The S&A Digest

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/01/2013

How to turn a diamond into a Rubik's Cube... Signs of a top in uranium... Telstra's leaving the NYSE... Russell on gold... Why you shouldn't go to college... Defending "Bimbo" Frank... Greed and call options... Misquoted, again!

Signs of a market top... There's a new hit show in Japan called Vulture. It's the story of a fictional New York investment firm that takes over Japanese companies and imposes harsh U.S. management. Remember back in the late 1980s when Japanese stocks were hitting all-time highs, and there was a hit movie in the United States called Gung Ho about Japanese managers taking over a U.S. company? Our advice: Fade the entertainment, buy Japan.

Signs of a market top in uranium... So far this year, the Colorado Bureau of Land Management has received 2,700 new uranium claims. That's nearly half the claims filed in all of last year, and a big jump from the 104 claims filed in 2004.

True Wealth pick and Australian telecom giant Telstra (TLS) will delist its American depository receipts (ADRs) from the New York Stock Exchange. Don't worry... you'll still be able to trade them "over the counter." We'll update you with the new symbol. The news hasn't harmed the stock... shares were up 3% this morning, and the stock continues to make new highs.

Seiyu, a Japanese grocer owned by Wal-Mart, has resumed selling American beef. Japan banned American beef in December 2003, following the first case of mad cow disease in the U.S.

This weekend may be a sad one for hundreds of thousands of high schoolers... The soaring number of applications has made 2007 the most competitive year in history for college admissions. If your kids or grandkids didn't make the cut, be grateful... There is no bigger bubble in America than college tuition: Since the 1940s, tuition has outpaced inflation by a wide margin each year and has never experienced an annual decline.

Judging from our own experiences and the performances of people we hire, "higher" education is horribly overpriced and largely useless. In fact, two of our smartest and best employees never went to college. The very brightest person on my team was smart enough to tell Princeton "No, thanks." These guys saw no sense in paying for what they could learn, for free, from a library. Admittedly, these are the rarest sort of men: independent, ambitious, and hard-working. Most 18-year-olds aren't. Even so, community colleges are nearly free and teach the same undergraduate curriculum as Harvard. Ivy League schools can't be worth 50 times more. Besides, what most people need in life isn't more education, but more determination and more hands-on experience. If only parents could buy these things...

Proving that even rich people are stupid... Hedge funds managed more than $2 trillion by year-end 2006, up 30% from 2005. Hedge funds worldwide returned an average of 13% last year, not quite matching the 16% from the S&P 500 and 21% for the Morgan Stanley Capital International world index. The market isn't Lake Wobegon... all of the hedge funds can't be better than average.

More about rich people, from Richard Russell: "Holding gold is a rich man's escape. The reason is that gold doesn't pay interest, and it doesn't pay dividends. The rich man can hold a large amount of gold, and it doesn't affect his lifestyle. The poor man, the middle-class man, can't afford to hold a significant portion of his assets in gold. No, the average American remains at the mercy of his government and the Fed. He's doomed to see his savings taxed away or inflated away.

"Beneath this truth lies the real reason for the growing amount of income inequality in America. If our money was sound, the outsized success of men like Bill Gates would not only make him rich, but would greatly increase the purchasing power of ours. Instead, despite enormous gains in productivity, the purchasing power of our money has declined by about 50% in the last 15 years. There's been no 'prosperity' dividend for those people without investments or without the ability to leverage their assets.

New high: Annaly Mortgage (NLY).

In the mailbag... When we "dared" to write about Barney Frank, we knew what would happen. And you saw it coming, too... Being homosexual, a member of a minority group, or even being genuinely handicapped does not give you a free pass to be disreputable, arrogant, or stupid. At least not in these pages. Feel free to continue the bombardment here: feedback@stansberryresearch.com.

"Here's a prediction – you're going to catch flak for pointing out that Barney Frank's roommate was a gay prostitute... Facts don't matter, people will be upset. I can't wait til tomorrow to see if I'm right." – Paid-up subscriber "JP"

Porter comment: Just for the record, I don't care whom Barney chooses to live with or whom he must pay for sex. As for running a bordello, I like congresspeople who are ambitious enough to start their own businesses. What I found galling and obscene was how blithely the rest of Congress accepted his boldfaced lie – "I didn't know about it..." Anyone else would have gone to jail, but not a member of Congress. The episode reminds me, yet again, that democracy is the worst possible form of government. It forces the lowest common denominators into the highest positions of power. They belong in the sewer.

"Your article on Frank is out of order and not appropriate for your service."

– Paid-up subscriber John Wander

Porter comment: You left out one other, more objective description – it was factually correct.

"Now your investment advice is excellent, but your ad hominem attack on Barney Frank is non sequitur and reminiscent of Rush Limbaugh and such. Barney Frank will always be the highest of heroes to me." – Paid-up subscriber Jim Perkins

"... Did you ever think you may have some Democratic subscribers, or independents, who don't appreciate your snipes at people who have opposing views from you...? As far as Barney Frank, he was never found guilty of anything and has a stellar record in Congress and has been re-elected by his constituents for years." – Paid-up subscriber Joann Slate

Porter comment: We figured our Democratic readers were just as amused and only slightly more embarrassed to be in the same political party as "hot air Al" and "Bimbo" Frank. As for our political orientation, we think even less of Republicans. After all, Republicans are smart enough to know better and Democrats have better parties. One more thing – your phrase "a stellar record in Congress" might be the funniest thing I've read in a long time. Don't we all wish it were just as easy for us to succeed in our jobs? All you have to do to "succeed" in Congress is show up.

"I know when Porter was talking about HMA, he said he would not buy the call option. I, being a dumba$$, didn't follow that advice and bought the January 2008 calls (YCNAE) with a $25 strike price which ex-dividend became LLPAE still a $25 strike price. After reading the S&A Digest, I assumed that my YCNAE calls would re-adjust ex-dividend to $15 (strike price less special dividend). I am not blaming anything on you I am just trying to understand how this works. I read this today and I am now more confused. Did my broker (E-TRADE) screw up? Please help." – Paid-up subscriber Phil Jones

"I again ask you if a reasonable procedure would be to buy CALL options after the shares go ex-dividend?" – Paid-up subscriber Kurt Lothman

Porter comment: You might find this strange... but we try to avoid answering questions about strategies that we specifically told you to avoid. I remember about five years ago, we found a very unique investment situation. It was a monopoly, trading for half of book value and paying a 9% dividend. We put out a special report. We thought it would soon double. We specifically told all of our subscribers not to buy call options, as the premiums would surely be too high and the timing on any investment is always difficult to predict. As it happened, we were terribly wrong about the stock. It didn't double overnight, as we had hoped. Instead, it tripled over a two-year period. Folks who took our advice made a killing. Folks who bought call options were wiped out. Alas, the greed of our subscribers is often far more powerful than our words.

With the S&A Dividend Grabber we've proven two things. One, our strategy works. As we've demonstrated in these pages and through Ian Davis' 37-year study, you can either grab the dividend and reinvest the cash in the stock to maximize your after-tax gains, or you can simply buy the stock when it's trading ex-dividend to capture a large capital gain. (Gains should average something like 25% in six months). The other thing we've proven is that a shockingly large number of subscribers seem to tie themselves up in knots using this approach. It's like handing someone a clear, perfect diamond and watching them turn it into a Rubik's Cube.

If you can handle following simple, clear directions, "Buy XYZ on this date. Reinvest the cash dividend immediately. Sell six months later," you can probably make 35%-45% on your money each year, safely. If you can't or won't follow the directions... it's probably not a good idea to subscribe.

"Send this off to Steve S. – what's up with Telstra? They're delisting their ADRs from the NYSE? What means this for the lumpen-investor, like me..." – Paid-up subscriber Ed

Porter comment: Check with your broker to make sure nothing's going to change for you – it shouldn't. We'll publish the new symbol when it appears.

"I would like to pose a question to my fellow Alliance members: What strategies are subscribers using to select which S&A recommendations to go for? Does anyone buy literally everything? Anyone use a system? Anyone just buy the S&A 16? I can tell you all how not to do it: Stick only to the speculative letters (Oil Report, Penny Letter, Gold Report, Big Trend, and S. Confidential) and buy only the stocks that could net a fast double. This has been my strategy, and since December I have bought 10 stocks, not a single one in the 'making new highs' list, and stopped out of three! Time for a change of tactics, so lets all help each other!" – Paid-up subscriber Adam

Porter Comment: I know from subscriber feedback and from talking to Alliance members at our annual meeting that some folks buy all of one editor's recommendations. Other folks use the S&A 16 picks nearly exclusively. My recommendation to all new subscribers is to stick to the most conservative, safest recommendations for at least the first year. Over the 11 years I've been in this business, I've found the most boring, safest-sounding recommendations usually perform, on average, as good or better than the risky ones.

And they're a lot easier to manage. Where will you find our safest recommendations? Look for my "No Risk" portfolio in PSIA, all of Dan Ferris' Extreme Value recommendations, Tom Dyson's 12% Letter picks, and Steve Sjuggerud's "safe money" recommendations.

"I'm a recent new subscriber. I wanted to pick what seemed to be a very safe stock to start off with just to get my feet wet. I chose Harley Davidson from your PSIA letter. I figured since it was touted as a no-risk stock, it should be a good pick. What's going on with it? Since I bought it, it's been going down and down..." – Paid-up subscriber DS

Porter comment: Abused, misunderstood, and misquoted... Here's what I actually wrote:

Harley Davidson is not a 'no risk' pick because it's not cheap enough... I don't believe you should consider buying Harley Davidson unless, after buying the stock, you wouldn't be concerned if the stock market closed for the next 10 years. The stock simply isn't cheap enough for there to be much likelihood of a quick capital gain. On the other hand, the economics of this business almost guarantee that anyone who holds this stock for 10 years will see outsized gains and end up with a very powerful compounding machine.

"Following your comment in yesterday's Digest regarding Dean Food's high put option activity last Friday, wouldn't it be profitable to beat the crowd and buy put options on Dean Food on Thursday, wait for the people to bid up the put option prices, and sell the options at the end of Friday? What do you say to that, Jeff? Does this 'high put activity' happen only once in a while or most times when a company gives a special dividend?" – Paid-up subscriber Michael Ma

Porter comment: Good luck with your Rubik's Cube...

"Your Dividend Grabber is a very good opportunity for SOME people to take advantage of. But for others, such as myself, it may prove to be useless. Not because it does not work, it looks like it works well. The problem I see with it is that 99% of the stocks are priced in the medium to high end, so to make the super returns/average returns even you suggest are possible would require initial cash buys in the stocks (1,000-share) at a minimum average $25,000 and up! Would you agree with me on this and, if not, then please explain where I have gone wrong." – Anonymous paid-up subscriber

Porter comment: We get this question all the time. Why do people assume they must buy 1,000 shares to make an investment work? Assuming brokerage costs are very small (say $7 per trade), there is no reason to believe that a small investor will make smaller returns than "SOME" people (aka, wealthy investors). Obviously, investors who can afford to buy more stock will make bigger nominal gains, but on a percentage basis, all of the profits will be essentially the same.

"Finally, your new website is up and running. The site is a great improvement over its predecessor. Access is immediate. There is no hesitation or lengthy delay. And, the appearance of the sign-in page is up there with the best. Congrats." – Paid-up subscriber Roger

"How do I join the Alliance?" – Paid-up subscriber Nick Kanji

Porter comment: Thought you'd never ask... we only open the Alliance to new subscribers once or twice a year. We will have a new enrollment period sometime in the first half of 2007.

"Not long ago, several of you guys were screaming for us to buy homebuilder stocks. Recently, Steve S. tells us to dump DR Horton at a loss. When more than one analyst at your company is recommending the same sector, your subscribers tend to believe it's got to be right on. But you guys were way off – Why?" – Paid-up subscriber BP

Porter comment: I'm reminded of the time a CBS sports reporter asked Bobby Knight why his team was losing at halftime, as Knight was rushing to the locker room with his players. Clearly annoyed at the reporter's intrusion and lame question, Knight stared at her in silence for half a second and then said, "The last time I checked, in basketball, the team that has more points at halftime is considered to be 'winning' and the team that has fewer points is said to be 'losing.' So, we're losing because our players scored fewer points than the other team. Any more questions?"

One thing you should remember about our recommendations: We can only analyze the facts we have at the time. True, we've got to try and speculate about what will happen in the future, but as Rick Rule famously tells his clients, "I've got two balls. Neither is crystal." What we got wrong in the housing sector was the extent of the subprime blowup. That's what caused Sjuggerud to hit his trailing stop loss in D.R. Horton.

What I find interesting about the situation is that D.R. Horton still trades above its summer 2006 lows. We may discover, in time, that Sjuggerud was right about the housing sector, but that his trailing stop loss was simply set too tight to accommodate the rocky road to recovery for homebuilders. Does this mean his trailing-stop strategy is flawed? Probably not. Remember, subscribers should have only lost about 1% on their first shot at homebuilders (D.R. Horton). And that means you should have plenty of capital to try again, if things in the sector continue to rebound. Steve addressed the situation in today's DailyWealth.

"I am a very happy subscriber to True Wealth and have been for several years. The Dividend Grabber is of real interest to me because qualified dividends are taxed at the 15% rate as opposed to ordinary dividends, which are taxed at ordinary income tax rates. Therefore, I would be interested in knowing if you are going to review how the dividends will be classed, qualified or ordinary. The HMA special dividend was qualified." – Paid-up subscriber Ernie Sedara

Porter comment: Yes, we will. And you left out one possible category. Sometimes special dividends or portions of special dividends are classified as a "return of capital" and are tax-free.

Regards,

Porter Stansberry

Baltimore, Maryland

March 29, 2007

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