The S&A Digest: Poor Michael Armstrong

Poor Michael Armstrong... What recession?... How high will oil go?... Bullish on biotech... Bearish on bonds... Staying on the right side of the generation switch...

Poor Michael Armstrong...

First, as the CEO of the original AT&T (now defunct), he squandered the company's brand, wasted billions buying John Malone's 20-year-old cable infrastructure, and blew what should have been the best wireless business in the country by sticking with outdated technology. As a result, AT&T was ripped apart and sold to rivals, one undervalued piece at a time. For years, AT&T was our perennial short sell, and I called Mike Armstrong the worst businessman in the country. If only we'd paid closer attention to what Armstrong did after leaving AT&T...

He took key positions on the Citigroup board of directors – chairman of the audit and risk committees. So, after destroying AT&T, Armstrong led Citigroup to invest heavily in subprime-related derivates. It's hard to think of anyone who has destroyed more shareholder value in the last 10 years. But, like my old high-school water polo coach used to tell me, "Don't worry about it. No one is completely useless. You can always serve as a bad example."

The real estate meltdown hypothesis holds the economy will radically slow and sink into a recession (or even the worst depression since the Great Depression) as subprime losses lead to prime real estate defaults and then a decline in commercial real estate, too. I see two glaring problems with this hypothesis...

First, "Dr. Copper" hasn't gone along with the global recession predictions. Copper, and base metals in general, have remained strong, even hitting new highs. Second, the commercial real estate collapse doesn't seem to be materializing. In fact, after suffering late last year, several commercial real estate investment trusts seem to be rebounding strongly...

We wonder what the outlook for inflation will be if the U.S. economy doesn't slow down and if demand for commodities continues to grow from India and China. Perhaps the economy is stronger than most people think... and perhaps demand for oil is going to continue to accelerate. Looking at the prices of the onshore drillers, this seems to be the case – they've all shot straight up over the last two months. This kind of price action is indicative of another big leg up in oil and gas prices.

At last week's Jekyll Island meeting, a few ideas stood out to me as very good bets. First, our top biotech guy, Rob Fannon, was nearly despondent. Since last fall, the biotech indexes have fallen by about 25%. Bear markets in risk are very, very tough on young biotechs. Fannon has watched his carefully selected portfolio get marked down, day after day. Great investors aren't made during bull markets; they're formed during bear markets. Fannon is earning his stature. My bet is biotech bounces back strongly this year.

Keep your eye on the Phase 1 portfolio, which could easily bounce 50% or more this year. If you're not a Phase 1 reader, watch the PowerShares Biotech ETF (PBE) and biotech's only true blue chip, Genentech (DNA).

The other sure bet I saw last week came from Doug Casey, who reminded me that the trade of the next decade will certainly be shorting long-dated U.S. government bonds...

With the amount of inflation the Fed is producing and with the global economy showing signs of strength (oil and copper prices), it's a sure bet the yield on the long-dated government bond will, sooner or later, spike much higher. Right now, yields on the 30-year Treasury bond are bouncing off their lows, at just over 4%. Considering inflation, as officially measured, is higher, there's simply no way these low rates are sustainable.

New highs: Plains Exploration, Comstock Resources. Westshore Terminals, Sabine Royalty Trust, XTO Energy, Stone Energy.

The vacation is over. The bag was full... and featured a sizeable amount of venom. Whew! For a minute, we thought our greatest fears had been realized... We worried apathy had finally arrived. Luckily, some folks still hate us enough to write. We promise to read what you send us: feedback@stansberryresearch.com.

"If you would read about a lady living on social security receiving $739 per month with 7 payday loans of $345 each you would really be advising people against investing the these 'banks.' We are becoming a greedy, immoral nation which will lead to our doom. There can be no good coming from usurious gains off the misery of our fellow men. I don't know how anyone who owns or invests in one of these schemes can sleep at night." – Paid-up subscriber Larry Williamson

Porter comment: Seems to me, people should be free to engage in contracts of their own choosing, whether usurious or not. I have a hard enough time keeping my own affairs straight; it has never occurred to me that I ought to worry about the affairs of people I read about in the paper.

"Ya'll seem to cater to those who are already very wealthy... ex: today's Digest with an offering for 'high net income investors,' and in Burma 'something that shouldn't cost more than a few million dollars.' For those of us who are not in that category, but would like to get there, how about some good advice for us that doesn't cost an arm and a leg? Perhaps one of your success measures should be how many little guys have increased their net worth substantially using your advice... I like your approach, in most cases I simply cannot afford to follow it!" – Paid-up subscriber Fitz Fitzgerald

Porter comment: We offer nearly half a dozen very sophisticated investment publications, for around $100 per year – True Wealth, Porter Stansberry's Investment Advisory, The 12% Letter, The S&A Oil Report, and International Strategist.

In addition, we publish three free daily publications, all of which, at least from time to time, contain investment recommendations. And our lifetime subscription offers begin at around $1,000. My business caters to investors from all walks of life. But you do not have to spend much with us to get a lot in return.

"I have invested for over 40 years. Your reports are excellent... I would have to consider Mr. Palmer sour grapes or very unsophisticated. Keep up the good work and I will keep following your reports. My only objection is you never put my great comments on your report." – Paid-up subscriber Larry Middleton

Porter comment: Objection overcome.

Regards,

Porter Stansberry

Baltimore, Maryland

April 8, 2008

The Only Big Picture Trend You Need to Know

By Ian Davis

Staying on the right side of what Sjuggerud calls the "generation switch" can make you big bucks.

Here's how it works...

Looking back at the long-term performance of stocks and commodities, a kind of generational pattern emerges. Stocks tend to go on 20-year bull runs, followed by roughly 10 years of underperformance. Commodities tend to do the opposite. They go through 20-year bear markets followed by 10 years of gains.

The last big bull run in stocks lasted from 1979 to 2000. During this "stock generation," the S&P 500 rose 513%, adjusted for inflation.

While stocks enjoyed their huge gains, the Commodity Research Bureau (CRB) index fell 63%. Gold was less like an investment and more like a tax on your trading account. It was a grinding, 21-year bear market that wore down even the most dedicated commodity investor.

But then the stock market collapsed in 2000, starting a period of terrible returns. Let me show you some shocking numbers...

If you had invested in the S&P 500 on January 1, 2000, you would be down 5%. If you adjust for inflation, it's even grimmer... The S&P 500 is down 25% when you factor in the loss of purchasing power.

Of course, in 2000, everything started working for commodities. Between 2000 and today, the CRB index has risen 62.6% (also adjusted for inflation). Many individual commodities have gained more than 300%.

The following table shows the inflation-adjusted returns of the S&P 500 versus the CRB index. As you can see, when stocks crash, commodities take off... And when stocks take off, commodities crash.

Investors often find themselves wedded to a specific asset class. But to be a successful generational investor, you need to be investing in what is working now. Right now, the place to be is commodities – they're rallying and the market is not. In six months or a year, we may be able to say the commodity rally is over... but I doubt it.

I believe the stock market has a ways to go before finally bottoming. In the meantime, commodities should hold up well. So if you aren't at least partially invested in commodities right now, you're missing a big profit opportunity.

Good investing,

Ian Davis

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame