Our best ideas

Our best ideas... Walt Disney's version of capitalism... The financial bogeyman, the short seller... "Thank you"...

Below you'll find the notes our editors sent me, outlining their best, safe ideas right now. As a publisher, I'd rather make you pay for this kind of information. That's how we keep the lights on. But given the circumstances in the market, I think it's too important for you not to have this information now. If you benefit from it, buy a subscription with your profits.

It's all starting to go as we've long expected it would: The government is agreeing to prop up the banks and the brokers. We thought it would do it on the sly via huge purchases of mortgage securities by Fannie and Freddie. And that's certainly happening. But the market's weakness has forced its hand. So, now it will go public. Specifically, Hank Paulson and Ben Bernanke will create a new government-owned entity to buy up the toxic waste (worthless mortgage securities) the banks and brokers have been swapping for Treasury bonds at the Fed's discount window for months. The size of this super-bailout will roughly equal the size of the Fannie and Freddie bailout – probably around $500 billion. How do I know? Because Fannie and Freddie owned half of the mortgages in the U.S. Wall Street owns the rest.

The government will also set aside up to $50 billion to protect investors from losses in money-market funds. The $3.35 trillion money-market fund industry was rocked on Wednesday when investors pulled a record $89.2 billion. A PIMCO managing director said of the move, "They're putting up a firewall. It's the ultimate nightmare to have a run on the money markets – that is truly the Armageddon outcome – and they're not going to allow that to happen."

And the SEC temporarily banned short selling of 799 financial institutions. The ban, effective immediately, will last for at least 10 days – and up to 30 days. Never forget, despite claims to the contrary, the United States is not a free market. A free market allows price discovery by creating an equal playing field for buyers and sellers. Actions to prevent selling, or hedging, are actions designed to prevent accurate price discovery. The government only allows a free market when the free market makes the government look good. When the free market threatens the government or its interests, you can forget it.

Banning short selling also interferes with private property rights. If I own shares of a given company, I ought to be allowed to lend those shares to anyone I choose. Lending stock generates more income for long-term shareholders. And a declining price gives long-term shareholders the opportunity to lower their cost basis. Real investors love short sellers.

Financial stocks across the board are soaring. Goldman is up 20%, and Morgan Stanley gained 28%. Bank of America and Merrill Lynch gained 36% and 30%, respectively. Wachovia is the big winner of the past two days – gaining more than 80%.

Joe Sixpack is probably cheering. The government made stocks go up, and now his 401(k) looks a little better. Meanwhile, the total size of the entire national debt has increased by several trillion dollars in only a few weeks. If this money were to actually be repaid (and it won't be), it would require about a decade of savings and hard work by an entire generation of Americans.

This is not capitalism. Capitalism requires price discovery. Capitalism requires firms that have misallocated capital to go bankrupt. America has a sort of Walt Disney version of capitalism. It looks like capitalism from the front. The rides can be scary. But nobody actually dies. And if you walk around to the back, you see it's all just an illusion.

In most other places around the world, they call this socialism. And as we're about to find out, it doesn't work. The capital that's been lost in the real estate bubble won't be paid for in bankruptcy – a bill that should have been delivered to the creditors and the equity holders of each failed firm. Instead, the bill will be paid – unwillingly – by our entire society, in the form of higher taxes and higher inflation. The power of politicians is increased. The rule of law and the rule of the market are diminished. All at the hands of the supposedly free-market believing Republicans...

New highs: Realty Income (O), Potlatch (PCH), Health Care Property (HCP), Ventas (VTR), Plum Creek Timber (PCL).

In the mailbag... A subscriber eloquently points out something we've long believed, that a country's culture determines its destiny. Also, readers debate the usefulness of our ranting. Send us your thoughts, eloquent or not: feedback@stansberryresearch.com.

"So far we (our family) have weathered the storm for 3 reasons: 1. I spent time on the streets of Argentina and knew we were going the same way and the same schemes would be used to make it look like the loans will be repaid. This is called creative accounting. 2. Basically I am a rancher/veterinarian and general aviation pilot where we always leave ourselves some leeway. (Eastern Oregon, keep 2 years hay supply just in case). 3. My family did well in the 1930's using a philosophy that does not put all our eggs in one basket. I might correct you in one area. Economics overshadows science/logic. Politics overshadows economics and culture overshadows politics. We now have a culture where we believe what we read and you can buy insurance that covers anything and it will. Do we really believe we will have a workable health care system whereby we do not have to pay out of our own pockets? See what I mean by culture. Really insurance is just hoping someone else will bail you out Our culture has gotten to the point whereby we expect the government will bail you out. We are not responsible for our poor decisions and this also includes our health. Creative accounting is culturally acceptable. When you get caught so what. You are not going to change that culture so accept it or move to a place like Russia where they will not because they have lost the ability to do it. We will be an Argentine and probably a Russia someday. It may take 50 + years." – Paid-up subscriber Anonymous

"I find your ranting to be hilarious with a good dose of sarcasm and sprinkled with a lot of truth and insight. It goes great with a cup of hot coffee after breakfast... I'm curious as to how you'll overcome your promise to a subscriber, in a recent Digest, to cease-and-desist. You seem to be a gentleman of integrity and honor, so I don't think you'll be going-back on your word. Right? Wrong, or 'something' in-between?"

– Paid-up subscriber Larry

Porter comment: I didn't promise to stop being critical. I promised that we'd focus on finding solutions for our readers, not merely pointing out the problems.

"Porter--Just a note to tell you I enjoy your 'rantings', and even pick a few good morsels out of them to profit by... I have canned all the other publications (4) that I used to subscribe to save one. Your team actually lives up to it's name by providing real research and great insight. Since I have been a subscriber my portfolio has been revamped and is staring to show increases even in a market like this. Keep up the good work." – Paid-up subscriber Dennis Taylor

"Perhaps subscriber Rob Hickman is correct when he opines that 'he speaks for others' but just so there is no misunderstanding – he doesn't speak for me. Keep doing exactly what you have been. It works. And I am solvent because of it. Thank you."

– Paid-up subscriber Ross Reynolds

"I just wanted to let you know that I was unable to secure 100 troy oz. bars of silver at my local dealer this week. There seems to be a run on them everywhere I try. I'm not sure who is purchasing all of the silver, but they are drying up my market, and we don't have a very heavy trading volume here. I just thought I would pass that along, as I have been following your reports on this issue." – Paid-up subscriber Rick

Porter comment: I'm not surprised. I certainly wouldn't sell you any of my silver at its current price. Or even double its current price.

"Given your vast understanding of the credit markets meltdown, why no mention of the special net capital exemption given specifically by the SEC to only five brokerage firms...Goldman, Merrill, Lehman, Bear Stearns and Morgan Stanley. This exemption allowed them to extend their ratios from 12:1 to up to 30 or even 40:1. Surprise!!!!! No wonder they blew up." – Paid-up subscriber Steve Morse

"It was Thomas Jefferson, not Benjamin Franklin, who wrote: 'If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.'" – Paid-up subscriber Bob Wilber

"Being a Libertarian, I agree with most of your analysis of politics and government. I am also a doctor and agree that we should all have the right to our bodies and I have no desire to tell you how to live. My comment is about the 'doctors union'. Today our organizations are in response to government involvement and it is a fight to stay even. Medicare has not even kept up with inflation and Medicaid never has covered the cost of providing care. Add to that the increased paperwork and other requirements and many doctors find it isn't worth the hassle. Yes, some doctors make a lot of money but it is proportional to the education and responsibility required. Many of us have not had a raise in income for over 10 years. I would welcome the same playing field as other businesses (ie Lawyers, financial gurus, etc) and would charge what I felt was a fair price for my services instead of having the government and insurance companies set the prices. It is a perverse system and will only get worse when the government takes it over completely. I do not understand why Americans think we need to socialize an entire system to take care of those who are needy. We don't do that with food and we have the best in the world and still provide for the poor. Free markets are messy but they provide the best opportunity to experience the good life (as opposed to centralized systems that seem simple but are the most inefficient and oppressive)." – Paid-up subscriber Ann L.

Porter comment: No law stops you from demanding cash payment for all of your services, Ann. And no law forces you to treat patients who are covered by insurance schemes whose reimbursement amounts you find unacceptable. The AMA brought the government into health care (in the early 1900s) in an effort to limit the number of people who could practice medicine and establish control over who would be allowed to prescribe drugs. This policy led to vastly higher incomes for doctors and, arguably, a much safer health care system. But once you let the wolf (the government) into the hen house, it's only a matter of time before the wolf eats you, too. Meanwhile, if there were truly a free market for health care, demand for doctors would be much lower and their wages would fall dramatically. Of course, a lot of quacks would also be out there practicing, and people would have to be much more responsible for their own health. Freedom comes with its own costs.

Regards,

Porter Stansberry

Hatteras, North Carolina

September 19, 2008

On Wednesday, we promised to look for the "assets, corporations, and people who will lead our economy out of this crisis." No better place to start than here... a rundown of our editors' best, safe picks.

Jeff Clark, editor of Advanced Income and the S&A Short Report:

Buy United States Natural Gas Fund (AMEX: UNG) around $35, and sell the UNG January 37 calls (UNEAK) for around $3.50.

For 14 of the past 15 years, natural gas has rallied during the fourth quarter of the year. Right now, natural gas is trading at its lowest value relative to oil in more than a decade.

This trade generates a 10% immediate return ($3.50 for the call divided by $35 for the stock). It gets you into the trade for $31.50 net ($35 for the stock minus $3.50 received from selling the call). So, you'll make money as long as the stock is above $31.50 on January option-expiration day.

You'll make even more money if UNG goes up. You're selling the $37 call, so you'll profit until the stock is above that level. Since the net investment is $31.50, you can make up to $5.50. That's more than 17% in just four months.

So you can make up to 17% if the stock goes up; 10% if the stock stays exactly where it is; and you can only lose money if the stock drops more than 10% from the current price.

George Huang, editor of the S&A FDA Report:

The Imclone (Nasdaq: IMCL) "call spread" is my best trade from the FDA Report.

Specifically, you should: Buy IMCL October 65 calls (QCIJM) up to $1.80, and Sell IMCL October 70 calls (QCIJN) for at least $0.40. Try to keep the total cost of the trade below $1.40.

The company is trading at about $57, even though it has a cash buyout offer from Bristol of $60 a share and a "preliminary" offer from a mystery bidder at $70 a share.

I structured this option trade so it's extremely unlikely you'll lose money. A total return of 50% in four weeks is possible, depending on how the buyout proceeds.

Matt Badiali, editor of the S&A Oil Report and the S&A Prospector:

My best idea right now is to buy shares of Penn West Energy Trust (NYSE: PWE).

This is as well-run an oil company as you can find right now. And for added security in a volatile market, it pays a reliable 17% dividend.

This company is about the safest oil investment I can find. Penn West paid out $4.05 per share in 2006 when the price of oil averaged $66 per barrel. And it paid $4.08 per share in 2007 when the price of oil averaged $72 per barrel. The price of oil spent months in the high $50 per barrel range during both years, yet Penn West still paid the dividend. So even if the price of oil collapses, the company won't need to cut its dividend.

That's the most security I found in any sector of the oil industry.

Rob Fannon, editor of Phase 1 Investor:

Sigma-Aldrich (Nasdaq: SIAL) is my top, safe pick.

It is the principal supplier of research/bulk chemicals, equipment, and other tools to practically every life-science laboratory in the world – the cornerstone of the health care research industry. SIAL has 1 million customers in 165 countries – 60% of its sales are international.

Its five-year earnings growth rate is 13%, despite the rising cost of raw materials. And its revenues have grown 12% a year for the last five years. The company has reduced its share count by 40% since 1999 and uses its massive cash flow to fund an aggressive repurchase plan. Finally, it trades at an attractive 20x enterprise value to free cash flow.

In summary, it maintains a clean balance sheet, strong cash flows, a healthy share repurchase plan, must-have products, and spot-on operations

Dan Ferris, editor of Extreme Value:

My No. 1 pick right now is Berkshire Hathaway (NYSE: BRK-A).

It is run by the greatest living investor, and the richest investor in the world.

Berkshire Hathaway is the best underwriter of risk and best capital allocator on Earth... which is a good thing to be when we're living through the worst capital destruction in the history of American finance... caused by the worst risk underwriting in the history of American finance.

The noninsurance subsidiaries have grown earnings 23.5% per annum since 1993. This is certainly one of the fastest-growing large-cap companies in existence. Earnings grow mostly by acquisition. Last year, Buffett spent $1.6 billion. So far in 2008, he's spent $4.5 billion on one acquisition alone, 60% of the Pritzker family empire, Marmon Holdings. More acquisitions means more earnings growth. Buffett has nearly $30 billion in cash to spend on acquisitions. He just toured Europe looking for new ones.

The market has been discounting further declines in property and casualty insurance pricing, due to an abundance of capital. AIG's apparent failure potentially removes significant capital from the property-and-casualty insurance market. That will support prices, perhaps stopping and even reversing the trend of the last couple years.

Berkshire has $84,000 per share in investments and about $6,000 a share in cash earnings. It's share price is $125,000. Take out the investments, and you get a huge, growing company, pounding out cash flow, and perhaps the greatest insurance organization in the world, trading for less than 7x pretax earnings.

This is better and safer than any stock anyone will ever tell you about in your life. It should be everyone's largest position going forward.

Brian Heyliger, editor Inside Strategist:

My favorite place to put money during a credit crunch is a company with zero debt... MEMC Electronic Materials (NYSE: WFR).

MEMC is a semiconductor company with wads of cash, and a license to print money.

The stock is down 70% this year as operational issues and missed earnings have sent investors on a selling spree. Also, concerns about Hurricane Ike in Texas added to the selling. But now the stock is a value dream. Trading a little more than two times cash from operations.

Here's how I'd play it. Buy the stock today around $30, then sell covered calls. I'd sell the January 35 calls (WFRAG) above $3. If the calls expire worthless in January, just sell another out-of-the-money call three-to-four months out. Even if MEMC is flat over the next year, you'll pocket 30% in income selling covered calls all year.

Now you own a company loaded with cash, zero exposure to the credit crunch, paying you 30% per year to own it.

Sean Goldsmith, editor of the S&A Dividend Grabber:

Kraft (NYSE: KFT) is my favorite pick.

Kraft is a $50 billion food giant with dominant brands in almost every category. As the economy slows, people will eat out less, and spend more money in grocery stores... on Kraft products.

On Thursday, Kraft was added to the Dow Jones Industrial Average – the first pure food company in 23 years. This shows investors are tired of risky financials. As investors start shifting money into safer assets and stocks, Kraft will be high on the list.

Kraft also has a generous 3.5% yield.

Tom Dyson, editor of International Strategist and The 12% Letter:

My specialty is finding safe investments. While banks in Britain and America evaporate like water off a skillet, my readers are enjoying 12% dividend checks and the steadiest stock prices anywhere in the market...

Let's use New Century Financials bankruptcy on March 14, 2007 as the day the financial crisis began. Since that day, Realty Income (NYSE: O) has grown its business 21% (measured by portfolio size). It's raised its dividend six times, and its stock is up 5%.

Or take my latest pick, Oneok Partners (NYSE: OKE). It's just laid a gas pipeline from Wyoming to Texas. It's raised its dividend 10 quarters in a row. Now, the project is complete, so it represents no execution risk. Investors can sit back and receive the 8% dividend yield. The demand for this pipeline was so high, it'll run at full capacity from the first day they operate it.

These two stocks have no exposure to the financial crisis on Wall Street. Investors looking for a safe place to compound their wealth while the storm rages should include these two stocks in their portfolios.

Steve Sjuggerud, editor of True Wealth and Sjuggerud Confidential:

Annaly Capital Management (NYSE: NLY) is in a sweet spot.

Annaly's business is incredibly simple... It borrows money at a low interest rate and invests it at a higher interest rate in government-guaranteed bonds. It earns the difference – the spread. And when it's in its sweet spot, it makes a fortune.

Right now, it can borrow money incredibly cheaply... at about 3.5%. It invests the money in government-guaranteed bonds. When the Treasury bailed out Fannie Mae and Freddie Mac, it wiped out shareholders. But it explicitly guaranteed the bonds. So the bonds Annaly owns are just as good as risk-free Treasury bonds. In the latest-reported quarter, Annaly earned 5.5% interest on its bonds. So it earned a 2% spread.

Analysts figure Annaly will earn an even wider spread next year... for earnings of $2.78 per share. Annaly is required by law to pay out almost all its earnings in dividends. If it pays out $2.78 next year, that's a 16% dividend yield (based on a $17 share price).

If you buy Annaly today, you'll probably earn more than 30% in dividends over the next two years. Plus capital gains as investors chase the dividend. This is ridiculous... An opportunity like this only appears during market turmoil like we're experiencing now.

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame