Predictions from Grant's conference

Predictions from Grant's conference... Kerkorian missed our letter from GM's chairman... A great conference call... "Wish I'd followed my stops"... New highs, finally...

Jim Grant's Interest Rate Observer is the best-written newsletter in all of financial journalism and its progenitor is a brilliant and classy man. Attending his conference this week was genuinely a pleasure... and we were joined by the finest minds in all of investing. A summary of some of their ideas is below.

But first, one of my favorite lines of the conference. Says Jim Grant about the newsletter business: "The only barriers to entry are a rude question and a pencil."

In his third-quarter letter to investors, permabear Jeremy Grantham of Grantham, Mayo, Van Otterloo said the market is attractively priced for value investors, but there's more pain to come...

At under 1,000 on the S&P 500, U.S. stocks are very reasonable buys for brave value managers willing to be early. History warns, though, that new lows are more likely than not. Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not. Don't worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry! Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: Hesitant and careful buying at these prices and lower. Good luck with your decisions.

Seth Klarman agrees. Klarman, founder of hedge fund Baupost Group, reminded Grant's attendees cash flows don't set stock prices. The most panicked seller at the end of the day sets them – as evidenced by the panicked selling and hedge-fund liquidations that have punished almost every stock. While most investors are complaining about extreme volatility and going to cash, Klarman is pouring cash into the market. "This is value heaven," he said.

Klarman usually holds up to 50% of his $6 billion fund in cash. His cash position is currently around 15%, a "historically low" level. Klarman said he expects the market to fall farther, but it's OK to start building positions now. Better to buy now, lose some money, and ride the stock on the way up than miss the meteoric rise. Unfortunately, Klarman didn't discuss any specific holdings... He never does.

In a bullish note, Klarman did say he hardly has any hedges in place right now, other than "disaster insurance," because all assets have fallen so drastically.

Leon Cooperman of Omega Advisors doesn't believe we've hit bottom either. But he thinks we're getting close. The most interesting stat Cooperman presented was that 21.2% of all S&P 500 stocks are yielding more than 10-year Treasuries – a historic high. He also said the best evidence the recession is over will come when a company announces bad earnings and its stock holds steady or rises. He hasn't seen it yet.

Monday, we reported on an attempt by private-equity firm Cerberus to merge Chrysler, the struggling car company it holds, with General Motors. Now, another major auto investor, billionaire Kirk Kerkorian, wants out.

Kerkorian started buying Ford on April 2 and amassed a 6.43% stake. On Monday, he sold 7.3 million Ford shares on the open market for an average price of $2.43 – well below his $7 entry price. Tracinda, Kerkorian's investment vehicle, said it will further cut its Ford position and may sell all 133.5 million remaining shares. At the current share price, Kerkorian would lose around $640 million of his original $980 million investment.

Kerkorian's other large investment is a 54% stake in casino operator MGM Mirage. The value of his stake has fallen almost $13 billion to a little more than $2 billion.

New high: Yes! And from Sjuggerud, no less. The Market Vectors Double Short Euro ETN (DRR).

In the mailbag, some positive feedback about our conference call. And as far as we know, these people aren't related to us. Maybe they're drunks... Send your comments here: feedback@stansberryresearch.com.

"Merging GM and Chrysler reminds me of the old saying that you can't create a tile bath by merging two outhouses." – Paid-up subscriber Pat

"I too want to thank Porter, Steve, Jeff, and Dan for taking their time on Friday to offer their ideas and strategies looking forward. It really made me feel like I was a part of something, and that you guys really care. I knew that already of course. I have learned a lot over the years, most all I know about investing and trading from you. If I could just learn to follow my trading stops, maybe I wouldn't have gotten killed as bad. It is truly hard to do for me. Still, I'm confident the portfolio I have will do well in the coming months, and I'm sitting on a pile of cash. No matter how cheap stocks are right now, I have to see something that convinces me the worst is over. That hasn't yet happened by a long shot. Thanks for really caring guys." – Paid-up subscriber John

"I finally bit the bullet and did something I've wanted to do for a long time... I joined the S&A Alliance. I just have to say that I am blown away by the value this service offers - just incredible. I must also mention how efficient and polite your customer service people are. You have the best customer service of the whole Agora 'stable.' I hope you take good care of those guys, Porter, as they are in the front-line of your business and they do an excellent job." – Paid-up subscriber Mark Eaton

Regards,

Porter Stansberry

Baltimore, Maryland

October 22, 2008

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