The S&A Digest: Where Commodities Go, the Loonie Follows

The new funny money... Goldsmith and the cross-dressers... Jon Stewart trounces Greenspan... New nukes, finally... Buffett's still buying... Rogers pounds the table... Our GM numbers... Economic hit men...

"In Iran, we don't have homosexuals like in your country..." Ahmadinejad didn't sound scary or threatening in New York. He sounded nuts. Perhaps we should send Goldsmith to Iran to investigate the no-homosexuals claim... Goldsmith apparently has a knack for spotting cross-dressers. See the note below...

Alan Greenspan looked only slightly less kooky than Ahmadinejad when he was interviewed on the Daily Show with Jon Stewart. Stewart, who hid a series of brilliant fundamental questions about the role and purpose of the Fed behind his comedy schtick, proved to be the toughest interviewer Greenspan has ever faced. "If you're such a believer in free markets, why do we need the Federal Reserve to set interest rates at all?" Stewart drew Greenspan into admitting that the Fed's actions reward wealthy investors at the expense of working-class savers and left Greenspan clinging to the obvious lie that without the Fed there would be no "price stability."

Jon Stewart is, without question, one of the sharpest critics of world affairs, and this episode was a tremendous example of his acumen. He gives me hope that there's still a place in America for brilliant skeptics... if only in comedy. If you didn't see the interview live, I urge you to check out the video on the link I've provided. When I first saw it, I literally couldn't believe my eyes... I made my wife watch it twice.

Speaking of Greenspan... The residential real estate bust hasn't hit bottom yet. Inventories grew to a 10-month supply by the end of August, up from 9.6 months in July. The 20-city S&P/Case-Schiller home price index fell 3.9% in July.

A trend to watch: NRG Energy submitted to the Nuclear Regulatory Commission a request to build and operate two new nuclear reactors – the first such request in 31 years. If people are serious about reducing carbon emissions, hundreds of new nuclear power plants will be built over the next 20 years. The two leading nuclear power companies in the world are PSIA recommendation Exelon (EXC) and Weber Global Opportunities Report recommendation Areva (CEI).

Buffett on the move... Berkshire Hathaway bought 6,000 more shares of railroad operator Burlington Northern Santa Fe, bringing its ownership to 52.98 million shares, or 15%. This is in addition to last Friday's purchase. Berkshire Hathaway also owns 7.85 million options of Burlington, which if exercised, would bring its ownership to 17.2%. The "Buffett Factor" must already be priced in because shares of Burlington Northern fell $0.52 yesterday.

No big surprise, but Jim Rogers is still pounding the table on commodities. He says the bull market, which began in 1999, will run for another 15 years. I remember having dinner with him in New Orleans in 1998. He had just begun to buy commodities heavily, and they were plummeting in price. Oil touched $7 per barrel. I asked him, "Jim, what if you're wrong? When will you cut your losses?" His reply: "I'm never wrong." To see his latest Bloomberg interview, click here...

Goldsmith writes from New York City, where we've sent him to report on Jim Grant's Fall Conference:

"The drag queens were taller than me...

"I got into New York last night. After checking into my hotel, a friend called me and invited me to a high-society AIDS benefit hosted by a notorious, drunken celebutante. The benefit was full of beautifully dressed people (drag queens included), pretty cocktails, and delicious food. Fifteen different New York restaurants set up tables to sample their faire. I had wild green ravioli with a bone marrow and butter sauce – absolutely amazing. I finished that off with a gin and tonic, and a frozen hot chocolate from the local Serendipity dessert shop. We left before an apparently raucous dance party started... I have to be fresh to give you actual updates from Grant's conference..."

Sitting at home last night with a crying newborn baby, Goldsmith's message took me back to seven years ago... when I was single, living in a penthouse in South Beach (Miami), and on the right "lists." Probably the best party I went to was the Ford Modeling Agency's season kickoff party in 2000. It was at a huge nightclub called Level. Supermodels, rock stars, venture capitalists (who were hot at the time)... they were all there. Standing next to one of the best-known and most beautiful models in the world, I said: "Hi, I'm Porter Stansberry." Her reply? "So?" Being invited to the party, as Goldsmith will soon learn, isn't the same as being in the club.

New highs: Google (GOOG), Coca-Cola (KO), Arcelor Mittal (MT), Petrobras (PBR), Petro-Canada (PCZ), POSCO (PKX), PetroChina (PTR), PrimeWest Energy Trust (PWI), Sangamo (SGMO).

In the mailbag, more GM defenders and some kudos for our income expert Tom Dyson. Send your messages here: feedback@stansberryresearch.com.

"My husband and I were discussing the response you made to my recent e-mail concerning GM. We question whether Porter's calculation of debt service is correct. The latest GM f/s shows $811 million for last 3 months, which would extrapolate to $3.24 bil/annum. Not the $17 billion level Porter referred to. What I suspect is he is using the combined GM Auto and GMAC residential mortgage operations on a consolidated basis. Now that GM has unloaded GMAC, the numbers re very different. Doesn't look so bad to me."

– Paid-up subscriber Patrice Lockwood

Porter comment: That's the beauty of America. You can say and believe whatever you like... No matter how delusional...

The facts about GM are available for anyone who wants to look them up. GM sold a controlling stake in GMAC on November 30, 2006, for $7.4 billion, not including possible further distributions. In accordance with accounting standards, GM set aside the finance arm from its financial statements as soon as the deal was consummated. Thus, looking at the quarterly statements, in December 2006, GM's total liabilities fell "only" $191 million from its third-quarter total of $458 million.

Why then has GM's interest expense fallen from $3.3 billion in the fourth quarter of 2006 (post GMAC sale) to only $1.4 billion in the second quarter of 2007? Debts roll over at different schedules and interest payments are made at different times during the year. Here's what we can know for certain about GM's interest obligations. The company has promised to repay long and short-term debt holders a little more than $113 billion. On these hard-dollar loans, the company will have to pay around 7% a year in interest, on a blended average basis, because its credit ratings have fallen into junk levels. That's about $8 billion – which GM has no chance of earning from operations this year.

I don't believe GM will ever be able to repay these obligations because it will have to continue to borrow simply to afford its interest payments. Additionally, the company is on the hook for $75.6 billion in "other liabilities" – essentially health care and pension obligations. These debts have highly variable carrying costs. Even if you assume a rosy scenario (say 4% carrying costs), that would cost GM at least another $3 billion this year. It's much more realistic to assume costs at least twice this amount. These facts should be obvious to any subscriber who looks at the numbers, let alone Wall Street's analysts.

And yet... every time I write about these facts, we get dozens of e-mails saying that it's un-American or anti-union to criticize GM. Or people insist we're just plain wrong. The willful desire of human beings to avoid bad news, and people's habit of blaming the messenger, seem to be in full effect.

"I loaded up on PWI at just under $20, (couldn't resist the 13% dividend). I don't want to sound dumb, but should we take profits with this spike in prices, or is this the beginning of a big move?" – Paid-up subscriber Ken

Porter comment: 12% Letter editor Tom Dyson sent out an update on the situation... check our website (or your e-mail).

"I got in late on PWI (about a week ago) and made $4,500.00! GREAT CALL!!! Apparently Abu Dhabi thought it was a good buy also! Because of you I'll always think PWI means 'Pretty Wonderful Insight.'" – Paid-up subscriber Jan

Porter comment: Tom Dyson did a great job. He went to Alberta, saw what was going on with his own eyes, and made the correct recommendation. Thanks, Tom... Great job.

"On your recent discussion about the World Bank, I believe this issue is not really complete without reading "The Secret History of the American Empire" by John Perkins. I saw his presentation at a book signing at Politics and Prose, a wonderful independent book store in DC. It was standing room only and the Q&A would never have ended unless the store owner had interrupted the discussion to focus the crowd on buying books.

"Perkins might make people think very differently about the real purpose of so called 'assistance' from the IMF and the World Bank. Indeed if you measure the extent of aid provided by the US and the way in which it is provided, and then consider trade restrictions and domestic subsidies, it is quite possible that the net effect of US interactions with the rest of the world may not be quite as helpful as many of us would like to believe."

– Paid-up subscriber Chris Belchamber

Porter comment: I personally didn't care for Perkins' book, which relied too much on conjecture. On the other hand, Legacy of Ashes is a rigorously researched book written by a Pulitzer Prize-winning author. It details 50 years of American foreign policy... and the nut-jobs who ran it. I'm not being pejorative – the head of the CIA's covert directorate from 1948 through the early 1960s suffered from severe mental illness and was treated with electric shock therapy. This guy was directing coups all over the world, sometimes against U.S.-backed governments.

One of my favorite stories from the book came from the war in Indonesia that the CIA started in the late 1950s against the U.S.-backed regime in power. You had CIA pilots fighting against U.S.-trained Indonesian pilots, flying the same planes and shooting the same guns. You had the U.S. military supporting the regime, while the CIA was trying to overthrow it. Classic. And lots of people die in screw-ups like this...

Regards,

Porter Stansberry

Baltimore, Maryland

September 25, 2007

Where Commodities Go, the Loonie Follows

By Ian Davis

Collect that Canadian funny money from the bottom of your junk drawer...

For the first time in three decades, the Canadian and U.S. dollars have reached parity. Those silly Canadian quarters are now actually worth as much as their American counterparts.

If you had said in 2002 that the Canadian dollar, also known as the "loonie," would be worth as much as the greenback in five years, you would have been sent off to the nuthouse... But that was before commodities took off.

Commodities began soaring in February 2002. Since that date, the trade-weighted value of the Canadian dollar has increased by 19.6%...

When measured against the U.S. dollar, the currency's done even better... appreciating by a staggering 59% in the last five years.

As you can see in the following chart, the Canadian dollar peaked alongside commodities in the 1970s, before entering an extended bear market... Then, finally, it rebounded (along with commodities) in 2002.

Where Commodities Go, the Loonie Follows

If the current trend continues, the U.S. dollar may become the new funny money. Protect yourself from further declines in the greenback with investments in hard assets, like gold or collectables.

Good investing,

Ian Davis

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