The S&A Digest: Diversifying Gets Harder

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

As of 07/01/2013

We're not selling Russian brides... Battling with ISPs... Ian on global correlations... Harley breaks into India... Morgan Stanley follows Sjug into Japanese real estate... JP Morgan bidding for Barclays?... Will I run for office?... Valhi breaks into the top 10...

IMPORTANT: We've received several hundred e-mails like this one over the last week: "I have not received a Digest since April 6th. What gives?" – Paid-up subscriber Ron Putman

The people responsible for delivering your e-mail (your Internet Service Provider, or ISP) are flooded by junk e-mails sent anonymously from places like Eastern Europe offering you such wonderful products as genital enlargement devices and young Russian brides. To manage this onslaught of illegitimate "spam," ISPs set up automated filters that decide what should be delivered and what shouldn't be delivered.

In the past, we've never had a problem with these filters because we've never bought an e-mail address (yes, you can buy them). All of the e-mail we send is either to paid subscribers or to folks who have signed up to receive DailyWealth or The Growth Stock Wire. However, the honeymoon between us and several of the world's largest ISPs ended abruptly this month when EarthLink, one of the largest ISPs in America, suddenly decided to rate all of our e-mail as spam.

Most of you have an e-mail box that's reserved for spam. And if you look in that box, you'll probably find the missing Digests – and anything else we've sent you over the last two weeks. But here's the thing: If you're reading this Digest, then you probably weren't affected by these problems. If you were affected by these problems, you probably won't see this message because it will have been filed as "spam" by your ISP.

So... please know that we publish the Digest every weekday. Generally, if we can't publish, we let you know the day before. If you don't receive a Digest, look in your spam box and indicate to your ISP that the Digest isn't spam.

There's one more thing you should know. ISPs are labeling more and more e-mail as "spam" because doing so allows them not to deliver messages at all. This reduces their service costs. At the same time, they're developing systems that can guarantee e-mail delivery – for a fee. The ISPs hope to one day charge you (and me) for delivering the e-mails you've already paid for.

Morgan Stanley is buying 13 hotels in Japan for $2.4 billion. The purchases, which will nearly double Morgan Stanley's Japanese real-estate portfolio, are expected to close June 1.

Mangoes for motorcycles... The U.S. has lifted an 18-year-old ban on Indian mangoes, which were outlawed due to heavy pesticides used in farming. In return, PSIA pick Harley-Davidson (HOG) will now be allowed to sell motorcycles in India. The bikes have had a hard time in India due to high emissions standards and a 90% tariff.

Going from bad to less bad... The yen rebounded from a record low against the euro.

Dutch bank ABN Amro (ABN) hired Goldman Sachs to advise on an estimated $80 billion takeover offer from British bank Barclays. Shares of Barclays (BCS) also received a boost yesterday, as rumors circulated that JPMorgan may make a bid for the bank.

New highs: Telstra (TLS), FLIR Systems (FLIR), Kayne Anderson (KYN), McDonald's (MCD), Schlumberger (SLB), Janus (JNS).

In the mailbag, a return to normalcy – anger, accusations, bold-faced lies... etc. Enjoy it. And keep the venom flowing. Send us your worst here: feedback@stansberryresearch.com.

"You want a criticism... I must call you to task about being 'intellectually dishonest' regarding the sale of your home... You rented for 3.5 years a deluxe 2,400-square-foot unit for $833 a month, which works out to 35 cents a square foot. I am going to guess the rental price of that inner harbor deluxe unit (3br, 5ba., view) has to be $0.85-$1.10 a foot, so your effective rental rate for 4 years was 2.5-3x below market based on your $833/month rent." – Paid-up subscriber Van Hart

Porter comment: I made it clear that I couldn't have rented a similar place to live for what I ended up losing on the house. However, getting discounted rent via ownership isn't the same as making a profit.

"You (or someone from your staff) recently recommended a book by Van K. Tharp called Trade Your Way to Financial Freedom. I haven't read the whole book yet, but on p.5 he writes, 'I don't know many people who have made money consistently following other people's advice. There are exceptions, but they are very rare. In time, people who have followed other people's advice and have consequently lost their capital get discouraged and drop out of the picture.' Isn't that what you're asking us to do when subscribing to your newsletters? Follow your advice? If so, then you have basically recommended a book that tells us NOT to buy your newsletters or follow your advice." – Paid-up subscriber Chris

Porter comment: You're taking Van Tharp's words out of context. The point he makes early in the book (and frequently in person) is that YOU must be responsible for your own investment decisions because taking responsibility for your trading is the first step to becoming a better investor. Reading our letters helps YOU make investment decisions. I know Van reads our letters and frequently follows our recommendations. In fact, he reviewed dozens of newsletters for the book and found Extreme Value and True Wealth were the top two performers over the last five years. But Van chooses what stocks to buy and when to buy them. And he chooses what and when to sell. He's responsible for his own decisions.

"I am glad to see your top-10 open recommendations and your hall of fame, but the information does nothing for me other than to give me the feeling that I might reap some similar rewards in the future. Of course, it might be interesting to see your bottom-10 recommendations, but it would not be useful either – other than to reinforce your claim to honest reporting. How about giving us the list of all open positions and what they are doing if you really want us to have accurate information on your ability?" – Paid-up subscriber Stan Levine

Porter comment: We want to interest you in our products by showcasing some of their results and by discussing, from time to time, their current recommendations. But... if we gave everything away, up front... we'd end up like the girl who slept with her new boyfriend on the first date and wondered why he never called the next day.

"Did you ever think that your marketing is precisely the kind of marketing that draws to you the dopes that write in saying in myriad ways how you have let them down? I have for a long time, years really, put newsletter recommendations in an MSN Investor Watch list and monitored the results. I just wish I had been smart enough to have put every dime of mine in any number of letters under your banner..." – Paid-up subscriber Michael Meek

Porter comment: We get complaints, from time to time, about our marketing copy. It's too long. It's too hyperbolic. There's not enough track record data, etc. We don't take it personally because we don't choose what copy works – you do, dear subscribers. We publish the kind of marketing copy that sells. We test it constantly to figure out what will work. If sending people a short letter with our track records actually sold letters, we'd do it in a heartbeat. But, as anyone in advertising, marketing, or romance will tell you, the head is the dupe of the heart. By the way, when it comes to dopey ads, the newsletter business has nothing on the brokerage business. What in the world does a bull running through a china shop have to do with investing?

"Porter, last month you told us to buy American Real Estate Partners. It was at $125.58, and has been dropping – today closed at $111.54. Do we hold on or sell?" – Paid-up subscriber G. Bottinor

Porter comment: Huh...? I last recommended American Real Estate Partners in a July 2005 special report. It was trading around $30 then, as I recall.

"I have just about had it with the consistent performance of your newsletters... My accountant can't provide me with an accurate estimate for my quarterly tax payments because the recommendations in your newsletters rise faster than anticipated... Now, you offer a new service called Dividend Grabber and my first purchase is up 5.25% in 9 days! For a guy who claims to want smaller government, you sure are doing a great deal to increase the ability of the government to grow by generating higher tax revenues for them!" – Paid-up subscriber Ken McGaha

"I just had occasion to check the performance of my rollover and SEP IRA's for the past two years since enrolling in the Alliance. Delighted to say that I'm up 55%, largely due to the Alliance recommendations..." – Paid-up subscriber Dick Jaffe

"I am surprised that you even know who Ron Paul is and what he stands for. Congratulations for your astute judgment." – Paid-up subscriber Mac McDaniel

"I love my country, but I don't feel that there is a political party that fairly represents me. Porter, how about you running for office?" – Paid-up subscriber T. M. Spiewak

Porter comment: My friend, Doug Casey, says of our country's political predicament, "It's too late to solve the problem, but still too soon to line them up and shoot them." Maybe Doug is wrong about what the future holds for our elected officials... but I'd rather not take any chances. Besides, why waste your life trying to help all of your fellow deadbeat citizens, who rob, cheat, and steal from you every chance they get.

"Since you can't invest in what you recommend, what do you invest in for yourself? When researching a stock how do you decide between recommending it to your subscribers or investing in it for yourself?" – Paid-up subscriber B. Cantlie

Porter comment: I invest only in the absolute safest equities I can find, typically ones recommended by Dan Ferris and Steve Sjuggerud. (We are allowed to invest in each other's recommendations, if we wait a fair period after the recommendation has been published.) My goal when I buy a security is to never sell. I've found that holding stocks for at least three to five years is, by far, the best way to grow my wealth. It's easy. It's safe. It doesn't take much of my time. And I like being the owner of a business much more than I like gambling on stock prices. The only hard part is boredom. But that's a challenge I'm prepared to face.

"I see Valhi made the top 10, giving you 3 in the top 10. And you missed the chance to trumpet it? Hmmmm, maybe I missed that Digest, but as it is my favorite e-mail every day of the week, I doubt it. Of course, I was a moron selling it in the low $20s when it was 'stalled' to go for bigger gains elsewhere: stupid me. Interestingly, SSRI might displace Valhi, as it looks to be about in 11th place or so today. Luckily, I hung on to that one... against your advice. Some you win, some you lose. Fortunately, with you guys doing my research, winners far exceed the losers."

– Paid-up subscriber Jeff Persson

Porter comment: Honestly, I hadn't noticed until now. How about that! I'm catching up to Dan!

Regards,

Porter Stansberry

Baltimore, Maryland

Diversifying Gets Harder

By Ian Davis

Germany's stock market (DataStream Index) fell by 8.4% between September 14 and September 19, 1997. What happened to the U.S. market over that same period? It was oblivious, posting a flat week (down 0.06%).

More recently, between March 8 and March 13, 2004, Germany's stock market crashed again, falling by 7.04%. However, this time instead of shrugging it off, the U.S. market also posted a strong loss, falling 3.73% for the week.

If your portfolio is diversified into foreign markets, you may find that you're less diversified than you originally believed. You see, in the last 10 years, the correlation between the US stock market and other developed countries' markets has been steadily rising. The correlation is now as high as it's been in at least 30 years.

Bloomberg recently reported that "stocks worldwide are moving closer in tandem than at any time in two decades, reducing opportunities for money managers and forcing investors used to buy-and-hold strategies to trade more like hedge funds."

Let's take a look at what exactly a correlation is and how the relationship between markets has changed in the last 30 years.

HOW CORRELATIONS WORK

Statisticians measure the correlation between two variables (in this case, the weekly percent changes in two countries' stock indexes) on a scale of -1 to 1. If the correlation between two countries' stock markets is -1, it means that they are perfectly negatively correlated. Every time one country's stocks go up, the other country's stocks go down – and vice versa. When the correlation is +1, the two country's stocks are perfectly aligned. The two markets rise and fall together in unison.

At 0, statisticians say there is no correlation, i.e. the movement of one country's market would be unrelated to the movement of the other's market. This situation is ideal for diversifying. If you hold uncorrelated stocks, it is unlikely that all of your holdings will fall at the same time.

GLOBAL CORRELATIONS ARE RISING

In the following chart, I've plotted how global correlations have changed since 1978.

Back in 1997, the correlation between U.S. stocks and those of other developed countries was only 0.25, meaning that U.S. stocks were mostly unaffected by markets in other developed countries.

Since 1997, however, that correlation has risen to 0.72 – a fairly strong relationship.

Correlation Between U.S. and Developed Countries (Ex. N. America)

Correlation Between U.S. & Emerging Markets

BUT HOW ABOUT EMERGING MARKETS?

Emerging-market stocks are less correlated to the U.S. stock market than those of developed countries. However, being diversified isn't the only thing you should consider when investing abroad. Most emerging-market stocks are extremely expensive right now.

Currently, the Nikkei is the most attractive foreign market if you are looking to diversify away from U.S. markets. Its correlation to the U.S. market is a fairly low 0.4, and it is one of the five cheapest markets as measured by its price-to-earnings and price-to-book values.

In the following table, you'll find the countries most correlated to the U.S. market and those least correlated to the U.S. market.

CONCLUSION

There are many reasons to invest abroad. You may be bearish on the U.S. dollar and want to diversify away from currency risk. Maybe you are interested in diversifying away from a downturn in the U.S. market. Or perhaps you just fell in love with a foreign stock. Whatever the reason, diversifying away from the U.S. market by investing overseas is becoming more and more difficult. In developed countries, we are slowly approaching a global marketplace.

Good investing,

Ian Davis

April 13, 2007

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