The S&A Digest: The OBAMA! years

The OBAMA! years... More from Rogers... Thar's gold in them thar cell phones... Trading sardines... More drunks in the mailbag...

On Election Day, maybe we should all simply walk down to the ghetto and empty our wallets...

According to various polls and tallies of political fundraisers, there seems to be a very good chance OBAMA! will be our next president. I've suspected as much for a long time, not only because he is a charismatic speaker, but also because he is the most liberal candidate we've had for president since at least the Great Depression. History, I know, has a wonderful sense of humor. And Americans have a terrific propensity for electing the president they deserve and getting it, good and hard.

OBAMA! promises to raise taxes dramatically and increase the size and responsibilities of our government – two things our economy can't afford. Specifically, OBAMA! has promised to deliver the largest, most progressive tax increase in history by eliminating the $102,000 cap on the Social Security payroll tax. That's in addition to raising the top bracket to 39%. The result will produce a maximum federal income tax of 51% for the highest wage earners. OBAMA! has also promised to raise taxes on dividends and capital gains – though doing so will certainly reduce the total amount of revenue generated. (When you tax capital transactions, the rate of transactions decreases immediately.)

If you don't own a small business or if you're not a high wage earner, these ideas might appeal to you. But they will have an extremely negative impact on spending and investment. No spending, no investment, no new jobs. Or, in other words, you can eat the rich, but only when you're out of work.

OBAMA! also promises to increase social spending by more than $300 billion per year, granting health care to all citizens under the age of 18. It's a wonderful idea, especially coming from a government that hasn't routinely run a balanced budget in more than 40 years. So my children will inherit a bankrupt nation. But at least they'll be healthy enough to spend the rest of their lives paying for our debts.

Commodities bull Jim Rogers is on the PR trail again, and he's still buying agriculture. He's also buying China, whose stock market has fallen 39% this year... "All my new money goes to commodities and China. All the panic looks like a bottom. I have bought in the last four to five weeks. I've been buying shares in China for the first time in a long time," Jim said at a conference in Beijing. Rogers is buying shares related to tourism, education, airlines, water companies, and agricultural producers.

Think about this the next time you throw away a used cell phone.

"...a tonne of scrapped mobile phones can yield 150 grams of gold or more [versus five grams for an average gold mine] according to a study done by Yokohama Metal. Further, this same 'mine' of discarded mobile phones also contains 100 kilograms of copper and three kilograms of silver. Is there any wonder why recycling has become so important in recent years. It is not because of ecological concerns; it is because economics trumps all else. The market works!" – Dennis Gartman

There's an old story about investment manias that goes like this... A trader bought a tin of sardines for $1, then resold them for $2. The trend continued for years, with each bid successively higher than the next. Then a starving man offered $10 for the sardines. He opened the tin and found the sardines were inedible. "You don't understand," the vendor said. "Those were trading sardines."

The moral of the story is that sometimes the price people are willing to pay is not the true price of the underlying asset. This seems to be the case in agriculture today. Commodity-index funds control a record 4.51 billion bushels of corn, wheat, and soybeans – equal to half the amount held in U.S. silos on March 1. And the futures are worth more than the actual commodities. Investors are paying 55 cents more a bushel than farmers, the biggest premium since 1999.

According to an Illinois farmer, "It's the best of times for somebody speculating on grain prices, but it's not the best of times for farmers. The demand for futures exceeds the demand for cash grains. It is very difficult to operate a grain business when the cash prices are below the futures." We'll see what happens with the "trading grains."

Tomorrow, we're going live with the S&A FDA Report. We've been offering Digest readers our newest trading service at a huge discount, and today is your last chance to sign up. Dr. George Huang trades biotech stocks after they receive FDA approvable letters – the regulator's notorious maybe-yes/maybe-no ruling. Share prices usually plunge after a company gets hit with a letter, creating an excellent entry point for knowledgeable investors. The latest company to receive one, Biovail, is up 7% in three days. And many of these stocks jump over 20% in the days following the approvable letter. Dr. Huang's trading methods have produced back-tested gains of about 75% a year. To learn more about the FDA Report, click here. The special offer ends tonight at midnight.

New highs: Comstock Resources (CRK), Wal-Mart (WMT), Health Care Property (HCP), Health Care REIT (HCN), Ventas (VTR), Occidental Petroleum (OXY), Stone Energy (SGY).

Perhaps I should apologize for the mailbag. Once again, it's full of compliments. And while we appreciate reading such kind words, we know the angry, bombastic notes are much more fun to read. We print nearly every negative e-mail we receive, simply because we know you look forward to reading them. But of late, all of the letters have been fairly tame or even downright... nice.

Whatever you write, complimentary or full of sour hate, we promise to read. Send your two cents here: feedback@stansberryresearch.com.

"I just wanted to say thanks for Mike Williams' True Income. This is a great service. I've been looking for something like this, and here it is. I'm in process of shifting the bond portion of my portfolio into his recommendations. Looking forward to the improved returns and safety. Excellent analysis." – Paid-up subscriber Steve

"Thanks for the best performing advice in Advance Income and Short Report, these two are the best performing letters out of the S&A Alliance portfolio year to date. I have managed to gain consistent income generated by your ideas. UNG is your superstar since inception of this service I sold calls 3 times and managed to generate 18% return in about 5 months. I am also very excited with your recommendation of selling Puts for FTO, this is a new twist to this equation, rather than shelling out money upfront for stock in order to be able to sell calls against it you sell puts and only need to worry about buying stocks when at expiration date cost of the stock is less than what you sold it for, if that is the case than you can sell covered calls against it. You got me excited about this one, I for one would like you to recommend more of these trades. Your short recommendations are also on the money lately, I have learned that patience in dealing with options is the key. Your recommendations have increased my living expenses portfolio by about 11K this year." – Paid-up subscriber John S.

"Just to let you know, I bought gold and silver specifically because of your publications. I had thought about it before but never did anything about it. My first subscription was to True Wealth and shortly after receiving my first issue back in mid 2005, I bought gold. I bought a variety of coins, some just bullion and some rare coins. I have continued to add to my position ever since with both gold and silver and both common and rare coins. Needless to say, they are doing quite well. Besides the physical gold and silver, I also have good exposure to your recommended mining stocks. I use only discount brokers and do all the trading myself. In case anyone is interested, Wells Fargo Investments has a good service for do it yourselfers and I get 100 free trades a year with them. I am now an Alliance member and I find myself continually refining my portfolio based on the various publications. I especially appreciate the fact that you have experts in so many areas. Not just investment experts, but honest to god, know their industry experts. One thing I have found from my own experience is that being an expert in a given field will help you to quickly eliminate what might sound like a really good deal to someone unfamiliar with a particular industry. You can see through the hype much easier. I also wanted to let you know that I don't mind you sending all the advertising. It takes only a second to see that it is advertising and to hit the delete button if I have no interest. You might consider sending out a disclaimer (written in big bold letters) when someone first subscribes, letting them know how you do your advertising. It used to bother me too when I first subscribed, till I understood from your digest remarks what was going on. If it didn't take people by surprise, maybe it wouldn't bother them so much. But then some people are just whinners and you won't please them no matter what. I have to say that it is somewhat disconcerting to have your highly paid analysts come up with exactly the opposite conclusions on different situations like housing and banking. Like Rodney King said 'how come we can't all just get along.' Or maybe we could understand that 'it just don't work that way.' Wouldn't it be nice if they all came up with the same conclusions and we all made lots of money on all the positions and never lost anything! I'll be sure to send you my crystal ball as soon as I'm done with it." – Paid-up subscriber Dave Hunt

"Thank you, Porter, for your sometimes wry, but always piquant self-criticism relative to the criticism of others. I've been reading your work for a couple of years now, and through it all runs a thread of healthy self-evaluation that keeps you humble in the face of failures (few though they be) and reasonable in the face of the predominant successes. BTW, I don't know the difference between a stop loss and a 'trailing stop loss,' and I'm fairly sure I'm not the only one of your subscribers who doesn't know. Could you devote a line or two to a simple explain?" – Paid-up subscriber Donald Lewsader

Porter comment: Thanks, Donald. A trailing stop changes as a stock price increases, while a stop loss is based on your purchase price. Say you buy a $10 stock, and it rises as high as $16. If you're using a 25% trailing stop loss, you sell if the stock falls down to $12 (25% below the stock's recent high). If you're using a 25% stop loss, you hold your shares unless the stock falls below $7.50 (25% below your purchase price).

As I wrote last week, with an initial allocation of 4%, a 25% stop loss puts 1% of your original capital at risk. If you use a trailing stop loss, and the position moves up at all, your principal at risk can quickly fall to zero.

Regards,

Porter Stansberry

Baltimore, Maryland

April 28, 2008

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