The S&A Digest: A buy on Devonian shale

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(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/26/2013

A buy on Devonian shale... Hunt: live from Botswana... A spare billion... Buffett on the move, again... The rest of the story...

We continue to be overwhelmed with your gifts and cards. Thank you very much for celebrating the birth of my son, Traveler. (My wife says if you knew me better, you wouldn't be so kind...)

Brian Hunt reporting from Botswana:

At first, I thought an ambulance was headed our way. After I saw the motorcycles' flashing blue lights, I thought it was the police... But it's just another day in Botswana...

"They're transporting diamonds," Ray said, as we watched the motorcade enter the roundabout with sirens blaring. Drivers stopped in their tracks to yield. A large armored vehicle followed the motorcycles in the lead. An open-top jeep with a machine gun nest followed. "That's excellent theft insurance," I said.

"They're probably coming from the Orapa mine. You see one every couple of days or so." Ray was referring to Orapa, the world's largest diamond mine by volume. Later, we passed several white cars with the "De Beers: A Diamond is Forever" mantra stenciled on the side. The headquarters of Debswana, the joint venture between De Beers and the government, has a prominent spot in Gaborone's business center.

Ray explained how the government finances homes and university education with diamond revenues. He mentioned how Blood Diamond, the 2006 movie about the diamond-financed bloodbath in Sierra Leone, caused a panic in Botswana. It can't afford to have the world sour on diamonds, which represent 75% of exports. It doesn't take long to realize that as diamonds go, so goes Botswana...

If you're not a billionaire yet, you don't really count. The price of admission onto the Forbes list of the 400 richest Americans is now $1.3 billion, up from just $300 million last year. Close to half of the 45 new entrants are from hedge funds and private equity, including John Paulson, who pocketed more than $1 billion shorting subprime stocks. The usual suspects still top the list... Bill Gates and Warren Buffett are Nos. 1 and 2. The Google guys, Michael Dell, and the Waltons round out the top 20.

Buffett on the move... According to a Thursday SEC filing, Extreme Value pick Berkshire Hathaway (BRK) purchased call options to buy 392,378 more shares of Burlington Northern Santa Fe (BNI), the country's second-largest railroad. These options are in addition to 7.46 million BNI call options from a September 4 filing. If Berkshire chooses to exercise all of the options, which expire on October 3, the company will own 17.2% of Burlington Northern.

S&A Advisory Board Member Peter Lacy is one of the most experienced equity traders in the country. He got his start in the business doing merger arbitrage as a floor trader on the New York Stock Exchange and was later the head of trading for Bank of America. Since joining our board, he has been a font of good ideas for us... And he found this interesting situation written up on the Guru Focus website:

A special case is National Fuel Gas (NFG). The century-old utility company is based in NY and PA and owns 770,000 acres of land sitting on top of Devonian Shale. Until recently, the land was truly worthless because the gas could not be recovered due to the dense formation of the shale. The drilling technology now allows for a decent portion of the gas to be captured. Both analysts and the company's balance sheet value this land at virtually nothing. But that is about to change. In a recent Morgan Stanley report on the comparable Devonian Shale of another company, the land was valued at $5,500 per acre. Using the Morgan Stanley valuation, we get an additional $49 per share, or more than 100% upside...

Update for S&A Oil Report readers... BG Group, formerly (BRG), is now trading under the ticker (BRGYY.PK).

New highs: Alnylam (ALNY), BHP Billiton (BHP), CGG-Veritas (CGV), Covance (CVD), streetTRACKS Gold (GLD), Arcelor Mittal (MT), Nokia (NOK), POSCO (PKX), Raytheon (RTN), Schlumberger (SLB), Sinovac Biotech (SVA).

In the mailbag... lots of friendly notes. Just when I think my cynicism and negativity has overwhelmed all of you, you prove me wrong. Apparently, you're even more cynical than me... Drop us a bomb: feedback@stansberryresearch.com.

"Stansberry, how can you do this, keeping us in suspense? You've got a very young baby in your arms, you have a stubbed toe, and now you have a 'damsel' in distress at the front door. This is the cruelest thing I'm sure you've ever done in your life. When do we get Chapter 2? Or as Paul Harvey says, 'The rest of the Story'?" – Paid-up subscriber MS

Porter comment: The good part of the story was told... I ran to the door because I thought something terrible had happened – maybe a car wreck, maybe my neighbor's house was on fire, something worth ringing a doorbell after midnight. But this was no damsel in distress or friend in need. This was a dirty, drunk slob who didn't have enough good sense to walk home after she got kicked out of her boyfriend's car. She wasn't hurt or lost. She was just drunk and lazy. She decided to make that my problem by waking up my entire house and scaring us all. I called the police... but by the time they arrived, she'd wandered elsewhere.

"Sorry, Porter, I have no interesting invectives to share. I'm a paid-up 62 year old relic of the 60's – seen it all. My comments are – I have noticed you seem to think Obama is worth criticizing. That must mean you think he may be a contenda', which means you think he is a real person. Personally, I think compared to previous political heavies like Clinton, Roosevelt, even Reagan and Nixon – this guy is an animated character, if he exists at all. I've been thinking he may be a mock-up from the media, a total fabrication, complete with photo-tampering and a politician's costume. You may be giving him too much credit." – Paid-up subscriber Steve Simon

Porter comment: He's got very wealthy backers – essentially all of the Democrats who doubt Hillary can win the general election. And he's made for TV, as you note. There's no doubt in my mind that he can... and likely will... win. I hope he does because his victory might cause Americans to finally question the validity of our political process. If a guy with zero experience and nothing but TV charm can win the presidency?

"Your rude and misinformed comments to your reader about a very smart, charismatic, and principled politician is just plain ugly – and wrong. Obama is not an empty suit consumed by a lust for power. He consistently and courageously goes against the grain, telling people the truth, asking more of Americans than to simply shop, which is often NOT what they want to hear: telling the teacher's union he believes in merit pay and charter schools, warning against the Iraq war when almost all the other pols acted like lemmings following the idiot in the White House, calling on African Americans to spend more time cleaning their own house. A craven politician would be Romney, whose ambition to power is so transparent in his attempts to flip flop his way to the GOP nomination. Please, less name calling and more substance in your political opinions." – Paid-up subscriber Kaleo Kaluhiwa

Porter comment: OBAMA! is a great candidate, and he seems like a good person. I have nothing against him personally... He's merely a reflection of what our society values – cheap, pretty, and shallow ideas that will only further the deep rot of entitlement we have embraced. With the exception of Ron Paul, there isn't a single presidential candidate whose "solutions" will do anything but further the systemic problems we face in America: the declining value of our currency, the loss of our creditworthiness, the politicization of our foreign policy, the expansion of an entitlement society driven by self-serving interest groups, and the utter folly of our two biggest national expenses – Social Security and Medicare.

America is well on its way to bankruptcy, and the political will to address these facts doesn't exist. Consider just one aspect of our problems: It is utterly immoral to burden future generations with our runaway expenditures, and yet, our sitting vice president states publicly that "deficits don't matter." The people running our country are destroying it – rapidly. As my friend Doug Casey says of our political leadership: "It's too late to solve the problem and it's too early to line them up and shoot them."

"I find it curious how I find myself looking forward to reading your daily dish and even the daily diatribes that are part of your Digest. I know the word 'community' gets stretched these days but there is somehow on your pages the suggestion of that. I remember as a kid attending the Mont Pelerin Society economic conferences that my father belonged to and hearing different economists apparently agree to disagree at the podium, as they often roundly denounced each other's points but somehow seemed not to take it personally. Maybe it's ego size or largesse of spirit, or just the rules of the game of being out there in public, but diversity of opinion and the willingness to take a stand are both entrancing. Contrasts make life more 3-D. Maybe this is the thing that other investment newsletters are missing. I also think we benefit from admitting when we get things wrong or react wrongly and then take stock of it. As a trader, I find I have a lot to learn about not trading when I get impatient or emotional, and that 'a little knowledge can be a dangerous thing.' Personally – in retrospect – I felt ashamed of myself for selling a couple of positions during the August slide. Anyone else?"

– Paid-up subscriber John Chamberlain

Regards,

Porter Stansberry

Baltimore, Maryland

September 21, 2007

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