BIG CHANGES AHEAD FOR THE BLAST

Dear Subscribers,

I have a confession to make: For the last several months, I’ve cringed a dozen times or more while reading The Blast. "We didn’t publish that, did we...?" Oh, crap.

I’ve long believed The Blast, sent out only to our subscribers, should be our best daily e-letter – and the best you receive from any source. But… I don’t think we’ve achieved that level of quality in a long time.

To serve you better, I’ve decided to completely revamp The Blast – and change the name, too. Before you give it a read, let me tell you what we’re trying to do. Then, I’ll let you be the judge of whether or not we’ve accomplished our goal.

We want to take you "inside" our editorial room. A dozen of us sit up in the fourth floor loft (an attic, really) of our headquarters in Baltimore. If there were windows up here, we’d have a great view of the original Washington Monument and the train station. But there are no windows.

Instead, our "view" is dominated by the information that flows through this office every day. We look at all of the world’s major financial publications, dozens of the top newsletters, close to 50 private "blogs" and, of course, e-mails and publications from our own researchers. My associates and I will take the best insights we see each day and edit them down into short form, allowing you to digest hours of the best financial content with a brief, less-than-five minute read. We’ll also let you know what we’re thinking – about the markets, about our products, and about what’s happening in the world.

The idea: to bring you "inside" our world of information, investments, travel, politics, and friendships. We’ll call this new publication The S&A Digest. And, keep in mind, because it’s for subscribers only… from time to time we’ll share a few of our group’s very best stock recommendations.

* * * The commodity bull market is wheezing. It’s hard for commodities to rally when the Fed has set interest rates so high and shown a willingness to keep raising them. Oil prices won’t be immune to weakness, either.

We’ve been looking closely at the amount of capital expenditures at drilling companies. The more capital spending, the more rigs for rent. The more rigs, the more oil. In 2003, Patterson Energy spent $117 million building new drilling rigs. Last year, it spent nearly $400 million. And you see these kinds of increases across the entire sector. There’s a lot more oil coming out of the ground… perhaps even more than there’s room to store. Most of the folks in my office are bullish on gold and oil, still. But I don’t think you can fight the Fed. I see oil going below $40… soon.

* * * Why am I so sure commodity prices will continue to decline and that our economy will soften? The real estate market. New home construction and mortgage financing has been the engine in our economy for the last four years. Interest rates and declining affordability finally killed the housing goose. Condo flippers aren’t the only ones in danger.

The last time housing went bust (1990-91), dozens of homebuilders went bankrupt because they couldn’t roll over their debt, which was invested in big land holdings. The same thing is about to happen again – though this time it won’t bankrupt the firms, it will only seriously impair their balance sheets. Homebuilders have learned to keep their land-holding obligations off the balance sheets in minority-owned joint ventures and options.

As Barron’s reported over the weekend: "Miami-based Lennar (LEN) last week reported it wrote off $15.8 million in [land] option deposits and related costs and made a ‘$16.5 million valuation adjustment’ to the company’s [land holding] joint ventures." The loss of land deposits is a serious threat to homebuilders’ balance sheets. NVR, for example, holds $642 million worth of land option deposits. That’s equal to 64% of the company’s book value. Lennar holds $1.45 billion of equity in its land-holding joint ventures. That’s 25% of the company’s book value. The number at Standard Pacific is 18%. At KB Home, it’s 13%. And at Hovnanian, it’s 11%.

Meanwhile, all of these firms still trade at a significant multiple of their probably inflated book value. Or, in other words… these stocks still have a long way to fall if real estate doesn’t rebound quickly.

* * * What’s working? Large caps and Pharma. Steve Sjuggerud wrote this about Pharma in a recent issue of True Wealth: "There have only been two times that drug stocks have traded cheaper than the overall stock market – 1993 through 1994… and recently. For specifics, Pfizer trades at a P/E ratio of 13.3x right now. This number is the ‘forward’ P/E, based on what analysts expect Pfizer’s earnings will be by year-end 2006. The apples-to-apples comparison of the S&P 500 is a forward P/E of 16.2x."

* * * I saw an excellent documentary on Lord Black last night on the Sundance channel. You’ll remember that Lord Black got caught with his grubby hands in the shareholder pot at Hollinger, the newspaper holding company.

Lord Black arranged to pay himself millions in "noncompete fees" when his holding company sold newspapers. I couldn’t help thinking how Lord Black, as a leader of the neoconservative wing of the Republican party, close friend of Henry Kissinger and Richard Perlman, is a perfect example of what’s gone wrong with Republicans.

Black grew wealthy because he understood sound principles of business, just as the Republicans came to power in ’94 by articulating sound principles of limited government. But as Black grew more powerful, he became arrogant and greedy… and mistook his personal desires for his moral compass. When Black lost his way, his thinking was corrupted too. He began to repudiate the values that brought him to power, even writing a glowing biography of FDR – the historical antithesis of the principles of free enterprise that had made him a wealthy man.

Sounds like a lot of other Republican leaders, doesn’t it…?

* * * My wife and I recently got a new puppy. She’s a vizsla, a purebred Hungarian bird dog. Very pretty. Not too smart.

Good investing,

Porter Stansberry

Founder, Stansberry & Associates Investment Research

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

As of 07/08/2013