New S&P 500 lows next year?

New S&P 500 lows next year?... Morgan Stanley blames the shorts... Chanos pulls his Morgan Stanley account... Jim Rogers buying ag... Don't move to Britain... Gartman short the pound... "Get rid of Porter and Ferris"...

Jeremy Grantham, the long bearish leader of asset manager GMO, said in a recent interview that he gives 2-1 odds the S&P 500 will make new record lows in 2009. Grantham is buying high-quality U.S. stocks, however, due to cheap valuations. He's buying now because he thinks they'll perform well – over the next seven years. Can you stomach a seven-year wait to make money? Most investors can't, so they miss all the great buying opportunities.

Grantham says four asset classes are cheap right now: High-quality U.S. stocks, emerging-market stocks in the aggregate (he didn't name specific countries), Japanese stocks, and fixed-income securities.

Grantham also made what I believe is a very good suggestion for how to proceed from here. He said you should consider how you'd feel if the market fell another 20%-30% and act accordingly. So maybe you just put 20%-30% of your money in stocks now, and then wait to buy more after the market falls more. That's how most professional investors enter any position.

The Wall Street Journal published a great article yesterday talking about the meteoric drop in Morgan Stanley's share price and the role short sellers played in the destruction. On September 17, shares fell from $28.35 to as low as $16. It all started with a rumor that Deutsche Bank withdrew a $25 billion credit line to Morgan Stanley. Traders panicked. The cost of credit default swaps (CDS), insurance against default, soared. The price for insuring $10 million of Morgan Stanley debt rose to $727,900 a year, from $221,000 on September 10. Before noon on September 17, brokers were requiring up to $2 million upfront to insure $10 million of Morgan debt. The spike in insurance cost spurred equity traders to short the stock. The number of shares sold short jumped to 39 million, nine times the daily average this year.

John Mack, CEO of Morgan Stanley, called Hank Paulson and SEC Chairman Christopher Cox – whoever he could get on the phone – and asked them to ban the short selling of his stock. He then released a memo to employees saying, "I know all of you are watching our stock price today, and so am I... We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."

The memo upset some Morgan Stanley clients, many of whom sell stocks short, including hedge-fund pioneer Julian Robertson. Short-selling legend Jim Chanos, another client, "hit the roof" when he heard about Mack's memo. After the market closed that day, Chanos pulled more than $1 billion of his Kynikos Associates' money from a Morgan Stanley account. "It's one thing to complain, but another to put out a memo blaming your clients," said Chanos. He added that the memo ended a 20-year relationship Kynikos had with Morgan Stanley and that his firm did not buy swaps or sell Morgan's stock short. Days later, more than three quarters of Morgan Stanley's approximately 1,100 hedge-fund clients requested to pull all or some of their assets from the firm. Morgan Stanley shares are still floundering at less than $15 a share. And that's after a nearly 50% three-day rally.

As if on cue from our subscriber's question yesterday, Jim Rogers did yet another interview... this time with Bloomberg. The famed investor said the U.S. dollar will be "devalued" with the actions of policy makers. "They think that if you drive down the value of your money, it makes you more competitive. Now that has never worked in history in the long term," he said.

Rogers also predicted the dollar will lose "its status as the world's reserve currency." To counter the move in the dollar, Rogers is buying the Japanese yen, the best-performing currency this year. And of course, he's buying commodities, saying the "fundamentals have not been impaired, and, in fact, are improved." He's buying all commodities, but especially focusing on agriculture. "Sugar is 80% below its all-time high," Rogers said. "It's astonishing how low some of these prices are."

The Wall Street Journal reported today that Treasury Secretary Hank Paulson says it's "naïve" to think one action or piece of legislation could stem the "once or twice in a hundred years" event that the U.S. currently confronts. Odds are, his successor will agree with him, so we'll see more actions and more legislation, none of which can be good for the economy over the long term.

If you earn more than $225,000 a year, don't move to Britain... If re-elected, the current government will raise taxes for the highest bracket to 45% – the measure will be introduced on April 11. The current rate is 40% and hasn't been changed since Margaret Thatcher's government cut it from 60% in 1988. The government would also abolish sales tax and increase duties in tobacco and alcohol.

Our friend Dennis Gartman parlayed this information into a trading thesis... "England has relied upon financial services for economic growth for the past decade or so, and to tax that area of the economy at a time when it is already contracting materially is economic lunacy. Certainly this cannot be supportive of the British Pound Sterling, either in the long run, or the short run too."

New highs: none.

In today's mailbag... Apparently I've been "infected" with negativity... but still deserve a happy holiday. How will you enjoy your Thanksgiving? Drop us a note:

feedback@stansberryresearch.com.

"In the November 24, 2008 issue of Daily Wealth, Dan Ferris commented on the prospect of a General Motors bailout by saying, 'Failure is an integral part of our system.' Just GM was mentioned, not the Domestic Auto Industry as a whole. If memory serves me, Chrysler was bailed out in the past, but what was good for Chrysler then, and may still be good for Chrysler now, as Dan didn't mention Chrysler at all, is most definitely not good for GM now. You don't see, so I am forced to point out that I look for POSITIVE suggestions that inherently imply that what was not mentioned is the negative suggestion. I don't need to be spoon fed any more of Porter's long standing rant against GM. I am going to take this negative sentiment to heart and now apply it to all the Stansberry and Associate research products, including Dan Ferrris' S&A Digest. Ferris has now been 'infected' with this negativity that once only seemed to afflict Porter. Unfortunately the only way to purge the bad, Porter and Ferris, from the other good researchers is to let all of Stansberry and Associates fail. I don't want to throw any of my good money into an organization with these leaders at the top of S&A and, besides, 'Failure is an integral part of our system.' You will have lots of company in your failure. Happy Holidays." – Anonymous

Ferris comment: Getting rid of the guys who shorted Lehman Brothers (me), Fannie & Freddie (Porter), and Gannett (Porter), and criticizing us for "negativity" about GM, Ford, and/or Chrysler seems a bit misplaced right now. And since we started talking about GM's bankruptcy almost two years ago, the stock is down over 90%. Also, I don't know what "You will have lots of company in your failure" means. If you mean that lots of people will agree with me the next time I cherry-pick the first major financial institution to go bankrupt in years, I doubt it.

"I must say you guys sure take a lot of abuse for not calling everything EXACTLY right. I think what everyone needs to get a grip on is to pay attention to general tone and direction you give. The market always has and always will do what ever the hell it wants (even if we had a crystal ball) and when it does that we all have to make individual decisions on what we can live with. Your advice/prediction on the real estate problem prompted me to sell all my commercial 2yrs ago, I pulled my money out of stocks in July due to your predictions. Am I buying stocks now... you bet, do I follow all your recommendations... oh hell, no... just the ones that make sense to me because ultimately I am the one responsible." – Paid-up subscriber JT

Ferris comment: "...ultimately I am the one responsible." My experience tells me that attitude is an unusual achievement. Congratulations.

"So does this mean the taxpayers just bailed out a company that spent $400m to put their name on a stadium?" – Paid-up subscriber Steve

Ferris comment: Gosh, I guess you're right. Looks like you and I are partners in a stadium.

Regards,

Dan Ferris

Medford, Oregon

November 25, 2008

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