The S&A Digest: Lots of food, but no sleep

Lots of food, but no sleep... Oil: It's different this time... Lundin on the move... Why stocks will move higher this week... What about GM?

I should have babies more often. Friends brought over homemade chicken parmesan and made-from-scratch carrot cake. A neighbor brought oysters Rockefeller. We've gotten blankets, flowers, cards – everything but sleep. Thanks all.

You have an important choice to make, dear reader. According to people like Ron Oxburgh, the former chairman of Royal Dutch Shell, the price of oil will hit $150 a barrel in coming years. The oil bulls say prices will continue to soar, unabated by market forces, because "it's different this time." Ever-higher oil prices are inevitable because of the looming "crisis" of peak oil and the insatiable demand of a place called "Chindia." Oxburgh goes so far as to claim the oil industry is "sleep walking" into the peak oil crisis. Ha, ha, ha...

I find it difficult not to laugh when folks who should know better use not one, not two, but three classic, top-of-the-market expressions in a single sentence.

And, hooray, I'm not the only oil bear anymore. Finally someone who actually knows what he's talking about agrees with me. In Barron's this weekend, famed oil analyst Mike Rothman, who spent 20 years at Merrill and is now the head of oil research at ISI, predicted oil will soon fall to $45 per barrel. The key to his analysis – standard economics. Supply is set to increase by the biggest amount in 30 years, while leading indicators of demand (such as jet fuel) are falling. Rothman's analysis doesn't play well to the press: There's no jargon, no slogans, no big scary theories... nothing for the media to latch onto... just cold, hard, boring facts.

As for peak oil, Rothman throws more cold water on all the big-idea fun: "The data doesn't show it... Growth in non-OPEC supply this year looks like it will be about 1.3 million barrels a day, and that number is about twice what people believed would be the case. And the Saudis clearly have the barrels available. They are bringing on new fields. Khursaniyah is coming on in the fourth quarter, Nuayyim next year and Shaybah next year and Khurais in 2009. These are fairly big additions... supply growth this year is going to be one of the largest in almost 30 years, and next year looks like it is going to be similar to this year."

S&A Gold Report pick Eurasian Minerals (EMX.V) will raise up to $2.1 million by way of a private placement of 1.5 million shares to Global NR Holding SA. Who cares? Global NR Holding is controlled by the Lundin family, the best resource investors in the world.

Eurasian is one of the companies Matt Badiali recommended in his special report, How to Make a Fortune With Prospect Generators. These small companies discover high-quality gold deposits, then sell them to other investors. The low business costs mean these companies stay small (market caps in the low eight figures) until they strike gold... then share prices explode. It's not unusual to see gains of several thousand percent in a matter of months. To see the other companies in the special report, click here...

It will be an interesting week for U.S. stocks... Four of the biggest investment banks are reporting third-quarter earnings. The companies will have to come clean about their subprime losses. Prediction: Whatever the numbers show, stocks will go higher. Why? The market can handle bad news, but it can't handle uncertainty. These firms reporting their losses will allow the market to move past the subprime mess.

New highs: CGG-Veritas (CGV), eBay (EBAY), McDonald's (MCD), Arcelor Mittal (MT), Raytheon (RTN), Sangamo (SGMO).

In the mailbag... What is the Digest? Nothing good, apparently. What should we be writing about? Tell us here: feedback@stansberryresearch.com.

"The S&A Digest is supposed to be a 'digest' (i.e. abbreviated/distillation) of important Financial news/views isn't it? It seems to have veered off course again and now reached new lows with the 'discussion' on smoking and cancer. This seems to reflect your 'e-generation's' view of things... i.e. all the many bullsblogs and so on... Any opinion is the same and worth showing up 'online' as this is the new 'democratic' communication age... 'user generated' nonsense and all... A lot of wind with nearly no substance. Good journalism, this stuff is not. Of course, we're 'supposed to know' that this 'S&A Digest' is just another excuse for cross-selling the Stansberry subscriptions, so we're supposed to be adult enough to wade through this nonsense to find an occasional nugget of something financially useful and be happy that 'the system works' i.e. you got what you pay for. You and your team are capable of better, but probably not willing to work hard enough to sift thru all the chaff and be disciplined about what to include and what to exclude."

– Paid up subscriber SC

Porter comment: When we have the opportunity to sit down with smart businessmen (and women), we always make it a point to ask lots of questions and to steer the conversation away from finance toward "outside" topics. What good books have you read recently? What music do you like? Where do you travel? What do you cook? What is your favorite wine? How did you raise your children? Do you use drugs? Did you learn anything, at all, in college? Money might be our beat, but it is not our whole life. We're fascinated with ideas... and how people come to believe what they do.

Sure, you might find some of these ideas a bit crazy... but we've noticed that many times what's "crazy" today becomes conventional wisdom tomorrow. I remember 12 years ago when colleagues of mine began publishing Dr. Atkins "insane" ideas about the benefits of a high protein diet. Today? Even the New York Times has come around to his way of thinking. We collect ideas. And when we find interesting ones, we share them with you. Are they right? We don't now. But it gives us something to think about, it challenges our assumptions... it keeps our mind pried open... like a weak stick holding up a big, heavy lean-to that's always filling up with water.

"Just want to say how badly I disagree with 'Anonymous' in the Sept. 14 S&A Digest. First of all, you can't get the high level of entertainment that is in Porter's 'political crap' anywhere else. As far as smoking and BBQ recipes, I'll admit, I smoke. I smoke salmon, venison jerky, and now a kick-butt brisket, so keep 'em coming. I believe that I am in a growing group of people who feel that we are not fairly represented by any political party. I was a politician for a short time and now believe 'If you like politics and you like sausage, you don't want to see how either one is made.' It was the only place outside of the Market where you got punished for being right... The people who really control America aren't your politicians, the politicians are put there to make Americans feel like they have a choice, (they don't). And to a large extent they control what you see and hear in the media. So let's turn off the 'Boob-Tube,' and bring Critical Thinking back in style." – Paid-up subscriber T.M.S.

"'Ron Paul: Wise resistance to one's own government doing bad things requires a love of country, devotion to idealism, and respect for the Rule of Law.' I think this says it all." – Paid-up subscriber Matt Z.

"Maybe because your parents stuck you with a name associated with carrying baggage (appropriate?) you decided to 'saddle' your son with the name of Robert E. Lee's horse. Yeah, he spelled it Traveller. Teacher: 'And what's your name young man?' Trav Stansberry. 'Oh Travis?' Uh, no its Traveler. (Teacher covers mouth to avoid chuckle) 'Well, how about your middle name?' It's Rey. 'Oh, R-A-Y?' Uh, no it's R-E-Y. Teacher: 'Wow, I can't wait to meet your parents.' Perhaps they are two great names from your family tradition but you are not making life any easier for the kid. Enjoy reading 5 of your publications and the repartee generated here."

– Paid-up subscriber Ted Buckenmaier

Porter comment: I'm sure my son will pine for a name as eloquent as yours...

Ted...

"I need some advice bad! I bought some stock (ABY) on Dan Ferris's article recommending a good stock that had the potential to do much better in the future than [it] was doing at the time I bought it. His article was great! I am new to investing and the stock pick was based on good premises that all seemed to make since. Good company, little debt, well diversified assets, etc. Well I know that Dan doesn't believe in trailing stops so I have followed his advice and hung in there on this one because I believed his research was good. So far I am down 39.88%! I don't want to be wedded to a particular stock but at what point do I 'take the poison pill' and cut my losses? I believe that the long term still looks good on this stock! Porter, yours or his thoughts would be greatly appreciated!" – Paid-up subscriber Dan Cook

Ferris comment: While I am not able to provide you with individual advice, our stance on S&A Penny Letter holding Abitibi-Consolidated (ABY) has not changed. However, investors everywhere are down on the newspaper industry, and Abitibi hasn't been spared. It's true, declining newspaper sales and smaller newspaper formats mean less demand for Abitibi's newsprint.

But when prices fall, newsprint facilities close up. Sometimes they retool for other types of paper. That lowers the supply... which should cause prices to stabilize, or even go up. A September 3 Barron's article pointed out, "Current list prices for Northern Bleached Softwood Kraft pulp are quoted by PulpandPaper.net at $820 a ton – versus $590 in October 2005 – and another $20 price hike has been announced for contracts that are written beginning Sept. 1."

When commodity prices go up, stock prices for that industry generally follow. If this were gold – which is far less widely used than paper – everyone would be talking about the bull market in gold.

In the meantime, we know that Abitibi has excellent hard assets – including timberland and hydroelectric dams – which are worth more than double its current share price.

"Where are all the rants and raves against GM these days? Could it be that you underestimated the abilities of some of the top planners at GM, and their abilities to see a solution to their massive mistakes of the past? GM is far from out of the woods yet, but the wisdom and straightforward dealings that Rick Wagoner uses to tackle its biggest hurdles is showing results. Too bad you can't see through your preconceived judgments to acknowledge the potential turnaround this company is working so hard to achieve."

– Paid up subscriber Patrice Lockwood

Porter comment: I've been updating my bearish call on GM each quarter... and I'll continue to do so. As for the turnaround, I wish them all the good luck in the world. I'm sure Rick Wagoner is doing the things any rational person would do in his position. But what's wrong with GM took a long time to accomplish and can't be solved overnight without filing for bankruptcy. GM operated at a capital deficit for more than 20 years. Each year, year after year, operations devoured a bit more of the company's equity. The result is apparent to anyone who can read a financial statement: GM can't afford to pay the interest it owes on its debt. Thus, it must borrow more to meet its current obligations. The problem is getting worse because interest rates are rising and its credit rating is falling. Like millions of subprime homeowners, GM is rapidly running out of time. It has run out of collateral, sold off all of its best assets... and continues to spend more and more on interest payments. In 2006, GM spent $17 billion on interest – up from $12 billion in 2004. Even if GM could produce results similar to its best years, like in 2004 when it made $13 billion from operations (mostly from mortgages, not from cars), the company still wouldn't be able to afford its debts. These are the facts. You can ignore the facts if you want, but it doesn't make them go away.

Regards,

Porter Stansberry

Baltimore, Maryland

September 17, 2007

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