Layoffs grow

Layoffs grow... Bankers looking for work... Foreclosures rising... "Time is short" for GM... The end of '2/20'... Insiders buying... No liberty, no vote... Why MLPs are a great idea now...

Automatic Data Processing (ADP), the country's largest payroll processor, estimates U.S. companies cut 157,000 jobs in October – the most in almost six years. The layoffs were larger than expected. An official government report, due out Friday, may show the economy lost jobs in October for the 10th consecutive month.

And Wall Street is still fueling the layoff fire... CNBC reports big broker-banks are preparing to lay off as much as an additional 15% of their workforce. The biggest layoffs will come from Merrill Lynch. But Barclays, which bought Lehman Brothers, Goldman Sachs, and JPMorgan, will also announce layoffs.

New foreclosures rose 50% in New York City and more than doubled in Seattle in October from a year earlier. Miami and Los Angeles saw 35% and 11% increases, respectively. The New York increase came from defaults in Queens, which had 12 of the city's 15 ZIP codes with the most foreclosures. According to PropertyShark, a Brooklyn-based real estate researcher, Los Angeles led the country with 2,389 foreclosures, followed by Miami with 861, NYC with 336, and Seattle with 150.

At the risk of beating a dead horse... Roger Altman, the former Treasury official advising GM in merger talks with Chrysler, says "time is very short." Altman, who assisted in the 1979 Chrysler bailout, said the government should have enough in its $700 billion chest to help the Big Three automakers.

"The consequences of a collapse by GM or all three would be very severe," he said. "The impact would be widespread." We don't doubt GM will be bailed out. We do doubt the bailout will work or be good for the country. And most of all, we wonder how the board of directors at GM could have been asleep for the last five years as GM spiraled toward bankruptcy.

Despite all the negative economic news, John Bogle, founder of the mutual-fund firm Vanguard, thinks we've hit a market bottom. "It seems to me that people have lost sight of the fact that the fundamentals have improved radically. The value of the U.S. stock market was $18 trillion a year ago. And now it's about $9.5 trillion or let's call it $10 trillion with today's rally. Anyone who believes that American business is worth $8 trillion less than it was a year ago I think is a fool," said Bogle.

The Alternative Investment Management Association (AIMA), the hedge-fund industry's trade body, said huge fees are a thing of the past. Alexander Ineichen, a member of the investor steering committee of AIMA, also believes 80% of hedge funds with less than $100 million under management will fail and 30% to 40% of mid-sized funds will fail.

"The majority of people in the hedge fund industry believe 'two and 20' is not going to hold. The two will go to one, which was the original fee structure of hedge funds," said Ineichen. One of the main reasons hedge funds performed so poorly is due to investor redemptions. In the future, Ineichen says funds will have to institute one- to five-year lock-up periods, also driving fees down... "The longer the lock-up, the lower the whole fee structure. 'Two and 20' is quite a stiff fee, even the 20 can be lower for five-year money."

We've long believed that "two and 20" – 2% of assets and 20% of gains – was ridiculous. Very few managers deserve those incentives, to the dismay of every MBA graduate trying to start his own fund. However, the managers who do deserve the fees – Seth Klarman, Steve Cohen, Jim Simons – will probably emerge from this shakeout more powerful, with more assets under management.

Inside Strategist editor Brian Heyliger sent us this update:

Eagle Materials (EXP) director Laurence Hirsch bought almost $7 million in October. This is his first buy since 2006, as the company has fallen from $75 to $35. Shares hit a low of $13.01 last week... down 83% peak to trough. Today, shares trade around $19.

We're finally starting to see insiders pour money into their beaten-down stocks, an excellent indicator that the bottom is nearing. Heyliger has some excellent trades in the pipeline. To learn more about Inside Strategist, click here...

New highs: none.

Subscribers expect us to embrace OBAMA! and to stop "fear mongering." We wonder who will disappoint them more, us or OBAMA! We enjoy the banter. Send your comments here: feedback@stansberryresearch.com.

"Regarding your comments about Obama – you sound like any typical selfish Republican that only cares about their own personal fortunes and not the direction of the future of our country. I am sure there are plenty of avenues with Obama to make good money also; ie alternate energy, infrastructure companies, medical groups etc. instead of defense, oil companies, banks and mortgage companies, and Wall Street (all of which seem to keep taking the American public to the cleaners one way or the other). So instead of the fear mongering try giving us our money's worth in recommending investments that keep up with the change in government and hope that our country survives financially instead of shorting and putting it out of existence."

– Paid-up subscriber J. Irons

Porter comment: The world would be a much safer and better place if more people were selfish in the way you describe. I have no desire to influence the "direction" of the country, that's far too ambitious a task. On the other hand, I work extremely hard to serve our subscribers, my partners in business, and my employees. I serve my community... and try to leave everyone else alone. If only they would return the courtesy.

Your comment about "fear mongering" makes me chuckle. Do you really think Fannie and Freddie wouldn't have gone out of business, that GM wouldn't have collapsed, that Lehman wouldn't have failed, or that Gannett wouldn't be heading for bankruptcy if we hadn't written about these situations? Apparently, you'd have me abandon my actual responsibility to serve my subscribers and participate in your imaginary world of directing the "future" of the country. Reading your note, I couldn't help but remember the words of my favorite philosopher, Eric Hoffer. "People who bite the hand that feeds them usually lick the boot that kicks them." Pucker up.

"Are you God stansberry? You can't be made to care what happens. But whoever is elected the outcome will affect your life and your childrens lives. There is always a better choice and to not to take advantage of that oppurtunity is pathetic. Your like a little child whining and whimpering. 'I wont' vote! I won't vote! I Unless I have a perfect Canidate. We have a saying down here in Arkansas as they do in Tennesse also I'm sure. 'If you can't run with the big dogs stay on the porch' So throw your dog in the race and get out and vote." – Paid-up subscriber and "a Man who is darn sure gonna vote." Gordon Davenport

Porter comment: Unlimited democracy is nothing more than mob rule, dressed up with lawyers. Our founding fathers rightly feared their limited republic would devolve into the kind of unlimited democracy we have suffered under since 1913. I absolutely fear for my child's future. And my own. I'm fairly certain our current government will be insolvent in about a decade – if not sooner. This will cause our country enormous difficulties. But my participation in the farce of an American election will not bring our government any legitimacy, nor will it restore my liberty.

Neither of the two main political parties have any intention, or incentive, to return our central government to its traditional, limited footing. As long as my neighbors can vote themselves my wallet (via sharply progressive taxation and estate taxes), as long as our government is allowed to create unlimited deficits (unauthorized taxes on future generations), and as long as the government controls the supply of the only legal tender, there will be no liberty in America.

In my eyes, our government is nothing more than a bunch of thugs, no different than a street gang, except for sartorial splendor and the awesome power of their arsenal. Reading this, I can imagine most of you will doubt my sincerity... or perhaps my sanity. That's because you don't deal directly with the federal government. Unfortunately, I have. For the most part, the people in government are nothing more than gangsters.

How did this come about? How did the land of the free become the home of whipped dogs, a group of people so consumed with their own lazy comforts that they'll submit to almost any indignity, from their phones being tapped to their estates being plundered? Where are the Americans who founded this country and built it? Where are the Americans who wouldn't tolerate a 2% tax on tea and would have been horrified at the very idea of an income tax? Where are the Americans who volunteered their lives, their fortunes, and their honor rather than see their precious liberties trampled upon?

We have forgotten our traditions and our heritage and lost the civic vitality that made us the greatest nation on Earth. Instead, we submit to the prattling of an Alaskan housewife, the incoherent ramblings of a plagiarist from Delaware, and we've become enraptured by the junior senator from Illinois, a man who has never even held an honest job for one day in his whole life.

You ask why I do not participate in such flim-flam. You ask why I don't join the mindless parade of the rubes. I ask: Where has your dignity gone? I might not be able to throw the yoke of our tyrannical government off of my back, but I will not dignify my own subjugation by pretending to choose it.

"I've been a loyal subscriber for several years, and I must admit I have made alot of money buying puts on Fanny Mae and Freddy Mac, plus some of your other suggestions... To protect myself [from the democrats] I have changed the majority of my income producers to MLPs in the past month. I have locked in dividends averaging 14%, and I already have several MLPs that have increased 50% in price since I bought them. By the way, there is something about MLPs that you have completely overlooked. The dividends I receive are taxable (at 15%) only on 20% of the dividend, The other 80% is TAX DEFERRED. Obviously, when you sell, you pay the piper. However, being retired, and close to 80 years old, I don't intend to ever sell. When I pass on, my heirs will pick up the MLPs at a stepped-up basis, and the deferred taxes never get paid. Why don't you tell that to your subscribers. I'm sure those in their 70s and 80s will be very much interested. The month of November will be the biggest month of dividends I have ever received, and every 3 months after that I expect most of my dividends to increase at a rate of an average of 10% per year. It will be interesting to see how long it takes our new government to close this loophole. I can only hope it will be grandfathered. I hope you reconsider your decision not to vote, I would hate to consider you to be unamerican. When the time comes, we can always go the route of John Gault in Atlas Shrugged by Ayn Rand." – Paid-up subscriber J. Bandler

Porter comment: In regard to MLPs, I think we've been beating the drum about as loudly as we can. Tom Dyson is doing most of the work on the sector. He even prepared a special report dedicated to MLPs for his 12% Letter subscribers. To learn more, click here.

Regards,

Porter Stansberry

Baltimore, Maryland

November 5, 2008

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