The S&A Digest

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

As of 07/01/2013

A promise from Seabridge… Strike is over for HOG… Chrysler going private… Exposing the "hoax"… Avoid what mutual funds are buying… Why Nicaragua?…

Our Top 10 list has sparked a corporate rivalry of sorts… Rudi Fronk, the CEO of Seabridge Gold (SA) and an S&A Digest reader, wants to see his company back on the top of the list. Seabridge was recently "unseated" by Dan Ferris' American Real Estate Partners (ACP) recommendation as the top-performing open position in our coverage universe. Rudi Fronk told Steve Sjuggerud this week that Seabridge's increasing reserves should lift its stock back into the top spot.

PSIA pick Raytheon (RTN) today won EU approval to sell its aircraft division for $3.3 billion to a company owned by Goldman Sachs and Onex Partners. Raytheon will spend $1 billion of the proceeds paying down debt and $750 million buying back stock. We bought Raytheon originally because we were bullish on the future of private, civilian aircraft, and Raytheon's share price was depressed because of an ill-fated expansion into real estate contracting. We've doubled our money in less than five years.

According to published reports, Chrysler Group contacted four major private-equity firms about a potential buyout: Blackstone Group, Apollo Management, the Carlyle Group, and Cerberus Capital. If there is a deal, it will shed light on how institutional investors value U.S. automakers, which is interesting because of the long-dated pension liabilities of these firms. My bet? In less than five years, GM declares bankruptcy and GM's assets, reorganized into a new firm, end up being a world-class investment. In this respect, both Ford and Chrysler are in trouble, because GM will almost surely be reorganized first.

Dan Ferris passed along this note by James Montier, author of Behavioural Finance: A User's Guide:

"A recent paper by Dasgupta et al shows that the stocks which institutional fund managers are busy buying are outperformed by the stocks they are busy selling! Over a two-year time horizon Dasgupta et al found that, on average, the stocks that fund managers had bought most over the last five quarters underperformed the stocks they had sold most, by 17%! They found that this strategy worked for large and small caps, and value and growth stocks, so regardless of your universe, being a contrarian seems to make sense."

Remember when all of the dot-com stocks went bust and somebody set up a website called f*ckedcompany.com? Now there's a similar website for subprime mortgage companies, 23 of which have gone bust recently. Check it out here.

Last night, unionized workers at the Harley Davidson (HOG) factory in York, Pennsylvania, approved a new labor agreement and officially ended their three-week strike. Of the workers who voted, 83% agreed on the terms, which included a 12% pay hike over a three-year period.

New highs: American Real Estate Partners (ACP), Alexander & Baldwin (ALEX), Ares Capital (ARCC), AutoZone (AZO), Cumberland Resources (CLG), Southern Copper (PCU), POSCO (PKX), Seabridge Gold (SA), Silver Standard Resources (SSRI).

Our one-day hiatus (we were flying across the country) didn't stem the tide of mail, but it did spur a few letters suggesting that we take more time off. When we travel, we also get lots of invitations – thank you very much. Our trip is pretty tightly booked this time, but we certainly like being invited. Send your notes here: feedback@stansberryresearch.com. We promise to read everything you write, but we cannot respond individually.

"Donald B. Roberts' attack on the Digest view of the globaloney warming got me going. Despite a Ph.D. in Electrical Engineering from Oklahoma State University, 1976, by no means am I an atmospheric physics expert. But I do know this much. NOBODY KNOWS WHAT THE SUN IS GOING TO DO! NOBODY. If we can't predict what the sun will do, I see no hope of us predicting what the climate in any place would be like. Incidentally, is it true that the polar caps on Mars are also shrinking?" – Paid-up subscriber Samuel Odell Campbell

Porter Comment: Thinking about academia reminds me of Fred Smith. He got a C in his Harvard MBA class because his professor said his business plan (for FedEx) was impractical.

"The number of rigs drilling for natural gas has reached new records in this country, but that is not a good indicator. In the past, new wells had a decline rate of 3%-5% while for many of today's wells it is 45%, meaning that the new wells have a very short 'life span.' We're drilling merely to stay even! It will be interesting to see the inventory level of natural gas in storage at the end of the season, April 1. Also, I have to disagree with your thoughts on LNG since the past failures were years ago and under different market conditions. The subject alone merits at least a 'three martini discussion.'" – Paid-up subscriber Mike Kelly

Porter Comment: Oh… I see… it's different this time. Then there's nothing to worry about for those LNG gas companies. But, if you're right about how the wells dry up quicker now, then why is working gas in storage up more than 10% from its five-year average for this week – even after the biggest two-week drawdown seen in 30 years (during the last cold snap)? Could it be that new production technologies, like coal bed methane, are actually more productive and capital-efficient than older methods of drilling?

"Dear Porter. I continue to love your comments. But you shouldn't feel that you have to do this every day. I have an idea that it's very time-consuming to do the Digest, so you shouldn't think twice about it not being a daily." – Paid-up subscriber Marty

"Porter and Sjug – While you are in San Francisco – My three sons and Chef Ben own and operate a great restaurant called SAUCE, which I know you would enjoy. They have a great selection of wines and an American cuisine menu you would love. Give them a call..." – Paid-up subscriber John Hosley

Porter Comment: There's a lot of great food and wine out here… Last night, we ate at this tiny place in Sonoma, Cafe LaHaye. There were only about 12 tables. Both owners work in the restaurant – one is the maitre d', the other is the chef. If you go, try the local smoked-trout appetizer ­– it's the best trout I've eaten since I was in Patagonia, Argentina. I also recommend the pot roast… which sounds pedestrian, but was absurdly tender and delicious.

"I am wondering, Porter, why you chose Nicaragua for your beach house?" – Paid-up subscriber TC Laverdure

Porter Comment: Despite what you read in the papers, Nicaragua is the safest country in Central America. Nicaraguans are very conservative, very religious, and very family-oriented. I like the people; I like the culture. I like that Nicaragua is almost completely without any modern tourism or large-scale development. I like the rough roads and the chaotic nature of life there: The streets have no names. The poverty of the country forces people to work together, to be more communal.

I actually think, in many ways, my quality of life in Nicaragua is higher than where I live in Baltimore. The food is certainly better and fresher. The people are much more friendly and warm. And in Nicaragua, you can easily afford luxuries that are very uncommon in the United States, like having a cook, a gardener, and a driver. It gets harder for me to leave Nicaragua each time I go there.

"Again today, it says get this free report 'free of charge.' But to get it, you have to pay $2,790 to join the True Wealth Alliance. I know you don't think this is an 'outright lie,' but how can you claim this isn't a lie? The snake's butt is still higher than your principles!" – Paid-up subscriber Ed Caldwell

Porter Comment: Ed, have a glass of wine. Take an aspirin. It's advertising. It's "puffery." And, in this case, it's true. We expect you to understand that you'll have to buy something, but that by joining one of our three different infinity subscription programs (the S&A Alliance, the True Wealth Alliance, the Private Wealth Alliance), you can get our products, for years, without paying for another annual subscription.

The offers are typically priced for less than what one year of each of the included products would cost. Thus, after the initial fee, you'll end up getting our products "free" for years. Plus, because we constantly add new products to each offering, you'll probably end up getting several letters in addition to the ones you were promised.

"Along with the global warming 'hoax,' you need to highlight some of the other hoaxes that have been perpetrated through the years on the gullible and weak-minded. Like, cigarette smoking causes cancer; crack cocaine is addictive; beans can give you gas; the earth is round; and pregnancy is caused by sexual intercourse. Keep exposing those hoaxes!" – Paid-up subscriber Daniel Prichard

Porter Comment: Obviously a sarcastic note… but still an interesting one, because it suggests an "I read it, so it must be true" mindset. I think it's a big mistake to put aside skepticism… or what your own experiences have taught you, simply because the government or a scientist has published a different theory.

Take lung cancer. Only about 12% of cigarette smokers get lung cancer. That's a lot of people, and it's not a risk I'd advise anyone to take… but it also demonstrates that the link between cancer and smoking isn't as linear as most people believe. In fact, the best new data (published on February 11 in the Journal of Clinical Oncology) shows 20% of female lung-cancer victims never smoked. About 8% of male lung-cancer victims never smoked. Also, the prevalence of non-smoking-related lung-cancer continues to rise, as the prevalence of smoking declines.

Doctors dismiss these facts, blaming the substantial numbers of nonsmoking lung-cancer victims on secondhand smoke, which can't be proven. If secondhand smoke is the real culprit, then why would so few nonsmoking men end up with lung cancer, compared to women? There's obviously something more complex going on here. If we figure out what, we might learn something very important about human health. But, if we simply say "smoking causes lung cancer" and consider the case closed, we won't learn anything else about it. That's why critical thinking is important.

I don't think cocaine – crack or powder – is addictive. I've known dozens of people who use cocaine socially, but, as far as I can tell, no one I know has ever become addicted. Cocaine has been around for a long time – centuries. Looking historically, many people who used cocaine regularly remained perfectly healthy. It wasn't illegal to use cocaine in this country until recently (the early 1900s).

Like most social prohibitions, the laws against cocaine have turned the substance-abuse patterns of a minority of people into a "crisis." The "crisis" has its own economic ecosystem. It empowers the government, sells advertising and magazines, and generates billions for health-care providers. What the real problem was about – individuals who have addiction issues – is quickly forgotten. People who try to point the finger back at individuals and the problem of addiction, are quickly discredited. So, remember (envision Nancy Reagan pointing her finger at you): If you try cocaine one time, you'll lose your mind, become a slave to the white powder, lose your family, and end up on skid row.

Regards,

Porter Stansberry

Napa Valley, California

February 23, 2007

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame