The S&A Digest: Not for the weary

No rest for the weary... No bottom in homebuilders... OBAMA!... What about the return of capital?... Why can't we pick better stocks...?

I hope you'll indulge me by allowing for a brief personal note. Last night, my wife reached the point in her pregnancy (she's due in three weeks) when she can no longer sleep comfortably in any position. We were up all night... which explains the paucity of today's Digest. As this is our first child (it's a boy), last night also marked the beginning of many, many such nights for me. It's a small price to pay. I've never been more excited about an event in my life.

We can't seem to find a bottom in homebuilders. Yesterday, a fresh batch dropped to new lows – including Levitt, Centex, Lennar, Hovnanian, and M/I Homes. The iShares Dow Jones U.S. Home Construction ETF (ITB) is down 48% since February. When will the bottom hit? No one knows for sure, but our quant analyst Ian Davis shares some insight here...

OBAMA! I can tell this guy is going to be far more entertaining than our current president. Upon learning that the number of Americans without health insurance has increased by 9 million people in the last seven years, OBAMA! pronounced the figures "a betrayal of the ideals we hold as Americans." I recall learning in high school civics classes what Patrick Henry famously said, "Pay for all of my health care needs – including my Viagra pills – or give me death!" Maybe OBAMA! didn't read the fine print of the study, which also found that 75% of newly uninsured Americans have household incomes greater than $75,000. Some people, it seems, are exercising their freedom not to buy health insurance... a freedom whose days seem to be numbered.

Wait... there's more. OBAMA! also has an inventive solution for the overleveraged subprime borrowers: Fine the lenders. OBAMA! says enough money could be raised through such penalties to bail out borrowers suffering foreclosure. It's perfect, isn't it? The entire foreclosure process will, from here forward, be reversed. Rather than using property as the foundation for a loan's security... now property will be used as an anchor around the lender's neck.

Another one bites the dust... Australian hedge fund Basis Capital is the first Asia-Pacific-focused manager to go bust. The $1 billion fund's exposure to risky credit derivatives caused it to seek bankruptcy protection in Manhattan courts yesterday. The subprime scare caused "significant devaluation" in the fund's assets and triggered margin calls and fire sales. One of its funds reportedly lost 80% of its value.

PSIA pick Microsoft (MSFT) agreed to acquire Parlano, the maker of MindAlign – an application that enables group chat for enterprises. Microsoft will add the application to its MS Office software. Terms of the deal were not disclosed.

New high: Nokia (NOK).

As always, we welcome your taunts, accusations, and ire at: feedback@stansberryresearch.com.

"Surely you can do better than the results in your Penny Letter portfolio. I'm just glad that I was wise enough not to buy any of these stocks." – Paid-up subscriber Ed Kessler

Porter comment: If only we could sort out a bit more accurately, at the moment of our recommendation, whether or not a given idea would work... Think of what would be possible if we could truly see the future. On the other hand, while we remain mortal, we have noticed a striking correlation between peak levels of subscriber angst and excellent entry points. While there is never a guarantee that any correlated event will repeat in the future... these occurrences seem very closely related over a long period of time.

"I manage a small amount of money (roughly $15 million-$20 million) for some clients, and I rely on your observations and market commentary not only for my own edification, but I often pass your insights on to some of my clients as well. I particularly found the commentary on the housing blow up to be an amazingly well written and descriptive piece on the hows and whys. I use a lot of closed end funds and have for some time – due to what I perceive as many inherantly superior characteristics of these investment vehicles over their open ended bretheren. Although I realize that you include, from time to time, closed ends in your recommendations, I would be interested in writing a letter exclusively about closed ends. There are some unique opportunities there as the market is extremely inefficient. For instance, one of my current favorites GCF has a very stable NAV yet the pps is all over the place. A couple weeks ago when there was blood in the streets, the pps fell to the $15 range while the NAV was at $19. What makes this unique is that GCF has a yearly tender offer to buy back shares at NAV. With a 9% + dividend and a stable NAV, it was about the easiest and safest way to 25% gains out there. I've been running portfolios of CEFs for about 6 years, sprinkled with REITS and Canadian Income trusts (before Canada got stupid on us). I understand these creatures and I love their inefficiency. Let me know if you're interested." – Paid-up subscriber Scott

Porter comment: Sounds like a great niche you've found. And there's only one problem with it, from our perspective. What do you think will happen to all of those incredible discounts the moment we begin publishing information about them? There are many good investment strategies that cannot be usefully published.

"Here's a complaint for you... I've yet to see truly outstanding analysis for a potential bear market issued by anyone other than Jeff Clark, yet it's been pretty obvious for a while now that a correction (maybe more) is coming. A monkey and a dart board can make money in a bull run, so patting yourself on the back too much for picks since 2003 seems rather uninspiring. What will you do when/if this market moves down in a big way? Are you just going to sit by and lament how you didn't see it all coming? How about buckling up, stop telling us to buy homebuilders and mortgage lenders, do some bear market homework, and start preparing recommendations to profit if the bear returns? This will be my clue to pay closer attention to all those autorenew messages I've been getting in email." – Paid-up subscriber D. Summers

Porter comment: Steve Sjuggerud picked a leveraged, inverse real estate ETF (a fund that goes up when real estate stocks go down) in the July 3 issue of Sjuggerud Confidential, published just days before real estate finally imploded. The next month, he told subscribers to buy the yen to profit from hedge funds trying to unwind their carry trade positions. Both ideas went up sharply as stocks fell. So... no... Jeff isn't the only analyst who has been right on the money for the last two months. (For the record, during the last down year in stocks – 2002 – the average gain in my recommended portfolio was 20%. We closed several short positions up more than 50%.)

We are not typically bearish because we know that most of the time stocks go up. We also know you'll do much better using market corrections, and even bear markets, to buy great businesses, trading for great prices, than you're likely to ever make shorting stocks.

"Being a philosophy major in college... I love to see the mixing of religion and stock picks. The two should be intertwined and discussed and debated because both have core values as their premise that are both equally applicable... especially in a down market!! Both respond to mob behavior, zealousness and leave logic alone. And a good stock like one of the ten commandments stands the test of time as a basis for proper behavior. Keep mixing it up... I love it." – Paid-up subscriber Lee

Regards,

Porter Stansberry

Baltimore, Maryland

August 30, 2007

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