The S&A Digest: Porter's babysitting

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(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/20/2013

Porter's babysitting... Losing nine homes... The war on MBIA... Burning money at AIG... Dealing cocaine...

Goldsmith comment: Porter's wife and kid are sick today, so he's at home taking care of them. He'll return to The Digest on Wednesday.

 This guy is the poster boy for 21st century excess... A 37-year-old California man defaulted on nine homes and expects the bank to foreclose on all of them. He bought a Santa Cruz, California, home in 2000, then used $800,000 in tech-company stock options to put 10% to 40% down on negative amortization loans – loans in which payments don't cover the interest and the principal grows. After the fact, the man said, "I knew I was sitting on time bombs. I knew the market was going to go soft, and I knew that property values would decline. But I figured that I had enough equity to survive the storm and sell or take the loss and refinance. I didn't anticipate a downturn of epic proportions such that home values are 40% less than they were."

In his defense, he probably wouldn't be any better off if he had held onto those stock options.

 Our friend Chuck Butler of EverBank noticed: "The Futures traders are beginning to go long the dollar again... We haven't seen this since 2005... But, here it is, staring us in the face... The question from me would be simply... What is driving them to go long the dollar?"

Last time the traders were long, in 2005, the dollar surged 15% in one year. It's down 22% from its 2005 high, but it may be starting to turn the corner...

 We've spent a lot of time covering the disintegration of bond insurer MBIA in The Digest. Here's a brief recap: William Ackman, Whitney Tilson, David Einhorn, and most everybody else is short. Even Warren Buffett says the company doesn't deserve its AAA rating. But value legend Marty Whitman is long. The short side already made a killing – MBIA is down 87% in a year – and it looks like more profits are to come. MBIA announced a $2.4 billion, $3.01-a-share quarterly loss – more than double the analyst estimate of $1.21. The loss was MBIA's third straight.

 At last year's Value Investing Congress, hedge-fund manager Leon Cooperman stressed the importance of responsible management, presenting Henry Singleton as an example. We wrote about Singleton last year, "Between 1972-1984, Singleton repurchased 90% of Teledyne's outstanding stock – but he would only buy back shares when they were severely undervalued. When Teledyne's stock was expensive, he would use it to make acquisitions. Although Singleton never received more than $1 million per year in total compensation, he became a billionaire by investing in his own company (and thanks to his remarkably adept buybacks)."

The world's biggest insurer, American International Group, should start studying Singleton. Last week, the company announced a $7.81 billion loss for the quarter and said it needs to raise $12.5 billion in equity. Despite huge losses staring management in the face, it bought 76.4 million of its shares in 2007 and 12.2 million more through February 15. It halted the buybacks at the end of February, but it's not finished wasting money. AIG also is raising its quarterly dividend 10% to 22 cents a share. The insurer said the increase will cost about $200 million a year and shareholders appreciate higher yields. I'll bet they'd appreciate a solvent company more.

 In this month's PSIA, Porter imagined what it would be like to be an international dealer of branded cocaine... The margins are enormous, the customers are loyal, and the demand is constant. Of course, Porter's disdain for prison kept him planted at his desk, writing newsletters. However, he did discover a publicly traded, legal drug dealer trading at its lowest price in history:

"[W]hat if you identified a drug very similar to cocaine used every day by 90% of the adult population of North America? What if this drug was also the most frequently used drug in the world? And what if, like cocaine, people became extremely addicted to it and tied to their favorite brand? Do you think a strategy of delivering a premium product at high-end locations and at high prices would eventually consolidate the market and become one of the world's great businesses? You better believe it."

 To learn more about PSIA and the legal drug dealer, click here...

 New highs: Sabine Royalty Trust (SBR), International Coal Group (ICO), Pioneer Drilling (PDC), Plains Exploration (PXP), U.S. Natural Gas Fund (UNG).

 Almost every feedback e-mail worth printing today skewered Porter. We'll wait and let him address them personally on Wednesday. Until then... feedback@stansberryresearch.com.

 "If I recall correctly, PWE was mentioned in one of your newsletters for its relative safety and high yield. I owned PWE in an IRA for a while. Uncertainty about if or when they would change their business structure in advance of the change in the taxation of Canadian trusts, and noting that I got whacked by a hefty Canadian tax imposed on my dividend, I reluctantly sold PWE. I am interested on what you see for the present and future of Canadian trusts of this nature. When the goverment begins to collect taxes from the trusts, will we foreigners continue to be taxed? Perhaps the sale of the stock was not the most prudent, however, I would anticipate a drop in share price as 2010 approaches since the desirability of the asset as an income producer. There are other income producers such as DSU and CHY that are about the same in dividends without the Canadian tax..." – Paid-up subscriber Charles

Goldsmith comment: Tom Dyson wrote an excellent report on the future of Canadian income trusts available only to his 12% Letter subscribers. You can find more about the 12% Letter and how to access his income trust report here.

As for Penn West (PWE), I recently recommended it as a Top 10 holding in the Monthly Dividend Program. We're up more than 14% in two months, and that's not including the 13% yield. We're happy holding it for now.

 "Did Dan Ferris get lost the other day. I got one of these dillys 'From The Desk Of Porter Stansberry'. Not a word from Porter anywhere! All from Dan! Did he get lost or sit at the wrong desk by mistake? Yeah, I checked it to be sure I read it right. Maybe you two were trying to see if anybody noticed, If so I did. but I don't drink. Maybe I should start, huh?" – Paid-up subscriber Gary Jones

Goldsmith comment: The Digest crosses Porter's desk at some point every day, whether he writes it or not.

Regards,

Sean Goldsmith

Baltimore, Maryland

May 12, 2008

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