THE S&A DIGEST

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

As of 07/05/2013

Toll Brothers touches bottom... Mutual funds above the law... Subprime mortgages default at record rate... Democratic global warming racket gets going... Eight cords of wood? You decide... What to see in Argentina...

Toll Brothers, a leading luxury-home builder and Ian’s pick in the sector, reported its earnings fell 42% over last year in the most recent quarter. But… the CEO says, "[W]e may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above. The metro D.C. suburbs of northern Virginia, which was the first market in which we saw activity slow, seems to have stabilized… In metro D.C.’s Maryland market, a more lot-constrained region where builders built fewer spec homes and there were fewer speculative buyers, the market also appears to be stabilizing…"

Homebuilding stocks are up across the board. My pick in the sector (not a homebuilder, but a closely related company) is up $2 since my recommendation last Friday.

One critical feature of this most recent housing bust was the shift made in the early 1990s away from large land holdings and "spec" building. National homebuilders now largely own rights to lots via options and build only after a house has been sold.

Toll Brothers, for example, has had to write-off the options it bought on 19% of its lot holdings since the market began to slow in 2005 – a $115 million charge. Next year, it expects to write down another $60 million. But these options also give the company far more financial flexibility. Because Toll Brothers doesn’t have all of its equity tied up in collateral for mortgages on land, it qualifies for big credit facilities, giving it a rock-solid financial position. The company’s $1.8 billion credit facility includes $1.1 billion of available credit and is in effect through March 2011.

The headlines about the housing bust have been so dire… and have been published for so long… it’s hard to remember that a lot of people are still buying new homes. Toll Brothers will deliver 7,000 homes next year, generating revenues close to $5 billion. On these sales, it will earn around $300 million. While that’s a long way from the $800 million it earned in 2005… it’s not bad in the midst of the worst industry slump in 15 years.

While the market for new homes might be stabilizing, the market for real estate is probably a long way from reaching bottom. According to UBS, 2006 is shaping up to be the worst year ever for subprime loans. Currently, 80,000 subprime borrowers are behind on their payments. "We are a bit surprised by how fast this has unraveled," Thomas Zimmerman of UBS said in today’s Wall Street Journal.

One company likely to feel the brunt of these subprime losses – H&R Block. Its Option One unit, which specialized in making big loans to poor people, posted a $39 million loss last week for the most recent quarter. H&R is closing 12 branches… and reportedly looking to sell the business.

But the rich don’t borrow at subprime rates… Tiffany reported sales from its catalog and on its website are up 11% over last year. Sales in its New York flagship store rose 13% this year, on top of a 12% increase last year. Most of the gains occurred in transactions over $20,000 and over $50,000.

Microsoft announced strong sales projections for 2007 – growth of 13% to 15%. The stock is up 25% since my July recommendation, though it seems "stuck" below $30 a share.

Brokerage firm Jeffries Group has agreed to pay $10 million in fines to settle accusations that its former trader, Kevin Quinn, used gifts to lure Fidelity Investments into business deals. Fidelity faced no penalty for accepting the gifts and potentially harming its mutual-fund clients. Interesting, isn’t it? Mutual-fund companies must be among the best politically connected firms in America. They’re entirely corrupt… and yet… as an industry they dodge almost every regulatory bullet. (I say mutual funds are corrupt because their directors have a fiduciary responsibility to the fund’s shareholders, but actually always represent the interests of the fund management company. Meanwhile, mutual funds remain the most popular tools for individual investors and have a stellar reputation. Amazing.)

This letter from Sens. Jay Rockefeller (D-W. Va.) and Olympia Snowe (R-Maine) to ExxonMobil CEO Rex Tillerson started out friendly enough:

"Allow us to take this opportunity to congratulate you on your first year as Chairman and Chief Executive Officer of the ExxonMobil Corporation…"

But the true meaning of the letter was soon clear:

"We are convinced that ExxonMobil’s longstanding support of a small cadre of global climate change skeptics, and those skeptics’ access to and influence on government policymakers, have made it increasingly difficult for the United States to demonstrate the moral clarity it needs…"

"This climate change denial confederacy has exerted an influence out of all proportion to its size or relative scientific credibility… ExxonMobil is responsible for much of this bogus scientific ‘debate’ and the demand for what the deniers cynically refer to as ‘sound science’… The Internet has provided ExxonMobil the means to wreak its havoc on U.S. credibility…"

Porter Comment: Damn that Al Gore for inventing the Internet!

The letter goes on…

"In light of the adverse impacts still resulting from your corporation’s activities, we must request that ExxonMobil end any further financial assistance or other support to groups or individuals whose public advocacy has contributed to the small, but unfortunately effective, climate change denial myth. Further, we believe ExxonMobil should take additional steps to improve the public debate, and consequently the reputation of the United States. We would recommend that ExxonMobil publicly acknowledge both the reality of climate change and the role of humans in causing or exacerbating it…"

Porter Comment: For those of you who believe "global warming" is anything other than a global political power play, welcome to Washington. Global warming is the new "war," the new reason for increasing government power and higher taxes. To oppose global warming on scientific grounds is not only unpatriotic, it is immoral. To think differently than Sens. Rockefeller and Snowe is a crime…

Seemingly, in response to this incredible abuse of power, Republican Sen. James M. Inhofe (Okla), the current chairman of the Environment and Public Works Committee, will hold a committee hearing tomorrow on "Climate Change and the Media." Geologist David Deming of the University of Oklahoma, paleoclimate researcher Bob Carter of Australia’s James Cook University, Dan Gainor of the Business & Media Institute, Naomi Oreskes of the University of California at San Diego, and professor Daniel Schrag of Harvard University will speak. The hearing will be held at 9:30 a.m. in 406 Dirksen Senate Office Building. It can be watched live on the Internet.

New S&A Research portfolio highs: Raytheon (RTN), MCG Capital (MCGC), Chevron (CVX), American Real Estate (ACP), Allegheny (ATI), Sirna (RNAI), Xcel Energy (XEL), ExxonMobil (XOM).

And finally… the mailbag. With the exception of paid-up subscriber Al Dietrich (see below) I hope you’ll drop us a line at least once during your subscription. We read every note personally. And, to improve our services, we need to know what we could do better.

"Can we be sure you guys are not writing some of the ‘attack’ letters from readers yourselves? It reminds me of when Dear Abby used to write in response to some letters that the boys at Yale must be back from vacation."

– Paid-up subscriber Patrick J. Flaherty

Porter Comment: We couldn’t make this stuff up if we tried.

"I’m much happier with an average return being quoted than I am with one of the other Agora publications which is currently claiming a 30% return in 3 months for an annualized 120% return because they’ve recommended 4 stocks that have gone up 7.5% each. They have not sold any of these stocks. Every time I see that ad I know I wouldn’t touch it with a 50’ pole." Paid-up subscriber Joel Clark

"My, you Yanks are a funny lot! Why do you people get so steamed up about someone expressing an opinion? So long as it’s interesting, well written, and/or amusing why get steamed up just because we disagree? Having been a politician in my country for the last decade, I think your observations about politicians are by and large very fair. It’s good to entertained as well as informed!" – Paid-up subscriber Bob Simcock, New Zealand

"I am a recent Australian subscriber to your group and receive S&A Short Report, Extreme Value, S&A Oil Report, The Big Trend Report, True Wealth and the Investment Advisory. Also, I have just signed up for your super duper 5 in 1 offer. But, I have just noticed that I haven’t been receiving The Blast for quite a time. What has happened to this paper?" – Private Wealth Alliance subscriber David Strahan

Porter Comment: We’ve replaced The Blast with The Digest. Hope you like it.

Paid-up subscriber Mike Polo suggests that I’ve got nothing to fear from Tommy’s deer. "…Here’s a livestock recommendation: Take the deer meat. No antibiotics. No hormones. Road kill or not it’s a safer nutritional investment."

"Even though I have been in the market for about 15 years (401k mutual funds), I consider myself a new investor. I just wanted to tip my hat to you guys for ‘schooling’ me on the ways of Wall Street. I’m a paid member of the recent offer of the 5 newsletters and I’m loving it. Wish I’d known about you guys years ago. Wish I also had more money to invest, but a guy has to start somewhere... Everyday I anticipate with great enthusiasm, receiving your e-mail messages. I’ve learned so much in such a short time and, of course, now question the motives of my AG Edwards investment advisor. And he now questions me as to where I’m getting my ideas... I’ve taken a more hands-on approach to investing and I have your company to thank for that... I feel more in control of my financial future. And I thank you, again." – Paid-up subscriber Tony Massaro

"I’m going to Argentina in April with my wife and another couple – what are the essential places to visit, and/or the best guidebooks?" – Alliance subscriber John Duggar

Porter Comment: At that time of year, Patagonia is starting to get pretty chilly. Buenos Aires will be beautiful, though. My top recommendation is Cafayate in Salta province. It has great weather year-round, it is one of the premier wine-growing regions in the world, and it’s almost totally undiscovered by American tourists.

Contrary to what most city boys think, a real cord of wood is a stack of four-foot logs, piled 4’ high, that is 8’ in length, i.e., a rectangular box of 4X4X8 (128 cubic ft.). At 8 cords, ol’ Tommy did 1,024 cubic feet of wood. If that’s the case, then you should toss him a chunk of that famous smoked brisket as well. Many people I talk to about a cord of wood are referring to a "face cord" – one that is already cut into firewood size pieces and consists of a 12" to 16" length. At one foot lengths and dealing with a face cord vs. a real cord, Tommy’s workload would have been 32 cubic ft per cord and 1/4 of the 1,024 that he would have had to deal with in a full 8 cords. In that case, you both got a great deal. Tommy got his beer and his money. You got your firewood. Otherwise, I think you should invite Tommy back for some more beer and brisket." – Paid-up subscriber… and firewood expert… Chuck Pullyard

Porter Comment: Chuck, my wood barn is about 18 feet wide and 12 feet deep. The rafters are about 8 feet above the floor. The firewood Tommy split for me fills up the entire barn, up to the rafters. Here’s a picture:

"Several respectable folks are beginning to speak to the continued – and expected further – decline of the dollar and strongly suggest that investors seriously consider placing a significant portion of their portfolio in places that will not be impacted by this devaluation. In your opinion, is this perspective a tempest in a teapot, a tsunami to be reckoned with, or just what?" – Paid-up subscriber Baz Stevens

Porter Comment: There’s no doubt in my mind that the dollar, like every other paper currency, will eventually reach its intrinsic value – zero. I have no special insight into the timing of its decline, but examining the present value of our government’s total liabilities versus our ability to finance these debts (let alone repay them), the only logical answer is sometime in the next 20 years. I think silver is a better hedge than gold, because of the silver ratio and China’s historic affinity for using silver as its base currency.

You can get all of the facts you need about the ultimate fate of the dollar from Addison Wiggin’s excellent book, The Demise of the Dollar. I’ve read all of the history and seen all of the data on why the dollar will ultimately collapse… and Addison has done the best job of putting all that information in one place. To buy a copy, click here.

"Hey, Porter, I avidly read your Digest every day, but I cannot figure out why you keep hammering on the bigoted religious fundamentalists. I mean, they have two of the three traits you are always on the lookout for: They are cheap and they are hated." Alliance member Rich Gustafson

"You are crazy for thinking anyone would put Jobs in jail anymore than they would jail Barry Bonds for his transgressions. No prosecutor would be courageous enough or dumb enough to prosecute an American icon. You cite this other CEO who is going to jail because of options back-dating. The difference between him and Jobs is that the other guy enriched only himself. Jobs enriched everyone all over the world who held Apple stock. Certainly no stockholder would bring suit. And prosecutors will look for a way AROUND THE LAW to avoid charging Jobs." – Paid-up subscriber Howard Caine

Porter Comment: Subscribers already have brought suit. Bonds would be in jail, except his drug dealer has refused to testify against him. Nobody will be that loyal to Jobs. Howard, I predict you’ll change your mind about all of this, because, in the words of Charlie Munger, you’re smart and I’m right.

"Stop &_)%#& asking me to e-mail you!!!!!" – Al Dietrich

Porter Comment: You got it, Al.

Regards,

Porter

Cockeysville, Maryland

December 5, 2006

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