The S&A Digest: The Old Man and The Stock Market

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

As of 06/24/2013

The Old Man and the Stock Market... SocGen's 'rogue trader' loses $7 billion... Santelli vs. Cramer... The whole enchilada on share repurchases... Sjuggerud's yen trade scores... Soros in the mailbag...

 Every stock I own rallied yesterday. I'm giving some gains back today. What most folks don't realize is days like yesterday make people who don't understand what they own and cut their losses when the market turns against them – so-called "weak longs" – think everything will be OK. If bear markets went straight to the bottom, everyone would sell in a day or a week, and it would all be over quickly. But the market likes to let you think you're winning.

The market is like the sea in Ernest Hemingway's The Old Man and the Sea. The Old Man lashes the enormous fish to the side of the boat after an epic battle to catch it... only to have sharks reduce it to a skeleton on the long trip back to shore. He emerges, like so many investors do, wiser and sadder. That's what bear markets do to the great unwashed hordes. They let them think it'll be OK, then one day, they all wake up wiser, sadder, and poorer.

A few wise souls take advantage of lower stock prices. They come out richer and happier. You don't see Buffett selling. He's buying. He's not a weak long. My pick Winthrop Realty (FUR) isn't selling. Winthrop CEO Michael Ashner isn't a weak long, either. He's buying real estate and real estate debt... and raising new equity to buy more.

 Remember when a whippersnapper named Nick Leeson single-handedly brought about the collapse of Barings Bank in 1995? Well, hope has triumphed over experience once again, as yet another child at a big European bank has gotten his hands on a huge sum of other people's money... and lost it. The youth's employer is the French bank Société Générale, or SocGen for short.

A 31-year-old SocGen trader named Jérôme Kerviel took much larger positions than he was authorized to take on European stock index futures and lost about $7 billion in the past few weeks. He was short last year, but suddenly went long at the start of 2008. (ouch!) SocGen says Kerviel's "deep knowledge" of the bank's risk-control procedures made it possible for him to conceal his trades.

Kerviel has been labeled a "rogue trader," as if this sort of thing were highly unusual. Financial Industry Regulatory Authority CEO Mary Schapiro sees it a little differently. The head U.S. regulator of broker dealers told reporters, "There is always a possibility of a rogue trader at a bank so risk controls have to contemplate that possibility – that is why you have built in controls."

I can't tell you how much better I feel, knowing that major banks have controls in place because there's always the possibility of a rogue trader!

 My e-mail inbox is atwitter with schadenfreude regarding a video that gives CNBC's James Cramer a tongue-lashing. View it here.

I thought everyone knew you didn't actually take Cramer's advice, that he's just throwing stock picks at you like a six-deck card shooter spitting out cards in a James Bond movie.

 Jeff Matthews' post yesterday was interesting. He notes there were no big buyback announcements while the market was tanking on Tuesday. Matthews says buyback announcements flooded the tape back when the market capitulated in October 1987.

Maybe fewer companies are buying back shares today, but plenty of well-financed companies are still buying back shares. I recommended Sturm, Ruger (RGR) a couple months ago, and it just bought back almost 10% of its shares in one day. I doubt if Extreme Value picks ExxonMobil (XOM) and Wal-Mart (WMT) are going to slow up at all on share repurchases anytime soon. Same with Extreme Value pick Dun & Bradstreet (DNB). Its capital-allocation program isn't likely to change anytime soon, either. PSIA pick NVR is going to keep buying back shares, too. Maybe that's why NVR is up so much in such a short time, when most stocks are falling apart.

Matthews' best point is that private equity's buying binge may have caused too many companies to lever up to buy back stock. But he ain't the whole enchilada, anymore than me or George Soros or anybody else. And trust me, enchilada-wise, you want the whole thing in front of you before you take a bite.

 We know one person is making money in financial stocks... S&A Short Report editor Jeff Clark went long Citigroup at the perfect time. He's held Citi calls for two days, and he's already sitting on a 122% gain.

 We wrote it. Did you buy it?

I expect that the Citibanks and the Morgan Stanleys of the world will seriously curtail their lending of Japanese yen. That means far less selling of yen... The yen will stop weakening... As the carry trade unwinds globally, you'll profit from the strengthening yen, this currency has gotten way out of balance as everyone chases the free money.

– Sjuggerud Confidential, August 2007

The yen hit an 18-month high yesterday as traders fled risk and pared back carry trades (borrowing money in a low-yielding currency to buy a high-yielding currency). Steve is up 12% in a couple months on CurrencyShares Japanese Yen (FXY).

 In a world filled with way too many securities, another bizarre offering has been created. You can now buy a share of a minor-league pitcher's future big-league salary. Cleveland Indians farm team pitcher Randy Newsom is selling 4% of his future major league earnings for $50,000. You don't have to buy all 4%. You can buy shares in Randy for $20 from his broker, Real Sports Investments. I wonder what the odds are of a submariner like Newsom having a great career? Has it ever happened? It's not a rhetorical question. I honestly don't know.

 New high: MFA Mortgage (MFA).

 It seems all anyone cares about in the mailbag today is George Soros. Do investors find any other topics in the financial world important? Should you discover one, tell us about it at feedback@stansberryresearch.com.

 "Hate George Soros? Why would I or should I? Considering the intellectual capacity of most Americans, I would consider being hated to be flattering." – Paid-up subscriber A. J.

 "But you can't separate the political from the hedge, who wants to hear how great a painter Hitler was." – Paid-up subscriber T.J. Troske

 "George Soros and Warren Buffett are both wealthy liberals. I admire their investment acumen more than I reject their political views. Mr. Buffett's words are succinct and brutal to the point. I rarely, if ever, read quotes from Mr. Soros that relate to investing, the economy, or the equity markets. His political rants get a lot more coverage. You are to be commended for focusing on both men's wealth generating strategies and leaving the politics out of it." – Paid-up subscriber Robert Erickson

 "You certainly ought to have an interest in his political agenda. He not only tries to manipulate currencies, but also elections, you dumb butt." – Paid-up subscriber Cliff McCormick

 "He is a scum bag of the lowest order!!!!" – Paid-up subscriber Bert Tarayao

Ferris comment: People get so angry with Soros whenever we mention his name. I know it's coming, and yet it surprises me every time. I'd like to think you're angry with Soros because you love freedom so much, and you see Soros and his ideas as threats to that freedom. My fear is that you're fascinated with him the way you're fascinated with Britney Spears. They're rich and famous, and their behavior seems questionable. So anything they do makes the news.

Regards,

Dan Ferris

Medford, Oregon

January 24, 2008                                                                                         

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