The S&A Digest: $2 billion long Countrywide

$2 billion long Countrywide... Hitting the Fed's feeder bar... Honey, don't forget to fire the mortgage broker... Religion and gold in the same mailbag, oy vey!

Two days ago, we examined Countrywide Financial... and opined that, for long-term investors, the stock was very attractive – attractive enough, perhaps, to warrant attention from "the big guy," Warren Buffett. Bank of America (BAC) agreed with us...

Yesterday, BAC bought $2 billion of Countrywide preferred stock, erasing concerns that the nation's largest mortgage lender was going under. Under terms of the deal, BAC gets shares that yield 7.25% and are convertible to common stock at $18. Shares of Countrywide shot up 15% to $25 premarket on the news, leaving BAC with an instant 39% capital gain should it choose to convert. Interestingly, BAC shares – which Buffett has been buying – hardly budged.

12% Letter pick Citigroup (C), Bank of America, Extreme Value pick JPMorgan (JPM), and Wachovia each borrowed $500 million from the Fed yesterday. JPMorgan, BAC, and Wachovia said they had "substantial liquidity and the capacity to borrow money elsewhere on more favorable terms" but were making a symbolic gesture to encourage other banks to borrow from the Fed.

Lehman Brothers is shutting its subprime mortgage unit, BNC Mortgage, and firing 1,200 people. Lehman expects the move to cost $50 million. Total job losses in relation to the subprime mortgage crisis have surpassed 40,000.

Quant funds are returning to glory after a sharp downturn. Goldman Sachs' Global Equity Opportunities fund gained 12% last week after a $3 billion infusion of capital from the bank and private investors. Goldman still has a way to go, as it lost 30% in August. Super quant James Simons, head of the $29 billion Renaissance Technologies, has almost recovered the 8.7% his fund lost in August.

Li Ka-shing, Asia's richest man and chairman of Cheung Kong Group, announced that Sjuggerud Confidential pick Cheung Kong (0001.HK) has no U.S. subprime exposure. Shares of the international conglomerate gained close to 3% on the news, and readers have made 39% on the recommendation.

New high: Sangamo BioSciences (SGMO).

Gold help us. We dared to write "religion" and "gold" in the same Digest. The mailbag will now punish us for our sins. If you want to whip us, you'll have to get in line: feedback@stansberryresearch.com.

"In The Digest of August 10 you favoured owning gold as the one and only protection against the inevitable collapse of the dollar. In The Digest of August 22, you expect the price of gold to drop by at least 20% during the next 12 to 18 months. Conclusion: you favour an (long side) investment in a commodity you expect to go down in price. Sometimes life is confusing."

– Paid-up subscriber Henk van der Wijk

Porter comment: Making a forecast about gold's price is useful to some people. It isn't a statement about gold's value or its importance. Personally, I have no interest in selling any of my gold, ever. In fact, I do not understand why anyone would be willing to exchange gold for paper at any exchange rate. However, I am glad that people will exchange their gold for my paper. And when I make such exchanges (as I try to do at least once each year), I hope for conditions that lower the perceived value of gold in the market. I prefer to buy at the lowest possible price. How about you?

"Thank god you're turning bearish on gold... I finally have an opportunity to make some money here. Long GRZ, MDG and CGR."

– Paid-up subscriber Jay Arnold

"You say that you expect gold to go down in price. I have a Persian 1/4 oz gold piece from 400+/- bc that would buy an oxen (cow) at the time. I have a Roman 1/4 oz gold piece from 400 ad that would buy an oxen at the time. I have a US 1/4 oz gold piece from 1800 that would buy a cow at the time. I have a US 1/4 oz gold piece from 2000 that will (guess what) buy a cow today (ok, not much of one). I would bet that 1/4 oz of gold will buy a cow at most dates from here forward. If you want preservation of capital, I don't see how you could buy anything better with your paper dollars. I agree that you will not make any money from owning it, but few things will give you equal security. I would bet that any stock, bond or paper currency that you could buy today will be worth nothing 100 years from now (not that it will make any difference to me personally)." – Paid-up subscriber Jim Evans

Porter comment: Exactly. Whether or not the price changes only matters if you want to buy more. Gold's value rarely changes at all.

** "I am not a very religious man, but I found your belittling of religious oriented books to be an expression of ill founded and misguided snobbery. Your prodigious intellect pales in comparison to great minds such as Moses Maimonides who wrote 'A Guide to the Perplexed' and other classics. Most of our founding fathers grew up on religious books. Compare their intellects to what passes for the 'educated' today." – Paid-up subscriber Bob Unger

Porter comment: Classic. Mention the word "religion" in any context – no matter how innocuous – and dozens of people will be offended. Why is it that religion, while teaching tolerance and love for your fellow man, seems to inspire intolerance, anger, and violence more than any other institution? (Interestingly, nobody wrote to defend fiction...)

"Just a thought – religious books, chosen carefully, may keep your soul from stagnating – far worse than having your mind go."

– Paid-up subscriber Dale Hower

Porter comment: I'm not worried about losing my soul. I'm worried about those other people whose souls seem to require violence. I sure wish those people would pick up something else to read. A little more Warren Buffett and a little less divine-inspired dogma might do the world some good.

"I really like how you honestly report winners and losers on your picks. Not many investment researchers are so transparent. One thing that would help a lot though is adding a column to normalize the average annual returns. Listing some investment that made 30-40%, but took 3 years to do it, is not that great. Let's be honest and normalize what you report for 1 year, then we can compare apples to apples more easily. Thanks and keep up the good work. You guys are awesome." – Paid-up subscriber Tom Cottrell

Porter comment: This topic comes up about once every two months. The main reason we don't annualize our returns is because doing so would tend to inflate our track records. Throughout our careers we've seen many financial publishers take losing track records and magically create winning track records with only a few small (but quick) profits. A 10% gain in a month makes for one hell of an annualized number. Unfortunately, very few subscribers will become wealthy taking 10% gains, because they can't be earned consistently every month. (If you get a letter in the mail saying an investment fund is earning 10% monthly... reply at your peril.)

The other problem I have with annualized comparisons is they're not truly important for most subscribers. What most people do is cherry-pick our recommendations. Almost no one buys the whole portfolio of any particular letter. Annualized results are only meaningful in terms of multiyear performance for entire portfolios. Average results are much more significant to anyone who is picking a stock here and a stock there. What most people want to know is: On average, what can I expect, based on past results, from this analyst and this category of recommendation? That's the information we provide.

"Why does it say at the end of a feedback paid up subscriber Joe/Jane Smith. Aren't subscriptions all ready paid for?"

– Paid-up subscriber G. Montinola

Porter comment: Yes. That's why we use the past tense – "paid" – rather than "paying."

"I have lost almost $13,000 on American Home Mortgage and $3000 on Thornburg Mortgage only because I did not sell when I reached my 25% stop loss. I have now been stung and learned my lesson. This validates your constant reminder to set a mental stop loss and apply it. It is now burned in my brain and will always be careful." – Paid-up subscriber B. Patel

"I am a recent subscriber, and am being inundated with information, much of which is very conflicting. One letter is aggressively promoting Canadian natural gas companies, while another speaks of the coming 'carnage' in this area. Another speaks of the coming large upspike in gold, while another speaks of its coming fall to $550. How does a person make sense of all this, when he is paying for guidance/advice?" – Paid-up subscriber Jim Carey

Porter comment: That's a very common question... In The Digest and my newsletter (Porter Stansberry's Investment Advisory), you'll find my opinions and my best investment ideas. From time to time, my ideas will contradict some of the analysis you read in other letters, which are written by other people. I don't pay these guys as much money as I do to parrot my opinions. Sometimes we truly have different points of view. But... that's actually pretty rare. For example, Tom's natural gas pick you cite has several unique factors (location being the most important) that tend to shield it from down cycles in the market. In fact, Tom spent a lot of time in his last letter (and the July issue before that) talking about how to get safe yields from natural gas companies, even if prices keep falling.

What should you do? Why not read the different arguments and make your own decision? Hopefully my macro view helps you make a better decision and be more aware of the possible risks in the market.

If you want to see how we'd combine the different ideas and recommendations into a single portfolio, consider signing up to receive the S&A 16. It shows how we would construct a balanced portfolio from scratch, using stocks we've covered in our newsletters. It contains four value stocks, four growth stocks, four income stocks, and four "macro" plays. Assuming you've got 60% of your investable assets in stocks (which is a common allocation), you'd be putting 3.75% of your portfolio into each position, which isn't too much. The S&A 16 is only available to Alliance subscribers.

Whether you use our model portfolio or build your own, we think the best way to use our advice is to focus on our stock picking. Put together a balanced portfolio that's relatively diversified. And remember: If you try hard not to lose money (by buying our safe, conservative recommendations), you will inevitably do much better than if you shoot for the moon.

"The O'Neil approach NEVER suggests an 8% trailing stop or an 8% stop for everything. Nowhere in any of the books or in the paper. It's unbelievable to me how often this is misrepresented/misinterpreted. O'Neill recommends making entries at very specific points with very specific characteristics and then not allowing more than an 8% fall below those specific points. He also recommends holding stocks that show strength beyond that point *through* *significant corrections* (if they have not shown specific sell characteristics). His sell signals are diverse and you may or may not agree with them but the incredibly large number of people who claim that 'Bill O'Neill recommends never letting your stocks fall more than 8%' have either stopped reading after the first chapter or are repeating what someone told them... Keep the good stuff coming." – Paid-up subscriber Gene Colgan

"What may account for the sudden disappearance of a recommendation in The 12% Letter from the Aug. to the Sept. edition? Is this a proofreading error or a hint? I was just thinking about purchasing some shares of this stock – when poof it disappears. Since I no longer have access to a message board, hopefully some answer could be obtained through The Digest."

– Paid-up subscriber Lou A.

Porter comment: The stock you're talking about is Newcastle Investment Corp (NCT). Tom sold it last month. He sent two updates about it... on July 20 and July 25.

"If you're claiming you're right about a coming crash in natural gas prices because they hit $5.50, you might be claiming victory a bit too soon. Last September natural gas dropped to about $3.65, and yet the natural gas companies have survived and still seem to be making money this year. You might be right about investing in natural gas companies... but so might Chris Mayer. I'd say the jury is still out." – Paid-up subscriber Steve Colton

Porter comment: The mega-bull move in energy – in all forms – began in late 1998, when the benchmark price of energy (WTI) was sitting at around $7 per barrel. It peaked a few months ago. We can quibble, if you want, about the ups and downs in between. In any case, I think the big move is over.

"How can you be negative on the dollar, and at the same time be negative on gold, oil, natural gas and real estate prices? Or do you think the Fed's coming rate cut to bail out Wall Street and the banks yet again will somehow be good for the dollar, keeping it from breaking July's all-time lows?"

– Paid-up subscriber Michael Murphy

Porter comment: Who said we are bearish on the dollar?

"I just signed up for your 12% Letter. I am trying to locate the play advise for Seabridge Gold (SA) I read on the [Yahoo! Finance Seabridge] message board that you advised to 'SELL': 'there is a gold sell rec from Stansberry reports, which means that ultimately the SA hold position will most likely be moved to sell and those who haven't left the position will.' Where do I locate this information?" – Paid-up subscriber David Lara

Porter comment: We have published several reports about Seabridge (SA), starting with Sjuggerud Confidential in July 2005 – more than two years ago. Steve Sjuggerud put his "buy" on the stock at around $2.60. A few months later, we hired our first staff geologist, Matt Badiali. He recommended Seabridge about a year later, in June 2006, when it was trading around $10.85. Subsequent to our earlier research, the company made several major discoveries. As a result, Sjuggerud recommended Seabridge again, in the July 2007 edition of his True Wealth newsletter. It was trading around $17.50 by this point. You should consult these letters to see the editor's current opinion of the stock. They're the experts, not me...

Now... here's a question for you. Why would you think information about a development-stage gold stock that has never paid a cash dividend in its history would be found in The 12% Letter? And why wouldn't you simply type "Seabridge" into our website's search engine to find our work on the topic?

"Wondering why no one has mentioned/explained the change from AAUK to AAUKD along with 1 share = .91 shares and the special dividend of 1.65/share? (not sure which came first)" – Paid-up subscriber Tom Fox

Porter comment: Have you tried typing "AAUKD" into our search engine on the website? You'll find the topic was discussed thoroughly in the July 27 Digest. (The company spun off an asset and paid the cash to shareholders.)

"Hey Porter we think your picks are the best available,'BUT' i have to question your location for the alliance conference. As good as you are at picks why would you pick Playa del Carmen in the middle of hurricane season? It would not have anything to do with saving money? Just kidding!!!! But we really do respect you guys and your work. Even if we do blame you for hurricane Dean. You've been blamed for everything thing else why not Dean. You know come to think of it as much stuff as you stir up i think we should start calling you 'Hurricane Porter' What do you subscribers think? Lets hang this title on him. Again we thank you Hurricane Porter for our porfits. And looking forward to my gala dinner." – Paid-up subscriber KK

Regards,

Porter Stansberry

August 23, 2007

Baltimore, Maryland

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