The S&A Digest: Poor Bill Miller

Poor Bill Miller... Huge losses at Fannie... The cost of stamps... Sjug goes long the dollar... Another round of GM controversy...

Poor Bill Miller. He got the boot this week from the people of Massachusetts. The $50 billion Massachusetts Pension Fund withdrew all of the $675 million it had in Miller's Legg Mason Value Trust and gave it to State Street for low-cost indexing. We've long believed Miller's amazing reputation was one of the great frauds in finance... And we wondered how long it would take for his performance to "revert to the mean." Miller's fund is the lowest performer in its group, down 34% over the past 12 months.

On the other end of the spectrum, you find James Simons of Renaissance Technologies. His $8 billion Medallion fund was up 48% so far this year, net of fees. The fund charges an outrageous 5% management fee and 44% incentive fee. Last year, when Simons took home almost $2 billion, the fund returned 85%.

Would we buy this fund? No way. What we've seen is every hedge fund eventually blows up. And the only investors who actually get rich are the guys being paid the performance fees and the guys smart enough to take out money along the way.

Fannie Mae announced a $2.3 billion quarterly loss, its fourth straight, and slashed its dividend to five cents from 25 cents a share. Henry Paulson should turn on his $30 billion spigot any day now.

The U.S. Post Office lost $1.1 billion this quarter on reduced mail volume and rising fuel costs. The agency has reduced its staff by 100,000 since 2000 and is offering early retirement to more employees. Postage rates rose a penny in May to the current 42 cents, and they should increase again next May. Why not allow UPS and FedEx to deliver to mailboxes and P.O. boxes? We could eliminate the post office overnight. And save taxpayers billions.

The dollar is finally turning around... The currency jumped today and is on track for its biggest weekly rise in 3.5 years, as fears grow that the U.S. economic slump is spreading around the world. And as the U.S. dollar rises, the euro is falling. European Central Bank President Jean-Claude Trichet announced there are growing risks for euro-zone growth.

Sjuggerud noticed this trend earlier this month and found a way to make huge profits from the overvalued euro's demise. His latest Sjuggerud Confidential recommendation is up 8% in four days. But it's not to late to jump on this trend. To learn more about Sjuggerud Confidential, click here...

New highs: Covance (CVD), Barr Pharma (BRL).

In the mailbag... A subscriber who knows nothing about accounting and less about economics disputes my analysis of GM's impending bankruptcy. This is like fencing with a paraplegic. It's easy to win, but it doesn't make you feel good. Send your ideas here: feedback@stansberryresearch.com.

"Point blank... Utter hogwash if you think GM's demise is solely from the UNION's end. You have got to be kidding with that kind of thinking. The Union men who build the car which is not designed by the Union guy getting the Union wage. Which I might add the Company GM, did agree to for over 40 years. There was very few true UNION strikes in that time. GM had many options to negotiate a better contract with better terms which they would if given the chance paid low wages with no benefits and still be in the same place today... Bankrupt. Why would they be bankrupt you ask?? Well like almost every other company in the world, the greed comes from the TOP Down! Stop your Fu*king spouting off about the common worker who ruined it for everyone! It's the complete and utter Greed once again by the top management, (just like our government too) who ruins it for not some of the people but ALL of the people... like I've stated in some past letters the corporate revolution will start and then we will see stuff change! Who was it who said 'off with their heads'? It can't come soon enough, waiting for the show to begin." – Anonymous

Porter comment: It's not a matter of what I "think." The financial collapse of a corporation can be objectively measured. It's not a mystery. Just answer this question: Which costs spiraled out of control? In GM's case, the answer is clearly the pension and medical obligations promised to both employees and retirees. Have executives also been paid too much? Absolutely. But measured against the costs of the union contracts, executive compensation is a tiny drop in a huge swimming pool.

You might blame the executives for giving into the unions. But thanks to legislation passed as part of FDR's New Deal (the 1935 National Labor Relations Act), it became essentially impossible to fire striking workers. Coal-mining companies and railroads that did so saw the government seize their operations. Thus, blaming the executives for agreeing to union demands is like blaming a man for getting mugged. They had a gun pointed at their heads.

As far as your claim that GM endured few strikes during the last 40 years – it's simply wrong. The union went on strike – or threatened to – nearly every three years from 1949 until the present. In 1961, the union led a 225,000-employee strike at GM. It got 100% health insurance for employees and 50% for retirees. Three years later, in 1964, it threatened to strike again. This time, it got 100% health care for retirees, and all pensions were raised by 50%. It was at this moment GM began to fail.

Let me explain a little economics here... There is no such thing as 100% "insurance." If the individual shoulders zero financial burden, then the demand for payments will be infinite. And the medical community and drug companies have no incentive to make medicine affordable when GM or the government is on the hook to pay 100% of the costs. Not surprisingly, GM cut its dividend for the first time ever in 1966, as the burden of paying for 100% of employee and retiree health care began to strain its true bottom line.

The idea that a corporation or the government is responsible for paying 100% of health care is absurd. Whether you think they should pay doesn't matter in the slightest. No one can legitimately promise a benefit to you if they can't estimate what that benefit will cost. No company can afford an open-ended liability where the recipient bears no shared expense. And you're delusional if you think you can rely on the promises of a company or the government to pay: There's no way they will have enough money.

In many ways, the idea of a 100% health care benefit is akin to the idea of buying a house with no down payment. They're both illusionary. They both warp the demand curves in the market, sending prices soaring. They will both cause a crisis. You can only ignore the laws of economics for so long. There is no Santa Claus. There is no free lunch.

We can either face these facts, or we can continue to pretend nothing's wrong and the laws of economics have been rewritten. If we chose the latter, we will bankrupt all of our large companies and, eventually, our government itself.

"I really don't believe the letter you sent out in your Aug 6th Newsletter, (from the GM Chairman), is really from CEO, Rick Wagoner. It is a well-written letter but it sounds like something you wrote, after doing some good research and exaggerating some facts. If it was in fact from Mr. Wagoner, it would be FRONT PAGE NEWS on every newspaper across our nation. Why would he send it to you, and not to some national publication, or national news outlet like ABC, NBC, or CBS?? The letter does go on to state some very important and scary information about how GM possibly got to the position they are in. It also states how, what happened to them, could happen to many other companies across our country, and in fact, could bankrupt our very nation!! PLEASE say it really isn't from him and that it is just an exaggerated display of your imagination!" – Paid-up subscriber M. Mundy

Porter comment: Yes, I wrote the letter. I've been writing these parodies for more than a year. None of the facts are exaggerated, however. These are the letters the real chairman of GM should be writing. If more people understood GM's situation, perhaps we could have a more informed and honest discussion in our country about pensions and health care costs. But Wagoner's strategy of putting his head in the sand and pretending everything will work out somehow isn't going to work – either for GM or America.

"I happen to enjoy what you call Porter's 'astounding arrogance'. He skewers both sides as circumstances demand. What you see as arrogance, I see as aplomb. If either set of scoundrels ever starts to put the Country ahead of Party and Self in their strategic calculations, then they might earn some respect. They have brought my country to ruin through their malfeasance. Damn them. Now we have the closest thing ever to the Biblical description of the Antichrist who wants to be President. Sheesh, the Obama nation. Really has a ring to it." – Paid-up subscriber SMK

"Do you really expect a tiger in financial analysis to become a pussy cat on other subjects? Let's face it, all of us who have made a pile shorting GM at $32.00 can hardly complain about his political views even if he is frequently wrong. At least he is NEVER in doubt!!! Who do you want working for you? A feisty tiger, or a wishy washy pussy cat?? Go Porter!!!!" – Paid-up subscriber R. Kent

Regards,

Porter Stansberry

Baltimore, Maryland

August 8, 2008

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