The S&A Digest: American ethics hit a new low

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

As of 06/19/2013

American ethics hit a new low... OBAMA!'s tax plan... TSA's new toy... Why buy bonds?... Joe takes the bet... Tasting notes from Italy... Someone likes The Digest?...

Ah... the ethics of the deeply indebted...

"I can find the exact same house as what I live in right now, for half the price," explained Michelle Augustine to the Wall Street Journal. The move is called "buy and bail." Borrowers with good credit can buy a new home and then simply walk away from their existing mortgage.

Several subscribers have e-mailed me saying there's nothing wrong with repudiating your promise to repay a debt. That's utter nonsense. Lenders have the legal right to sue for losses, but most don't, because this kind of fraud wasn't prevalent before. That will change, but not before billions in additional losses are passed on to mortgage investors.

In the last issue of my newsletter I compared the current real estate bust with the giant San Francisco earthquake of 1906. In that disaster, people set fire to their homes because they didn't have earthquake insurance but they did have fire insurance. The resulting inferno destroyed 500 blocks – essentially the entire city. The earthquake didn't cause most of the damage... the fires did. The same thing is happening now in our mortgage markets. Home prices would probably stabilize. But the fraud and the crime that's following the disaster is the real problem. No one will take responsibility for his actions. And that's going to bankrupt just about everyone in the mortgage business.

OBAMA! has come forward with his tax plan. And it's a doozy. Not only will he shift more of the burden onto the top 1% of American incomes (folks who already pay more than 30% of all income taxes)... but his promise of a tax cut for Americans earning less than $38,980 means his budget will add another $3.3 trillion to the federal debt over 10 years. That's a good strategy to get elected, but a terrible way to run the country. Our national debt is a tax on our children and grandchildren. It ought to be against the law to run a deficit, except in times of real war.

Great news for perverts at the Transportation Security Administration... Agence France-Presse reported, "A random selection of travelers getting ready to board airplanes in Washington, New York's Kennedy, Los Angeles and other key hubs will be shut in the glass booths while a three-dimensional image is made of their body beneath their clothes. The booths close around the passenger and emit 'millimetre waves' that go through cloth to identify metal, plastics, ceramics, chemical materials, and explosives, according to the TSA."

It also allows the security screeners to clearly see the passenger's sexual organs... "People have no idea how graphic the images are," said Barry Steinhardt, director of the technology and liberty program at the American Civil Liberties Union. When, we wonder, will Americans finally regain their senses when it comes to the balance between security and privacy?

The tough thing about buying stocks is, you never know when they'll appreciate in price (and you'll make a profit). The other tough thing is, no matter how much homework you've done, there's always a risk that something will go terribly wrong (fraud, accident, etc.) and your position will be wiped out. There are no guarantees when it comes to buying equity.

On the other hand, when it comes to buying bonds, investors have one tremendous advantage: The corporations that issued the paper are legally required to pay the bondholders their interest and then return their capital – on time. It's not optional.

Remember the movie, Goodfellas? There's a scene where someone has borrowed money from the mob to expand his restaurant. He learns a painful lesson. The godfather gets paid, no matter what. As the movie explains in graphic language: "Economy goes bad? Fyou, pay me. Restaurant burns down? Fyou, pay me. Wife gets cancer? Fyou, pay me." When you're a bondholder, the same rules apply. No matter what happens to the business or the stock price, you get paid.

The other good thing about the bond market is that most individual investors know nothing about it. As a result, there are tremendous inefficiencies, simply because most investors don't buy individual bonds. Why not? They don't know how. We'd like to fix that problem for thousands of investors by publishing the only advisory on the market for individuals looking to buy bonds. Our newest product, True Income, makes individual bond recommendations, the way our other publications recommend stocks. But, unlike stocks, the moment you buy a bond, you'll know exactly how much money you're going to make and when you'll get paid.

We publish more than a dozen investment newsletters, and I'm proud of all of them. But publishing True Income is a real milestone for me. We've worked hard for three years finding the right analyst for the job. (Mike Williams, our analyst, is a 62-year-old CFA who's been buying and selling bonds since before I was born.) And we've structured the product so our subscribers will make big, triple-digit gains in fixed income – something most people believe is impossible.

To date, we've only shown the letter to our S&A Alliance members. The feedback has been phenomenal: "I loved your February 2008 100%-return bond recommendation! This is exactly what I've been looking for in this volatile market... Please keep this publication going, as it is my most favorite right now."

I believe True Income is the best newsletter I've ever published. I'm very happy to announce it will be available to our subscribers for the first time this week. Check your inbox this weekend for subscription details.

New highs: none.

In the mailbag... Joe Dowling takes my bet. Plus, a good question: What about Fannie and Freddie's fixed-income obligations? And I share a few of my recent tasting notes. Send your comments, your questions, or your rants, here: feedback@stansberryresearch.com.

"Porter, I have funds in a money market with DWS that calls itself Government and Agency Money Fund. A look at the most recent semi-annual report reveals 45.2% of assets invested in 'Agencies Not Backed by the Full Faith and Credit of US Government.' about half of that is with the Federal Home Loan Bank with the remainder split between FHLMC and FNMA. Based on the latest issue of PSIA, I am planning on moving this money. Are the short-term notes just as vulnerable as the stock? Keep up the good work." – Paid-up subscriber Mike F.

Porter comment: It's not accurate to say the notes are "just as vulnerable" as the stock, simply because Fannie and Freddie are extremely likely to continue paying the interest on their debts. If they didn't, it would be the "end of the world" for the global financial system. And that's why it's utterly unlikely the U.S. government would allow them to fail. That doesn't mean the stocks won't go to zero – they will. Freddie and Fannie will not be able to meet their debt service obligations without wiping out their existing shareholders unless they get help from the federal government. As a result, I expect the discount between Freddie and Fannie's paper and U.S. government paper to widen, which could result in small losses for short-term noteholders... but nothing like the losses already experienced by the shareholders.

[Regarding Porter's bet]"... I accept with a condition which is we have a true-up every year – with 1k going to the charity of the winner's choice every year. In 10 years the loser donates the 10k amount to winner's charity! So the bet is actually 20k, but we get to donate 1k every year which will make it fun. If you want to increase the bet I will go dollar for dollar with you up to a reasonable amount. This is not a bet against you – I expect you to be neck/neck with Buffet... Start July 1, 2008?" – Paid-up subscriber Joe Dowling

Porter comment: Fine. To reiterate, the average gain of my "No Risk" portfolio must exceed the total return of Berkshire Hathaway, Protégé Partners hedge fund, and the S&P 500. To be included in my average, the stock in question must be rated a "buy" at the beginning of the period. Also, because we're going to measure annually, I'll need some adjustment to account for the huge time disadvantage I face. I'm flexible on how the measurement is done. No adjustment will be required on the 10-year total. To make sure the entire wager is fair, let's allow Steve Sjuggerud, whom we both know well, and who is utterly trustworthy, to referee. His decisions will be final. Agreed? This wager is a great opportunity for me to prove something – that you can make great returns buying totally safe stocks. And that even "average" investors can make great returns without paying ridiculous fees.

"Porter, of all the Brunellos my wife and I have tried (believe me when I say we've tried every one we can find) I keep comming back to Banfi. Please, please let me know your favorites. We adore Italian reds." – Paid-up subscriber John Jones

Porter comment: I can understand your choice: Banfi makes good wine. It is also the region's only truly industrial-scale producer, thanks to its enormous estate (over 7,000 acres). As a result, it is easy to find its wines almost anywhere in the world. And its wines tend to be lower priced than most Brunellos. Over the years, I've found Val di Suga to be the best lower-priced maker of Brunello. And, let's be honest, none of these wines are cheap. A lower-priced Brunello will still cost $50-$100 in the United States. Even here, in Montalcino, a lower-priced Brunello still costs 20-30 euros.

I spend a lot of time when I'm here figuring out what tastes good to me, irrespective of price. We do a blind tasting every day before dinner, trying four to six wines of the same vintage. Val di Suga is frequently our "control" wine – the wine we know well that we compare to other wines. And more often than not, it's our favorite wine in the tasting, even when we're comparing it to wines that cost two or three times as much. Another great lower-priced producer is Togata. We had a '97 reserve Togata last night that was one of the greatest bottles of wine I've ever tasted. Sure, it cost $120, but it compared very favorably to the more "hyped" Brunellos of the 2001 vintage that cost twice as much. On the higher end, we prefer Lisini's wines – in fact, I think these are the very best Brunellos made, with the possible exception of the ultra-high end Biondi-Santi, which can cost $250 per bottle or more.

Where can you find Val di Suga, Togata, Lisini, or Biondi-Santi in the U.S.? You probably can't, unless you live in a major city with a very good wine importer who specializes in Italy. But buying wine online is becoming easier thanks to changes in prohibition-era laws that prevent sending wine to some states. So, look around on the Internet, and you may be able to find a retailer you can trade with.

"Your article about Montalcino brought back pleasant memories. In 2004 we stayed in the villa in Montalcino right across the ravine from the center of town and right under the castello. Fifteen years in Italy taught me there can sometimes be nothing so dangerous as an invasive and efficient government. Italy's wasn't when I arrived there in 1989, but became so by the time I left in 2005. Latvia is repeating the same mistakes now. Greetings from white nights Riga." – Paid-up subscriber Lester Golden

"I'm utterly flabbergasted at readers who write to you with an opinion on the pros of their favorite political party vs. the cons of their enemy – the other political party. Aren't they aware that they are merely two sides of the same coin? They both NEED each other. Neither could survive if the other disappeared. One party wishes to bankrupt and crush our (and everybody else's) freedoms militarily, the other seeks to do the same thing socially. As far as I'm concerned they're all Fascists... " – Paid-up subcriber Gary Gibson

Porter comment: Amen. I'm looking for a political party that promises to make the government leave me alone, stop stealing half of my income each year, and stop interfering in the lives of people all over the world. Unfortunately, the way our unlimited democracy works, you have to promise the mob something they want to get elected. One party seems to promise war and the other seems to promise my wallet. All we – the folks who understand you cannot live at the expense of your neighbor – can do is make enough money so we can afford to escape. (And that's getting harder, by the way. Not only do the thugs in Washington demand the right to tax your global income, they claim the right to take your assets for up to 10 years after you've given up your citizenship!) The mob will eventually destroy itself; there is no honor among thieves. I just hope my family is safe when the class warfare turns violent...

"My subscription to the Short Report recently ran out, and although I thought the report was wonderful what I ended up missing the most was my daily S&A Digest updates. Taking five minutes a day to read your digest saves me the torture of having to watch CNBC or Bloomberg all day, yet still gives me valuable insights that I would not get on my own..." – Paid-up subscriber Scott B.

Regards,

Porter Stansberry

Villa Reineri, Italy

June 11, 2008

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