The S&A Digest

'The Rock' abandons research... Ferchill's $80 million bet on Detroit... GM grants new annual bonuses to management... A Wall Street firm returns its management fees... "Jack... no, I mean, Mohammed"... Palm's upcoming $9 dividend... Criticism for Sjuggerud?

Wall Street is getting out of the investment research business...

Prudential Equity, which operated one of the largest research groups on Wall Street, is firing more than 200 employees and closing down its research business. Why would Prudential – "the Rock" – get out of research? Because, unless you're convincing schleps to buy the wrong stocks at the wrong time, it's not a very good business (let me tell you...). As we've proven time after time, nothing hurts newsletter sales more than a great track record and consistently good advice.

Prudential abandoned investment banking in 2000. It sold its retail brokerage group to Wachovia in 2003. Without banking or brokerage, it couldn't use its research to garner more underwriting and trading. The Rock's unconventional plan was to become the only major Wall Street firm to offer truly independent investment advice. But, as I could have told them, there's no money in research. Why not? Because there's a horrible dichotomy between publishing and investing. To succeed in publishing, you have to print things that are widely popular, things that people are excited about. But to succeed as an investor, you have to remain focused on ideas that are out of favor.

Witness poor Dan Ferris' Extreme Value. He only covers the most unpopular (aka the absolute best) opportunities. His Extreme Value picks have produced the highest average returns in our group and the lowest number of losing recommendations over the last five years. And yet... despite all of his success as a stock picker... less than 14% of his readers decide to renew. So... for us as publishers... we're mostly wasting our time. Meanwhile, the newsletter publishing industry as a whole makes most of its money pitching incredibly risky options advice that's rarely profitable. I guess Prudential never figured this out. (Note: Jeff Clark's S&A Short Report is the only options service I've ever seen that's extremely profitable and maintains a verifiable track record.)

Perhaps I should be happy that a competitor is leaving the field, but actually I'm saddened. The less independent research there is, the more conflicted research will, once again, be considered legitimate... and the less opportunity we'll have to serve investors.

"I'm counting on the city of Detroit reviving itself in a manner that nobody expected to happen," said developer John Ferchill to The Wall Street Journal last week. Sounds familiar doesn't it? We've published a few reports speculating that once the car industry is eventually restructured, Detroit will again return to prominence. (It was once the fourth-largest U.S. city.) Ferchill is investing $80 million to renovate the city's most famous downtown hotel, the Book-Cadillac. Ferchill, an urban developer, has successfully developed projects in unlikely urban centers, like Buffalo and Pittsburgh.

Speaking of Detroit... Here's a good sign. All 10 of the shareholder-initiated proposals aimed at reforming GM's corporate governance and accounting standards failed to win a majority vote and will not be implemented. Meanwhile, the management team's four proposals passed by a huge margin. One of the new policies is... a big annual bonus for management! Says CEO Rick Wagoner about the company's progress, "We're moving very well on a path that our shareholders should feel good about." GM lost $2 billion after two years of restructuring.

Why is more evidence of the astounding arrogance and incompetence of GM's management team good news? Because the sooner GM goes bankrupt, the sooner the city of Detroit will come back to life. Until GM's more than $30 billion debt is retired, no new funds will be available for capital investment, new jobs, better cars, etc.

Signs of a market top... Tudor Investment Corp., a $17.7 billion hedge-fund group, is closing its $550 million small-cap fund, Witches Rock, due to lackluster returns. James Pallotta, the fund's manager, expressed frustration with the lack of current opportunities in the small-cap market. The fund returned 24% net of fees since its December 2004 inception, compared to 31% by the S&P 500 and 35% by the Russell 2000. Tudor will refund the customers' money, including $25.3 million in accrued fees.

Paul Tudor Jones – one of the world's best investors – runs Tudor Investment. Jones famously tripled the size of his fund on Black Monday in 1987 through various short positions. When one of the best investors in the world is willing to return $25 million in fees instead of remaining invested... it's probably a good time to evaluate your own exposure to stocks.

According to The Times of London, Mohammed is on pace to be the most popular boy's name in Britain by next year. The name, in all of its varied spellings, is currently second only to Jack.

To grab or not to grab... Handheld device maker Palm (PALM) will pay a $9 per share special dividend after selling 25% of its business to private equity. S&A Dividend Grabber subscribers will receive their recommendation by week's end.

Is there anything funnier than watching a presidential candidate make a complete ass of himself? Mike Huckabee, a victim of Arkansas public schools and currently that state's governor, told the national debate audience last night, "Today is the birthday of Ronald Reagan." Sorry, Mike. The Gipper was born on Feb. 6, 1911.

New highs: BHP Billiton (BHP), PowerShares Harvest Currency (DBV), EnCana (ECA), ExxonMobil (XOM), Petrobras (PBR), Pioneer Natural Resources (PXD), Royal Dutch Shell (RDS-A), Anheuser-Busch (BUD), Cemex (CX), Grey Wolf (GW).

As always, we happily accept insights, barbecue recipes, and wild-eyed sturm und drang here: feedback@stansberryresearch.com.

"As one of your earliest subscribers (since September 1999) and an enthusiastic supporter, I am truly amazed at how your business has progressed and also how your investment strategies have matured over the years.

"I've certainly learned a lot and am looking forward to much greater success going forward. This year is shaping up to be my best year ever (10%+ gains so far) and a significant part of it is due to what I've learned from reading your letters over the last 7+ years. I'm sure that you are following what is currently happening with the US$ and interest rates. How far do you think the dollar will have to fall and/or 30-year bond prices will have to fall before there could be a genuine panic? Perhaps that is the million[-dollar] question." – Paid-up subscriber Walt Bolthouse

Porter comment: Yes... I think you're right, Walt. We can't know what will happen, exactly, but something, sooner or later, will have to stop the continuing escalation of debt/leverage that's going on with private equity now. Rising interest rates is the one thing most of these highly leveraged deals can't stand. And... it's funny how an inflated market tends to go in search of its own unique pin.

"Many months ago, there was much hullabaloo about the coming opportunities in water, but I haven't seen any specific recommendations in any of the newsletters about how we can take advantage. Have I missed them? Also, have you considered a utility newsletter? Due to its strict and ever-changing regulations, the utility sector is fraught with a great deal of peril and large potential profits. I would love to have a first-class treatment of the sector published with your high standards. Make it happen!" – Paid-up subscriber Chris Walters

Porter comment: Funny you bring that up... From our perspective, no water company in the world is worth buying right now. A surprising majority seem like downright frauds to us. And we've looked at all of them.

Meanwhile, water-based newsletter promotions are selling like hot cakes. You can do the math... if it's popular, it's probably not a good investment. And, while I did recommend a utility in my last issue, it's a very special situation. If you look at the valuations of most utilities and at their historic yields compared to today... they're just not that attractive right now. Over the long term, though, I certainly agree with you. Utilities are one of the least well-understood areas of the market for individual investors, probably right after insurance stocks.

"Early this year, when you rated your newsletter editors' performance, you gave Steve an Incomplete because of his FortuNet pick. Steve admitted his mistake, and you will too since you have it in one of your S&A 16 model portfolios (IX). When do you plan to give your good mate his final grade? Don't embarrass yourself by giving him anything more than an F. I'm still 'smarting' from the loss as you no doubt have detected." – Paid-up subscriber Tim Nealon

Porter comment: Sooner or later, we all recommend a stock (or two) that blows up – even Dan Ferris. It happens eventually to anyone who picks more than a dozen stocks each year. In Steve's defense, he stated clearly that FortuNet was a risky speculation. But... he did recommend it. And we will count it (as we do all recommendations) in his track record.

Steve's average return from his 2006 Sjuggerud Confidential recommendations is about 9% – including the 50% loss in FortuNet. Now... as for how I'd score this performance (we score every editor's performance annually – and we publish our report cards), I'd give it a C+.

FortuNet was the only mistake Steve made all year. Yes, it had a crushing impact on his average gain. But... if you were lucky enough to avoid FortuNet, Sjuggerud Confidential's average gain from 2006 is now about 13%. And that's pretty good, considering the very low risk he generally takes.

Good investing,

Porter Stansberry

Baltimore, Maryland

June 6, 2007

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