The witch hunt begins

The witch hunt begins... In NYC at the VIC... Panic or opportunity?… Our list... Even the Chinese can sell short...

What a day. The stock selloff is bad enough. But what's happening in Congress with Rep. Henry Waxman's witch hunt is just embarrassing. It's like watching a room full of children argue about who spilled the milk. It's no wonder most folks are afraid of our financial system. We've got one group of clowns regulating another group of clowns. What could be more absurd than listening to a politician complaining about someone else being financially irresponsible?

I'm in New York today with Goldsmith, Ferris, and S&A Health Report editor David Eifrig. We are attending the Value Investing Congress today and tomorrow. Today, we'll hear from Whitney Tilson, Bill Ackman of MBIA short-sale fame, and Carl Icahn. This morning, Tilson provided a tremendously detailed analysis of the Alt-A mortgage securities market, which covers about $1 trillion of mortgages. The news isn't good. He says the losses on Alt-A loans underwritten in '05, '06, and '07 will be more than 60%. Wachovia owns about $122 billion of these loans... And now, thanks to Paulson's bailout, they are most likely the property of the U.S. government.

You can look at the big decline in the stock market two ways. The obvious way is to shudder as the prices of your assets get marked down. But... the other way to look at things is to realize that the value of your assets probably hasn't changed all that much.

Unless you're particularly leveraged, own more houses than you ought to, or were too heavily invested in financial firms and commodities, you might be sitting on some cash. If that's so, you have a once-in-a-decade opportunity to seriously upgrade the quality of your portfolio. This is your chance to buy gold-standard businesses. Look for long-lived companies that don't require much capital investment, earn 10% or more on their asset base, pay a solid cash dividend (and buy back stock), and have a "moat" around their business.

Obviously, you also want to buy the stocks trading for the lowest price (measured against cash earnings). Here are a few of the ideas I'm working on now: UPS, Campbell Soup, Molson Coors Brewing, Clorox, MasterCard, Paychex, Polo Ralph Lauren, RadioShack, Tiffany & Co., Harley-Davidson, and Expedia. Also, I noticed Anheuser-Busch's stock was trading for less than $62 today – even though InBev's all-cash $70 per share offer is fully funded and should close before the end of this year. What stocks are you looking at? Send us your gold-plated ideas here: feedback@stansberryresearch.com.

While the rest of the world is scrambling to shore up its financial markets through bailouts, short-selling bans, and deleveraged balance sheets, China announced a trial introduction of margin trading and short selling. In the announcement, the China Securities Regulatory Commission didn't refer to the current global economic crisis, but said it plans to introduce "new vitality" into the stock market. How ridiculous is it that even the "communist" Chinese have a stock market more open and free than our own?

Citigroup announced Saturday night it had persuaded a New York judge to temporarily stop Wells Fargo from acquiring Wachovia. Citigroup accused Wells of destroying its $2.2 billion, or $1 per share, takeover offer for Wachovia. Four days after Citi announced the deal, Wells offered seven times as much for the entire company – and Wells said it did not need FDIC insurance to back the deal. A person familiar with the situation said Citi is seeking $60 billion in damages from Wells Fargo.

Citigroup doesn't stand a chance in this lawsuit because the government appears to prefer the Wells Fargo deal. According to a sworn affidavit filed this weekend in federal court by Wachovia CEO Robert Steel, the bank nearly failed twice in the last week and faced huge pressure from the FDIC to sell itself. The affidavit also suggests the FDIC pushed Steel to make a deal with Wells Fargo. The Wells Fargo deal would let the government off the hook for almost $40 billion in losses, which it had to cover under terms of the Citigroup deal. Wachovia entered into confidentiality agreements with Wells and Citi on the same day.

The market's fear gauge, the CBOE Volatility Index (or VIX), hit an all-time high of 53 today – up more than 150% since the end of August. The VIX rises as investors panic. Most people hear this news and sell, sell, sell... But Advanced Income editor Jeff Clark is glued to his computer screen right now because he knows something most people don't – call premiums get hugely inflated when the VIX rises. High call premiums mean Jeff can generate huge, overnight income using his Advanced Income strategy.

Right now, we're offering Advanced Income as part of our new Income Alliance. For an initial membership fee, you get all of our income-focused advisories for a lifetime. The best deal we have ever offered on these products, by far, expires at midnight tonight. To get more details on our Income Alliance, click here...

George Huang, our biotech analyst, has done it again…

Just as I predicted, Eli Lilly made a $70 per share offer for Imclone (IMCL) this morning. Carl Icahn, Imclone's billionaire chairman, has agreed to vote his 14% stake in favor of the deal. Bristol-Myers has backed out of the bidding. The companies expect the deal to close by the first quarter next year. Our combo trade for Imclone is going for around $2.30, a 64% return in three weeks.

There's nothing better than making a huge gain in the midst of a terrible period for stocks. To learn more about what George is recommending, click here.

New highs: nyet.

Banks and bailouts filling the mailbag. Send us your e-mails at: feedback@stansberryresearch.com.

"Born in 1903, my father was raised in a tiny village. He put himself through 7 years of law school at night. After he graduated, the Collapse of 1929 hit. He worked as a bank teller during the Depression. When he met my mom, she said that she couldn't raise a family on a bank teller's salary, so he became a national bank examiner working for the Comptroller of the Currency, a position he held until he was 70 years old. The strange thing about my dad – he would never have a checking account! It was bizarre. He had no credit cards, and he cashed his paycheck, driving around to pay all his bills in cash. He said that he didn't trust banks. He never had a mortgage either. He did, however, scrimp and save to buy blue-chip stocks. I always thought he was slightly crazy, but now I wonder – I think he knew the banking industry thoroughly." – Paid-up subscriber Mary Gartrell

"Was anybody else annoyed at the fear mongering going on at CNBC this week. The talking heads were all panicking after the big point drop and as a result started bullying and using scare tactics on senators and other people who genuinely thought the bail-out was a bad idea. Dylan Ratigan even went as far as basically saying us dumb folk on main street just don't get it and there are some of us out there that are mad at wall street and would rather everybody just have nothing. I'm calling for a boycott of CNBC among Stansberry readers. No matter what your view of the bail-out was, the actions of CNBC were very irresponsible and highly unprofessional for a news network. Anybody among the Stansberry crew care to speculate as to why the talking heads were so adamant about making sure they scared everybody into passing this bill?" – "Ordinary main street moron" and paid-up subscriber Vinnie

Porter comment: Isn't it obvious? The man robbing you thinks you're stupid for not just giving him the money and saving him all the trouble.

"Your explaination of the crisis is superb, but should be seen by as many people as possible (excluding your recomendations). Will you write this in a non copyright form so we can send it to as many people as possible, especially our children." – Paid-up subscriber HD Gaede

Porter comment: Thank you... You can read most of my explanation of what went wrong in September and the role the giant fraud at AIG played in the financial crisis in Saturday's DailyWealth. It's one of our free e-letters, and you're welcome to send a copy to whomever you'd like.

Regards,

Porter Stansberry

New York, New York

October 6, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame