming years. We've already seen Wells Fargo buy Wachovia, Bank of America bid for Merrill Lynch, JPMorgan buy WaMu and Bear Stearns, PNC buy National City, and Citigroup bid for Chevy Chase.

What's the best way to play this upcoming trend? The SPDR KBW Regional Banking Fund (KRE). It's down 19% this year and yields 4.5%. Billionaire vulture investor Wilbur Ross owns a big chunk.

Today is the 75th anniversary of our nation's favorite hangover cure... the Bloody Mary. A French bartender named Ferdinand Petiot created the drink when he came to Manhattan in 1933. If you're in Manhattan today, stop by Times Square at 1552 Broadway, where the city will honor Petiot's granddaughter with a Bloody Mary toast. Thousands of New York bars are running specials on the concoction.

Citigroup is jumping on the gold bandwagon, calling for the precious metal to hit $2,000 an ounce within two years. The bank says the government's liberal money printing will either cause inflation or depression followed by civil disorder and possibly wars.

"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock. Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop."

Fitzpatrick also said gold traders are watching reports from Beijing that China is considering boosting its gold reserves from 600 tons to 4,000 tons to diversify away from paper currencies.

Hedge-fund manager Paul Tudor Jones, who made his name predicting the 1987 stock market crash, is the latest hedgie to halt redemptions. He suspended withdrawals from his $10 billion flagship fund and plans to split out toxic assets into a separate fund with lower fees. In a letter sent to clients on Friday, Jones wrote investors wanted back 14% of their money at year's end. This would have left remaining investors with too large a percentage of illiquid assets, particularly corporate debt in emerging markets.

Jones' investors are rushing for the doors despite his relatively stellar performance – the Tudor BVI fund is down only 5% at the end of November. "I recognise that a restructuring is an unwelcome, but I believe necessary, step against the backdrop of Tudor BVI's 22-year history of unbroken profitable years," Jones wrote. "I believe it is but a brief step, however, on the road to important long-term changes for the benefit of all investors."

We've recently been writing about upcoming bankruptcies in the highly leveraged REIT market... and General Growth Properties (GGP) is the poster boy. GGP is the second-largest mall owner in the country, owning and managing more than 200 malls. The stock has fallen more than 97% in one year, and the company was spiraling toward bankruptcy. But it got a lifeline over the weekend... It won a two-week extension to pay a $900 million debt. Two malls in Las Vegas, one of the worst real estate markets in the country, are pledged as collateral. GGP is clearly trying to delay the inevitable.

Nearly 50% of U.S. companies have below-investment-grade credit ratings. With yields on so-called "junk" corporate debt approaching 20%, these companies can't afford to raise money. Only two companies have successfully issued debt in the high-yield market in the past two months – the lowest deal volume since 1995.

"It's not optimal conditions for companies to go into the market right now," said Martin Fridson, chief executive officer of Fridson Advisors, an investment firm in New York. "There are no deals getting done, which shows there is no capital available at prices which are appealing to issuers," he said.

In current conditions, two things can happen: 50% of all U.S. companies can go bankrupt or yields on corporate debt can decrease (by government intervention or other means). And with the government printing money so freely, I think we know which outcome will occur. When yields go down, bondholders who bought today will make a fortune... They will earn near 20% yields for years and collect healthy capital gains as the credit markets thaw. As long as the issuing business doesn't go bankrupt, your capital is 100% safe.

To put it in perspective, in a recession, default rates could reach as high as 11%, meaning 89% of corporations will still pay their obligations in full. True Income analyst Mike Williams is busy finding that 89% and producing huge yields for his subscribers. This truly is a once-in-a-lifetime opportunity to buy corporate debt. We're currently offering Mike's service at a large discount, but only through midnight tonight. To learn more, click here...

New highs: none.

In today's mailbag, Porter's a "prik" and some Hong Kong recommendations. For those subscribers in Hong Kong, tell us what you thought of the conference: feedback@stansberryresearch.com.

"Hong Kong has always been a shining example of What Is Possible! They (at least used to) have a whole class of folks known as the Middle Class Millionaires, people who worked up from the push-cart economy to millionaire (in US$) status. They had the highest per capita ownership of Rolls Royce cars. Go to any night spot and you would see people from every race and culture hanging out together having a cocktail – it reminded me of the bar scene in Star Wars with all the space creatures. They came from Everywhere but had one thing in common, they came to make money. Hong Kong has lost some of it's beauty and excitement for me due to 1. Closing Kai Tak airport – landing there was the MOST fun to have in a large jet. The Cathay Aero Club next to the runway was the best place to have a beer and watch outrageously bad flying – lots of pilots just panicked! 2. Commies taking over, more red tape and less entrepreneurial fever 3. Commies sending smog! It used to be sparkling clear! But I still love 1. Evening harbor cruises and any boat ride across Victoria Harbor 2. Victoria Peak Tram – incredible! – and a burger and San Miguel at the Peak Café. Walk it off on the path around the Peak for the most incredible views. 3. Take a tram tour. Anyone that says "overcrowding and poverty" cause crime and violence have not seen Hong Kong. I think people there are too busy moving up the ladder to get bogged down in that. 4. Escalators from Central up to Mid Levels – World's largest escalators have created their own neighborhood of nice little restaurants and bars 5. High Tea at the Peninsula Wish I could be there!" – Paid-up subscriber Sally E.

"CAN'T GO BECAUSE I DON'T HAVE YOUR BUCKS Mr BUFFIT" – Paid-up subscriber Ron

"As a young Marine Corps officer in 1985 looking toward my next career on Wall Street I ordered three suits from a Hong Kong tailor while on our battalion's Western Pacific deployment. I did not notice when trying on the suits in the shop weeks later but when I actually had to wear them to work several months later when I was discharged (honorably) from the Corps I realized the problem. The suits were cut too high under the armpits. It seems the lean body type they are used to fitting is different than the American body (and I was a lean American body at the time). The prices are enticingly cheap but beware the fit. Hope you have a productive and enjoyable conference and safe trip home." – Paid-up subscriber Bob

"Why I'm not going [to the Alliance]. I do not have a passport, and Porter sometimes acts too much like a BMW driver (a prik)." – Paid-up subscriber Larry

Goldsmith comment: Porter actually drives a Mercedes... which he occasionally backs into his garage.

Regards,

Sean Goldsmith

Baltimore, Maryland

December 1, 2008

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