Goldsmith vs. Stansberry

Goldsmith vs. Stansberry... Gross calls Paulson out... "Sell" Merrill Lynch... Insiders loading up... Citigroup scams... Buying rock...

Goldsmith comment: As Porter said Wednesday, he's out of town, and I'm covering The Digest. Enjoy your day off from political rants.

Bond King Bill Gross doesn't think the financial crisis is close to over. He says we're heading toward a "financial tsunami" unless the Fed sets a backstop. Gross, manager of the world's largest bond fund, said banks are selling assets to raise capital (so-called "delevering"). That's driving down demand and prices for loans, stocks, bonds, and commodities – even assets of "impeccable quality."

To back his statement, Gross said his firm, PIMCO, would not take part in any bank offerings in the near future. As Jim Cramer said yesterday on CNBC, "This guy [Gross] is the best. He's big enough that unlike anyone else in the world he can actually have that impact." If anyone can catch Hank Paulson's ear and the ear of the entire bond market, it's Gross.

Goldman Sachs also thinks more write-downs are coming... in particular at Merrill Lynch. Goldman placed the elusive "sell" rating on its fellow Wall Street bank. William Tanona, a Goldman analyst, expects Merrill to fall 23% from here...

"Merrill currently trades at the highest price-to-book multiple in our large-cap brokerage universe, despite having some of the most significant exposures to troubled assets such as CDOs, mortgages, and leveraged loans," Goldman stated in its report. "With these markets still under pressure, we believe additional write-downs and book-value deterioration will continue to plague the stock."

We all know Wall Street is crooked, but this is ridiculous... Citigroup, the biggest loser in the credit crisis, recently paid $18 million in refunds and settlement charges for stealing $14 million from customers' credit-card accounts. The bank had an "account sweeping program" that automatically removed positive balances from customers' credit-card accounts. If a customer double paid a bill by mistake or refunded a purchase, Citigroup took the positive balance without notification – outright theft. In defense, Citi said it voluntarily stopped the program in 2003. In a statement, it added, "We take issue with the state's characterization of our conduct and the parties' voluntary settlement."

We think biotech stocks are heading for a big rally. Steve Sjuggerud recently called it the "first screaming buy of 2008." And Inside Strategist editor Brian Heyliger discovered insiders agree. Heyliger found executives and officers at several biotech companies aggressively buying stock... a huge bullish indicator. If biotech stocks aren't for you, Heyliger also found an energy company yielding a safe 10%.

Corporate insiders are very bullish right now, and they're voting with dollars. Heyliger has some great picks in the pipeline. And we're currently offering his service at a huge discount, but the deadline is Monday at midnight. To learn more, click here...

The Sequoia fund, managed by Ruane, Cunniff, and Goldfarb, is one of the premiere value-oriented mutual funds of all time. It has returned 15.1% a year since its inception in 1970. A transcript from the firm's 2008 investment day offers some great insight into two infrastructure stocks – Vulcan Materials and Martin Marietta. The companies produce aggregate, which is used in construction – "anything you need rock for, it's used." Infrastructure is a hot macro trend right now, but Ruane, like true value investors, bought the stocks on "the economics of the companies themselves."

[T]here's no risk of technological obsolescence. For Martin Marietta, they have over 50 years of reserves in the ground beneath their feet and Vulcan has 43. The key is really in their pricing power. The weight of rock is very high relative to its cost to transport, and that leads to the markets' being very local in nature. Truck transportation – which is the most common form of transportation for rock and also the most expensive – can reach as high as 30 cents per ton per mile. That means that if you have a job 30 miles away from my quarry, by the time you deliver that rock to your job, you've more or less doubled its cost. By the same token, if you have a job next door to my quarry and the nearest competitor is 30 miles away, I can double my price before you have an economic incentive to go somewhere else. If you draw a circle with a 30-mile radius around a typical Martin Marietta quarry, that circle will contain a competitor's quarry only about as frequently as it does another Martin Marietta quarry. Vulcan's quarries fall into a similar competitive pattern.

And the firms will face little competition in the future because it's so difficult to get permits to build a new rock quarry. As Dan Ferris wrote in yesterday's Digest, buying dominant businesses like these and holding forever is one of the best ways to ensure wealth. You can read Ruane's entire presentation, here.

New highs: none.

We received loads more birthday wishes for Bill Bonner, which we'll pass along. Today, we're soliciting fitness advice: feedback@stansberryresearch.com.

"Hey, weren't you guys having an office fitness challenge awhile back? I thought I heard something about Goldsmith and some of the other editors embarking on it. Then, never heard it mentioned again... I think you hit a homerun with Retirement Millionaire. A little advice about wine and travel is a nice break from the usual investmentspeak (although that is what we're paying for, right?) Just appreciate the variety. Keep up the good work!" – Paid-up subscriber Anne

Goldsmith comment: We were... We embarked. We lost. My team and I met at a Mexican restaurant the day before the initial weigh-ins to eat and drink as much as possible. Then, we ate healthy and worked out for a few weeks, lost about 10 pounds each, and went back to eating and drinking what we like.

But about two months ago, Porter and I made a new weight-loss bet – fittingly over a 14-course dinner in Las Vegas (we were both getting a little plump). It's a race to 200 pounds. The first person to hit 200 and hold that weight for two weeks wins a large cash prize. As a bonus, Porter threw in a bespoke suit (win or lose) from my favorite Savile Row tailor, Thomas Mahon. Of course, I'll have to keep the weight off to fit in the suit.

I don't want to talk trash about my boss, but let's just say I'm kicking his ass. I'll soon have a pile of cash and a beautiful, new suit.

Also, we'll happily accept any weight-loss tips you have.

"While I enjoy your writing and stock research, I feel a need to provide some balance to your comments today on the riot police at the Republican National Convention. They were there, in part, because of violent protestors, as reported in today's Wall Street Journal. While most protestors were, as you report, peaceful, some were not: 'Demonstrations this week have been the most violent at a national party convention recent memory, with protestors smashing windows, slashing tires, throwing bags of urine and excrement and physically confronting Republican delegates in the street... On Monday, protestors blocked members of the Connecticut delegation from proceeding to the convention... The demonstrators spat on the delegates and squirted bleach on at least six of them.'

"This is dangerous behavior, and increasingly (and ironically) common on the 'peaceful' radical anti-war left. For those who behave in this manner, I say: 'Hooray for the riot police!'" – Paid-up subscriber Scott Erbe

Regards,

Sean Goldsmith

Baltimore, Maryland

September 5, 2008

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