The S&A Digest: Off to Grant's

Off to Grant's...Big Brother in Africa...Easterly vs. Sachs...BHP's big gold discovery...Ron Paul's gold coins...Why no individual advice?

Goldsmith and Ferris are off to New York tomorrow for the annual Grant's Interest Rate Observer Conference – "the financial-information medium that least resembles CNBC." Jim Grant is an old-school, contrarian financial publisher and the most eloquent financial writer of our generation. Jim's ideas and insights are always worth reading, but it is his pen that we hold in the highest regard.

Some of the big names at Grant's conference include renowned short-seller Jim Chanos, real estate billionaire Sam Zell, and perma-bear Jeremy Grantham. Expect some updates from the conference in Wednesday's Digest.

Brian Hunt reporting from Botswana...where he's discovered the Chinese are re-colonizing Africa:

"You see, here's how the Chinese do it...they can do jobs cheaper than anyone because they have Big Brother backing them up. Bungle a job? Just call daddy, and he makes everything OK..." I was sitting in the Bull & Bush, one of Gaborone's most popular expat hangouts, with Marshall, the son of a British soldier stationed in Zimbabwe during World War II. Marshall spent most of his 60+ years working in the southern African construction business.

Marshall's point was that in addition to offering cheap labor, the Chinese have the financial backing of the state. It gives them incredible leverage and cheap financing when bidding for infrastructure projects. In a classic Afrikaner accent, Marshall continued: "Nobody realizes it yet, but the Chinese are colonizing Africa...But they're doing it the smart way. Instead of doing it with guns and tanks, they're doing it with construction, loans, and consulting..."

So...after more than 40 years of expensive failures, the World Bank and the United States have some serious competition for the hearts, minds, and resources of Africa. The most experienced expert on the American approach (CIA coups, guns, and loans to corrupt governments) is William Easterly. For 30 years, he worked as the top economist at the World Bank. It was his job to study the effects of the billions Americans spent (mostly through the World Bank) trying to pull Africa out of poverty (and keep it out of the Soviet sphere of control).

His conclusions are stark and unambiguous: Easterly says there's not a single example of success using the American approach. Not one penny of all that money has helped lift anyone out of poverty or has created a truly American-friendly regime in Africa. Meanwhile, Easterly eloquently explains that all of the government programs failed because, instead of supporting and rewarding entrepreneurs, government aid went to bureaucrats and politicians...who either killed each other over the money or immediately wired whatever they could steal to Switzerland. The Chinese approach seems a lot more civilized...and a lot more likely to work.

Lately, Easterly has stood up to Jeffrey Sachs, the Ivy League economist hack who claims (with rock star Bono at his side) that with just a bit more money from the world's governments...he could solve poverty in Africa. Ha, ha, ha...

See Easterly's website for a transcript of his most recent debate with Sachs: It's not a fair fight. Easterly has spent decades on the ground in Africa. Sachs has spent hours...flying in a helicopter. But it's a very entertaining debate because it's not on TV. You get to see, for once, behind the sound bites, where you discover that Sachs is an utter fool whose project is nothing more than a PR front for the World Bank. Besides, it's not every day you get to see economics enter the mind of an Ivy-League-government-knows-best-economist for the first time in his life...

Abu Dhabi National Energy Co. - the state-owned oil producer from the United Arab Emirates - has agreed to buy PrimeWest Energy Trust for $5 billion, a 34% premium to last week's closing price.

This is the biggest ever takeover of a North American business by a company from the UAE. The deal also reflects a new trend: Flush with petrodollars, the Middle East is becoming a serious force in international finance.

In the September issue of the 12% Letter, editor Tom Dyson recommended PrimeWest Energy, a Calgary-based income trust, based on its valuable natural gas assets in the Athabasca region of western Canada. PrimeWest traded at $19.58 on August 21. The shares jumped to $26.25 today for a quick 34% gain...

Shares of Inside Strategist pick BHP Billiton (BHP) exploded more than 5% this morning on speculation that it would announce what could be the largest gold deposit in the world at its Olympic Dam mine in South Australia. Coming off of a 13% gain last week, the mining giant will announce its Olympic Dam findings Wednesday as part of its annual report.

True Wealth pick PetroChina (PTR) got the OK to list 4 billion yuan-denominated A shares on the Shanghai stock exchange. The company will use the IPO money to increase production at its Daqing and Changqing fields. The company gained 10% on the news, in addition to the 6% jump on Friday. Readers are up 63% in five months.

Good news: According to Goldman Sachs, the bottom is here...The world's largest securities firm sees lots of opportunities in the mortgage business and other distressed assets in the wake of the credit turmoil. Why listen to Goldman? The bank turned a profit during the subprime crisis, it's beaten earning estimates for the past seven quarters, and it's the only one of the five biggest U.S. securities firms to advance this year, up 5.3% so far.

The push seems to be on to get the public interested in starting another war – this time with Iran. President Mahmoud Ahmadinejad was on 60 Minutes again last night, this time with Scott Pelley. Ahmadinejad wouldn't give straight answers to Pelley's questions about Iran's nuclear program. Even worse for the folks who'd prefer we not invade another country in the Middle East, Ahmadinejad looked like a madman on TV – either he really is crazy, or 60 Minutes cut the tape to make him look that way. Regardless, he certainly makes a convenient devil. According to the Western press: He wants to wipe Israel off the map, he might have nuclear weapons (here we go again...), he is supposedly sending bombs into Iraq, and, according to some accounts, he was personally involved in the Iranian hostage crisis back in 1979!

The hawks have one small problem this time, though. Unlike Iraq, the fight with Iran can't be about "freedom" or "democracy." The only people who have violently opposed democracy in Iran were Americans...who overthrew the democratically elected, secular president in 1954 and supported a brutal dictator there for the next 25 years. Meanwhile, the current government was put in power by national referendum in 1979, and Ahmadinejad was popularly elected in 2005. It will be interesting to see how our Decider-in-Chief juggles the historic record with his foreign policy goals. Freedom means different things to different people...

A flurry of new highs: Alnylam (ALNY), Becton Dickinson (BDX), BHP Billiton (BHP), CGG-Veritas (CGV), Covance (CVD), Chevron (CVX), eBay (EBAY), Google (GOOG), Gen-Probe (GPRO), Coca-Cola (KO), Arcelor Mittal (MT), Petrobras (PBR), Park Electrochemical (PKE), PetroChina (PTR), Raytheon (RTN), Verizon (VZ).

In the mailbag...We dig into the mirage of SEC regulations for a subscriber who asks, why all the fuss about giving advice? Send your questions here: feedback@stansberryresearch.com.

"That's it. You made up my mind for me. I don't care if he has a chance in Hell or not, but I WILL Vote for Ron Paul. It's time to do the right thing (Voting for a Man with Sound Economic Principles) as opposed to voting for the lesser of two evils as I have in the past. I moved to Texas from California after getting my degree from UC San Diego right about the time Dr. Paul was in a heated Congressional battle in my 'New' Texas district. I later bought Gold from his now defunct 'Ron Paul Numismatics' (Burlingame, CA), per His & Dr. Gary North's advice in the late 1970's for $200 per Ounce. When I sold at $800 per ounce it bought me a new sports car – Thanks, Ron!"

– Paid-up subscriber Robert

Porter comment: Paul is certainly the only presidential candidate in a long time whose financial advice is worth listening to.

"In response to John Chaimberlains question regarding who else sold during the August correction, I consider myself a smart trader who generally follows all the basic rules...investing in good businesses instead of speculating on the market etc...so I reluctantly admit that I sold my whole portfolio, not just on the day, but right on the hour the market turned around. My stop loss was break even, and I couldn't bear to see my portfolio slipping into the red, after profits of about 16% at the top. Needless to say, it has now rebounded and today, if I still owned it, would be up 27.46%. If only I hadn't panicked..."

– Paid-up subscriber Kanan Alexander

"In the September issue of True Wealth you indicated there are seven companies in a certain index that are worth our investment. You said, 'Obviously, we want to set ourselves up for those kinds of gains. So we'd like to own what's in [the index].' You named three of the seven and recommended buying a certain ETF that includes all seven in its top ten largest holdings. Question: Why not just buy the companies rather than pay an ETF to manage a larger portfolio of industry related companies? Is the ETF a safer play than the individual companies?" – Paid-up subscriber Richard

Porter comment: That's up to you, of course...We don't provide any individual advice. How should you decide for yourself? Well, depending on the size of your position, you might find it worthwhile to buy all of the companies in the ETF individually. For example, if you're going to put $1 million into the idea, the ETF management expense begins to become pretty onerous. But for most people, it's a lot more convenient, and probably cheaper, to buy the ETF. If you're investing $50,000 and the ETF charges 0.30%, you'll pay about $150 per year annually for fund management...which seems pretty reasonable to us.

"You make a point of saying that S&A is not allowed to provide investment advice. And yet, your analysts use phrases like, 'I recommend...' 'Here's what I recommend...' and 'Buy XYZ at $nn or better and use a 25% trailing stop.' Does the SEC not consider such phrases as investment advice? I'm not upset, just curious." – Paid-up Alliance member Richard S. Shaw

Porter comment: We publish investment research. We publish opinions. We publish model portfolios. We publish to a wide audience...and we have no control over how our published materials are used by our subscribers. We do not provide personalized investment advice. That's the difference between research and "advice."

Why is the difference important? SEC regulations. According to the SEC, to qualify for a publisher's exemption and remain outside its clutches, we must not communicate individually (one-on-one) with our subscribers and we must be "bona fide publishers" – i.e., we have to publish on a regular schedule, we have to have legitimate subscribers, etc. Besides the fact that we genuinely prefer only to research investments and not to provide individual advice, we also seek to maintain the publisher's exemption to avoid the constraints on speech associated with SEC regulations and the brokerage business – where every statement you make must be qualified with dozens of phrases like "the sun rising today is no indication of the sun rising tomorrow."

Because S&A exists on nothing but subscription revenue (we do no banking, brokerage, or money management) and we have dozens of publications with subscribers in 130 countries, you'd assume we're bona fide publishers, wouldn't you? Ah...but you're wrong. You forgot the most important thing about government. The regulations will mean whatever the government says they mean, after it has brought charges against you for not following the rules...

Regards,

Porter Stansberry

Baltimore, Maryland

September 24, 2007

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