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

Hunt on Cafayate... Buffett on "Generation Debt"... Investment Banks Go Shopping at Saks... Citigroup Bullish on Japan

Managing Editor Brian Hunt returned from Cafayate, Argentina last week. He went with our old friend, David Galland, who's putting together a real estate deal.

"What did you think of the place, Brian?" I asked.

"It's a no-brainer. Beautiful. Cheap. Good wine. Great food. Nice people. Good airport. And money pouring into tourism and development by the bucket-load. Think we'll have an S&A satellite office down there soon?"

"Yes, I bet it's the next place I'll buy real estate."

In the June 16 DailyWealth essay, where I first wrote about Cafayate, I also mentioned Cresud, a large, publicly traded Argentine land holding company. The stock closed at $12.74 the day after I mentioned it. Today, it trades for more than $18.

One more note about Argentina... Another friend of mine, Will Bonner, is so bullish on Argentina that he sold his homes in South Florida and moved to Buenos Aires to get into the real estate game directly. He writes a blog about his adventure here. You can follow along, vicariously, for free.

Warren Buffett published his most recent annual letter last week.

You will learn more by reading all of Buffett's annual letters (almost all of which are available for free at www.berkshirehathaway.com) than you will by attending business school or by going to any investment seminar. I've read all of them twice. And I'm sure I'll read them again. Below is the single most important item I found in this year's letter. It's sure to be ignored by the press, simply because so few journalists have any idea what Buffett is talking about:

The "investment income" account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we've used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience "reverse compounding" as we pay ever-increasing amounts of interest on interest... Our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won't be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual "tribute" so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a "soft landing" seems like wishful thinking.

Both publicly (unlimited Medicare spending, huge national debt) and privately (record levels of mortgage debt, negative savings rate), America has abandoned the economic and political traditions that collectively made us a great nation and individually made us rich. What your neighbors are doing with their finances and what they're demanding our government do with our taxes will bankrupt us all in the next 20 years. That's why I own gold. And that's why I buy more every year.

GM's chief executive, Rick Wagoner, declined to comment today as to whether GM would make a bid for Chrysler, but said the rising costs associated with developing the next generation of automobiles favor mergers.

It's fascinating that, despite the almost nonstop media coverage of GM and its trouble, no one mentions the company's $450 billion total debt or the company's $4.8 billion quarterly interest payments. That's close to $20 billion a year in interest. GM has never earned more than $7 billion in a year. And it hasn't turned a profit since 2004, when it made $2.8 billion. GM is bankrupt; investors simply don't know it yet.

PSIA and Inside Strategist pick USG (USG) today announced that it has received a $1.057 billion federal tax refund. The company used the proceeds, along with cash on hand, to repay a $1.065 billion tax bridge loan. The refund was received due to the large asbestos payments USG has made through the years.

Extreme Value pick American Real Estate Partners (ACP) announced fourth-quarter earnings today. The company finished the year with a $798.8 million profit, up from a $25.7 million loss last year. When we first recommended the stock, its total market cap wasn't much larger than last year's net income figure.

S&A Gold Report pick Royal Gold (RGLD) yesterday announced that it will acquire 100% of Battle Mountain Gold Exploration (BMGX). In the all-stock deal, Royal Gold will give 1.57 million shares to Battle Mountain, representing 60¢ per fully diluted share, or a 29% premium.

Better check your wine cellar... Federal prosecutors have discovered counterfeiting in the wine market. Rare wine collectors and some auction houses, including Christie's and Zachys, have received subpoenas from the government. Prosecutors believe that these auction houses may have been knowingly selling counterfeit wine.

Taking our advice to load up on yen-dominated assets, 12% Letter pick Citigroup (C) today announced a tender offer worth up to $10.8 billion for full control of Nikko Cordial, which would make the Japanese brokerage a subsidiary. If the deal goes through, it would be the largest foreign acquisition of a Japanese securities company. There's a bull market brewing in Japan.

A group of tests conducted by the California Pacific Medical Center showed that older men, 65 and above, who drink moderately perform 3% to 5% better on physical tests than their peers who either abstain from alcohol or drink excessively.

On November 20, 2006, we recommended buying shares of Saks Inc. (SKS), parent company of Saks Fifth Avenue, to obtain the $4 special dividend issued by the company. To date, we have made an 11% return on the purchase. However, investment banks have been pouring into the stock. Goldman Sachs, Morgan Stanley, and Fidelity are all large shareholders in the company and have been beefing up their holdings since the fourth quarter. The companies are happy that Saks is refocusing on its core consumer – wealthy women 35 years of age and older. Morgan Stanley quadrupled its holdings to 8.8%. Although the banks declined to comment, smart money suggests that a buyout of Saks is imminent. You may want to hold onto those shares.

Once again, there were no new highs across our recommended portfolios on Monday.

We got more... uh, "naïve" is probably the nice way to say it... questions about our dividend-grab strategy. Apparently, it's much too complicated for some subscribers. Beats me why. You simply buy a stock, collect the dividend, and sell the stock about six months later. That's all. Yes, there are ways to make more money, but they involve taking additional risks that, in our opinion, aren't necessary. And, no, for the last time, you cannot buy a put to protect against the fall in price caused by the dividend payment. I've had to answer this question almost every time we've written about grabbing dividends... Sorry, folks. I hate to be the one to break it to you – there's no such thing as a free lunch. The options market treats the dividend as a share split, adjusting the strike prices accordingly.

One very smart letter we got noted that you'll make a lot more money (twice as much, hypothetically) on a situation like HMA's 50% of market cap dividend by buying the shares after the dividend is paid. After all, you could buy twice as many shares following the dividend payment. That's true, but you'll only make the gains you expect if the share price does, in fact, get cut in half. There's no rule that requires the share price to fall by as much as the dividend. It typically does, but if the share price doesn't fall by the same amount of the dividend, you won't get the opportunity to buy shares at the price you're expecting. Thus, the safest and most conservative course to take is to buy the stock, get the dividend, and hold the shares until the price rebounds back to its pre-dividend level.

The other highlights of today's mailbag are below. We asked for details on how you've managed this downturn in stocks. If you haven't sent a note yet, please do. We will read what you send us, but we cannot reply individually. Send your notes here: feedback@stansberryresearch.com.

"Since joining True Wealth as a subscriber one month ago, I have lost over 15% on your pick DHI, lost 15% on Plum Creek Timber, and 20% on SA. This just goes to show you that no system is foolproof. Once the market decides to correct, it takes down over 90% of all stocks, no matter how special they are. Since I lost over $5,000.00 in a month on your three above picks, I would be very surprised if you have the 'balls' to print this. I would like to ask you why you don't recommend shorting stocks. Is it because the average investor gets eaten alive by market makers and their short squeezes? Since you can't recommend stocks to appreciate now, why don't you propose shorting stocks?" – Paid-up subscriber T. Evens

Porter Comment: Who says we don't recommend shorting stocks?

"I've weathered the downturn nicely by using 10% trailing stops on all my emerging market ETFs. I got in 3 months ago with some pretty healthy gains on Brazil and China when last week I got a queasy feeling and put on the stops. They kicked in and saved my butt. Thanks for the great newsletter, I enjoy your foresight." – Paid-up subscriber Vern

"I weathered the correction lately with less than a 1% portfolio loss. This is because I sold all but 10 stocks (BTTRX, DBV, HMA, LLINX, NGPC, SDS, TLT, TYN, WCG, and WHOSX) one month ago on the strength of all your writers' warnings (out of the 100 I usually own). It was tough to watch the last month's rising action from the sidelines, but now I'm glad I did. I did just buy AIG, EEF, EHI, and FXY. When this correction is over in a few weeks, I'll be back in with both feet using your recommendations. It's a good feeling to pay for good advice, get it, and use it profitably." – Paid-up subscriber Mark DeBard

"On Friday, February 23, I had a position in 30 stocks. Something told me that I had to protect my positions. On Monday, February 26, I closed out my positions on 20 stocks. I made money on 18 out of the 20. I put a 6 percent trailing stop on the remaining 10 stocks. I have closed out on two more stocks due to the 6 percent trailing stops. Now I have 8 good stocks that I will hold. If I get stopped out on them, I will buy them back at a lower price. I am not afraid to sell. The commission to sell and buy back is much less expensive than to hold on and pray that the stock will not go down." – Paid-up subscriber Oscar

"For the first time in my life, and I am a bit long in the tooth, I have been shown an absolute 'No-Brainer' method of investing. I am a paid-up subscriber to a number of your newsletters and I want to be among the first to sign up for the 'Special Situations' letter. You have shown me a refreshing new way to invest with the dividend grabber and enjoy my retirement." – Paid-up subscriber Tom Humanek

"Your Feb. 23 missive entitled This Stock Is Going To Zero convinced me to enter a put position on that very day. The position is now up 32% in 7 days. Your free advice is the best in the business. Please send more picks." – Paid-up subscriber Shawn McGuire

Porter Comment: Nothing is free, Shawn. Buy a few more subscription products and I'll see what I can do...

"I took Steve's advice and increased our cash position overall, but what's really great is last Monday I sold two riskier emerging market positions and immediately rolled into Steve's recommended Access Flex Bear High Yield Fund. Of course, last Tuesday as Steve would say, things went to 'less perfect.' Porter, I can't thank you and your team enough for being really smart and helping us keep our portfolio on course (and I'm just smart enough to listen and act... shorted GM last week also). Great Job!" – Paid-up subscriber Ralph

"Porter always says not to place your stops in the market. Can understand that for long-term positions, but what about short-term options with lots of volatility (I'm trading Jeff Clark's Short Report recommendations)? Placing them risks a whipsaw, but not placing them risks a larger loss." – Paid-up subscriber Rob S.

Porter Comment: Rob, trust me on this – You don't want my options advice. Do what works for you. And if you can figure it out, tell me how to do it. My luck with options is so bad, Jeff Clark won't sit next to me at meetings.

Regards,

Porter Stansberry

Baltimore, Maryland

March 6, 2007

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