The S&A Digest: MBIA and Ambac do the kabuki

MBIA and Ambac do the kabuki... "Soup off the rails"... Wal-Mart up, S&P down... A wheat-trading rogue... The pension fund sell signal... How FBR's board rewards failure…

 Standard & Poor's has affirmed the credit ratings of beleaguered bond insurers MBIA and Ambac Financial at AAA, its highest rating.

S&P also recently affirmed the AAA rating of another insurance company: Berkshire Hathaway. It said Berkshire's AAA rating would not be hurt by the company's recent entry into the bond insurance market. It said the rating is based on "its extremely strong competitive position, extremely strong insurance and reinsurance capitalization, and extremely strong financial flexibility."

I wonder how many of those same attributes S&P finds at MBIA and Ambac? Strong competitive position? Writing new business must be hard for MBIA and Ambac, given their current and ongoing state of implosion and Berkshire's recent entry. Strong capitalization? Their equity could easily be wiped out by the losses on all the toxic asset-backed garbage they've guaranteed. Strong financial flexibility? Well, they've been granted a temporary stay of execution by the ratings agencies, and they managed to raise a little new capital. But I doubt anyone in the Western world could describe their current financial condition as "flexible." It's probably more like "arthritic."

Says our friend Whitney Tilson, whose firm is short both MBIA and Ambac, "This kabuki dance [of re-affirmed AAA ratings] is likely to be meaningless in the end because these companies... are likely to incur tens of billions of losses."

Another short seller, Doug Kass, adds simply, "If you want AAA, buy batteries, not MBIA stock."

 If you want to look inside the company that gave AAA ratings to MBIA and Ambac, just talk to Tanya Azarchs, managing director for financial institutions at S&P. As she tells it, the ratings don't mean much anyway. Azarchs discussed a lesser-known off-balance sheet entity called variable interest entities (VIEs) with Bloomberg: "The disclosure on VIEs is hopeless. You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup has run off the rails."

 The vast majority of investors would be better served by simply avoiding complex financial stocks altogether. Fortunately, that's very easy to do today, with big, safe blue chips – like Extreme Value pick Wal-Mart (WMT) – selling dirt-cheap. Don't make the mistake of viewing Wal-Mart as a bellwether for other retail stocks. You should expect Wal-Mart to do well during tough times, as shoppers defect from higher-priced venues.

People yawned last November at the Stansberry Alliance meeting in Mexico, when I said Wal-Mart was the best stock you could buy for the coming year. (I actually said it was the best stock you could buy on Earth, period.) Today, just three months later, Wal-Mart is up 14% (including dividends), and the S&P 500 is down 2%. The stock made a new 52-week high yesterday. Not many retailers are doing that these days... To read more about Wal-Mart and my No. 2 pick for 2008, click here...

 In hot bull markets, the headlines fill up with tales of greed, and the commodity bull is no different. Yesterday, Evan Dooley of MF Global lost his firm $141.5 million – 6% of its equity – trading wheat futures. The company said, "A failure in one of the company's retail order entry systems permitted the representative to establish significant positions in his own account... "

You'll recall rogue trader Jerome Kerviel losing $7 billion last month for his employer, French bank Societe Generale. Like Dooley, Kerviel found it remarkably easy to exceed his trading authority.

Steve Sjuggerud and I once visited the commodity-trading firm Campbell & Co. in Towson, Maryland. There must have been 10 PhDs in math and computer science writing programs that spit out trading signals. If traders didn't trade the signals properly, they could be fired. The traders were more than okay with that. They lived the system. They believed in it. It was an honor to stay the course and practice the disciplined art of trading. The floor was very quiet. Traders hunched over and squinted straight at their screens all day. A night crew came in to trade global markets into the wee hours.

The memory of my afternoon at Campbell certainly conjures a more disciplined image than the stories about SocGen and MF Global. The rogue traders seem less like disciplined practitioners of a time-honored craft and more like drunken 17-year-olds behind the wheel of a new Porsche.

 More greed in commodities... The California Public Employees' Retirement System, the largest U.S. pension fund, is considering increasing its commodities investment 16-fold to $7.2 billion through 2010. Pension funds are notorious for chasing investment fads and piling in at the top.

 Greed in a bull market is obnoxious, but expected. In a miserable bear market, it seems a tad out of place. Investment banker and asset manager Friedman Billings Ramsey's stock is down about 90% since early 2004 on one debacle after another, from its illegal short sales of a client's stock to its subprime mortgage originator, First NLC, declaring bankruptcy.

Michelle Leder's website, www.footnoted.org, said this morning that FBR's board of directors has nonetheless granted Chairman and CEO Eric Billings a $2.48 million cash/stock bonus, 3.5 million shares of restricted stock, and a $2 million cash payment. The latter two grants are both described by the word, "retention," as in retaining the talented Mr. Billings at all costs. We shudder to think what the talented Mr. Billings would have earned if his shareholders hadn't lost 90% of their money.

 New highs: Petrobras (PBR), Stone Energy (SGY), Wal-Mart (WMT), CurrencyShares Japanese Yen (FXY), Eurasian Minerals (EMX.V), TNS Inc. (TNS), streetTRACKS Gold (GLD).

 Today in the mailbag we learn the warmest location for your offshore accounts, but not much else. Are we boring you? Let us know at feedback@stansberryresearch.com.

 "For those of us who think Jeff Clark is a superstar, receiving a pre-market up date from him, like we got this morning, is extremely helpful. I'm not suggesting that he send one out every morning. Just when he thinks things may be changing or, when he doesn't think so, that we need reassurance to that effect." – Paid-up subscriber Bill

Dan comment: Jeff also sent out an update to his Advanced Income subscribers today... It seems that all of his picks have moved up beyond their buy prices, so he's going to put together a new "overnight dividend" recommendation for Tuesday.

Jeff's strategy is one of the best income-producing systems available to investors. If you're interested in trying it out risk-free, click here. The price is set to increase 150% after Monday.

 "You mention Liechtenstein and it's banks, but don't forget Panama for offshore accounts. The US IRS cannot get information on your account from Panama, whether it be a simple checking account, CDs, investments, foundations or anything else. (One exemption is if you are caught laundering money, the local police can view your accounts) I bank in Panama. It is a little harder to open an account as you need two letters from banks, investment accounts or an attorney.

"Panama is like Switzerland for accounts and Liechtenstein for investments and trusts, nobody can see what you have. It is the banking center for Latin and Central America. Oh, the monitory unit for Panama is the Balboa (only coins) and is on par with the US Dollar. In fact, the US dollar as well as all US currency is used here. Merrill Lynch and others have offices here. The country is stable and modern. Through my bank, I can buy on all of the world's markets, unlike Merrill Lynch whom I used to use in the US. Oh, and you can buy and hold gold bullion.

"Another interesting aspect of Panama Finances is that you can form a Panamanian Corporation and you are in possession of the shares, therefore no one knows who "is" the corporation as far as finances are concerned (see exemption above). Remember that a large portion of ships are registered in Panama. Airplane tickets are cheap, about $650 round trip from major US hubs and it is 88-91 degrees year round and no insects, so don't bother bringing a lot of bug spray." – Paid-up subscriber Fred Fleming

Good investing,

Dan Ferris

Medford, Oregon

February 28, 2008

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