Pawning a Picasso

Pawning a Picasso... A "steaming pile of libertarian bullsh*t"... Just bail 'em all out... Earnings from Ford, a delay from GM... Stocks are cheap... Buy now, "idiot"...

Goldsmith comment: Porter is down in Florida, feverishly finishing up his issue. I'm on Digest duty today.

Looking for a new Ferrari, Rolex, or Picasso painting on the cheap? Just head to the local Beverly Hills pawnshop. "Business is booming" at Beverly Loan Co, according to CEO Jordan Tabach-Bank. Bank has "never seen so many bankers, lawyers, doctors, and actors" trying to pawn valuable things. He believes things are so bad his shop has become "the bank of only resort" for wealthy Californians.

Business has tripled at another Beverly Hills pawnshop, where the owner is making many "six- and seven-figure deals," including a recently pawned $2.7 million necklace. As evidence of how bad things are getting, the redemption rate fell 7% to 82% and, according to one owner, will likely drop more during the next six months.

Ford released quarterly numbers today, and they're awful. The automaker announced a $2.98 billion operating loss. It burned $7.7 billion in cash and said it would cut more salaried jobs. Sales dropped 22% to $32.1 billion.

Things at GM were so bad that at the time of this writing, it delayed its earnings announcement. But don't worry... The government is here to help.

GM, Ford, and Chrysler are now asking the government for a $50 billion bailout. The package would be $25 billion for health care spending and $25 billion for general liquidity... Mind you, the "Big Three" said they only needed $10 billion a couple weeks ago. These businesses have failed, plain and simple. A government bailout for car companies is absolutely ridiculous. Yes, it would be unfortunate for their employees. But if you run a shoddy business, you fail and declare bankruptcy. That's the way capitalism works.

And while the hose is still on, AIG is asking the government for yet another bailout – in addition to the $100 billion or so already on the table. I'm not sure if the insurer will get any more cash, but possible resolutions include backstopping AIG's credit default swaps and reducing the interest rate or extending the duration of its two-year loan.

Brookfield Asset Management (BAM), a Canadian holding company, announced earnings today... BAM is a $10 billion business sitting on $3.5 billion in cash. It generates $1.5 billion in free cash flow a year and regularly turns over 10% of its portfolio annually – generating another $2 billion in capital. Additionally, BAM has access to $20 billion of permanent capital. This company is in the sweet spot: Global assets are dirt-cheap and it's sitting on a mound of cash. But the only thing BAM has been buying is its own shares. From the company's latest shareholder letter...

Since June 30th, we have focused our investment capital internally, investing in what we know best. This has included repurchasing 7.5 million of our shares at prices from US$16 to US$22, with an average purchase price of US$20. We believe this to be a substantial discount to long-term intrinsic value, and we inherently have greater knowledge of this security than anything else we can purchase.

In addition, our North American office property company Brookfield Properties, repurchased 1.5 million of its shares. Furthermore we have been buying up shares in, and pieces of our other assets and investments, and selectively providing capital to our subsidiaries to repay debt to help ensure we can be in a position in each to withstand extreme events and capitalize on opportunities.

Managers who recklessly repurchase shares when they are overvalued can hurt shareholders, but intelligent managers like the guys at BAM are a gift. They know exactly what their stock is worth, and they'll happily buy it all back at the right price. This creates enormous value for shareholders in the long run.

Another company known for intelligent share repurchases is Loews Corp, run by the Tisch family. The company has repurchased 25% of its outstanding shares every decade since 1970. Longtime Loews shareholders have seen their investment grow at a compound rate of nearly 17% a year, for about 8,000% gains since the stock went public.

The U.S. unemployment numbers came out today, and they were worse than expected. Job losses accelerated in the past two months, pushing the unemployment rate to a 14-year high. Nonfarm payrolls (which exclude government employees, farm workers, private-household employees, and nonprofit employees) dropped 240,000. Wall Street was expecting 200,000, but the market still opened up over 1.5%.

I ran a screen this morning for all U.S. stocks trading at or below 10 times enterprise value (market cap + debt – cash) to EBITDA (earnings before interest, taxes, depreciation, and amortization). EV to EBITDA estimates "takeover value," or what you'd pony up to buy an entire firm, and a 10 multiple is pretty cheap.

Currently, 2,424 companies in the U.S. meet the criteria. You may recognize some of the names: ExxonMobil, Wal-Mart, Microsoft, Johnson & Johnson, Verizon, Intel, McDonald's... the list goes on.

Even though the market is cheap right now, things could, and probably will, get worse from here. But that shouldn't stop you from starting to build positions in some of your favorite stocks. If you don't have any stocks on the watch list, the list above is a great starting point. In the words of the "Wizard of Wharton" Jeremy Siegel, "If stocks are attractive and you don't buy and they run away, you don't just look like an idiot, you are an idiot."

New highs: none.

Get in your cheap shots while Porter's away: feedback@stansberryresearch.com.

"If your short a stock which goes bankrupt and you then buy back the stock you incur a tax liability. If you stay short it is my understanding that you will never be taxed on the gain. Am I correct?" – Paid-up subscriber Jack Huotari

Goldsmith comment: Sorry, Jack. You need to talk to your accountant about that one.

"What a steaming pile of pretentious, libertarian bullsh*t! Are you ready to pick up your own garbage, maintain your own streets, parks and infrastructure? Are you ready to provide your own police and fire protection? Are you ready for EVERYONE to educate their own children (you think most Americans are morons now, just wait)? What about caring for all the elderly in your community? You think our government is composed of gangsters? Ever been to Mexico? That's just the beginning of the list – with a guy like Ron Paul, even though he cannot be elected right now, we can start to move towards the limited government our ancestors fought for – but he doesn't waste his followers' time with these 'everyone sucks but me' rants like you do. Yes, we've gotten far away from where we should be. It took a long time to get there. It will take a long time to reverse all of this. Your scorched-earth rants accomplish nothing. As for Obama, fifty years ago, the thought that a person with any significant African ancestry could become President of the United States was totally and utterly unrealistic. Two days ago, it happened. So, there is hope, whether you believe it or not." – Anonymous

Goldsmith comment: This is one of the great idiocies of "statism"... the belief that government entities should oversee most aspects of our lives. Almost every service a government provides (like delivering mail or disposing waste) can be done cheaper and more efficiently by a private enterprise – one that must economically serve its customers or cease to exist. America's founders would be aghast to see government involved in most of the activities it is in today.

"I just wanted to say that your response to a subscriber who asked are you god Stansberry on Nov 5th was outstanding. Your response to him was one of your best ever. You put into words exactly how I feel; unfortunately our country is full of sheep. I really enjoy your demeanor." – Paid-up subscriber Mark

"There is a big plus being an Alliance member, beyond the obvious. I use Jeff Clark's work as a market barometer to time purchased and sales. Granted, he often has a short term view, but there is enough divergence in his time horizons to make following him worthwhile. Like the 920 level. The market blew past to the downside, then retraced to about 918 where it paused for about 25 mins. Seemed positive, but the S&P never could surmount the resistance and now it plunged back to 908. Not a good sign. Thus... having support and resistance numbers are a great help. I prefer relying on those developed by traders, not by me the investor. Add Jeff to the list for me... why I feel good about being an Alliance member. I still have Brian Heyliger to thank for Prospect Capital. Sure, it blew through the stop he set but we held on, noting that insider buying got furious, the co reaffirmed a positive quarter, etc. It's one of the best run companies I've run across in some time, young as it may be. Sorry, no vitriol here!" – Paid-up subscriber Jim Pursley

Regards,

Sean Goldsmith

Baltimore, Maryland

November 7, 2008

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