The S&A Digest: Chanos covers homebuilder shorts

Chanos covers homebuilder shorts... EnCana doubles dividend... Steve Wynn tells it like it is... The muni-bond insurance scam... Steroids and prostitutes... Deny this...

 Regulators and finance experts met in Washington Tuesday to clear up the problem of plummeting mortgage-backed securities. Among those present were hedge-fund manager Bill Ackman, private ratings agency proprietor Sean Egan, and short-selling legend Jim Chanos of Kynikos Associates.

Jim Chanos recommended regulators ease off debt owners. Regulators "have to understand that losses have occurred" and give investors "safe harbor." As it stands, certain debt holders are forced to sell paper when it drops below a certain, arbitrary rating. The forced selling drives prices down farther and allows private investors – like Chanos – to scoop up paper for pennies on the dollar. Chanos believes this is just transferring wealth from publicly traded entities to private entities who have done their homework and know exactly what the paper is worth...

Chanos' taking this all very seriously. I can't remember ever hearing a hedge-fund manager implore the government to not let him game some profits out of the system.

Chanos also mentioned he has covered all of his U.S. homebuilder shorts. Steve Sjuggerud also thinks we've hit a bottom in homebuilders. He recently made a long bet on the homebuilding industry in True Wealth that is set to take off. To learn more about True Wealth, click here...

 Now here's a CEO who tells it like it is. An analyst asked Steve Wynn why his casino operator, Wynn Resorts, sold stock at $154 at the end of September and then paid a $6-per-share dividend on December 10. Shares traded around $80 last June and go for around $120 today:

"It is the job of board of directors and especially of the CEO to take advantage of the market when that market movement is extreme. When a company increases its value by 100% in 60 days, that's an unnatural movement of value and the market also goes the other way sometimes... No company gets to be worth twice as much in 60 days as it was before... So when that happens, we take advantage of it. If everybody is so hungry for shares, we let them have some. If the shares go down, we buy them. And that is a statement of policy in this company, period." 

 Extreme Value pick EnCana (ECA) doubled its dividend and made $11 per share in cash flow in 2007. EnCana owns 25 million acres (give or take a few) in western Canada... oil sands country. Extreme Value readers are up about 260% on the stock since we recommended it in May 2004.

 I hope you bought some Sturm, Ruger (RGR) when I said to buy it up to $10 a couple months ago. It's still under $10 if you didn't, and it's one of the best ideas I've come up with in awhile. It's one of only two publicly traded gun companies. The industry is highly fragmented: The largest company, Remington, has less than $500 million in revenue. It's made up of hundreds of little mom-and-pop companies.

The incentives in a capitalist system scream for consolidation in this type of situation, which usually means rising share prices as companies are taken private and merged at premiums. Ruger is a well-loved brand name. The company has no debt and tons of cash. It just bought back nearly 10% of its outstanding shares. It's remaking its production system in the image of Toyota, the most effective manufacturing system on the planet. And after years of falling behind on hot new product trends, it's come out with two new models recently. A year or two from now, I want someone to remember I pounded the table on Sturm, Ruger.

 On Tuesday, Warren Buffett offered to bail out muni-bond insurers with $5 billion of capital. Shares of bond insurers actually fell on the news. Today, critics say Buffett's offer dooms the troubled companies. If they were to accept Buffett's offer, the bond insurers would be left holding the bag on their most toxic assets – mortgage-backed securities – while surrendering their safer muni-bond business.

Perhaps they just don't want to pay Berkshire Hathaway 150% of the premiums still owed on the bonds. Berkshire charges twice what MBIA and Ambac charge.

 In written testimony for the U.S. House Committee on Financial Services, MBIA whined about short sellers (Bill Ackman) working to undermine confidence in bond insurers. MBIA asked for Congress to work with the SEC to curtail the "unscrupulous and dangerous market manipulation activities of short sellers."

This is pretty rich coming from a company that colludes with ratings agencies like S&P and Moody's to bilk muni-bond investors. Moody's rates muni bonds lower than corporate bonds – even though everybody knows muni bonds have a lower default rate. As if by magic, those same muni bonds get AAA ratings when MBIA provides bond insurance. That means the ratings agencies rate tax-free bonds and taxable bonds differently – even when they're from the exact same issuer. Roughly two-thirds of muni-bond buyers are regular retail investors, most of whom have no idea they're getting gypped. States and municipalities have overpaid for muni-bond insurance by an estimated $30 billion, according to hedge-fund manager Bill Ackman.

 Speaking of insurance that's not always necessary... New York has filed an antitrust suit against the big title insurers (including Extreme Value pick, Stewart Information Services), alleging they paid kickbacks to brokers that recommend their policies. Four companies have about 90% of the U.S. title insurance market. And title insurance is required on every real estate transaction, even if you're refinancing a home you already own. I wouldn't expect the title insurance market to sustain too much damage, though. Most people won't want to be bothered about an expense of a few hundred dollars when purchasing a home for hundreds of thousands of dollars.

 And, if you've read Hernando De Soto's book, The Mystery of Capital, you know property titles is one of capitalism's essential elements. On p. 47, De Soto writes, "consider whether it is possible for assets to be used productively if they do not belong to something or someone."

 Government regulators were asleep at the switch with the muni-bond insurance scam, but they're going out of their way to police something much more important... baseball! Yesterday, baseball star Roger Clemens testified before a congressional committee with nothing better to do than ask him if he used steroids. Speaking of consensual crimes that are none of the government's damn business...

 Freakonomics author and economist Stephen Levitt says Chicago-area "prostitutes are more likely to have sex with a police officer than to be arrested by one." Prostitutes also said they made more money and worked less hours when they had a pimp. Several prostitutes asked Levitt's researchers for a pimp reference. Sounds like we could all use a good pimp.

 New highs: none.

 If you know a baseball star who's used steroids, keep it to yourself. But if you're a cop who has had sex with a prostitute (preferably while on the job), send us a note: feedback@stansberryresearch.com.

 "Looks like someone (obviously more than one) knew about the S&A Oil Report recommendation of today well before your subscribers. The stock was "only" up 6.5% today, ahead of the supposedly after-the-close report was issued to your subscribers. And many other energy related stocks were down today. So it was not a group move up... This front-running happens often with your publications... Shame!!!... and no denials, please." – Paid-up subscriber Robert Bloch

Ferris comment: I deny your accusation, sir. I deny, I deny, and thrice again I deny it. I deny it to the depth and breadth and height that my soul can reach (and I gotta helluva long soul, lemme tell ya).

First of all: Do you have any idea how much money you'd have to invest to move a $400 million market cap stock? Porter's a great boss, but he ain't payin' us that much.

Front-running is a serious charge; and it's illegal. Our explicit policy prohibits anyone at Stansberry & Associates from buying any stock we recommend until our subscribers have had a fair chance to act on our advice. And it bars the analyst from ever buying a stock he personally recommends.

Besides if you had any clue how little evidence you're presenting, you'd never have made your accusation in the first place. Shame!!!... and no denials of your ignorance, please.

 "Today marks two years until the opening of the 2010 Winter Olympics here in Vancouver & Whistler, and you would think they were opening tomorrow with all the buzz in the media. We don't have as many cranes as Dubai, but we have our fair share. If you have traveled to Vancouver and visited The Granville Island Public Market, it's hard not to notice the concrete plant next door. Well, that's where I work and last week I put in almost 60 hrs in 5 days. My employer can't find enough drivers or trucks to haul concrete. This is the case all across the construction industry here. The Olympic Village in Vancouver will be turned into condos after the games and last fall they went on the market and the ground had barely been broken. A dozen or so buildings to house the athletes were sold in days. People paying half a million dollars for small one-bedroom suites. Sure, the Olympic Village may hold a bit of cache to it, but there are tons of other projects all around the city and British Columbia that people are lining up to buy.

"Even if there were no Olympic Games being held, it wouldn't diminish the amount of projects being built here. People can come up with the financing and pay the ridiculous amounts for a shoebox in the city. There is no subprime fiasco here, and there are few foreclosures. I don't know what makes this place so special that everyone wants to live here, and the boom looks like it will never end. When it does however, I plan on being retired! The largest project right now in British Columbia is the $2 billion subway to connect downtown Vancouver with the airport. It should to be completed at the end of 2009 and funded by partnerships between 3 levels of government and private parties, and built by a large Italian construction company, SNL-Lavalin. Real estate values have leveled a bit, and the market may not be as hot as it was a couple of years ago, but on my street as soon as sign goes up, the property is sold in days. I bought my 3 level,2 bedroom, 20 year old townhouse in May 2005 for 422 000.00 and I could ask 560 000.00 for it now and all I have done to it so far is paint and carpeting. A brand new 3 townhouse development kitty corner to where I live that was converted from an old house just sold the least expensive unit for just under $700,000.00. Anyone looking for work? Come on up!" – Paid-up subscriber Zoltan

Ferris comment: We should tell Hank Paulson and Ben Bernanke about this. Maybe they can arrange to have the Olympics in a different major city in the United States every month for the next five years. Seriously, I bet the huge bull market in natural resources doesn't hurt Vancouver's economy one bit.

 "I live in the high desert (Victorville CA) which is 60 miles northeast of LA. I am a school teacher and a realtor. How bad are things here? A home that sold in January of 2007 with 100% financing for $398,000 is now an REO on the market for $209,000.00. I am seeing some REO lenders drop prices up to $50,000 a month most are dropping prices $20,000 to $30,000 a month, on homes in the $300,000 price range. A local escrow company that processes Countrywides REO's says they have 1,200 new ones coming in Feb in CA. I hope B of A has some staying power... I think the market will continue to drop until investors can step in and rent the REOs for a profit, or the average Joe can qualify based on his income again. We are now eating into 2003 values here." – Paid-up subscriber Chris Smolensky

 "We just had a phone call from a farmer friend who lives in upstate NY near Cobleskill. He has an ARM on his farm and he has no debt otherwise. I don't have the exact figures, but it sounds like his rate went from 8% to 16% this month and he asked to refinance. The bank said 'We don't do that for farmers.' So he is paying $2,600 per month on his mortgage. Good thing he had no debt otherwise!" – Paid-up subscriber Kay DeLong

Ferris comment: Three men were on a radio call-in show: an investor, a banker, and a farmer. The radio host asks each what they'd do with $1 million. The investor says he'd buy stocks and bonds. The banker says he'd lend it out and collect the interest. The farmer says, "Ah think ah'd just keep a-farmin' 'til it was all gone."

Regards,

Dan Ferris

Medford, Oregon

February 14, 2008

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