The S&A Digest: Bull Market... Or a Falling Dollar?

China has the biggest... BusinessWeak... Citi ups BUD... Economics in the mailbag... No credit for the winners...

The list sounds very familiar...

BusinessWeak today released an article naming nine stocks in the Dow 30 that are still value plays. Not surprisingly, nearly every stock mentioned has already been recommended by our analysts: Wal-Mart, Johnson & Johnson, JPMorgan Chase, Home Depot, American Express, and Citigroup.

This should be a wake-up call to most investors... The world's largest bank is now Chinese. Industrial & Commercial Bank of China unseated 12% Letter pick Citigroup (C) as the world's largest bank by market cap.

ev3 (EVVV) and Phase 1 pick FoxHollow (FOXH) will merge to become the global leader in endovascular devices, with a market cap of $1.7 billion. Under terms of the deal announced Sunday, FoxHollow shareholders will receive 1.45 shares of ev3 stock and $2.75 in cash – a combined value of $25.92. Readers will make 20% upon completion of the deal. We'd hoped for a lot more... but that's not bad in only four months' time.

New Haven, Connecticut, will give illegal immigrants government ID cards, allowing them access to city services and the ability to open bank accounts. The first-in-the-nation program hopes to improve public safety. New Haven officials approved the program in a 25 to 1 vote.

Citigroup upgraded PSIA pick Anheuser-Busch (BUD) to "hold" from "sell," stating a possible merger between BUD and Belgian brewer InBev. The stock gained 1.25% on the news. We picked BUD in March 2006, noticing the company's battered stock price and troubles in the domestic market. Readers have made 25%.

New highs: Oneok (OKE) and Schlumberger (SLB).

In the mailbag... all the losers are our fault, of course. Nevermind what our actual advice was... Plus, one of the most fascinating topics in economics: Where inflation comes from. Questions? Accusations? Death threats? We read them all: feedback@stansberryresearch.com.

"As I trust you as a person and a financial expert, I was wondering if you could explain something for me in layman's terms. Two things, really. First, can you explain why it is that the printing of more money causes inflation? What determines when there is too much money in circulation? I have never been able to get a grip on this. The next question deals with the economic collapse of the U.S. that I keep hearing about because of the excess printing of fiat money. Is this something that your readers should be concerned about and if so, what should we do about it?" – Paid-up subscriber Dave

Porter comment: I could spend hours talking about this topic... it's one of my favorite areas of economics. But... you'd enjoy learning about it much more by reading chapter 23 in Henry Hazlitt's Economics in One Lesson, "The Mirage of Inflation." If you still want to know more about it, try the relevant sections of Rothbard's opus, Man, Economy, and State. (See Chapter 11: "Money and its Purchasing Power.") Paper money is the greatest con ever invented. That we've gotten away with propagating our paper currency as the world's reserve currency is the single greatest economic anomaly in human history.

What does it mean? Every experiment with paper money in history has ended in an inflationary disaster, caused by excessive government spending – typically on wars. Sounds familiar, doesn't it?

"I won't bet against you that the SEC won't charge the Bancrofts with inside trading, but maybe I'll take you up on your claim that Steve Jobs is going to jail. With Al Gore on the board of directors of Apple Computers, I think Steve Jobs is a safe as anyone could be from prosecution for options backdating." – Paid-up subscriber Luis Anderson

Porter comment: You know... Jobs' actions were so brazen, particularly at Pixar, I thought it would be too much of a liability for Gore to protect him. Boy, did I underestimate Al Gore. Anyone with enough gumption to publicly sell carbon credits to himself isn't afraid of a little backdating...

"Did a little meandering from boredom and revisited your Hall of Shame. Been with you since 1998 and Alliance Member since 2003 (I think), should've e-mailed this last month but decided against it... of the 10 listed, I disgustingly bought eight and I'm still around. OCA should be in a class by itself since Ferris banged the table to buy more and average down. But it seems you overlooked my personal horror story... VaxGen (VXGN). Now THAT one was a REAL hoser... almost single-handedly buried a novice greedy investor." – Paid-up subscriber Dave

Porter comment: In our defense, we repeatedly warned that VaxGen was the single-riskiest stock we would likely ever recommend... and we urged everyone to own no more than a 2% position, as trailing stops wouldn't be effective, given the all-or-nothing nature of its vaccine program. You win some. You lose some. Overall, in biotech, we've done incredibly well.

"I can go with the coins, etc., but please not so many recommendations on foreign exchanges that are difficult to get into and out of... If you are going to do this, please give us some sort of a proxy that we can trade with similar results, maybe an ETF?" – Paid-up subscriber W Nickell

Porter comment: If you want to end up with investment results that are average, stick to what everyone else can easily buy. One way to open your portfolio to the possibility of outsized returns is to simply be able to buy stocks that most people can't. Obviously, being able to buy securities around the world doesn't guarantee great results... but there's a reason why almost every Swiss bank can buy any security, anywhere in the world. Rich folks know you have to buy value where you can find it.

"Um, though I hate to inflate your considerable ego even more, and I REALLY doubt you guys need this 'competition' to make you better... I have to say I think the best analyst is you [Porter Stansberry]. I like Sjug's class and broad reach. I like Clark's thinking. I think Ferris and Dyson are great 'value' guys, and Badiali explains oil and gas like nobody else I've ever read. ALL of you also have great integrity, in my opinion. I've made the most money with you, Badiali, and Sjug. But you provoke me, you get me thinking, you make me laugh, and even when I disagree with you I have to make myself think hard about why. Maybe you're 'just' the best writer, but I have to think there's more to it than that. Maybe the biggest reason is your courage, and I do appreciate that in a whiny world. You've also had the guts to surround yourself with really bright people, so the whole question of selecting 'the best' was really difficult. In any event, you have my vote. Thanks for providing the best service out there, bar none." – Paid-up subscriber Paul Deepan

Porter comment: Thanks for your kind words, Paul. I'm humbled by the trust our readers have in our work. It's an obligation we take very seriously.

"I read the S&A Digest and see all the stories about people who supposedly make a lot of money with your recommendations. You should hear another side of the story, which is probably more accurate of the actual results for most people. I have made some money with your recommendations, which went up a small amount. But my losers have resulted in three times the loss for me as your gainers. All of these were picks that you supposedly research out well. Some picks are absolutely horrible. [S]ome examples in just this year.

NEW - a total loss

AHM - down 50 %

BQI - down over 50%

OPX - down over 50%

USG - keeps going down

WON - down 25+%

OHB - down 50% and repeatedly pushed

HW - option trade which has basically lost all value, but Clark doesn't comment about this.

I am beginning to think that your guys' advice is hazardous to a person's wealth and think I may stop following your advice. It's expensive even if it is free... Can't you do better?" – Anonymous

Porter comment: Unlike most publishers in our industry, we discuss, at length, what happens when something goes wrong with our picks. We've published a "Hall of Shame," for example. And in the case of AHM, I spent a large part of my last issue looking at what went wrong. In our business, it's impossible to completely avoid losses.

That's why we've developed strategies (like "no risk" value investing, trailing stop losses, and position-size guidelines) to help investors minimize the inherent risks. What I noticed in your note is that you, apparently, didn't follow any of our advice in this regard. For example, you cite NEW as a total loss... but we stopped out of the position only down 18%. Likewise, with most of the losses you've posted: OHB was a 17% loss, AHM was a 33% loss.

Your list contains nearly all of the losers we've recommended this year. Of course, in the same timeframe, we've seen: Seabridge go up 140%, Posco go up 70%, Southern Peru Copper go up 92%, Sangamo go up 40%, and PetroChina go up 38%. We expect our subscribers to judge us based on the results we achieve... and we hope they will do so a bit more fairly.

"You appear to think that it's illegal for the Bancrofts to buy shares in a company in which they already have a sizeable stake. Is it indeed the case?"

– Paid-up subscriber Samuel

Porter comment: No... I've said no such thing. It's entirely appropriate for the Bancrofts to increase their stake in Dow Jones. In fact, I hope they don't sell out to News Corp. I would prefer The Wall Street Journal to remain a family-controlled business, and I think the Bancrofts have been excellent stewards.

However, it appears that some family members were able to buy shares in Dow Jones at an absurdly low price relative to the News Corp. bid because they had knowledge that such a bid was likely to be made, long before the rest of the shareholders had this knowledge. In short, it looks like certain members of the family used their position to gain a huge advantage over the rest of the shareholders, which, if true, is immoral and illegal.

Originally, the SEC was created to look into these kinds of shareholder abuses and take corrective actions where appropriate. Today, though, the SEC seems more likely to sue publishers whose newsletters cover stories they deem inappropriate than to do anything remotely useful for real investors.

"Several weeks ago, I applied for one of the Advisory positions. I have not heard anything recently other than over 1,000 applications were received. Have the positions been filled or are you still in the process of sifting through all the applications." – Paid-up subscriber Lawrence A. DeSpain

Porter comment: We've selected our board... you can "meet" them here.

Regards,

Porter Stansberry

Baltimore, Maryland

Bull Market... Or a Falling Dollar?

By Ian Davis

On May 30, the S&P 500 index closed at its highest level in seven years... finally surpassing the peak it reached seven years earlier – the height of the dot-com bubble.

Now, the S&P 500 is reaching new highs almost weekly.

The rally that made this possible began in 2003, when the S&P began careening skywards...

In the years that followed, investors have been pocketing annualized returns of 15.5%... trouncing 8.2%, the S&P 500's compound annualized gain between 1950 and today.

However, the gangbuster bull market we've been experiencing for the last four years may be due more to a falling dollar than to an economic boom.

The following chart shows the value of the U.S. dollar in relation to the other major currencies of the world. As you can see, since the start of the bull market in 2003, the U.S. dollar has fallen by an annualized 4.7% per year. One dollar in March 2003 is worth only 81¢ today.

According to Bloomberg, "The currency has lost 13.2 percent since January 2001, when George W. Bush took office, the most under any president since at least Gerald Ford, who left the White House in 1977."

The Value of the U.S. Dollar Has Been Steadily Falling Since 2002

In terms of U.S. dollars, the S&P 500 Index is trading 2.6% above its dot-com peak. However, in terms of euros, the S&P 500 Index is still 34.7% lower than it was in the year 2000.

The S&P 500 Recently Reached New Highs,

But Is Still Down in Euros

Another way to gauge the real value of the S&P 500 is by adjusting for the consumer price index (CPI). The CPI measures the cost in dollars of a fixed basket of goods.

When the S&P 500 index is inflation-adjusted using the CPI, it's still 15% below its year 2000 peak.

Conclusion

A weakening dollar is a mixed blessing for Americans...

On the negative side, if the stock market goes into recession, falling stocks along with a falling dollar could cause foreigners to leave the U.S. market in droves. Plus, we feel an inflationary effect... A falling dollar makes foreign goods more expensive for Americans.

So when you consider these negatives, having a 5%-10% allocation to gold and silver, which have traditionally been uncorrelated to the dollar, has never been more important.

On the other hand, according to a recent Bloomberg article, "Rather than causing foreigners to flee U.S. securities, the depreciating currency is making American goods less expensive abroad and helping offset the worst housing recession in 16 years. Exports reached an all-time high of $132 billion in May..."

In other words, as long as you own multinational U.S. companies (which benefit from their goods being priced cheaper than foreign competitors) and you're not planning on touring Europe anytime soon, you can still make nice gains from a lower dollar.

Good investing,

Ian Davis

July 23, 2007

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame

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

As of 06/27/2013