THE S&A DIGEST: Where Did That Come From...?

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

As of 07/05/2013

What to do about the dollar… What $140,000 buys you from Fidelity… Rob Fannon’s track record… Verizon throws an extra $200 million into the buyback kitty… Car wrecks in China…

On Monday, I was called a "pseudocontrarian" by a long-time subscriber – in part because I recommended Verizon (VZ) this year in lieu of something more out of favor. The subscriber suggested Venezuela’s phone company, VNT. But, to be fair, at the time I recommended Verizon, it owned close to 30% of VNT. It sold its stake in VNT in April and is now distributing the money (along with proceeds from other foreign assets) to shareholders, raising its buyback authorization by $200 million. Verizon’s planned buyback for 2007 now totals $1.7 billion.

Looking at VNT and Verizon again… with "pseudocontrarian" ringing in my head… I’d still rather buy Verizon for four times pretax earnings than VNT for two times pretax earnings. Especially when Verizon’s capex spending should begin to subside and its share buybacks are starting to increase.

"Five years after the fall of the Taliban, a joint report by the U.S. Defense Department and the U.S. State Department has found that the American-trained police force in Afghanistan is incapable of carrying out routine law enforcement work. The report has also concluded that managers of the $1.1 billion training program cannot say how many officers are actually on duty or where thousands of trucks and other pieces of equipment issued to police units have gone. In fact, most police units had less than 50 percent of their authorized equipment on hand as of June, says the report, which was issued two weeks ago but is only now circulating among members of relevant committees in the U.S. Congress." – New York Times

Gifts given to Fidelity traders by broker Kevin Quinn: $140,000 Las Vegas golf outing, $75,000 private jet and limo for a bachelor party, and six bottles of Opus One ($2,600). According to Fidelity, none of these gifts led to additional trading or "padded" fills.

Biotech is the most difficult sector of the stock market to master because of the amount of science required to evaluate the companies. This knowledge hurdle also makes biotech among the most lucrative sectors – for investors who can get it right. I tell people Rob Fannon is the best biotech analyst I’ve ever met and that we were lucky to get him on our staff… and they naturally assume I’m overstating the case and trying to sell our business. But, at least in this case, I’m actually being modest. Here’s how he’s done for Phase 1 subscribers since its inception:

Stock No. 1: 50.4%

Stock No. 2: 200.7%

Stock No. 3: 33.0%

Stock No. 4: 13.7%

Stock No. 5: 41.4%

Stock No. 6: –13.4%

Stock No. 7: 27.3%

Stock No. 8: 12.9%

Average: 45.8%

Note: That’s every single recommendation made in Phase 1… and doesn’t include Crucell (CRXL), which Rob recommended to Diligence, the predecessor to Phase 1.

New Highs: Alnylam (ALNY), Sirna (RNAI), AutoZone (AZO), Oakley (OO), Chevron (CVX), Oneok (OKE), McDonald’s (MCD), Annaly (NLY), Raytheon (RTN), Disney (DIS), ExxonMobil (XOM), Berkshire Hathaway (BRK-A).

My townhouse has been for sale since July. Will lower interest rates lead to an offer? I doubt it. At last count, 770 houses just like mine are for sale in Baltimore. It’s going to take a long time to work out this supply glut. What am I going to do? What everyone does who works for a private company... I’m turning it into a corporate apartment. If you need a nice, furnished place to stay along the waterfront in Baltimore, let me know. Subscribers get a 10% discount.

We’re having a company poker night this Friday. Watching good investors and risk arbitragers play poker is a lot of fun. Historically, the best player in our group is Tom Dyson, something that’s good to know if you’re reading his 12% Letter. I’ll let you know next week if Tom retains his title…

And now a few pieces of mail. Send us what’s on your mind, here: feedback@stansberryresearch.com.

"One oft-quoted statistic amongst [ex-pats]: China has 2 percent of the world’s cars and 17 percent of the world’s traffic accidents." – Reader Ian Dubin

"To Ian Davis: Regarding Thailand, surprised you did not mention the ETF country fund EWT. It is among the leaders in these funds." – Paid-up subscriber Douglas Allen

Ian Comment: EWT is the Taiwan ETF country fund, not Thailand… which is why I didn’t mention it.

"I'll admit that when someone named Rockefeller starts talking ‘moral clarity,’ it’s time to wonder if the earth is still flat. And with someone who can’t spell ‘snow’ talking about climate change denial, I’ll have to check tomorrow to make sure the sun is still rising in the west. But global warming a ‘global political power play?’ Sounds like you’ve enrolled in the Bill Frist school of medical diagnosis. Whatever you do, don’t go a-hunting with Deadeye Dick Cheney." – Paid-up subscriber Paul Engleman

"Many legitimate issues are used by politicians to achieve their typical personal goals of power and/or financial enrichment of themselves and/or their friends. This does not mean that global warming is not a real concern. For a while, I read your stuff and got really upset over your total lack of intellectual rigor and stupendous, baseless egotism. I wrote angry e-mails (one of which you printed). I took a break from reading your stuff just to let things settle. Recently, I started reading you again, and nothing has changed. I’m just not going to bother anymore." – Paid-up subscriber Tom Luneburg

"Thanks for measuring that barn for all of us. By my calculations you have about 13 1/2 cords of wood… Has your community figured out a way to tax that stove yet? If not, I can send you some of our City Council Members from Boulder, if anyone can get it done, it’s these folks. Tell your mailman my heart goes out to him, I spent 14 years in that institution. Also suggest he raise his off-duty prices. I picked up a jug of Santa Ema Cabernet today, can’t wait to break the seal tonight. Thanks for the tip." – Paid-up subscriber Bob Greene

Porter Comment: A jug of Santa Ema? Are you sure you got the right wine?

Where Did That Come From...?

"I am a very happy paid-up Alliance member and have been for several years. I have learned more and made more from you and all of the other newsletters than I could have ever made on my own. I thought I had a pretty good feel for how each of you felt about investing and the economy in general until I read the following by Porter: ‘There’s no doubt in my mind that the dollar, like every other paper currency, will eventually reach its intrinsic value – zero.’ Where did that come from? If the dollar falls to ZERO in the next 20 years, does that not create complete anarchy throughout the United States and world? Why am I contributing to my 401(k)? If you feel that the dollar is going to zero, why aren’t you recommending that we invest ALL of our money in gold, silver, and currencies of other countries? I believe that the value of the dollar is headed for a slide – but to zero?"

– Paid-up subscriber Lynn Habrowski

Great questions, Lynn. Let me answer them one by one.

First, "[w]here did that come from?" The things I write often surprise people. Many readers, I’m sure, automatically assume I do this on purpose, for "effect." Like last year, when I wrote that Akamai would be the best stock to own in 2006. It sounds ridiculous to attempt to predict what stock will go up the most next year… and yet… that’s what happened. If you go back and read what I wrote about Akamai, my reasons were sound. Likewise, I think the dollar will be worthless in 20 years because that’s the only logical conclusion you can draw when you study the size of our government’s total obligations and its likely future growth. I strongly recommend you read Addison Wiggin’s book, The Demise of the Dollar. By the way, you should know that I don’t receive a dime for recommending the book. In fact, Addison is a major competitor of mine. But The Demise of the Dollar was relentlessly researched and is the best summary of these unfortunate facts.

Next, will the collapse of the dollar lead to anarchy? I doubt it. People might not understand the risks ahead for our currency right now, but as they continue to lose purchasing power (i.e., as the cost of oil, real estate, gold, commodities, etc. continue to go up) they’ll simply begin refusing to hold dollars or accept them as payment. This is already beginning to happen in many of the places I travel outside the United States, places where five years ago the dollar was the preferred means of exchange. Think about it… do you really care whether you pay for your groceries with dollars, yen, or silver coins? Government employees, people on a pension… doctors who receive a majority of their income from Medicare and Medicaid… these folks will have a much harder time dealing with what’s likely to happen. But, for most people, switching away from the dollar won’t be that hard.

Why are you contributing to your 401k? Well, if you’re buying stocks, you’ll probably be fine. Historically, even in periods of currency collapse, earnings keep pace with rising prices and the intrinsic value of most companies won’t be impaired. If you’re buying bonds, you might be in trouble. However, you have to remember that these changes will take a long time… I don’t think the dollar will "disappear’" overnight, and I don’t think these long-term problems are enough of a reason to suspect the bond market will collapse tomorrow.

Why don’t I advocate that you only buy gold and silver? There are lots of great businesses to buy and almost all of them will do fine, with or without the dollar. Meanwhile, owning as little as 10% of your assets in gold and silver will probably be enough to hedge you efficiently. If you want to speculate on the coming rise in commodity prices (especially silver) you should learn the history of the silver to gold ratio (see my May 2006 issue). Consider reading a few newsletters that specialize in hard assets, like our own S&A Gold Report, John Doody’s Gold Stock Analyst, and Doug Casey’s International Speculator.

Finally… it’s impossible to know for sure how our monetary problems and the relentless growth of our unfunded future liabilities (Social Security and Medicare) will play out. It’s never smart to sell America short. There are sensible solutions to these problems… but watching our political process, I don’t think it’s smart to assume that anything will change between now and the climax of the crisis that’s building. America has embarked on the "road to serfdom" by promising things to Peter that not even Paul can possibly afford. Historically, countries don’t get out of these kinds of ruts without a major crisis.

If you still think my thoughts on this matter are "outside the pale," consider this: Warren Buffett, who’d never bought a foreign stock in 40 years, is now heavily invested in China (PTR) and is directly short-selling the dollar, with an estimated $20 billion in foreign bonds and currency swaps. Buffett is hardly a renegade investor.

Regards,

Porter

Baltimore, Maryland

December 6, 2006

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