The biggest reason we don't like Petrobras...

The biggest reason we don't like Petrobras... A government involved in bribery and money laundering... Kim's thoughts on Russia today... How Steve Sjuggerud made 121% thanks to the U.S. government... A potential 279% gain today...
 

 The hits keep coming for Brazilian state-owned oil giant Petrobras...

 

We've long criticized Petrobras, not just because its $171 billion in debt makes it the world's most indebted oil major... and not just because the majority of its reserves are deep offshore and will cost hundreds of billions of dollars to develop.

 

Our biggest gripe with Petrobras has always been that it's run by a socialist government. And we don't want to invest in a company controlled by any government, much less Brazil's.

 

You can read more on our distaste for Petrobras in the October 27 Digest.

 

 Our skepticism surrounding Petrobras has proven correct. Just take a look at this stock chart...

 

 

 Last week, Petrobras announced it would miss its deadline for filing its third-quarter results due to a corruption investigation.

 

Imagine our surprise when today, news broke that Petrobras has been laundering money and paying bribes...

 

 Brazilian federal police arrested 18 people on Friday as part of a bribery and money-laundering scheme that has drained Petrobras of hundreds of millions of dollars. The police also served dozens of search warrants and raided the offices of 11 companies it suspected of participating in the scam.

 

Prosecutors allege some of the money went to Petrobras executives and high-level politicians – including members of the current president's party.

 

Shares of Petrobras were down more than 6% on the news. They're down more than 50% since the beginning of September.

 

 However, as bad as things are in Brazil (and for Petrobras in particular), it's still not nearly as bad as the situation in Russia, where corruption, manipulation, and bribery are simply part of doing business.

 

For the latest in Russia, we turn to Global Contrarian editor Kim Iskyan...

 

At the surface, Russia's stock market is a contrarian's dream. Between the conflict in Ukraine, sanctions on the country, a struggling economy and plummeting currency, and bad boy President Vladimir Putin, headlines about the country are relentlessly negative.   The country's stock market is the cheapest in the world, down 30% in dollar terms this year and trading at a price-to-earnings (P/E) ratio of less than five times. It's a bargain compared with the emerging-markets average of 11 times. Russian stocks yield 5.4%... twice the average of emerging markets. So is Russia a screaming buy? It's just a matter of time before the terrible sentiment fades and Russian stocks trade in line with other emerging markets... right? I think that's wrong. Russian stocks are cheap... but they'll stay that way for a long time.

 

That's not an easy thing for Kim to write. He spent nine years as a stock analyst in Moscow, working for Russian banks. His job was to try to convince emerging-market investors that Russian stocks should trade in line with other emerging markets... rather than at a steep discount.

 

 Still, he admits Russia's market deserves its lower valuation today...

 

Russia is different from most other markets. Energy companies – which dominate Russia's market – tend to trade at lower valuations than other sectors because of their cyclicality.   Russia's economy is also vulnerable to swings in commodity prices... energy accounts for around 25% of the country's GDP. When oil prices fall, as they have (down 30% since mid-June) the Russian economy is hit hard. Western sanctions plus lower oil prices means Russia will be lucky if the economy doesn't shrink next year. And much of the appeal in emerging markets is that they're supposed to grow faster than developed markets, not slower.

 

 As Kim explains, political risk – a large contributor to investor fear – is real. The invasion and annexation of the territory of Crimea in the spring, plus the ongoing conflict in Ukraine – by far the most serious confrontation between Russia and the West since the end of the Cold War – show that Russia is a wild card...

 

But it's not that Putin is taking the country in a crazy direction. His approval ratings are an astronomical 88%, which suggests that the vast majority of Russians agree with what he's doing.

 

 According to Bloomberg, Russian stocks' average P/E ratio over the past 10 years is around seven times. Over the past five years, that drops to 6.3 times. During most of that time, oil prices were higher than they are now... Putin wasn't waging war in a neighboring country... And Russia's economy wasn't under sanction.

 

But even if all of the problems in Russia went away (an unlikely scenario), the upside still isn't huge...

 

If investors bid up the valuation of Russian stocks to their 10-year average of seven times, that would be a 40% move higher from here. Of course, that's not happening. The conflict with Ukraine isn't going away. Russia's economy isn't about to start growing 7% per year like it did when oil prices were strong from 2000 to 2007. Regardless, Russia faces enormous structural problems that stand in its way of being a "normal" emerging market.   It's more likely that Russia slowly deteriorates. Earnings are declining and companies will cut their dividends. Sanctions will make it difficult for Russian companies to roll over foreign debt and the ruble will come under increased pressure.

 

But at the right price, Kim is willing to buy in... and at a certain point, all of the bad news will be priced-in to Russian stocks. If oil prices recover, Kim believes Russian stocks could easily bounce 25%. Russian stocks are so hated today that they're starting to draw the attention of some folks, including legendary investor Jim Rogers, who told attendees at the Stansberry Alliance meeting last week that he's buying Russia.

 In 2011, True Wealth Systems editor Steve Sjuggerud discovered a way to make triple-digit gains thanks to the U.S. government...

 

It was a little-known way to profit from the bailout of the U.S. financial sector. Steve stumbled upon this opportunity when he was researching shares of a beaten-down regional bank.

 

 But first, let's back up for a moment... During the 2008 financial crisis, Congress passed the Troubled Asset Relief Program (TARP) to bail out banks that sat on billions in bad loans. And the U.S. Treasury injected hundreds of billions into hundreds of banks around the country.

 

But the Treasury didn't hand out that cash for free. It invested in every bank that received TARP money. And it received preferred stock paying a high rate of interest.

 

Digging through one bank's financial statements, Steve discovered that the government held a pile of "warrants" – or the option to buy a huge number of the bank's shares at a specific price in the future.

 

The government paid nothing for these warrants. But should it decide to exercise these warrants, it could end up owning 10% of the bank... potentially worth billions of dollars.

 

Of course, the government doesn't want to invest directly in bank stocks. It's too much of a liability (not to mention a PR nightmare). So in a move most investors never noticed, the government sold those bank warrants to the public.

 

 Today, you can buy these TARP warrants through your brokerage account like any stock. And these warrants can offer incredible upside.

 

You can think of warrants as long-dated call options. They give the owner the right to buy shares of a stock for a set price any time before the expiration date. In this case, these warrants gave the government the right to buy shares of bailed-out banks for a set price over a set period of time.

 

Like options, warrants cost much less than the actual stock price... Thus, they offer huge upside potential. But warrants have two big advantages over regular options. One, they're longer term, which means you have more time for your investment thesis to play out... And two, you can buy and sell warrants just like a regular stock.

 

 Since discovering them in late 2011, Steve has recommended six TARP warrants. He closed out of four of them in the November issue of True Wealth Systems for an average gain of 81%. But there are still opportunities in this small sector of the market today...

 

Remember, the government received warrants from every bank that received TARP funds – even the largest, most stable institutions. So Steve's subscribers made triple-digit gains in even the safest banks.

 

For example, he closed out of the Wells Fargo warrants for 121%... the Hartford Financial warrants for 105%... and the JPMorgan warrants for 60%.

 

 Many of these banks are now trading at all-time highs, leaving less opportunity for gains out there for typical investors. But Steve went digging again... And he found one well-known bank that is still trading 60% below its 2007 high and at a discount to book value.

 

While the share price is still depressed, this big bank is improving... Earnings and book value are growing. Even if this bank's valuation returns to what Steve considers "normal" levels, these warrants could return 126%.

 

 However, Steve thinks the bank could perform even better... In which case, the warrants could return as much as 279% in four years.

 

Even though Steve has written about TARP warrants for a few years, they're still unknown to most investors. That's why he's able to find deals like the one we described above... and why Steve says there's still massive upside potential in one of the warrants he has already recommended.

 

 Steve shares the full details of the TARP warrants opportunity in his latest issue of True Wealth Systems. We spent countless hours and nearly $1 million on the data and programming to develop True Wealth Systems, which is designed to find market anomalies we can trade for a profit. It scours the globe, looking across dozens of asset classes for the biggest opportunities.

 

True Wealth Systems has produced huge gains for subscribers... The average gain of the positions that have been in the True Wealth Systems portfolio for at least six months is 134%.

 

 You can learn more about True Wealth Systems – and how to access his latest TARP warrant recommendation – by clicking here.

 

 New 52-week highs (as of 11/14/14): Apple (AAPL), Deutsche X-trackers Harvest China A-Shares (ASHR), Axis Capital (AXS), Cisco (CSCO), 3M (MMM), PowerShares Achievers Fund (PKW), PowerShares QQQ Fund (QQQ), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), TC Pipelines (TCP), Target (TGT), Wal-Mart (WMT), and Alleghany (Y).

 

 Well, well... as usual our Friday Digest has infuriated more than a few of our subscribers. No doubt our office was jammed with calls today with people canceling their subscriptions because I (Porter) dared to share a personal story about another business endeavor. Oh well. You can't please everyone. The good news is that our auction went well. Lots of folks, it seems, are interested in a high-quality shaving tool. How did you feel about last Friday's Digest? Let me know at feedback@stansberryresearch.com.

 

 "I am disappointed in being canvassed to enter an auction to aggrandize the razor business startup of the publisher. This is not the ethical way to behave and use your customer list for such crassly blatant solicitations for your side businesses... Next will we be invited to bid on a wine collector business? art business? cars?" – Paid-up subscriber Dr. John A.

 

Porter comment: My newsletter (and particularly, the Friday Digest) has always been a personal journal. Sometimes you might not be interested in some of the things I'm doing. That's fine with me. Delete it. I've been writing this way – about finance, about my personal life, and about my business endeavors – since 1999.

 

There are many subscribers who have been corresponding with me for years about all kinds of matters, both financial and personal. I'm grateful for the feedback and the many friendships that we've formed. Besides, the Digest is free. And 99% of the time, it's filled with education and/or practical information.

 

Likewise, if you read the whole Digest about OneBlade, you'll notice that I included some insight about investing in private deals (and there's even more about this below). But if you don't like it... or if you decide I'm merely another worthless shill... I'm always happy to part as friends. However, if you're interested in actually bidding on one of the first 10 blades we're selling, click here.

 

 "I'm still in shock after reading today's Digest... Anyone who thinks a friggin' razor needs to be made of stainless steel from a "state-of-the-art metal injection molding process" is an idiot. Anyone who would pay $5000+ for the same friggin' razor with a number on it should be lobotomized immediately before they reproduce. Today's Digest was a complete waste of time. WTF have you people been smoking this week?

 

"After firing Frank Curzio, one of my favorite S&A analysts, you decide to finish off the week with this self-serving piece of useless trash. What message are you sending? That hard-working analysts who never cease to provide value to subscribers are disposable? That the details of your personal business ventures are more important to your subscribers than investment advice? That ordinary investors don't matter to you? This is insensitive, to say the least.

 

"I would describe it as delusional! My two favorite S&A newsletters were The 12% Letter and Small Stock Specialist. Both of these are now gone. If you don't want to offer budget newsletters to low net worth subscribers, why don't you just say so? Cancel them all and issue refunds. I'm sure Casey Research and all the other investment advisories will be grateful for more business from ordinary investors – meaning those of us who can't afford to jet around the world boar-hunting, racing cars, and fishing for marlin. If this is your vision for the future of Stansberry Research I will be looking forward to becoming an ex-subscriber. I am utterly disgusted with you people!" – Anonymous

 

Porter comment: Well... I can see we touched a nerve. That's good. Love us or hate us, just don't ignore us. Let me address the serious matters you bring up (before we get to the stuff about the razors)...

 

We have continuously changed our product mix at Stansberry Research since the beginning of our company. But overall, the trend has always been (and will continue to be) toward more products that offer in-depth, fundamental research on reliable investment opportunities.

 

As we said when we announced our decision to fold Small Stock Specialist, we've never been able to make that advisory work as a business. The only other reasons we close a publication are when we lose confidence in our analyst (and can't immediately replace him) or when the market changes in a way that invalidates the strategy.

 

For example, in 2006, we canceled our Real Estate Shareholder publication. We did so not because Dan Ferris was doing a poor job, but because we could no longer recommend real estate (anywhere) safely. We canceled True Income for the same reason – high-yield bonds no longer offered investors any margin of safety. Buying junk bonds at 5% yields will evaporate all of your wealth eventually (if only we knew when).

 

We folded The 12% Letter into Income Intelligence, which is our service focused on income-producing securities. (Income Intelligence is extremely affordable and worth 10 times what we charge for it. You're welcome.)

 

As for your issue with my lifestyle of "boar-hunting, jetting around the world, marlin fishing," etc. I plead guilty as charged. I worked like a slave for more than a decade and took insane financial risks to build this business. (You try paying for an eight-year battle against the Federal government.) Time and time again, I took the road less traveled. I always bet on myself. Few folks take this path in life. One of the reasons why I did so was that I wanted to be able to enjoy myself and be truly financial independent.

 

What I've done isn't for everyone, but I don't see anything wrong with telling my story. And, by the way, doing these things – like organizing The Atlas 400 group – for example, pays big dividends for our subscribers. Just as one example, I met Texas wildcatter Cactus Schroeder in Pinas Bay, Panama. We were both there to marlin fish. I'm not going to meet folks like this – that contribute hugely to our research – shopping at Wal-Mart.

 

Finally, I would like to clarify a few statements you've made because they're simply not accurate. First and foremost, Stansberry Research has no business relationship of any kind with OneBlade. I simply happen to be a major shareholder of both companies. I was writing on Friday in a personal capacity. Stansberry Research isn't selling razor blades – and won't be in the future. My other business, OneBlade, will soon be in the business of selling razor blades. The retail price for these high-quality, lifetime-guaranteed handles, is going to be around $200 (not $5,000).

 

Why would someone be interested in spending so much money to get one of our first 10 razors? Well, to a lot of the people we serve at Stansberry Research, $5,000 isn't a lot of money. It's what they pay for a good bottle of wine at lunch. It's just a matter of perspective. Some of these folks, by the way, have made a lot of money following our advice. These fine people might be interested in bidding for these handles simply to show their appreciation of my work... or perhaps because they've learned that betting on me is good business.

 

Certainly no one was encouraged to bid more than they were happy to spend. And there are, of course, no guarantees that a market for these handles as collector's items will develop.

 

I believe these handles will become collectible. I am bidding on two of them. I would like to be able to give them to my sons. It's a blind auction, so I won't tell you what I've bid. Nor do I know what others have bid. But if you think paying $5,000 should result in a forced medical experiment on my brain, then you would never understand what I'm willing to actually pay... (Again, if you're interested in bidding, click here.)

 

 "Porter, Maybe it was the Winter Park High School education or something, but we certainly think alike. I often bemoan shaving and hate that it's never good enough... I think you're on to something with OneBlade. I will certainly give it a try when it becomes available. I've tried a number of shaving tools out there. Here's hoping that this is 'the one.'" – Paid-up subscriber Dr. Scott H. (WPHS '83)

 

Porter comment: Go Wildcats! (WPHS '91)

 

 "I love the idea of OneBlade and will certainly be bidding. I live in Dubai and it is a weekly ritual for me and thousands of others to go to the local barbershops across the city to have a proper shave. To get that feeling from a home shave would be incredible. Hopefully you will be looking to sell the product here in the middle east where I have no doubt it will be a huge success. At the time you decide to do so, if you need any assistance in developing in this market I will be happy to help. You and your team have made me a successful investor and I have no doubt this will be hugely successful also." – Paid-up subscriber Ray R.

 

 "I am not interested in bidding on the first ten razors, Porter, but I am interested in a very modest equity position in OneBlade... I don't have a lot of money, but can see the value in this passionate endeavor you are creating. Is it possible to get in on the (true) ground floor of OneBlade? The investing education gleaned from all the reports and letters received from Stansberry Research has apparently sunk into my (somewhat befuddled) brain... What I can contribute to working capital in exchange for equity will be a tiny (very tiny) drop in OneBlade's bucket, but I would be honored to have that opportunity. Please let me know if that is possible." – Paid-up subscriber Don G.

 

Porter comment: Don, thanks very much for your friendly offer. At this time, OneBlade is a closely held private company. I personally own almost all of the stock. I'm fortunate to have a small group of patient partners helping to back this venture via a convertible note. We have no plans, at the present time, to offer shares of the company to the public. If we decide to sell equity to raise capital, our most likely option would be to work with a venture capital group we already know well.

 

I have some thoughts about these matters that pertain to private investments overall, not just OneBlade. You might be surprised... but my best advice is to NEVER get involved in a private investment.

 

As I mentioned, almost every private deal I've ever been offered to invest in has failed. Luckily for me, I've turned down almost all such opportunities.

 

I've only invested in a handful of private ventures – and only alongside people I completely trust and respect. For example, I have invested in a few deals with Steve Sjuggerud. He's the smartest investor I've ever met, bar none. I've known him since I was 12 years old. I know from long personal experience that Steve cares far more about his reputation than he cares about money. I trust Steve so much that I have a standing agreement with him to invest in any deal he deems worthy of his own capital.

 

Likewise, I've invested a considerable amount of money in apartment deals with a private real estate operator in Miami (Pensam Capital). These guys are amazing real estate operators. They buy older multi-unit apartment buildings (in great locations) all around the U.S. They quickly fix them up, increase rents, and get them fully leased. They can then return nearly all of the capital invested, while maintaining quarterly distributions.

 

The economics of this business are amazing. No matter how good the numbers looked, though, I would have NEVER done the deal... except... my lifelong best friend (Marco), who is a successful lawyer in Miami, does due diligence for Pensam. Again, I know Marco cares way more about my family and me than he does about the money in these deals.

 

I have strictly avoided investing in private deals with marginal economics. I've passed up opportunities from successful guys because the deals weren't "lay ups." (To my chagrin, I avoided investing in Doc Eifrig's retail wine concern because the economics of retail operations can be challenging. Doc, of course, has made the difficult look gratuitously easy and he and his partners are being richly rewarded. But you won't go broke from a deal you didn't do.)

 

Likewise, I've avoided a lot of deals where the numbers looked great but I just didn't know the people well enough. While it's always true that every investment ultimately depends on the people involved, in private investments that fact is a daily reality – and sometimes a harsh one. It is difficult to get out of a private deal if your opinion of the people or the project ever changes.

 

And here's the final reason you should never invest in private deals. The deals you would want to invest in – the ones that are well-financed (the founders have plenty of capital), well-managed (there's a high-quality management team in place with startup experience), and offer compelling economics – rarely need outside capital.

 

The private deals that float around are the ones that have already been passed on by venture groups, private-equity firms, and high-net-worth local guys. The next time a broker or a buddy pitches you on a private deal, ask yourself why other experienced private investors have passed. The reason is always one of two things: poor economics or poor management.

 

 "It was a pleasure to read about your new business and I am delighted that you have the energy to start this business... I must admit that you have done an exceptional job with it and you have provided a great service for so many people who invest in the markets, many of them with no idea of what they were doing. I'm intrigued by your choice of your new venture... I fear that few men look upon shaving as an experience to be enjoyed or look forwarded to. I certainly do not dispute that a barbers single blade shave is not a desirable experience, but in this crazy world we live in when everyone seems to be trying to get 10 lbs. of oats in a 5 lb. bag, is there a substantial enough audience who will be excited enough to take the time and effort to provide themselves with the ultimate shave on a regular basis... I wish you well in your new venture and someday I would love to share your experiences, as our company is still seeking that magic formula." – Paid-up subscriber Percy L.

 

Porter comment: That's the great unknown in our business plan. Are there enough "shaving connoisseurs" in the world to support a business like ours? We don't know. But the Internet will allow us to find out at a low cost per impression. Likewise, global logistics companies have driven down the price of global distribution. Access to the entire world's markets means that even if only a tiny percentage of men want this kind of product, we could be successful. There aren't a lot of men who want to buy a $25,000 watch, either... but there are enough. And that's a far more competitive market.

 

 "I shave my entire head and want and have looked for a single blade shaver with no luck. However, 5k is way out of my league. When you come up with the 50 dollar generic let me know. I realize I'm not your target audience. Good Luck." – Paid-up subscriber Bruce P.

 

Porter comment: Just to be clear, our anticipated retail price is around $200 for the handle, which will come with a lifetime guarantee. By using great blade materials, our strategy is to sell you fewer blades that last a lot longer than the materials you're using now. So even though our blades might cost more, the total cost to shave will be similar (or even less). Our product will be affordable to anyone who wants a little bit of luxury in the one thing they have to do every day.

 

 "I love your newsletter and read it everyday... as far as the OneBlade goes, you can pay me $5 to use it to shave my balls and then I will throw it away." – Paid-up subscriber Todd D.

 

Porter comment: Do you think Todd speaks to people in person with this kind of bravado? I doubt it. But who knows. Maybe Todd is a New York City cab driver. Maybe he has Tourette syndrome. Maybe he's sitting in a trailer in parent's backyard and he hates himself. Who knows? Some friendly advice, Todd. If you want to be taken seriously, avoid cliché insults used by middle schoolers. I'm an easy target. You can do a lot better than this... Second, please... don't put our blade anywhere near your testicles. Really. I'd hate to see you on the Darwin Awards.

 

Regards,

 

Sean Goldsmith and Porter Stansberry

November 17, 2014