Update on our boldest third-quarter portfolio ever...

Update on our boldest third-quarter portfolio ever… A bloodbath in resources... The euro's important new low... Claims of a new recession... Buffett is betting big... These stocks rise while everything else sinks…

 In early July, we published our third-quarter "S&A 16." It was unlike any model portfolio we'd ever published before…

As longtime subscribers know, the S&A 16 is a model portfolio, normally made up of 16 securities, picked from across all our newsletters' recommended portfolios. We send these model portfolios to our most elite group of subscribers – the S&A Alliance – at the beginning of each quarter. This allows us to show Alliance members, in real time, how we'd use the research we produce.

Successfully managing money involves a lot more than merely picking stocks. You have to know how to build a balanced portfolio. The S&A 16 allows us to model that for our best subscribers, four times a year. This July, however… we did something with the portfolio we'd never done before. We put half of it into cash. We wrote, "Right now, we believe the right stance is to be concerned much more with 'return OF capital' rather than 'return ON capital.'

 And that's not all. We were so convinced that Europe's financial troubles would spawn a global bear market, we further protected our portfolio with short sells, including shorting the euro via gold in a double-weighted position. This positioned us at the beginning of the third quarter with a completely hedged portfolio that was 50% cash and 25% short.

What happened in the third quarter? It was the worst quarter for stocks since the 2008 credit crisis. The benchmark S&P 500 index lost 14.3%.

 We believe the most valuable advice we offer investors isn't what we tell them to buy, but instead, what (and when) we tell them to sell. You won't ever get this advice from anyone on Wall Street. And frankly, it's only our business model (the lifetime partnership approach we offer via the S&A Alliance) that allows us the independence we need to make bold calls like the one we made last quarter.

If you took our advice, you made a lot of money last quarter when almost everyone else in the world lost a lot of money. (The next S&A 16, for the fourth quarter, will be published next week. If you're an S&A Alliance member, look for it in your inbox.)

 The biggest losers during the third quarter were resource stocks... the same stocks that were the biggest winners off the credit crisis lows. Many natural resource stocks, like oil producers and copper miners, soared hundreds of percent off their late-2008/early-2009 lows.

Now, investors are fleeing this fast-moving sector. The Canadian Venture Index – the "Dow Industrials of resource stocks" – fell more than 22%. Mega copper miner Freeport McMoRan declined 42%. Vale, the world's largest iron ore miner, lost 29%. Coal, natural gas, silver, platinum, fertilizer producers… you name it… no resource sector was spared. They've all suffered enormous declines on extreme volatility.

 If you missed our interview with master resource investor Rick Rule last week, be sure to check it out here. It's during times of wild volatility that fortunes are made in the resource sector.

 Regular Digest readers are familiar with the big reason stocks suffered in the third quarter – the euro crisis we've been predicting for years.

We're sure you've seen the latest round of headlines and stories about Europe's "no way out" debt crisis, so we won't dwell on it today. Just know that despite all the bluster and "grand plans" coming from the bureaucrats, Greece will default. Italy is next. The market is finally waking up to it.

The euro punched through an important technical level of 1.34 to reach an eight-month low today. The next stop is 1.30 and lower... 

 One more boot on the market's neck is the growing worry that the global economy has entered another recession (if we ever got out of one, anyway).

Lakshman Achuthan, CEO of the research firm Economic Cycle Research Institute, made waves on CNBC last week by stating matter-of-factly that the U.S. has once again entered a recession.

Lakshman's firm has a solid record of predicting recessions. It uses a broad swath of manufacturing, service, income, and sales data to monitor the economy. He says "it's a done deal" that the U.S. is headed for a recession. You can watch the video here.

 Jeffery Gundlach – considered by many to be the best bond-fund manager in the country – agrees with the "U.S. is in recession" take. Gundlach, CEO and founder of the asset management firm DoubleLine Capital, notes that Europe is crashing, which will infect the rest of the world. You can read a summary of his views in this recent Wall Street Journal piece.

 The highest-profile "America bull," Warren Buffett, disagrees with anyone who claims the U.S. is in or on the brink of recession.

Buffett told a reporter on Friday that it "is very, very unlikely" that the U.S. will go into recession. He's also putting his money where his mouth is… In addition to buying back shares of his own Berkshire Hathaway, Buffett noted, "We are investing at Berkshire a record $7 billion in plants and equipment this year. Never before that much – 90-plus percent is in the United States. We're seeing our businesses doing well. Business is coming back in the United States."

 Who's right? Lakshman and Gundlach... or Buffett?

We lean toward the Lakshman and Gundlach take. But we'll add that if Buffett is right and we're not headed for recession, the "recovery" will look a lot like a recession. Our investment advice for either situation is the same: Stay conservative.

Own the highest-quality dividend-paying businesses in the world if you can buy them at eight or 10 times earnings. Hedge your long positions by shorting overpriced, highly indebted stocks. Keep plenty of "dry powder" on hand in cash, gold, and silver. If you're a skilled trader, sell puts during panics to generate large income streams.

 To guide decisions on buying high-quality, blue-chip dividend payers, you need to read only two newsletters: Dan Ferris' 12% Letter and Dr. David "Doc" Eifrig's Retirement Millionaire. Both Dan and Doc focus on the world's safest, most relentless dividend-paying stocks.

To get an idea of how this "get paid" strategy is working right now, have a look at the chart below. This "performance chart" plots the one-year performance of two stocks you'll find in the aforementioned advisories – cigarette powerhouse Altria (black line) and beverage maker Coca-Cola (red line) – along with the performance of the benchmark S&P 500 index (blue line).

As you can see, these two elite businesses that regularly pay cash dividends are rising, while the S&P 500 index is sinking. 

In a stagnant or declining economy, capital gains in the stock market will be hard to come by. You'll need reliable and increasing dividends to grow your portfolio. You'll need the safety of elite businesses.

The 12% Letter and Retirement Millionaire cost less than $100 per year. They are, hands-down, the best deals on research that covers securities producing reliable income. You can sign up for the 12% Letter here... and learn more about Doc's Retirement Millionaire – and one of his extreme retirement strategies – here.

 Dr. Eifrig doesn't just cover ways to grow money. He's also published hundreds of ways to keep the money you already have by getting the best deals on things like restaurants, travel, golf, and financial services. As for financial services, Doc has a major recommendation for folks looking for a new bank. From his update last week…

Again… to learn more about Doc's strategies for saving and making money… click here.

 New 52-week Highs (as of 9/30/11): None.

 In the mailbag... a subscriber thinks Coke is destroying American jobs by selling billions of dollars in products overseas. And a competitor gives us a nice compliment. What have U.S. corporations done to destroy your wellbeing? Let us know at feedback@stansberryresearch.com.

 "Just read the Friday Daily Wealth Premium by Dr. Dave. What a fantastic and interesting analysis on gold and silver, and his rosier outlook on things. While I remain for the most part in Porter's camp on what I believe the future will hold (fiat currencies are doomed, probably sooner than most people think), you guys at S&A are to be commended for showing both sides of the story, and not having all your analysts walk lock step with each other.

"I may have my idea on what is going to happen, but I always look for things that challenge that belief, and two of my mainstays for that are the two doctors, David and Steve. Thanks to all of you for your multiple viewpoints and everything you have taught me (which is substantial), and I look forward to meeting all of you and thanking you personally in one month at the investor's conference in Santa Barbara…" – Paid-up Alliance Member Winston Goodfellow

Porter comment: Winston, what a relief it was to get a note from a subscriber who isn't demanding that I pay millions of dollars to our analysts… and then tell them what to write.

 "In the End of America watch from the Sept 29th Digest I can't tell if you are praising the CEO of Coke for his whining of being taxed for the repatriation of money that was made in other countries or not. Considering that 80% of the money they make comes from the 206 countries they make their products in. They hardly produce anything here or employ many Americans at all and then to whine about being taxed on foreign made money pisses me off. Coke has certainly taken advantage of free trade and globalization at the expense of American jobs..." – Paid-up subscriber Greg V

Porter comment: My dad worked for Coke for about 20 years and... As I recall... local bottlers mix the syrup and the carbonated water together to make the cans and bottles as near to their retail locations as possible. Cans and bottles filled with liquid are heavy and expensive to ship. So Coke has local bottlers across the U.S. and in most of the world's countries because there's no other way to distribute the product efficiently.

But you said, "Coke has certainly taken advantage of free trade and globalization at the expense of American jobs." That's just about dumbest thing I've ever read. (And keep in mind, I've read all of General Motors' annual reports for years, so I know something about truly stupid ideas…)

The fact is, Coke, with American shareholders, has become one of the most successful corporations in history. That's GREAT for America. Do you have any idea how much capital Coke earns abroad? Do you have any idea how much of that money ends up in the pockets of its shareholders? By the way, these shareholders aren't "fat cats." Most Coke shareholders are pension funds, insurance companies, and mom-and-pop individual investors... Do you realize this flow of capital helps support the U.S. dollar... and without it (and the other corporate profits earned by the leading U.S. companies) our currency will continue to collapse, causing things like gas prices and food to continue to soar?

I see notes like yours – childish assaults on common sense – as a result of the class warfare the media is always printing and that politicians use to get elected. It's utter nonsense. We need great, rich corporations like Coke to succeed around the world. We need sensible tax policies to encourage these corporations to bring their hard-earned profits back into the U.S. and pay dividends.

Greg, no law says Coke must remain a U.S. company. Its board of directors has a legal obligation to do what's in the best interest of its shareholders. Dozens of major corporations have already left the U.S. in recent years, and hundreds more will follow as long as the U.S. Congress continues to charge U.S. companies the highest taxes in the world. What do you think will happen to the U.S. employment rate if all of our best companies decided to move to places like Zug, Switzerland, which doesn't require corporations to pay any taxes and offers a standard of living far higher than anywhere in the U.S.? For a more comprehensive review of the deal the U.S. government is currently offering global entrepreneurs, please see my offer to partner with any subscriber who wants to start a new business.

 "Firstly, apologies for my tardiness in dropping you a note about how much I look forward to your Friday letter. I would rather learn something (which I do from your letter) than have 10 (or more) recommendations. I'd so rather be the fisherman than a mere consumer. When writing instructional technical analysis articles for a geopolitical newsletter, I knew how few were going to take the time to study and understand, but writing for the few who would, made the effort worthwhile. I trust you have come to the same conclusion. Being one of that minority, I give you a galactic hat tip for so doing.

"I know that you are very supportive of Mike William's work, and I am implementing the same in my portfolio. Yet, you mentioned recently that you thought discount bonds were going much lower. Since I agree with you, it seems that 'keeping power dry' action might be prudent. A general clarification would be appreciated. I am not asking for specific investment advice.

"You are also enthusiastic about Doc Eifrig's Retirement Trader. I think it's a great approach, which I'm also implementing. But in a real downdraft (again, our views are identical), your covered calls will not make up for all the stock you have to buy – even if you only sell calls on World Dominators. 2008 proves this in no uncertain terms. Again, a general clarification would be appreciated.

"I suspect a long-short policy (long Dominators on which you sell covered calls and outright short positions) buffeted by copious amounts of gold & silver, in all forms, would be a good balance. Lastly, having been Chief Market Analyst for The International Harry Schultz' letter for over five years, I have firsthand experience on how very difficult it is to 'think outside the box' AND print it. Anyone can type away on the keyboard 'in the privacy of their own home or office,' but hitting the SEND button into the irretrievable is quite another matter. My most sincere compliments on your sublime ability to do just that." – Paid-up subscriber Dr. Bruce Roman

Porter comment: I don't consider my endorsement of these various investment strategies to be timing or "act now" advice. I've been consistent in my market timing advice since March 2010: 50% cash and 50% gold, unless you're able to hedge your entire portfolio via short sells/puts. And as you can see by looking at our asset allocation in the S&A 16 model portfolios, we are extremely cash-rich and hedged. Thanks for your kind words regarding my work… it's especially meaningful coming from a friendly competitor.

Regards,

Brian Hunt and Porter Stansberry

Delray Beach, Florida and Baltimore, Maryland

October 3, 2011