The S&A Digest: The Election No One's Watching

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/24/2013

Merrill Lynch's $12.8 billion bake sale and car wash... Three ways to prove a recession has already begun... The man who made $15 billion betting against housing... The richest man in American history... Pay attention to Taiwan's elections…

 "At one time when I was a bit younger I thought I could trade myself to riches. It didn't work out quite that way. I had to resort to compounding or taking a very occasional big position. Over recent years I've taken a very big position in gold, and even that hasn't been easy. But I've had faith in gold. I had faith in gold back in the '70s, and I'll let you in on a secret – I have even more faith in gold today."

– Richard Russell's Dow Theory Letters

 Citigroup agrees. The bank expects gold to touch $1,000 an ounce this year. When paper fails, gold prevails. And paper of every bizarre pedigree you can imagine is all Citigroup owns. That its paper is failing miserably is not a controversial statement. Today, Citigroup wrote down $18.1 billion in assets, took a $9.83 billion loss for the quarter, cut its dividend 41%, and was forced to raise $14.5 billion from outside investors to stay in business. Citigroup's stock is 51% off its 52-week high.

The big financial institutions selling debt, equity, and whatever else anyone will buy somehow conjures to mind the bake sales and car washes we did in my parochial grade school to pay for everything from sports uniforms to our eighth-grade overnight trip to Williamsburg, Virginia. I still remember cars driving away with wide stripes of untouched dirt. Did they get what they paid for? I don't know, but nobody ever complained.

 Merrill Lynch has been especially busy lately. Today, a group including Korean and Japanese government investment funds is paying Merrill $6.6 billion for preferred stock yielding 9%. Merrill has baked cookies and washed cars to the tune of about $12.8 billion in new capital commitments in the last two months. Shares are 45% off their 52-week high.

 Last week, we complained about all the annoying estimates that put the odds of a recession arriving soon at 50% or more. Our own opinion was – and still is – that there's a 100% chance a recession has already begun. James Montier, equity strategist for Societe Generale, appears to be on our side. In a note this morning, he provides three sentiment-oriented, recession-spotting ideas:

(1.) Three big US investment banks are now predicting a recession (albeit a mild one). This tells us that we are almost certainly in a recession. Economists never forecast recessions until well after they have begun – that is if they manage to forecast them at all! (2.) The Economist magazine's word count of recession in the NY Times and the Washington Post also shows a marked increase in the recent past. (3.) Intrade [a prediction market website] makes a market on a contract which prices the probability of a recession in 2008. This is currently showing almost 65% chance of a recession in 2008!

Montier also has some advice for investors, telling them to, "hold cash and await the arrival of the 'fat pitch.'" Since almost half the total return you can expect from stocks in any five-year period will come from dividends, Montier says, "large cap stocks that either pay a dividend (preferably a well covered one) or have the potential to turn cash piles into dividends" are "the best places to hide."

You'll find safe big-cap stocks that generate far more cash than they know how to deploy in Extreme Value, Porter Stansberry's Investment Advisory, and The 12% Letter.

 Perhaps a firmer measure of recession resides at the Countrywide Foreclosure Blog. We don't vouch for its accuracy, but it shows you what you'd expect to see: a solid bull market in homes going into foreclosure around the U.S. over the last 12 months – worth more than $3 billion, measured by asking price.

 Some folks get on the right side of misery and make a bloody fortune at it. A fellow named John Paulson runs two hedge funds that bet against housing. Last year, they made $15 billion, rising 590% and 350%. Paulson made his money by owning bizarre instruments known as credit-default swaps. His was more or less a bet that subprime mortgages would be seen as riskier and riskier, as they performed more and more poorly. Paulson's personal payday is estimated at $3 billion to $4 billion.

 Given what's been happening to the value of big bank paper, UBS employees probably aren't too happy. A large portion of year-end bonuses at UBS will consist of stock, which employees can sell within one year (three is the norm). The bank will give away an estimated $4.5 billion in shares – 5.2% of its market cap. UBS wrote down $14.2 billion of subprime-related assets last year. It still has tens of billions of mortgage-backed assets on its books. Was the upper management at UBS sending its employees a message? Like maybe, "Keep holding on to this junk, and you'll get our stock as a bonus." UBS' share price is 33% off its 52-week high.

 Petrobras' (PBR) domestic oil and natural gas reserves increased 1.2% in 2007 to 13.92 billion barrels. Brazil's state-controlled oil major said the reserve number does not include its huge Tupi field. Matt Badiali recommended Petrobras last year in his S&A Oil Report. Readers are up 136%.

Badiali believes these government-backed oil companies will change the face of the oil business. Read how to profit from this change in DailyWealth.

 Despite a downturn in consumer stocks of every kind, hedge-fund manager Bill Ackman is still buying Borders Group (BGP). He raised his stake to 24.4% from 21.8% according to today's SEC filing. Maybe Ackman heard Bill Miller some weeks ago, who says he expects the best performers of the next five years to come from the consumer stocks getting pummeled today. At this point, it looks like Ackman is going to wind up taking Borders private before he ever gets his money out of it.

 A man richer than Buffett and Gates combined... in today's DailyWealth.

 New highs: XTO Energy (XTO), streetTRACKS Gold (GLD), and Pharmaceutical Product Development (PPDI).

 For as awful as the markets are behaving, there's way too much understanding and not nearly enough insults and swearing in the reader feedback this morning. Take us to task at feedback@stansberryresearch.com.

 "You once put out a White Paper on the subprime loan debacle which I thought was first rate. Now, some of my friends who are less knowledgeable than I are asking me for an explanation and I can't even come close to your delineation. Is it still on your web page? If not, can you shoot me a copy?" – Paid-up subscriber Page Pferdner

Goldsmith comment: I believe you're referring to Porter's "What Caused the Housing Bust." We re-published this piece as part of our Twelve Days of Christmas. You can access it here.

 "Personally I get tired of reading the e-mail's from all the whiners, but then you created the environment so I guess you should expect no less. I am not writing to beat up on you though. I became an Alliance member solely because of the overall quality of the research presented. I stand by that. It's still my responsibility to make good decisions. If I were to say anything it would be that maybe your analysts should identify their speculations more readily and to pay more attention to the micro and macro economic situation before diving into a recommendation; I think that Steve does that the best; although a bit early on some... but the one thing I am sure of is that you are honest in your dealings with your subscribers. The last thing I would say is that I read the reports several times, only because I pick up information that I glossed over the first time. That is what has enabled me to continually refine the way I invest. Those tid bits of information are there if the reader is willing to dig them out. It's been a worthwhile process." – Paid-up subscriber Greg B

Ferris comment: Thanks for the kudos and support, Greg. Have another five or 10 cocktails and write us again soon. Seriously, you provide a reasonable recommendation on how to use financial newsletters. I wish more readers understood that it's their money, not ours.

 "I may sound delusional with such a comment considering I've been taken out to the back of the woodshed and beaten by just as many 'bad' recos as all other subscribers. The losses are regrettable but the days of investing are over. The stake was plunged into Investing's heart long ago. Today, everyone and his dog controls an online brokerage account and can trade hundreds to thousands of shares per whim with a time frame of minutes to days. The time frame for the Wall Street Hooligans is a mere three months as they tweak numbers to 'make' a quarterly earnings goal. The time frame for major investment banks is the year end bonus as they sell toxic waste to clients from one desk while they short the same junk for the firm's and the traders private accounts from another desk. We're speculating here people and speculation carries great risk. The playing field has never been level and never will be. Anyone that thinks different is delusional. Considering that the deck has and always will be stacked against the little guy (that's us folks) it's a wonder any of us are allowed to leave the table with anything in our pockets. Safe, predictable returns are found in CDs only. The equities are a crap shoot. Thanks for doing your best to give us an edge and keep up the good work." – Paid-up subscriber Herbert Rebhan

Ferris comment: I disagree that all equities are a crapshoot. Berkshire Hathaway isn't a crapshoot. Last Friday, in the current issue of Extreme Value, I wrote about a Berkshire-like company, and a whole list of other stocks, none of which are crapshoots.

You also mention the extraordinarily popular delusion known as the "level playing field." A playing field is leveled by a machine, by the conscious design of a single mind, or a few minds at most. Playing fields don't just happen. Markets, on the other hand, just happen. Unless you also expect to win at roulette or predict tornado paths, you shouldn't expect markets to be "level playing fields." If markets were level playing fields, you couldn't take profits out of them.

Regards,

Dan Ferris

Medford, Oregon

January 15, 2008

The Election No One's Watching

By Ian Davis

At a time when the U.S. presidential race is generating worldwide interest, investors would be wise to pay some attention to a much less well-known election taking place on the other side of the world...

Last week, Taiwan held its parliamentary elections, which resulted in a resounding win for the Nationalist Party. The Nationalists took 81 of the legislature's 113 seats.

The opposition Nationalist Party, unlike the ruling Democratic Progressive Party, is interested in cultivating closer ties with China... and apparently the Taiwanese people approve.

This election was a precursor to a March 22 presidential election, which many believe will have the same outcome.

The Nationalist presidential candidate – Ma-Ying-jeou – says he will loosen restrictions on investing in China and open direct air and sea links if his party takes control of the presidency. He also favors allowing Chinese investment in Taiwan.

The following chart shows the percent of Taiwanese exports destined for the U.S. compared to the amount headed to China. As you can see, China now imports more than twice what the U.S. does from Taiwan.

Taiwain's New Export Market

This could be good news for the Taiwanese, since it seems the U.S. is in the early stages of a recession... The S&P 500 is down 10.5% since October 9, and sectors like finance and housing have suffered more.

Conversely, emerging markets – and China in particular – have performed amazingly well over the last couple of years. I believe Taiwan will be the next to experience this incredible growth rate.

The Taiwan fund (TWN) jumped 4% in one day on the election news... This is just the start. If Taiwan opens its financial markets to Chinese investors, it could mean double-digit gains in a matter of months.

Just look at the Hong Kong stock market. When it opened to Chinese investors back in August, it rallied by 49% in three months.

Good investing,

Ian Davis

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