The S&A Digest: Introducing 'stupidism'

Introducing 'stupidism'... GM takes it on the chin, again... Mortgages you don't have to repay... Russell is bullish... How to become a millionaire with airlines... Welcome to Amerika, comrade...

"In the good old days, that was the best loan we had at Countrywide..." John Sipes told the Wall Street Journal. He was reminiscing about Countrywide's "Fast and Easy" loan (aka "liar loans"), which allowed homebuyers to get a mortgage without any supporting documentation of their incomes. Originally, lenders made these loans only to folks who could provide a 10% down payment and based them only on fixed interest rates. But before too long, lenders were making "Fast and Easy" loans with only 5% down and an adjustable rate. These loans were like embossed invitations to criminals: Please defraud us.

Who in his right mind would make a loan to someone with hardly any down payment or any proof he could repay it? And what kind of a bank advertises its underwriting as "Fast and Easy"? The kind of bank that can turn around and immediately sell its liar loans at a profit to a ready and willing agency of the federal government – Fannie Mae. Fannie bought these "prime" loans eagerly during 2003-2006, with full knowledge of the underwriting. But now, Fannie is calling Countrywide's actions fraudulent because "Fast and Easy" loans are 50% more likely to default than documented loans. Congressman Barney Frank's idea to "solve" the mortgage crisis is to let Fannie buy even more mortgages...

The actions of all the parties in this fiasco strains credulity. It's surprisingly difficult to figure out who was more greedy and stupid, the lenders, the borrowers, or the mortgage agencies (Fannie Mae and Freddie Mac). And liar loans weren't even the most preposterous mortgages. Many loans were made to borrowers who could positively not afford the debt service. For these buyers, who were known not to be able to afford their mortgages, a new type of mortgage was created, an "option" adjustable rate mortgage (ARM). The "option" was to pay or not to pay your monthly interest and principal obligation. If you chose not to pay your mortgage, the interest you did not pay would be added onto your existing mortgage, up until you owed 125% of the value of your home, at which point you would have to begin making a vastly higher monthly payment.

It won't surprise you to learn that folks who don't pay their mortgages usually can't pay their mortgages. And a growing mortgage balance doesn't make them any more likely to pay or be able to pay. In fact, owing far more than a home is worth makes it vastly more likely for a mortgage to go into default. Nevertheless, roughly 50% of Washington Mutual's "prime" mortgage portfolio is made up of option ARMs. So far, about 10% of these loans have gone bad. Far more will spoil when payments actually become due in 2009 and 2010. Keep these facts in mind when you hear the government talking about the good people who are "losing their homes" to ARM resets. When it comes to option ARMs, the people never actually owned anything, except a mortgage they clearly couldn't afford. These are the folks our government now wants to bail out. It's a new kind of socialism: stupidism.

Long-time readers weren't surprised when General Motors announced it lost $3.25 billion in the last quarter, its third-straight quarterly loss. Sales fell 1.6%, compounding the problems of the company's high fixed costs. We expect the company's "chairman" will write to us soon, detailing what's really going on behind the scenes. (You can see the "chairman's" most recent letter, here).

Tom Dyson thinks the agricultural boom is still in its early stages: "Yesterday I spoke to Ron Deiter, professor of agricultural economics at Iowa State University. Iowa State University is the nation's premier life science and agriculture college. It attracts students who want to work in the ag business. Dr. Deiter told me he has 275 students enrolled in his agricultural economics program. That's up about 13% from the 2003 low point, he said. In 1979/1980, Dr. Deiter's program had more than 600 students enrolled. This tells me we have a long way to go in this ag bull market. Even though ag investors seem exuberant now, we're coming off such a low base. What we've seen is simply the first stage – the oversold rebound – of a new bull market. I'll reconsider my position when farming is the sexiest career choice for new grads... and Prof. Deiter's program has more than 600 students."

In his next International Strategist issue – due out tomorrow – Dyson will recommend a company that provides Brazil with the one essential product Brazilian farmers must import. Without this product, they can't make Brazil the world agricultural superpower it wants to be. To learn more about International Strategist, click here...

From Warren Buffett's 1996 shareholder letter: When Richard Branson, the wealthy owner of Virgin Atlantic Airways, was asked how to become a millionaire, he had a quick answer: "There's really nothing to it. Start as a billionaire and then buy an airline."

Richard Russell is bullish:

I might also note here that the short interest on the NYSE has now climbed above 16 billion shares – this is the highest recorded short interest ever. In order for the shorts to make money, they need a declining market, preferably a market declining on rising volume. So far, the shorts have not received that kind of a market. That means that we have a record short interest locked into a market that refuses to fall apart. A rising short interest in a market that refuses to head down is a potentially explosive market. My guess is that in due time the current huge short interest will be driven out by way of a rising market. The big picture, as I have outlined it above, is for the Dow to advance to new highs in the months ahead (and it may take a year or so). If the Dow is fated to rise to new highs, the Dow will take a large number of stocks with it. The further implications of this will be that the US economy will be due to improve, and very possibly to boom in the period ahead. In fact, I expect this bull market to end with an unexpected bullish explosion in both stocks and the US economy.

New high: Wal-Mart (WMT).

In the mailbag, the OBAMA! crowd gets hot and bothered. Most people in America don't understand there's not a shred of difference between Democrats and Republicans. Any criticism you have of one party is just as applicable to the other... Send your best political criticism here: feedback@stansberryresearch.com.

"Wow, 'walk down to the ghetto and empty our wallets'. I'm not a long-time subscriber but that's the first all out political pitch laced with obvious hatred and misrepresentation of Obama's position that I've read in your interesting communications... Our grandchildren are already in trouble with your George Bush's administration racking up an enormous national debt." – Paid-up subscriber Jim Becket

Porter comment: H.L. Mencken had it right when he noted American presidential elections are "an advance auction of stolen goods." Yes, people who believe it is appropriate to use the unlimited power of the state to confiscate and redistribute wealth disgust me. It is particularly galling to me that the general public accepts highly progressive income taxes, which were an invention of Karl Marx and one of the 10 primary objectives of his Communist Manifesto. Prior to the rise of communism in the early 1900s, income taxes of any kind were widely considered the epitome of totalitarian government abuse. Our original Constitution – something that changed with the death of our republic in 1913 – explicitly forbade them.

OBAMA! is, by self-proclamation, a supporter of highly progressive income taxes. He has promised to raise the top marginal rate of income tax to more than 50%, by increasing the top rate to 39% and by eliminating the $102,000 cap on the 12% payroll tax. Being forced to pay half of my income to a bankrupt federal government is incomprehensible to me – welcome to Amerika, comrade.

Why would I bother to work, to employ dozens of people, to take all of the risks of entrepreneurship when, at the end of the day, I must pay the government the majority of my income? And why would Americans, of all people, tolerate such a clear abuse of their liberty, freedom, and property? It is utterly shameful our country, which once stood as the leading example of freedom and personal responsibility, now has the heaviest yoke of government in the developed world. Perhaps even worse is the stunning number of Americans who eagerly celebrate our slow devolution into a totalitarian communist state. But I agree with you on at least one point: George Bush is no better than OBAMA! or Hillary Clinton. His administration has taken the raw plunder of government to new depths of depravity, by simply handing out cash borrowed from future generations of taxpayers as tax "rebates" today. Never mind that a great number of people receiving checks right now didn't actually pay taxes at all! I think it would be far more poignant and interesting if the IRS marched me at gunpoint down to west Baltimore and made me empty my wallet once a week. Then people would at least be able to see the real function of the state.

"TSA is almost as big a scam as Y2K!!! These were a bunch of out of work, uneducated, unmotivated people that could do nothing else, but wait for another goverment scam to finally become employed, 90% are overweight smokers that not only cost us for thier salary, but the healthcare that will be paid over time is stagering! and as far as being safer! I personaly watched them check a persons baggage by hand and x-ray and missed a loaded revolver that was placed in the wrong bag!!! now don't you feel safe! and as far as my 600.00 I will spend it on rare coins as usual. keep up the good work!" – Paid-up subscriber Allen Nichols

"Could it be that Goldman Sachs' list of ten companies that will benefit the most from the economic stimulus checks includes those companies who Goldman Sachs hopes people will flock to buy their stocks so they can unload their own shares? I don't think they would sell WalMart but only included it to give the list credibility. I wouldn't put it past these guys. They did it to their own clients." – Paid-up subscriber Luis Anderson

Regards,

Porter Stansberry

Baltimore, MD

April 30, 2008

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