The S&A Digest: Watching Rates Move Up

Watching rates move up... Signs of a commodity top... Down 20%, what to do?... Whitman's secret... Icahn's next move... Earnings season... A college dropout?... Look at the sun...

No one has said much, lately, about interest rates. But we noticed during August's mortgage panic that long-term interest rates didn't get anywhere near the lows they set back in 2003...

Fears of a mortgage collapse and a recession ought to have sent long-term rates down to record levels – but it didn't happen. Falling long-term interest rates worldwide contributed to the 25-year global bull market in equities. (Rates on the U.S. 30-year bond peaked at 15% in 1981 and fell to as low as 4.15% by 2003.)

The trend of lower interest rates is finally over. Why? Japan, China, and Taiwan are dumping U.S. Treasuries as fast as they can. In August, Japan cut its holdings by 4%, China by 2.2%, and Taiwan by 8.9%. Together, the three nations still own $1.04 trillion in treasuries. Dick Cheney may soon realize that deficits do matter.

Signs of a top in commodities... Banks and securities firms hired a record 450 commodities traders this year – up 33% from 2006. Oy vey: Headhunters are turning to fired mortgage-bond salesmen to fill the void.

If you haven't read about Tom Dyson's favorite investment yet, don't miss today's DailyWealth.

"The key to making money, I think, is to know what to do when a stock you buy goes down 20% from when you first bought it. Do you buy, sell or hold? Those are the hardest decisions – and the ones that can make (or lose) you the most... I'd guess that we buy more, hold, and sell about 1/3 of the time each. When McDonald's went from $16 to $13 in the spring of 2003, we did more work, got more conviction and doubled the position from 5% initially (down to 4% at the bottom) up to an 8% stock position plus a 2% LEAP call option position and made more money on this (it's still our largest position) than any other stock in 7 years of professional money management..."

– Whitney Tilson (It's worth it to read the entire interview.)

A happier dilemma for investors is figuring out when to take profits on a stock that's appreciated. Marty Whitman, another investor we greatly admire, has the most interesting answer we've found yet: "If I'm right... these very undervalued companies will be taken over, liquidated or refinanced, and that's where you make your money..." Marty rarely sells stock on the open market – he waits until a private investor comes along who is willing to pay a premium for control.

Where will Icahn strike next? We haven't seen any press, yet, about his two newest acquisitions, a 3.9% stake in Enzon (a small pharmaceutical company) and a 1.3% stake in Global Payments.

It's earnings season…

PSIA pick Intel (INTC) announced a 43% increase in earnings based on excellent notebook sales. The company also said it will cut 2,000 jobs. Shares were up 4%.

Extreme Value pick JPMorgan (JPM) said private-equity deals helped to offset $1.64 billion in writedowns and announced a 2.3% increase in earnings. Shares gained 4%.

Inside Strategist pick Coca-Cola (KO) improved net income by 13% on ever-increasing international sales and strength in its sparkling beverages division. Shares rose 1%.

New highs: Occidental Petroleum (OXY), Berkshire Hathaway (BRK-A), KHD Humboldt Wedag (KHD).

In the mailbag, we learn more and more about human nature... Someone disagrees with you? They're arrogant. Someone not quite as devout as you? Better pray for them. Wonder if the sun is getting hotter? Just look at it! Send us a public display of your humanity here: feedback@stansberryresearch.com.

"How utterly arrogant of you – a sort of college dropout – to point out that the 'settled science' of G/W is far from a well-reasoned matter. What credentials do you have, beyond these blinding flashed of the obvious? Oh well, and so it goes. Kurt is dead, but so it still goes." – Paid-up subscriber TIA

Porter comment: I can see where the "arrogant" label comes from. I prefer stubborn. Or firmly opinionated. Okay, I get it. I've been rubbing people the wrong way ever since I can remember. But what's with calling me a "college dropout"?

"GO Porter GO. I thoroughly enjoy reading your S&A Digest and have never sent an email to this address. After reading your reply to mike the paid up subscriber about AL Gore I felt compelled to write. Your reply on the issue is one of the best I have ever heard. Al Gore is phonier than a three dollar bill and your views on the global warming issue are spot on. Thank you for a quality service and keep up the good work..." – Paid-up subscriber Chris

"One, quite obvious, reason the globe is warming up is because the sun is so hot. The solar maximum was supposed to be reached in 1998, I believe, but the sun has continued to heat up. Put on some sunglasses and glance at the sun at anytime of day. Rather than a golden hue, it is white hot. It can't help but affect us... " – Paid-up subscriber Deanna

Porter comment: We don't recommend looking directly at the sun, at anytime, no matter what kind of sunglasses you're wearing.

"I will pray for you Porter... I believe you to be an honest, but lost man who is in need of salvation. I am not being facetious and I hope I don't come across as being flippant. Please feel free to contact me if you ever want to address any of those issues. It will be free of charge and it will be the best advice you will ever have gotten. I will keep you in my prayers."

– Paid-up subscriber David Hunt

Porter comment: We don't turn down any prayers, but judging by the number of people who've told me they would pray for me over the years, I suspect God is getting tired of hearing my name…

"Doug Casey is brilliant, but pitifully foolish. He's brilliant enough to know that the knowledge of God is too wonderful for him to attain on his own, but he responds foolishly by trying, vainly, to flee from His presence. While embracing and endorsing Dawkins' irrational screed might offer the illusion of solace as he continues his attempted flight, he will not be delivered from God's presence. May God have mercy on Doug Casey and all of us poor pitiful sinners, by giving us the rational faith to trust in the finished redemptive work of the risen Lord Jesus, whom His Father gave as real solace for all who would escape the wrath to come when Jesus returns as the Lion of Judah on Judgment Day."

– Paid-up subscriber R. L. Toms

Porter comment: I guess you'd have to take God in a battle of wits with Doug Casey. But it would be close. Meanwhile, Ann Coulter is going to need all that mercy. Coulter agreed to debate Casey next Tuesday at the upcoming New Orleans Investment Conference. If you're going to the conference, don't miss it.

"It's to Doug's credit that he is an atheist. Not enough people realize the box they are in. Freedom is doing your best to lead a good life – without a divine overseer." – Paid-up subscriber Todd Waymon

"I wanted to second Doug Casey's recommendation of Harry Browne's How I Found Freedom in an Unfree World. It is a phenomenal book that confronts head-on much of the dysfunctional emotional, social and financial thinking with which most of us have grown up. It is head and shoulders above anything else of its kind. Read it with an open mind: if you do, it will change your life for the better as it has done for me. Unbelievably, it is out of print, but it can be purchased on Amazon." – Paid up subscriber E. Bingen

Regards,

Porter Stansberry

Baltimore, Maryland

October 17, 2007

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