Wells Fargo buys Wachovia (without government help)

Wells Fargo buys Wachovia (without government help)... Bad September for hedgies... Gartman on the markets... Buffett owns Blankfein... Manhattan economics... Subscribers making money...

Goldsmith comment: Porter's swamped preparing this month's PSIA, so I'm on The Digest. He'll return on Monday.

Wells Fargo agreed to buy all of Wachovia for about $15.1 billion in stock, trumping Citi's $1 per share offer four days ago. The Wells Fargo deal values Wachovia at $7 a share – a 79% premium to yesterday's close. "Wacho" is trading around $6.80 today. And Wells Fargo shares gained nearly 6%.

In addition to keeping Wacho whole – Citi was only buying part of the business – Wells Fargo said it does not need government backing to complete the deal. So Wells Fargo was able to pay more than seven times what Citi offered for Wachovia, and it declined any government insurance on the purchase.

Even the best investors in the world are having trouble navigating the current market. Berkshire Hathaway, Warren Buffett's holding company, is down 8% from its peak. David Einhorn's Greenlight Capital is down 12.8% just for September. Maverick Capital and The Children's Investment Fund (two other outstanding hedge funds) are down 19.5% and 15%, respectively, in September. The average hedge fund fell 8.6% last month – the biggest drop since Hedge Fund Research started collecting data in 1990.

Dennis Gartman of The Gartman Letter sums up the tumultuous environment:

We wish to make it clear that even the most seasoned of professionals... even the most touted of hedge fund mavens... even the most public of bears are having difficulties in this environment. No where is that clearer than hearing that David Einhorn, the gentleman made famous by his well reasoned, well documented, well organised, truly professional bearish attacks upon the likes of Lehman et al, is down for the year! Berkshire Hathaway, run by Mr. Buffett, is down for the year.

In this environment, staying even is a very, very real triumph. Being ahead is very nearly unheard of. If Mr. Einhorn is down for the year, what then shall September's results look like for the universe of hedge and mutual funds when they are made public in a few days? It shall not be pretty. Indeed, it shall be very, very ugly.

A basic lesson in economics: When demand falls and supply increases, prices fall. But that's not the case with Manhattan real estate. Manhattan apartment sales fell for the third consecutive quarter, down 24% from a year earlier, and inventory rose by a third. But prices are continuing a five-year streak of gains.

The median price of condos and co-ops increased 7.4% to $928,263, the second-highest price on record. The crisis on Wall Street has cost the city approximately 64,000 jobs – the highest-paying jobs in New York – and some experts estimate the total jobs lost will hit 90,000. When the huge, year-end bonus checks stop flowing through to condos this Christmas, sellers will probably wake up.

If Warren Buffett loses his bet on Goldman Sachs, so will the firm's top four executives. In addition to his already-sweet deal, Buffett entered into an agreement where CEO Lloyd Blankfein, CFO David Viniar, and Co-Presidents Gary Cohn and Jon Winkelried will hold on to 90% of their Goldman stock until October 1, 2011, or until Berkshire redeems its $5 billion in preferred.

It's no surprise Buffett wants the full support of Goldman's management. He's notorious for placing huge responsibility and faith in the managers of his wholly owned subsidiaries, like Geico and See's Candies.

New highs: Market Vectors Double Short Euro ETN (DRR). Of course, our one new high is a short position. Nonetheless, kudos to Sjuggerud.

Who knew reading The Digest could be so profitable? Some wise subscribers made big bucks reading in between the rants and raves. Anything else you'd like to tell us? E-mail feedback@stansberryresearch.com.

"With President Obama in charge in 2009 all of us who believe in any form of religion or ownership of any weapons will become enemies of the state. So when are you moving to South America? Also, precious metals will be seized and the seniors who subscribe to your publications will in all likely hood be dead. So while I am still alive I want to thank you for being entertaining and enlightening on various subjects.

"I personally think the USofA is going down for the count. I feel sorry for your son Traveler and his generation because they will never know the thrill that my generation felt. And I think you are too young to remember what I am referring to. My wife Linda says that I live in the past too much. I long for the days of yester year, no locks on the doors, fresh food out of the garden and politicians who at least I remember as being mostly honest.

"I do not mean to sound depressing, because we are living in the wonderful age of electronics, gadgets, etc. Because without the medical science available in August 1996 and of course God, I would have died from my cardiac arrest. And I would never have had the chance to know someone as great as you are. I feel like you are an old trusted friend who listens and is not critical. Thank you so much for that feeling. I feel like I know you, your wife, son, mom, relatives especially your uncle and his boat. I kept that article until my old PC crashed and burned. Are your daily musings locked away some place accessible? Enough of my rambling, and as always as Red Skelton used to end his TV show 'May God Bless'." – Paid-up subscriber Bernie Krantz

Goldsmith Comment: Thanks, Bernie. You can click here to access The Digest archives. I think we published the essay you're looking for, about Porter's uncle and his boat, in July last year. Here's a link.

"I'm an Alliance person, but my US market portfolio is currently less than 50k. I've hauled most of my assets out of the stock market and bought bank term deposits in Viet Nam, where I live most of the time. Our largest account at c. 200 000USD earns 18.3%, guaranteed by the state. I decided that, unless all of my far-out speculative investments came through, 18% is probably better than I can expect on the US equities market. Of course, things are looking so ripe in the US right now that I'm wondering about breaking one of my VN time accounts to buy US equities. On the other side of the situation, all of my VN bank accounts are in the name of the girlfriend so none of the interest in US taxable; bank interest in not taxable in VN." – Paid-up subscriber David

"I brought Put options on Wachovia, made around 700%." – Paid-up subscriber Nathan Kelly

"Did I make money last month? Yeah, I made a ton of money, and it was on a single trade. I listened to what you had to say, Porter, about Goldman, and bought a bunch of long dated puts. I was stopped out after four days for a 525% gain! I'm ecstatic."

– Paid-up subscriber Mike Sueirro

"I am a complete novice with respect to investing; however, after reading a lot of newsletters, I have settled on Stansberry – and only Stansberry... even though almost all my choices from your recommendations are either flat or down a little – that is, except for the Regions Financial play from Inside Strategist. I made $600.00 on that one – in three days! Since I have absolutely no experience relative to Wall Street, I am trusting my instincts and they tell me that you guys are the ones on the white horses and that you tell us subscribers the honest truth as you know it per the moment." – Paid-up subscriber Judy Taylor

Regards,

Sean Goldsmith

Baltimore, Maryland

October 3, 2008

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