Our country's next D-Day is coming this year...

Our country's next D-Day is coming this year… The Fannie and Freddie Ponzi scheme… UniCredit in the sh*t again… Gold hits an all-time high… The government's out of silver… Building a monument to a whiny subscriber… Investment advice for a 17-year old…
  "Investors should view June 30th, 2011… like D-Day"

The above quote is from Bond King Bill Gross – who manages the world's largest bond fund for PIMCO. On June 30, the government's second round of quantitative easing (QE2) ends – after a combined $900 billion between new money and maturing bonds. As a massive purchaser of U.S. Treasury bonds and municipal bonds, PIMCO is worried. Currently, Gross says, "Bond yields and stock prices are resting on an artificial foundation of QE2 credit that may or may not lead to a successful private market handoff and stability in currency and financial markets."

As Gross notes, the Fed has purchased nearly 70% of the U.S. government bonds issued since the beginning of QE2. China, Japan, and other sovereigns purchase the rest. So the Treasury issues bonds, and the Fed buys them. It's a scam. And the important (and obvious) question Gross poses is, "Who will buy Treasurys when the Fed doesn't?"

At current yields (10-year Treasurys at 3.24%), we'd say the government will have a hard time finding buyers… But everything is a buy at the right price. The next question is, what's that price? In Gross' opinion, "Treasury yields are perhaps 150 basis points or 1.5% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%."

Gross concluded his letter saying, "PIMCO's not sticking around" to see how this situation plays out. You can read Gross' full letter here. When one of the world's biggest investors issues such a dire warning, pay attention…

  What else is the Fed spending its QE2 money on? Fannie Mae and Freddie Mac, of course. As part of their takeover, Fannie and Freddie are required to pay a 10% dividend on the Treasury's preferred shares. It costs the firms around $15 billion a year. According to the Wall Street Journal, "The firms have paid $7.5 billion in total dividend payments, while receiving injections of $5.7 billion to help keep them in business."

It's ludicrous, but Fannie and Freddie say it's working. Fannie reported fourth-quarter income of $73 million last week – its first profitable quarter in 3.5 years. Oh… but that doesn't count the $2.2 billion Fannie had to pay the government (the government gave Fannie $2.6 billion that quarter).

"Even in their best years, they rarely had the type of income to pay these dividends," said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse. 

  So the Treasury sells its bonds to the Fed, which it pays for in printed money. And the Treasury "loans" billions to Fannie and Freddie (the U.S. housing market), which they then pay back to the Treasury. This is a Ponzi scheme… plain and simple. Except in this case, the patsy and the beneficiary are the same entity. One day, this will all end. And it will be ugly.

  Porter dedicated the lead in his March 2010 issue of Stansberry's Investment Advisory to the history of Oesterreichische Kredit-Anstalt, Austria's largest bank – and the leading bank in all of Eastern Europe. Following the crash of 1929 and the ensuing chaos, the bank became insolvent on May 11, 1931. The bottom line of the story is Kredit-Anstalt (now known as UniCredit) is a flawed bank. If there's a crisis somewhere in the world, you can bet UniCredit is involved. From Porter's issue: 

  When UniCredit needed a bailout in 2008 (following the subprime crisis and heavy losses from Madoff), who came to the rescue? It wasn't Italy, the U.S., or Germany. It was Libya.

Muammar Gaddafi invested $1 billion in the company for a 3.6% stake. As you know, Gaddafi's seen better days. He's currently in the middle of a massive civil war. And he's threatening to kill all opponents. Meanwhile, banks around the world are freezing his assets… The U.S. seized $30 billion of his assets. Canada froze $2.4 billion, Austria froze $1.7 billion, and the U.K. $1 billion. Where do you think Gaddafi had his assets? Libya's sovereign wealth fund and central bank (we use those terms loosely) own 7.3% of UniCredit. Assuming the majority of Gaddafi's wealth is parked at UniCredit, a freeze on his global assets will destroy their equity. The bank hit its lowest point is down another 1.5% today to its lowest point since the Libya crisis began. 

  In the midst of the madness, gold and silver are soaring. Gold hit an all-time high of $1,438.20 an ounce. And silver is approaching $35 an ounce. The dollar is still plunging. 

  On the topic of silver, the U.S. Mint just halted production of American Eagle silver coins (in addition to its indefinite halt of American Buffalo coins). The Mint stated:

  New highs: Mirasol Resources (MRZ.V), Sprott Resources (SCP.TO), Silver Wheaton (SLW), iShares Silver (SLV), Texas Pacific Land (TPL). 

  In today's mailbag, Porter offers to erect a monument dedicated to a subscriber outside out building. Don't miss it. He also gives investment advice to a 17-year old subscriber. Do we have any other teenage subscribers? Tell us here… feedback@stansberryresearch.com. 

  "Re Bonds: I suggest you reread 'your' advice re bonds. Mike Williams has a few good hits, but how about Tribune. I lost about $6000 on his recommendation. WHY don't you ever acknowledge that loss?" – Paid-up subscriber Curt Whitney

Porter comment: We wrote about the loss. We documented the loss. We include the loss in all of our total track record calculations. That seems like the proper acknowledgment to me.

But who knows, maybe I've got it all wrong. Please tell us, exactly how should we commemorate your loss? Perhaps a granite statue outside of our building? "Here stands a monument to the $6,000 Curt Whitney lost on the bonds of Tribune, one of the two significant losing bonds ever recommended by Mike Williams. We told him to buy at least five of our recommended bonds or not to buy any at all. We don't know if he followed our advice... or if he didn't. We only know he'll never let us forget the time he lost $6,000 on one of our recommendations." If you'll put up the money, I'll put up the statue. 

  "Porter, I have printed Friday's Digest and have it right beside my computer. Every time before I buy anything I'm gonna read that entire thing. And who says losing those customers over it is a bad thing? I've subscribed to a few newsletters and yours is the only one still active. So you have just won over your best customers for life. You'll be able to charge more for your services, you'll make more money with less subscribers and less hassle. I'm not a high-income guy, but I'm learning to spot value. A low-income person values education. And a $99 per year subscription from Stansberry research is a value beyond comprehension. Oh, and Solomon recommended acquiring wisdom over silver, gold, and worldly riches. So for the unhappy subscribers, if they don't acquire wisdom and understanding they'll never have riches of any kind." – Paid-up subscriber Steve Fisher 

  "I know that you don't have the time to help every subscriber personally but I am hoping you will make an exception and give me some advice. I'm only 17 years old and subscribed around early January so I could learn and know what to do in the stock markets. I am obviously an inexperienced investor but am very apt to learn and try to take in all the new ideas that you present. I greatly appreciate all the different ideas that you give to us Porter and try my best to learn and act on them.

"My problem though is that because of my young age I only have $2,000 to invest and so if I spend the money on things like a good broker to put money overseas, I've already spent a lot of my money and don't have any to invest. In Friday's Digest you said that 75% of new money should be kept as cash to spend when stocks get extremely cheap in the event of a crash, which I completely understand and believe is a good idea. The problem is that the advice came a little late. I'm not mad at all about this but I just bought BP, Exelon Corp., and Eagle Bulk Shipping on Tuesday and placed an order for Altria Group. I bought all of these according to what your Stansberry Investment Advisory model portfolio at the bottom suggested and I really liked Altria Group for its dividend after I heard about it on DailyWealth.

"My question is then should I sell these stocks once I get a small profit and put my money somewhere else or simply hold on for the long haul. I am extremely open to new ideas and appreciate any advice you give me. Thanks for the great work you guys do. I've really learned a lot and am very happy with my investment to subscribe with you all." – Paid-up subscriber Adam

Porter comment: As you know, I'm not allowed to give you any personal advice about which stocks to buy or sell.

But I can say this: Starting at 17 gives you a tremendous advantage. Remember that my advice in Friday's Digest was intended for a person who is 55 years old, with only 10 years more to work. That person's allocation would naturally look quite a bit different from yours.

This might sound trite, but it's the best advice I know and I mean it sincerely:

1. Always save as much as you possibly can. Economic freedom is only reached by those who learn to save.
2. Instead of looking for the big profit, look for the best odds of making a profit.
3. Do your best to avoid investment costs: fees, taxes, etc.

In 10 years, if you re-read this e-mail, you'll have learned how valuable those three rules are.... I hope it doesn't take you as long as it took me to learn them.

Oh… And read the Warren Buffett biography, Snowball. Let me know if you get it.

Regards,

Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
March 2, 2011