The S&A Digest: Gisele's Euro

Gisele's euro… Goldman's levitation… Nothing like a Chinese mania… Badiali's Haitian gold… Guilty as charged… Who is Ron Paul?…

Poor Gisele Bundchen.

Labeled by Rolling Stone magazine as "the most beautiful girl in the world," she reportedly earns more than $30 million per year for modeling and endorsements. And she's demanding to be paid in euro. Her fraternal twin sister, Patricia, who acts as Gisele's manager, says, "We don't know what will happen to the dollar…"

Nor do we. But unlike Gisele, who can seemingly make another million merely by smiling, we approach such matters with more to lose. And it occurs to us that all paper currencies will, eventually, return to their intrinsic value. It also occurs to us that the "long euro" trade must be getting very, very crowded. Gisele is a wonderful indicator of what's extremely popular… and the euro now has her endorsement. For free, no less.

As we've noted in these pages previously, either the managing directors of Goldman Sachs have all sold their souls to the devil in exchange for unlimited financial power, or their share price is destined for a large correction. All of the major Wall Street banks engage in essentially the same strategies. They all trade the same markets… and they have all piled into highly rated mortgage debt. These "pools" of mortgage loans were spiked, like the punch bowl at a cotillion dance, with highly toxic subprime debt. Some of the "dancers" have already been fined for public drunkenness.

To date, Goldman has avoided marking down its assets – but it is only a matter of time. According to Bloomberg, Goldman has more subprime debt outstanding than Credit Suisse, which has almost $10 billion; Citigroup Inc., with $6.8 billion; or JPMorgan Chase, with $7.8 billion. Goldman ranks 10th among 118 issuers, based on the amount of subprime loans still on the market. Which firms have the biggest exposure? Lehman has $33 billion and Morgan Stanley has $28.8 billion. Below… a chart comparing the relative share price of Citigroup (in red) to Goldman Sachs (in blue).

Goldman Sachs GRP

There's nothing like a stock market mania in China. I covered the handover of Hong Kong in 1997. The return of Chinese rule ended decades of fear and uncertainty, sending Hong Kong stocks straight up for the first six months of 1997. Housewives lined up around the block outside of brokerage firms, eager to pay any price for shares of so-called "red chip" stocks. These were stocks whose connections to mainland China supposedly assured them financial success. The whole charade blew up spectacularly, about two weeks after the handover was complete.

This year, the drama is repeating itself, except the focus of the mania this time is in Shanghai. Chinese mainland investors have lost their minds, bidding up the local shares of stocks, like PetroChina, to absurd prices. Based on its Shanghai-listed shares, PetroChina is now worth more than $1 trillion – roughly three times more than the exact same shares are worth in Hong Kong or New York. Baoshan Iron & Steel, China's premier steel company, has a local share value of $42 billion, more than three times that of U.S. Steel, though they have similar production volumes. Warren Buffett has cashed out of his entire PetroChina position. Which side of the trade do you want to be on? The Chinese housewife's or Warren Buffett's?

Extreme Value pick Western Union (WU) will offer its money-transfer services at more than 300 China Everbright Bank branches in more than 30 Chinese cities. Ex-pat Chinese send $22.5 billion back to the mainland each year, the third most of any country.

This from Matt Badiali: "Eurasian Minerals (EMX.V) announced a second area of gold mineralization at its La Miel project in Haiti. This second area is about half a mile from the first discovery. Trenching showed long areas of gold mineralization, including 300 feet of 2.5 grams per ton (that's 0.08 ounces per ton).

"We walked this area when I visited, but the company hadn't started trenching. I expect to see data confirming a third area announced sometime in 2008. All we need now are some drill holes to add the vertical component to La Miel, and we can calculate a resource."

Readers are up close to 20% in six months on the recommendation. With news like this, Eurasian is set to explode. Eurasian is one of Matt's top 10 prospect generators. These tiny companies are ignored by institutional and individual investors alike. They're small, have zero earnings, and often lose capital. However, the best prospect generators reward investors with outrageous returns. We're currently working on a report about these companies. Look for it in a future Digest.

Gold closed above $800 an ounce for the first time since 1980 on Friday.

Flight to safety in hedge funds… The credit crunch is keeping investors away from startup hedge funds. New funds are opening at the slowest pace since 2003, and almost all of this year's $164 in new investments went established players. Eddie Lampert raised $4 billion for his ESL investments this year, and Bill Ackman raised $2 billion in nine days. Already the 20 biggest firms control one-third of the $1.8 trillion of hedge-fund assets. Of course, it's only a matter of time before startup hedge funds regain the limelight. The hedge-fund bigwigs will take on too much money, returns will diminish, and investors will clamor to throw cash at the latest wunderkind trader.

New highs: EnCana (ECA), streetTRACKS Gold (GLD), Microsoft (MSFT), Newmont Mining (NEM), Transocean (RIG), Silver Standard (SSRI).

In the mailbag: Guilty as charged. We don't tell our analysts what to write. Nor do we object when their opinions differ. Should we do otherwise? Let us know: feedback@stansberryresearch.com.

"I am a subscriber to Tom Dyson's 12% Letter. In the October 2007 issue, Dyson makes a case for buying Pfizer on the basis that it is heavily undervalued despite its recent problems and it should be held until 2011 at which time it should have doubled in value. However, I received a Growth Stock Wire in which Rob Fannon of The Medical Investor states the following: 'At a $170 billion market cap, I wouldn't consider touching Pfizer stock until it shed at least 40%-50% of its value, something I think will happen in three to four years' time.' These two opinions seem to be diametrically opposed. How is it that two Stansberry experts can offer such differing advice on the same company?" – Paid-up subscriber Mark Wallin

Porter comment: We don't tell our analysts what to write, nor do we insist on publishing only consistent opinions about stocks. We can't know whether or not Rob Fannon's opinion about Pfizer is more valid than Tom Dyson's. Like Yogi Berra says, making predictions is tough, especially about the future. We do know, however, that their opinions come from looking at the same situation through very different lenses. Dyson is primarily looking at the company in terms of its valuation and ability to pay its dividend. Fannon is measuring the company by looking at its drug portfolio and pipeline.

"What happened to Markel? Hope this is only profit-taking based on not so hot quarterly earnings and will rebound. What do you think?" – Paid-up subscriber David

Porter comment: We got this note as Markel – which is an extraordinarily conservative insurance company we've recommended as a super-long term investment – fell a bit more than 3% in one day. We recommended the shares a month ago at around $500. Today, they're around $510. The stock has bounced around between $500 and $550 – in a tight 10% range. In short, nothing worth noting has "happened" at Markel in terms of its share price. I can't know, for certain, what our subscriber meant by his question. Maybe he got his stocks mixed up… But, if a 3% move in a safe stock like Markel causes you to worry about "what happened," we respectfully suggest that you should consider selling your stock portfolio and sticking with less volatile investments – like short-term U.S. Treasury bills.

You have pumped Ron Paul as a good man, which I whole-heartedly agree, but have you put your money where your mouth is? Many of the people in your office probably have the funds to really give this guy a boost. How about hosting a fundraiser in your 'castle' and inviting your wealthiest subscribers. One or two well-heeled subscribers could finance his whole campaign, just so they don't expect anything but freedom in return. Integrity should count and supporting his campaign will let the world know that it does. Today is his 'money bomb' day… you should post a link to his website." – Paid-up subscriber Michael T. Stevinson

Porter comment: Like I said the last time I was asked about endorsing Ron Paul, I try to stay out of politics in public. I don't want to encourage them or embarrass myself. Whether Ron Paul would be a good president or a bad president, I can't say.

I can tell you that Ron Paul is the only honest politician in Washington... and that should count for something. That's why I've given his campaign the maximum legal amount – $2,300. Anyone who wants to can do the same http://www.ronpaul2008.com/.

Regards,

Porter Stansberry

Baltimore, Maryland

November 5, 2007

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