The S&A Digest: Arabs buying London

Arabs buying London... New Euro City... MBIA finally headed for downgrade... Bottoms in the dollar and housing... Coal prices doubling this year... Buy guns... Buy gold... Ferris rants (and rants and rants)...

 Warren Buffett is still bullish on the economy. He sees the destruction of CDOs as "poetic justice" for the bankers who created them. Buffett believes the dollar will continue to fall unless the U.S. lessens its trade deficit. However, the U.S. economy should "do well over time."

Buffett also believes the credit crunch is overplayed... "I wouldn't quite call it a credit crunch... Money is available, and it's really quite cheap because of the lowering of rates that has taken place... What has happened is a repricing of risk and an unavailability of what I might call 'dumb money,' of which there was plenty around a year ago."

 It's easy (and not a little self-serving) for me to agree with Warren Buffett about investing... In the new issue of Extreme Value, due out tomorrow afternoon, I'm recommending a financial stock controlled by its founder. Shareholder returns have compounded at 15% after tax for more than 30 years, it's selling for a 57% discount to its cash and securities, and it owns nearly 20% of a leveraged financial company founded by a Forbes 400 billionaire. You can learn more about Extreme Value here.

 With Buffett bullish on America... Dubai is bullish on London. A property fund backed by the Dubai government bought a London property from the queen's portfolio. The group, International Hotel Investments, will buy the 400,000-square-foot Metropole Building on the River Thames for $255 million.

 Signs of a bottom in the dollar... Stores in New York City now accept euros and other foreign currencies.

 Signs of a bottom in housing... The cover of the latest issue of BusinessWeek says, "MELTDOWN: For Housing The Worst Is Yet To Come."

 In the market for a new home? We received an e-mail from Beazer Homes offering up to $40,000 in free extras when you buy a new home between February 8 and 10. Check out the website here...

 Trader Monthly  released its Trades of the Year issue today and awarded the "Equity Short of the Year" to Bill Ackman and his persistent short position on MBIA and Ambac. The article quotes a source close to Ackman saying he plans to ride the trade to zero, gaining approximately $3 billion for his Pershing Square hedge fund. The trade of the year, not surprisingly, went to John Paulson. Paulson's flagship hedge fund gained 590% for the year after taking massive short positions in subprime mortgages. His personal paycheck is rumored to be $4 billion.

 MBIA issued a press release last night that brings Ackman one step closer to that $3 billion payday. The world's largest bond insurer will try to raise another $750 million by issuing common shares. The company has already raised $1.5 billion since November. MBIA also said it will double its loss reserves to $200 million. Yesterday, Fitch Ratings put MBIA on negative credit watch. That means its long-overdue downgrade from AAA status could be arriving any day now.

 In the "Too Little Too Late Department," the International Organization of Securities Commissions (IOSCO), a global regulatory group, says maybe it's a bad idea for ratings agencies to help design structured products they also rate.

 Citigroup says blizzards in China, power outages in South Africa, and floods in Australia will cause coal prices to double this year. In December 2006, I recommended International Coal (ICO), billionaire investor Wilbur Ross' assemblage of coal companies bought in bankruptcy. ICO is up 26% so far, but I imagine it has a ways to go yet.

 A few weeks ago, I bothered our resident quant, Ian Davis, about whether gun sales went up or down in a recession. Ian's a busy guy, but he was kind enough to throw together some data for me on the last two recessions. It looks like gun sales didn't fall much, if at all, during the 1990 recession... and they rose quite a bit during the last recession, in 2001.

I was wondering about this because I like Sturm, Ruger (RGR) quite a bit. Since I wrote about it in November, it's come out with two much-needed new products and bought back close to 10% of its stock. It has plenty of cash and zero debt, and it's remaking its manufacturing operations in the image of Toyota, the most successful manufacturing system on Earth.

Since my recession fears are probably overdone, maybe Ruger is an even better idea than I originally thought. And since the gun business is highly fragmented and badly in need of consolidation, both Ruger and its only publicly traded rival, Smith & Wesson (SWHC), seem like decent stocks to own for the next couple of years. They've both got respected brand names with loyal followings. I gravitate more toward Ruger because it has no debt. But as interest rates fall, odds improve that Smith & Wesson will be able to lower its interest expense.

 Matt Badiali tells you why the world is "hot for pot" in today's DailyWealth.

 New highs: none.

 The mailbag offerings were a tad sparse this morning. What's the matter? Don't you hate us anymore? Or love us anymore? Have you stopped drinking? What's wrong? Tell us what we've done wrong – something hardly anyone ever does, I assure you – at feedback@stansberryresearch.com, so we can make it up to you, or abuse you further, whichever is more appropriate.

 "How do you determine the reference price?" – Paid-up subscriber Chris Krug

Ferris comment: When tomorrow's Extreme Value comes out, the reference price I'll use is today's closing price. If something crazy should happen, and the stock rises significantly on Monday, I'll adjust the reference for Monday's close, to make it fair. That's pretty rare, though.

It's important to remember the reference price is just a general marker to show the value of the recommendation over time. Securities prices aren't bull's-eyes. You buy when a stock is cheap enough and safe enough and hold it until either of those variables disappears, or until you find something much cheaper and/or safer.

 "What an excellent, insightful piece of literature you wrote on how our wonderful government will fix all of the problems it created. If the latest scams aren't enough for everyone, we can always count on the government to create more. Bail out the homeowners, the banks, the bond insurers and then give everyone a $600 check to buy more Chinese products. It just keeps getting deeper, making a simple solution far more complex. The idea of it all is to trick Americans into thinking that the spigot never stops. Why anyone or any government would give anyone money that is never repaid and then turn around and do it again is beyond imagination." – Paid-up subscriber Bob Greene

Ferris comment: The following is a rant, and has nothing to do with investment advice. You are forewarned...

Our government is a holy mess. But I don't blame the government. I blame you, me, and all the other so-called citizens, especially the rich prominent ones, who could use their power to sound off against the steady deterioration of our freedom, but instead use it to make things worse. Why are Americans such a bunch of whipped dogs? If the founders of this country were alive, they'd have staged a second and third revolution by now. They'd speak out and produce a firestorm of literature on the government's many crimes and the right thing to do about them.

I think it was Murray Rothbard who asked, "Where are the Sons of Thunder today?" (borrowing from the title of Henry Mayer's biography of Patrick Henry, A Son of Thunder). And I think it was Martin Luther King Jr. who said something about the appalling silence of good people being worse than the clamor of bad people. Why the appalling silence? Where are the sons of thunder?

If Warren Buffett and Charlie Munger, for example, are so great and wise, why don't they use their greatness and wisdom to do us some real good, by protesting the government's myriad unwarranted intrusions into our lives and its thievery of our hard-earned wages? If they love their fellow man so much, why don't they do him some real good, instead of whining about this or that tax not being high enough?

 "I went into town Monday to drop off some last minute election stuff for the elect Ron Paul effort, and stopped in at my favorite coin dealer. He got to talking about money. What else? Things have not changed much, he can still count on one hand the number of people that are buying gold or silver. How should I feel about being the dexter finger? He does not expect to see any increase in the numbers until gold goes above $1500. He did mention that one person had come in last week and bought every U.S. minted gold coin in the store. Just looking at the display counter, all the slabed gold coins, and other coins were indeed gone. That had to be at least a $20K buy. All he had left were a couple Maple Leafs, a Panda, and some Mexican gold." – Paid-up subscriber Larry

Ferris comment: Gold has a long way to go from here. In 2007 dollars, gold is about halfway to making a new high, which won't happen until it gets up around $1,800.

Regards,

Dan Ferris

Medford, Oregon

February 7, 2008

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