The S&A Digest: Latin "Monopoly" money

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

As of 06/27/2013

Latin "Monopoly" money... More casinos... Buffett continues to buy... Wilbur Ross on subprime... Jim Rogers on big banks... Subscribers mourn... A new Correction Report suggestion...

Venezuela seems poised to achieve a truly remarkable feat: a currency collapse in the midst of an oil boom. After doubling government spending, Chavez imposed price controls on meat, sugar, eggs, milk, and other basic products. You'll never guess what happened... Now shortages abound, and a black market for U.S. dollars is thriving (at a much worse exchange rate). The poor, who elected Chavez, are taking the brunt of the fallout. They can't get their money out of Venezuela, and they can't afford black market prices. Like Bill Bonner says – People usually get what they deserve... good and hard. Here's my favorite part: To solve the problems, Chavez is knocking three zeros off the paper bills and calling the new currency the "strong bolivar." It's like watching someone put on a lifejacket backwards. Sure, they'll float... but face down.

While it's easy to point the finger at Venezuela, you could accurately ask the same kinds of questions about America's finances (minus the price controls). In the midst of a 25-year economic boom, the amount of private, corporate, and government debt has soared, and the government has continued to grow faster than the private sector. I can't help but wonder how much longer it will be before it's our presidente talking about a new currency? It will happen.

Historically, periods of currency inflation and debt creation have been linked to increases in gambling. As if on cue, the $2.4 billion Venetian Macao – the world's largest casino – opened today. The hotel's slot machines, baccarat tables, and other games of chance cover more than three times the area of the largest Las Vegas casino. How profitable could such a sprawling resort be? Well, when the Sands Macao – the first American-owned casino in Macao – opened its doors three years ago, the first-year profits exceeded the total costs of the project. What's even more impressive, the new Venetian is one of 14 massive hotel projects underway. Steve Sjuggerud came up with the best way to play this boom in his Sjuggerud Confidential.

Buffett on the move... Extreme Value pick Berkshire Hathaway bought 10.1 million shares of railroad operator BNSF (BNI) since Thursday, bringing its total stake to 14.8%.

Famed "vulture" investor Wilbur Ross commenting on the subprime lending mess: "Now that we have identified the cause of the disease, how severe and how contagious is it? The present $200 billion of delinquencies will grow to $400 billion or $500 billion next year because $570 billion more low, teaser-rate mortgages will reset to market and consume more than 50% of the borrowers' income. Therefore most of the loans will be foreclosed or restructured. Probably 1.5 million to 2 million families will lose their homes. Meanwhile, few lenders will put mortgages on the foreclosed houses, so the prices will plummet. Despite these tragedies, total losses will probably be less than 1% of household wealth and only 2% to 3% of one year's GDP, so this is not Armageddon..."

Ross is right... it's not Armageddon. But it's unclear how much the fallout will hurt the economy and the banks. Jim Rogers thinks the banks have a lot further to fall: "I have been and continue to be short the investment banks and the commercial banks. If they bounce up, I'll probably short more. I'm certainly not buying anything. The market's only down 8%. I don't consider that a buying opportunity. The things that I'm short, some people probably think are buying opportunities, but I don't. I've been short the banks for close to a year, and for a while it was not fun. But I added to my positions, and now it's a lot of fun."

Rogers isn't the only bear. Merrill Lynch analyst Guy Moszkowski downgraded Lehman Brothers, Bear Stearns, and Citigroup to "neutral" from "buy."

Goldsmith just sent me the updated numbers from the S&A 16 Model Portfolio for the third quarter of 2007. We picked these 16 stocks in early July right around the very top of the market (we assemble a new portfolio each quarter for our S&A Alliance members). Goldsmith never sends the numbers around unless we're down. It gives him pleasure to point out any weakness in our acumen. Yes, dear subscribers, in our best portfolio, we're down 7% - which is a big loss in a little more than one month. We took a big hit on Thornburg Mortgage (TMA), which we had to sell when it hit our trailing stop loss, down 30%. On the other hand, it's still early in the life of this portfolio. Nobody wants to start off with a 7% handicap... but we've averaged double-digit gains in these portfolios, over yearlong holding periods, since 2004. And... we're already up 17% on the biotech stock we selected.

Says Dan Ferris about tough stock markets:

"When the flames have their season,

Will you hold to your reason?

Loaded down with your talents,

Can you still keep your balance?

Can you live on a knife-edge?

"That's from an old Emerson, Lake and Palmer song called 'Knife Edge,' some of the music was stolen ('adapted') from a Janacek piece called 'Sinfonietta.' The lyrics remind me of what Ben Stein said recently in Fortune about how some people are dumb enough to make money in stocks, and lots of people are too smart to do anything but lose. I bet lots of people find it hard to keep their balance, loaded down as they are with their talents. And the flames are definitely having their season, during which most folks find it hard to hold on to their reason. Finally, I would imagine the way most people obsess over market quotations, that investing is very much like living on a knife edge..."

I don't have Dan's knack for identifying remarkably obscure verses... but I do know it's a lot easier to be a successful investor when you're not taking risks you can't afford.

New highs: none.

The mailbag has quieted down considerably... Don't allow my sarcasm to bully you into silence. Your $49 subscription entitles you to far more than we've provided. We've wronged you in a thousand ways. We're liars, thieves... and baby snatchers, too. Blame us for all of your woes, here: feedback@stansberryresearch.com.

"Alas, my fun must end. You have destroyed my happy hobby. As an avid reader of your journal I find that, at my age, I must desist from frequent and adventuresome investments. I admire your integrity and respect your business acumen. Therefore I shall painfully revise my portfolio to maintain at least 50% in safe fixed income (despite the fact that being an owner has, over time, always been better than being a lender). How boring. How uninteresting. I will, despite the emotional cost, continue reading your Associate letters, knowing from their soundproof logic urging me to buy that I am denying myself future fortunes. I will resign myself to reviewing my portfolio only three times a year. Ugh! This is tough medicine." – Paid-up subscriber Bob Hallock

Porter comment: One of my personal goals this year was to find one great business that I should be able to own for at least 30 years. I am building a retirement portfolio, one stock at a time, as part of my financial planning process. (I'll be diversified, over time, as I build the portfolio.) I plan on putting about 10% of my income into one stock a year for the next 20 years. I hope to be able to live comfortably from the dividends on these stocks 30 years from now. It's fascinating to me how your perspective changes when you severely limit your opportunities to invest. Yes, I've missed out on some good trades this year. But I've also avoided doing lots of stupid things with my money, things I might have done if I wasn't looking and waiting for the perfect long-term investment. I've avoided paying lots of taxes. And... perhaps best of all... I've avoided wasting lots of time. If reviewing your portfolio no more than three times a year greatly increases your results (and I bet it will), maybe you won't mourn your hobby quite so much.

"Here is a correction play on the current credit debacle that warrants further attention. It's a company that Mohnish Pabrai has established a 3.4% position in since his last 13F, and its currently down more than 50%. From MP's latest 13F:

"Compucredit (CCRT) The CEO seems to have his head on straight. He says the market for these securities is behaving irrationally, and through a DCF analysis, these current bonds are inadequately priced as a direct result of the current credit concerns. He sounds like he thinks, instead of mindless following his peers.

"Some wise words from the CEO: 'We never grow for growth's sake... we make ROI based decisions.' You can hear the call here." – Paid-up subscriber Brian Heyliger

Regards,

Porter Stansberry

Baltimore, Maryland

August 28, 2007

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