S&A Digest: About the bailout

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/19/2013

About the bailout... Paulson gets one thing right... Silver to soar... The lie behind the dollar... Welcome to Amerika... Shoot the messenger... Buffett on Fannie and Freddie... Rogers on Fannie and Freddie...

As we've been expecting, the music stopped this weekend for Fannie Mae and Freddie Mac. The Fed's Board of Governors met Sunday and voted to grant the New York Fed authority to lend to Fannie and Freddie "should such lending prove necessary" (ha, ha, ha). From Washington, Treasury Secretary Henry Paulson moved to introduce legislation in Congress to greatly expand the line of credit both companies have with the U.S. Treasury and to get authority to buy equity in each firm. What will happen now is still unclear... but we have some thoughts...

First, Paulson has done one thing right. He has refused to bail out the shareholders of Fannie or Freddie. This is fairly remarkable, given the large number of former government officials who are now employed by Fannie and Freddie and presumably own large amounts of stock. The share price of both firms has continued to fall, sharply. The stocks are both certainly worthless. Many other financial firms face the same fate. Anyone who owns poorly collateralized consumer debt is in trouble. Anyone who has leveraged his balance sheet to buy poorly collateralized consumer debt will go bankrupt.

Second, as I type this note, gold and silver are both up more than 2%. They've risen steadily over the last week as news about Fannie and Freddie has gotten progressively worse. I believe the mortgage crisis, which led to Fannie and Freddie's insolvent condition, will mark the end of the global dollar standard. If I'm right, the prices of gold and silver – especially silver – will soon begin a parabolic ascent. (Please see the most recent issue of my newsletter, PSIA, for more details.)

The U.S. dollar is based on a lie. It is now being compounded by a fallacy. Let me explain... In 1971, Nixon reneged on America's promise to redeem dollars for gold at $35 per ounce. What's the dollar based on now? Only the faith and credit of the United States government. And therein lies the lie of which we speak. The lie is the idea that we can live forever at the expense of our neighbors, whether they are literal neighbors, foreign neighbors, or generational neighbors.

Since 1971, the government of the United States has continuously run budget deficits and accumulated off-balance-sheet liabilities that now total more than $50 trillion. It's all a lie. There is no possibility of ever repaying these obligations. Every dollar circulating in the world is simply one small token of this enormous lie. Our government has no faith and deserves no credit. The dollar is backed by nothing at all.

The lie of our dollar is now being compounded by the fallacy of socialism – Welcome to Amerika, comrade. We have decided to socialize the risks of our entire financial system by allowing commercial banks and investment banks the right to use the Fed's capital at a discounted price.

So far, the Fed has handed out more than $200 billion in such loans. And much more is to come. The Fed is prepared to hand Fannie and Freddie $300 billion, immediately. And the Treasury Department is moving to explicitly guarantee all of Fannie and Freddie's obligations. In effect, the government is papering over all of the mortgages in the country that aren't being paid.

If necessary, the Treasury will even buy equity in Fannie and Freddie. If this occurs, the government will directly own the two firms that currently produce roughly 80% of the mortgages in America. And the government will, to one degree or another, back nearly every financial transaction in our country. An onslaught of new regulations will follow. The folks who brought you Vietnam, the TSA, the Iraq war, welfare, etc., will now control the allocation of capital across our entire economy. It'll be a worker's paradise...

A sign of the new times on Wall Street? The SEC is investigating what traders say to each other. No kidding. The SEC has launched a full-blown investigation about the origins of the Bear Stearns rumor. And there are efforts being made to forbid traders from saying anything about Lehman Brothers. As I can tell you from my experiences as a newsletter publisher, there is no freedom of speech in America when it comes to speech about securities. In this case, the regulators want to know which traders were spreading the "rumor" that Bear Stearns was in desperate straits. Bear Stearns, you may recall, did in fact go bust. So... should it be a crime to yell "fire" in a crowded theater if it really is on fire?

I'm patiently awaiting my next subpoena from the SEC. The regulators will undoubtedly want to know how I knew Fannie and Fannie were insolvent and destined to go bankrupt. I'm sure they've seen me spreading this "unfounded" rumor: The gist of my June PSIA issue (which predicted Fannie and Freddie were going to zero) was the subject of this week's widely read Alan Abelson column Up and Down Wall Street on the front page of Barron's. Any securities attorneys who would like to volunteer their services, please contact us.

How did I know Fannie and Freddie were bust? Simple. I can read a balance sheet. I'm not the only one... Jim Rogers – the famous speculator and former partner of George Soros – sounded off on Bloomberg today about the Fannie and Freddie bailout. He called it an "unmitigated disaster." Rogers said anybody who can read a balance sheet knew the companies were a "sham." And the government is merely bailing out China and Japan, which hold billions in Fannie and Freddie agency debt.

According to Rogers, this move ruins the Fed's balance sheet and damages the dollar. He wonders why the people at Fannie and Freddie aren't in jail. And he's still short both companies, a basket of investment banks, and long-term Treasuries. If the stocks rally, he said he'll short more.

Another fairly smart guy has been avoiding Fannie and Freddie for years: Warren Buffett. As Whitney Tilson brought to our attention, Buffett's holding company, Berkshire Hathaway, sold in 2000 its large, long-term holding in Freddie Mac.

When asked to explain why, Buffett said: "We felt uncomfortable with certain aspects of the business as they developed, though they may not hurt the company. We did not sell because we were worried about more governmental regulation – The opposite if anything. We felt the risk profile had changed. There are many things you don't know by looking at a financial company's financial statements. We've seen enough to be wary. We can't be 100% sure that we like what's going on. With some types of companies, you can spot problems early, but you spot troubles in financial institutions late."

The Fannie and Freddie bailout wasn't the worst thing that happened this weekend... On Sunday, Belgian brewer InBev announced it will buy PSIA pick Anheuser-Busch (BUD) for $52 billion, or $70 a share, creating the world's largest brewer and enraging patriotic, beer-guzzling Americans everywhere. The new company will be called Anheuser-Busch InBev. Shares are up 1% today to above $67, and PSIA readers are up 74% on the recommendation in a little more than two years. You might recall, when I recommended BUD, I gave the stock my most aggressive buy rating ever, telling subscribers they could put up to 25% of their portfolios in the stock. It was truly a "no risk," one-way bet. If you've made money on the pick, please let me know.

Another one-way bet? Goldsmith found a way to receive nearly $7 a share in cash while buying into one of America's premier oil companies in his S&A Dividend Grabber. The company should pay the giant dividend later this month. If you buy 100 shares in this company, the dividend will more than cover your subscription price, because we're offering S&A Dividend Grabber at a 50% discount... but only until midnight tonight. To learn more about the offer and how to grab a $7 oil dividend, click here...

New high: Comstock Resources (CRK).

In the mailbag... It's hard to be mad at us when one of our main predictions comes to pass so quickly and profitably. Don't worry. The good times won't last. We're sure to completely screw something up shortly. Send us your thoughts here: feedback@stansberryresearch.com.

"I was really 'down' with the market and feeling a bit blue since I am supporting two grand kids through college. Then you burst out with the Fannie Mae and Freddie Mac suggestion and I bought a 'put.' The next day it had jumped up so much that I bought some more 'puts.' They also went through the roof in one day, so I sold some of my stocks and bought more 'puts.' They now reach into January 2009 and all are doing just fine. I believe the kids' education is now secure if nothing happens to the two geese that are laying the golden eggs. Each of my six puts grow exponentially each day. Thanks from a grandfather and a great-grand father. (I'm 85)." – Paid-up subscriber Muzz Ebright

"I'm relatively new to the investment scene. Lately I read a lot about 'puts' in your newsletters. Can you give some more detail... What is this type of investment?" – Paid-up subscriber J.D.

Porter comment: A put option is a contract you buy. It requires the seller to purchase 100 shares of a stock from you at a future date for a fixed price. For example, in the beginning of June, when I recommended selling short Fannie and Freddie, you could have bought put options on both stocks, which were trading for around $25. This would have given you the right to force the seller of the put option to buy the stocks from you at some point in the future at a fixed price. So you could have bought a January 2009 put option with a fixed (or strike) price of $25. It would have cost you $3 or $4, probably.

Today, you could exercise that put option, and the person who sold it to you would have to buy 100 shares of Fannie or Freddie for $25. You'd make the difference between the fixed price in the contract ($25) and the price of the stock today ($6 or $7), minus what you paid for the contract. In other words, after spending $3, you'd now have $18 or $19.

"Where would you recommend someone purchase silver to 'take possession'?" – Paid-up subscriber Jack Davis

Porter comment: Almost any reputable coin dealer will be able to sell you silver bullion. We've gotten good feedback from our readers who buy gold and silver bullion from Camino Coin. And I personally do business with Mark Checkan of Asset Strategies International. You can reach Mark here: rcheckan@assetstrategies.com.

Regards,

Porter Stansberry

Baltimore, Maryland

July 14, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame