The S&A Digest: Big banks start to crack

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Big banks start to crack... Weber: Buy silver... CEOs bullish on gold... Canada's huge new oil discovery... Tax revenues point to recession... In the mailbag, all about prostitution...

We've been waiting to see which of the big banks would fail first. Frankly, we expected Merrill Lynch would be the "winner." But now the odds-on favorite has to be Bear Stearns, which announced today it doesn't have enough money to keep the lights on in its buildings.

It seems the Fed's decision on Tuesday to allow banks and brokers to exchange mortgages for Treasury bills was put in place specifically to enable a Bear bailout via JPMorgan. And so you have it, dear subscribers. Our government sees fit to use an invisible tax (inflation) to bail out mortgage speculators whose perfidy and greed allowed mortgages to be made against stated income ("liars loans") to buy homes whose prices were wildly inflated. And... who will eventually pay for the costs of these transgressions? Oh, you know the answer already: you and me. How should you protect yourself from these new, unauthorized taxes? As we've said for a long time, buy gold or even better, silver.

One more thing about the big banks... My pick to sell short at the beginning of the year was Goldman Sachs because it was the one bank "everyone" thought would skate through the crisis unscathed. Meanwhile, to be short Goldman Sachs, all you had to believe was that its traders weren't superhuman. Young Goldsmith, enamored by GS's reputation, was sure I was wrong. I'm no chartist... but it looks like GS is "breaking down," doesn't it, Goldsmith?

Another one of my long-time whipping dogs, General Motors, also seems to be "breaking down." As I've written in my newsletter, if the U.S. slips into a recession (which seems a lock), GM will be bankrupt within 18 months.

Chris Weber has done it again. He's the only guy in our business I know who is literally always right about the major moves in the market. In the 12 years I've known him, I've never seen him be wrong – not one time. And I know from reading the books he's written over the years that, since the early 1970s, he's never been wrong about the major trends. Last November, he told his subscribers to sell everything (except precious metals). There's going to be a bear market. He was exactly right.

In his most recent newsletter, Weber says of silver:

Silver has been one of the world's best investments since those days of last August, when the crisis in the various bank credit derivatives started to blow up... I think we're going to see the silver price advance until it meets resistance at the $25-$27 area. I'll be very interested to see how it handles this battle.

If it can clearly better it, then the next target would be the old 1980 highs of roughly $50. But $50 in 1980 would not be the same as $50 in 2008, or in 2010, or whenever this finally happens. In 2007 dollars, what cost $50 in 1980 would have to cost $141 just to adjust to inflation. And the way prices have been rising since 2007, it is a fair bet that they'd have to be over $150 in terms of a 2008 dollar, or over $165 for a 2009 dollar, or $180 circa 2010.

If you'd told people three or four years ago that gold would break through its previous high of $850 without hardly a pause and then bust through $1,000, they would have looked at you like you were stark raving mad. But it's a bull market in commodities. The Fed has no choice but to run the printing presses night and day, and more and more of our nation's creditors will see this as a virtual default and will begin to flee into sounder money – gold and silver. I have no doubt silver will reach its previous high of $50... and sooner than most people think.

Gold company CEOs are still bullish on the precious metal as it hits $1,000 an ounce. Former Goldcorp CEO Rob McEwen predicts gold to hit $2,000 by 2010. Yamana Gold CEO Peter Marrone is calling for $1,500 by year's end. And Peter Munk, CEO of Barrick, the world's largest gold producer, says we are in the midst of a "commodities supercycle."

Munk notes this rally in gold is fundamentally different from the highs hit in 1980. That high, driven by soaring inflation, the Russian invasion of Afghanistan, and the Iran hostage situation, was a mere "blip". Munk believes the current financial crisis, falling dollar, high oil prices, and increasing demand from emerging markets will all bolster gold's price. Most importantly, Munk says exploration companies face "enormous" difficulties in finding new deposits.

Oil hit $111 a barrel yesterday. That means a big payday for Canada. For years, Alberta, Canada, has been the place for oil-sands deposits. But close by, Saskatchewan has similar geology, fewer people, and much cheaper land. And it won't be long until Big Oil discovers this gem. In yesterday's DailyWealth, Matt explains why "resource nationalization" is making it harder for players like ExxonMobil and Chevron to find large new deposits, and why Canada is looking so attractive.

Matt has found a penny stock that will directly profit from Saskatchewan's boom. To learn more about his favorite Saskatchewan oil play, click here...

Here's an interesting way to gauge the U.S. economy from Dennis Gartman... tax revenues:

We believe tax revenues to be the clearest and cleanest information regarding an economy. As we like to say and simply put, no one anywhere has paid taxes on business he or she thinks they are going to do, or upon profits they think they are going to earn, or upon hours they think they are going to work. People and businesses pay taxes only on profits they have indeed earned or upon hours they have indeed worked.

For years tax revenues outpaced GDP, suggesting the economy was growing better than the government projected. But tax receipts for February fell to $105.72 billion from $120.31 billion in February 2007.

New highs: EnCana (ECA), Stone Energy (SGY), CurrencyShares Japanese Yen (FXY), Westshore Terminals (WTE-UN.TO), streetTRACKS Gold (GLD), Great Basin (GBN).

In the mailbag, a new controversy – prostitution. Ferris made a good point yesterday about the matter: It's mutually consensual, so why should it be a crime? It's also the oldest profession, which indicates criminalizing the behavior is unlikely to stop people from engaging in it. But many subscribers object... What's your take? Should the government tell us how to behave? Should our neighbors have the right to inspect our bedrooms and our checkbooks to make sure we're living up to the standards they've imposed on us? Tell us what you think: feedback@stansberryresearch.com.

"I am so taken back by Ferris' comments I cannot believe what I just read ... reminds me of things I heard out of Berkley in the '60s and '70s. Any thoughtful reading of his statements will find blatant inconsistencies unbecoming of anyone providing financial analysis... With reference to Ferris' [comments on prostitution] if it is illegal, it is wrong... I cannot trust Ferris' judgment after this. If in the event this was one of your "gotcha" gimmicks, you win. Otherwise, I will stand by my comments. BTW I would be interested in how Dan's wife accepts his explanation about going to the prostitute not being wrong." – Paid-up subscriber Bill Bray

Porter comment: Well, as I think Dan made clear, what was wrong about Spitzer's behavior was that he's married. Also... Dan is married to an extremely attractive woman. I'm sure she's confident in their relationship.

"As to Dan's comment about Spitzer and the tart, I'm a lawyer and a pastor. Consent is not the standard of criminality for prostitution or any other illegal behavior. The standard for criminality is harm to society, of which prostitution causes much." – Paid up subscriber Dr. Scott Lively

Porter comment: If "harm" to society is the true underlying standard of criminality, then the government has even more explaining to do than I previously believed. What would you guess is more harmful to society: the government's monopoly over education, its monopoly over money, its "war" on drugs, or the petty problem of private prostitution?

Einstein saw the real problem as trying to enforce laws that make vice a crime. "Nothing is more destructive of respect for the government and the law of the land than passing laws which cannot be enforced."

"If it is true that freedom and free markets are the keys to America's greatness, who poses the greater threat to Americans, Ben Bernanke or Ben Laden? If Ben Bernanke is a threat, what are the implications for George Bush, not just as the man who appointed Ben Bernanke, but also as the office of the President of the United States who has the ultimate duty to uphold the Constitution of the United States, which unarguably precludes the Federal Reserve?

"Here is what Thomas Jefferson had to say: 'Banking establishments are more dangerous than standing armies... [The] Bank of the United States... is one of the most deadly hostility existing, against the principles and form of our Constitution... If the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.'" – Paid up subscriber Bob

"Ferris, I applaude your honesty. Too many people are afraid to speak out for fear of 'big brother' stepping on their toes. Judge no one's actions but your own. You're exactly right about the gov. trying to keep everyone in the 'place' where they can control you. Look where that's gotten us. Our standard of living is going down, the dollar is a joke, and our freedoms are being trampled." – Paid-up subscriber Steve

"Is there anyone better than Jeff Clark? Today in his e-mail for the Short Report, he said if your looking for something to try, grab some calls, but only if you can watch the markets. I grabbed Deere at 10:30 for $1.90, and sold them at 11:00 for $2.35. Thanks Jeff!" – Paid-up subscriber Tim Dakin

"I am so god damn tired of you and those other hacks banter on about the virtues of 'investing' in gold [bullion] coins... . Gold coins fail to throw off any cash; they are dependent on what a participant in that market will pay or sell the coins... You and your idiot lemming followers need to cut the crap..." – Paid-up subscriber David Woodworth

Porter comment: Gold has a unique and timeless role in the world's markets. It is the ultimate store of value. Thus, while it might not be an "investment," it is the ultimate form of savings. Additionally, in a world awash in paper money, where debt forms the basis of most commerce, an ounce of gold is no one else's liability. This makes it uniquely attractive during periods of financial turmoil.

Regards,

Porter Stansberry

Baltimore, Maryland

March 14, 2008

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