No Alliance bulls this year

No Alliance bulls this year... Fade the crowd... Wiped out by Lehman... Deflation?... What the data tells us... Infrastructure boom... Remembering Dave Sjuggerud...

At last year's S&A Alliance Conference in Cancun, Mexico, one of our analysts told the story of "little tiny, baby pine trees." He based his investment idea on the reforestation of British Columbia, where the pine beetle has devastated the forest. The audience was so excited about stocks and so bullish, hundreds of people rushed from their seats to get to a phone to place an order for the stock. Others simply pushed a few buttons on their cell phones to make the trade.

I laughed out loud during the presentation. I thought the idea was crazy. How do you maintain a competitive advantage if you're selling pine trees? Nobody paid any attention to me. The audience overwhelmingly voted pine trees as the best investment idea of the meeting. Dan Ferris' best idea received virtually no votes – buying shares of Wal-Mart. Since then, the baby pine tree stock has fallen from more than $9 to $1. Wal-Mart was one of the few stocks in the world to go up this year.

You might wonder why I bring this up. Am I trying to bash our best customers? Am I trying to embarrass one of my analysts? No, of course not. (You should know my best idea at the Alliance meeting last year was buying Moody's for less than $32 – advice that would have cost you money, too.) I bring up this story because crowds of people tend to be wrong about stocks. I was skeptical of the pine tree company. But I was 100% certain it would be a disaster when I saw how the audience reacted. If you want to be successful in the markets, fade the crowds. Ignore what's popular. Do your best to buy when other people are afraid. Do your best to sell when everyone rushes into the market.

The audience's mood at this year's S&A Alliance Conference was totally different. Everyone was very quiet. Very subdued. Several subscribers I met recently left jobs in finance. Many other subscribers were nervous they might soon lose their jobs, too. Most subscribers had lost money in stocks over the last few years. They were skeptical. They were afraid. And no one rushed out of the room to buy anything. In fact, I'm certain no one at our meeting was planning to buy stocks at all. The analyst who pitched the pine trees last year is so afraid of the market this year he could barely speak. He seemed visibly frightened. In a voice that didn't rise above a whisper, he told the audience about a family member who'd been wiped out by the collapse of Lehman Brothers. Then, after talking about touring a safe Hong Kong REIT that's yielding nearly 20% annually, he told our audience they shouldn't be buying securities at all. Only cash and gold. Next came an analyst who is convinced a global deflation is underway and prices for commodities, real estate, and stocks will continue to decline.

It was very depressing. Until the professional investors spoke... We hosted three professional investors. Rahul Saraogi runs a hedge fund in India. Peter Churchouse runs a property-centric hedge fund in Hong Kong and was Morgan Stanley's research chief in Asia for 20 years. And our "mystery" guest was Eduardo Elsztain, the head of the Cresud group of companies in Argentina. All of the professionals were bullish. Saraogi pointed out he's buying solid companies in India for around one year of earnings. Churchouse explained Asian property stocks have never been this cheap. And Elsztain explained why he was raising a private fund to buy real estate in the United States for the first time ever.

What do I think? The analysts on my team with the most experience – Sjuggerud, Ferris, Clark, and myself – are bullish. The professionals are bullish. My audience and several of my newer analysts are bearish – and downright panicked. Remember – fade the crowd.

What does the data tell us? Right now, 2,267 companies in the U.S. trade below their net cash value. And 49 companies have a market cap of more than $1 billion, including Bank of New York Mellon, holding more cash than the value of its stock and debt. Companies in the MSCI World Index trade for an average $1.17 per dollar of net assets, the lowest valuation since 1995.

What about deflation? A record 10% of the country's homeowners fell behind on mortgage payments or were in foreclosure during the third quarter, according to the Mortgage Bankers Association. The percentage of loans at least a month overdue or in foreclosure jumped from 9.2% last quarter and 7.3% a year earlier.

Bank collapses and declining mortgage credit is certainly deflationary. However, such analysis looks backward and ignores the elephant in the room: the central bank's printing press. U.S. Federal Reserve bank credit has increased from $868 billion to more than $2.1 trillion in the last year (141% growth). In the last quarter, it grew at a 2,596% annualized rate. The narrowest measure of money supply (M-1) is increasing at a 17.7% annualized rate. Next year's federal deficit will likely surpass $1 trillion – more than 10% of GDP. Various government programs will see federal purchases of more than $1 trillion worth of financial instruments, including $600 billion worth of mortgages. Upcoming government programs promise to spend $1 trillion on new roads, bridges, and railways.

Given this massive increase in money and credit, is it possible for us to continue to see falling prices and weaker aggregate demand? I doubt it. If I'm right, economic activity should pick up in the first half of next year, and we should see stocks and commodity prices rally. We should also see the U.S. bond market reverse course as the dollar weakens. The chart below shows the Lehman Brothers' TLT ETF, which is a basket of 20-year government bonds. If I'm right, the top is in.

We wrote it, did you buy it?

You'd be hard pressed to find a worse investment this year than the companies that design and build the world's roads, bridges, refineries, pipelines, and ports. After all, if the global economy enters a recession, business should dry up for engineering and construction firms like Fluor (FLR), Foster Wheeler (FWLT), and Shaw Group (SGR). Power-plant specialist Shaw, for instance, fell from $65 per share to $15 in just four months. Well... the world has a habit of not coming to an end. And it's a no brainer that Obama & Co will throw hundreds of billions at improving America's infrastructure. It's politically irresistible. You can argue against wars, drug laws, and censorship... but what kind of unpatriotic scum doesn't support new roads, electrical capacity, and bridges? – Brian Hunt, December 2, 2008, DailyWealth Market Notes

President-elect Barack Obama today said he'll make the "single largest new investment" in public infrastructure since the Eisenhower administration – which created the highway system 50 years ago. Obama said he'll create or preserve 2.5 million jobs while making public buildings more energy efficient, repairing roads and bridges, and modernizing health care with electronic medical records.

"We won't just throw money at the problem," he said. "We'll measure progress by the reforms we make and the results we achieve – by the jobs we create, by the energy we save, by whether America is more competitive in the world."

Shaw Group, Foster Wheeler, and Fluor are all up double digits today.

New highs: none.

In the mailbag: We were flooded with kind notes of sympathy for Steve regarding the loss of his father, Dave Sjuggerud. Ironically, I know all of the attention would have bothered Dave. He was the most modest man I've ever met. A giant, a tough guy, and a hero, Dave only wanted to talk about other people. But I wanted to share one thing about him with you. Every time I walked into the Sjuggeruds' house or whenever I saw him at meetings, he'd always say the same thing to me. "Porter, you're doing great. Keep going." If you were Dave's friend, you didn't have a bigger fan in the whole world. I can't explain how much I'll miss him.

If you'd like to contribute to the Dave Sjuggerud Memorial Scholarship, send a check to: GMACF, 500 Main Street, Suite 322, P.O. Box 53, Menomonie, WI 54751. Make sure to note "Dave Sjuggerud Memorial Fund" on the memo portion of the check.

As always, send us your feedback, even when it's completely graceless: feedback@stansberryresearch.com.

"Steve... As an Alliance member I admire your work. My subscription to True Wealth convinced me to join the Alliance. My reason for writing, however, is your Father. I attended the US Naval Academy from 1964-68. When I was a Plebe, your Father was someone I learned about who, as a Navy football player, I held in the same high esteem as Roger Staubach. I share your loss. I considered him a great leader and a great man. We lost him too soon." – Richard Nibe, RADM, USN (Ret.)

"Steve... Thanks for sharing the story about your father. I am certain his life was greatly enriched by the relationship you shared. You should also be proud of his success while flying the F-8 aboard ship. It was a notoriously difficult jet to trap consistently. I can relate to much of what you said about your father. I am also a graduate of Annapolis, '83, and flew the F/A-18c Hornet aboard USS America... it appears your Dad just left his assignment as Project Mgr of the Hornet simulator as I was arriving to the RAG in Jax... I also feel that most of my success today is due to the discipline and ethics ingrained in me by my parents and further reinforced at the Naval Academy. Mother B is always near out hearts, no matter how distant we are. Your Dad was a great guy, great success. I hope that you and your family will find the strength to carry on, knowing that he is always near by in your hearts, souls, memories, and just over your shoulder. Best to you and your family." – Scott Brooks USNA 1983

"I read every line and enjoyed it immensely. Altho' I am 20 years his senior and 5' 6", the parallels are interesting. I was an Eagle Scout, I play tuba in the high school band and double bass in the school orchestra. In 1942, I enlisted in the war-time Naval Aviation Cadet Program and received my Navy 'Wings of Gold' at Pensacola in Dec. 1943, whereupon I opted for the Marine Corps, served in the Pacific flying a PBJ, (B25, but the Navy has its own designations). Finally finished a couple of degrees at the U of Michigan. Retired in 1991 and enjoy all of the good advice received from Stansberry Associates. What a man your Dad was! I grieve with you for this great loss." – C A Rice

"Dear Steve... What a beautiful story of your dad's life. He was obviously a great guy, great athlete, great aviator, great test pilot, great dad. You are so blessed to have these wonderful memories. I too was a Naval Aviator (Korean situation), tho not near the success of your dad. My brothers-in-law were both Naval Aviators in WW2. One an Annapolis grad. I will be 80 on Sunday and love life as did your dad... Best wishes to you and your family this Christmas and the New Year." – Rev. Ledlie Conger

"Although we have never met and I didn't know your Dad, I had tears in my eyes when I read your piece that he had died. I remember you writing about his heart issues last year and how he persevered through and became a healthier man due to sheer will. Let me tell you, through your writing, he was not solely your inspiration, but he became mine (and probably countless other's) as well.... Thank you for sharing some of your experiences with your father with us and my sincerest condolences." – Sandra Comand

"I'm really happy for you and your dad and many of the other countless stories that are revealed in The Digest, but I don't subscribe to a diary journal... I subscribe to an investment advice advisory. Although heartfelt, I don't care. I'm trying to make a living to be able to have these kind of times with my dad and with my children. My time is valuable to me and I would rather be living in real time with my family, not mixing my business time reading about how great your family is (and all the other filler you add into The Digest)." – Paid-up subscriber Andrew Days

Porter comment: The financial newsletter business always has been and always will be a very personal form of communication and publishing. You don't subscribe to a nameless, faceless advisory. You subscribe to Porter Stansberry's Investment Advisory. It's mine. They are my stock picks. They are my opinions. There's not an editorial panel. There's only me. It's not True Wealth. It's Steve Sjuggerud's True Wealth. Inevitably, forces in our private lives influence what we write about, how we think, and what we share with our subscribers – many of whom have been with us for more than a decade. If you don't care for our intensely personal approach, you can find countless impersonal sources of financial news and opinions. We're confident you can find an alternative. And after reading your note, we wish you would.

Regards,

Porter Stansberry

Baltimore, Maryland

December 8, 2008

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