The S&A Digest: Back on the Job

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

As of 07/02/2013

Bob Nardelli’s 210 million reasons to walk... What Tennessee coal trains say about ‘peak oil’... Sign of a recession?... Europeans squirreling away gold... How to build your portfolio...

We start the year with good news. Two of our most contentious recommendations – Home Depot and Wal-Mart – leapt higher this morning. Wal-Mart reported better-than-expected holiday sales. And Home Depot reported its CEO, Mr. Bob Nardelli, is quitting. Some reporters wondered why Nardelli is leaving. His severance package is worth $210 million – he had 210 million reasons to quit. When will the outrageous pay packages of CEOs come to an end? When mutual funds (which are inevitably the largest shareholders) start acting like owners instead of like renters.

We spent part of our holiday in northern Tennessee, in Scott County, which borders Kentucky. An uncle of mine has owned mountain land here for decades. I’ve been visiting annually for more than 30 years. I’d never seen a working coal train before this trip. National Coal is actively mining in Scott County. If you believe in "peak oil," coal trains in marginally productive places like Scott County are a sign of declining production and rising prices. Or if you’re a skeptic that high energy prices will last, those coal trains are part of the economic forces that will soon send energy prices crashing. My uncle, by the way, sold almost all of his land two years ago…

U.S. companies unexpectedly lost 40,000 jobs in December, according to Automatic Data Processing Inc., the country’s largest payroll processing firm. This is the first decline in employment since April 2003. We’ve been expecting the economy to "roll over" for many months and suspect we might already be in a recession triggered by the declines in real estate. Look for the Federal Reserve to begin cutting interest rates soon.

The world’s oldest newspaper, The Post Och Inrikes Tidningar, will now be published exclusively online. The official Swedish publication for bankruptcies and corporate and government announcements has been published daily since 1645. Warren Buffett posed a world-class question about newspapers at his last annual meeting: "If newspapers hadn’t already been invented, would someone invent them now?" That’s an important line of questioning if you’re thinking about investing in a beaten-down, cheap stock.

Apple has announced its CEO, Steve Jobs, personally recommended options backdating at the company… but also insists that he’s done nothing wrong. David Yermack, a finance professor at the New York University, stated the obvious, as quoted by The Wall Street Journal: "They have pretty much admitted that he was directly involved in a fraud." We repeat our prediction, which we believe is just as obvious: Steve Jobs is going to jail.

More bad news for Thailand: A New Year’s Eve bomb in Bangkok left three people dead and 38 wounded. Analysts are worried that this blast may deter tourism, which is a crucial driver of the Thai economy. Several governments, including the U.S., have advised their citizens against traveling to Thailand. The Thai stock market is already the cheapest in the world, trading at six times earnings.

Finally… in what may prove to be the most interesting development of 2007… European central banks are, once again, buying gold. According to our friend Dennis Gartman, "[I]t is being reported that one of the legacy central banks of Europe was actually a buyer of gold in the last days of last year, and although we’ve seen these banks as buyers of gold in the past it has always been for coinage or commemorative purposes. This time, the data suggests that the purchase was for reserves instead. It is rumored that the buyer was the Bank of Italy, but we cannot confirm that, nor can we confirm that the buying was for the Bank’s reserves. Indeed, officials within the [European Central Bank] say that the gold purchase was done for ‘technical’ year-end purposes, and does not mean that any of the banks within the ECB environs have suddenly broken rank with the policies of the past." Sooner or later, all of the world’s central banks are going to want to replace their paper with something more substantial… something that’s not a U.S. liability or a political fiction (the euro). Gold is an excellent choice.

Tomorrow: your financial goals for 2007 and how to accomplish them. But first, we return to the mailbag, stuffed full to overflowing with holiday wishes… Send us your finest thoughts here: feedback@stansberryresearch.com.

"Here’s one reason some don’t follow your advice about not putting more than 3-4% in any one stock: It’s impossible for them. It took me about three years before it was possible to follow that advice. Until then I thought you – and others who advise this – were living in some kind of fairy-tale land. I had no option but to start investing 100% of my capital ($3,000) into one stock only. Gradually, through saving and taking profits on the one carefully selected stock, and then another and another, I managed after about four-five years to build up a portfolio of 20 stocks. It was only then that this advice of investing no more than 3-4% in any one stock could be followed." – Paid-up subscriber Chris Lock

Porter Comment: I respectfully disagree… If you’re working with less than $10,000, perhaps a safer way to begin is to find a value-oriented mutual fund with a history of double-digit annual gains and small maximum quarterly drawdowns.

"I read all your recommendations and choose those that fit my system. Of your 18 recommendations, I bought 9 that fit my system and have made a lot of money… I am averaging a profit of $978.23 per day on a diversified portfolio of $300,000 containing 32-34 stocks. I put no more than 5% ($15,000) in any stock... It’s a great part-time job making me over $245,579 per year, including dividends." – Paid-up subscriber Bill Ribblett

"It’s taken me awhile to figure out exactly what the standard use of the S&A model 16 is. Am I correct in seeing it as a ‘fresh new money’ list? If so, it makes sense to pick a particular S&A 16 and only add to it as positions drop off… Guess: You replace positions with others due to valuation and other ‘timeliness’ factors. If this is true, it makes sense to operate the S&A 16 as a single portfolio, with some ideas changed quarterly." – S&A Alliance member Jim Pursley

Porter Comment: The S&A 16 is a quarterly report and model portfolio showing you (all S&A Alliance subscribers receive the S&A 16) exactly which 16 stocks we’d buy today if we were launching a new investment fund. Frequently, positions are carried over from one quarter to the next, although we consider each quarterly portfolio to be separate, and we track the performance of each quarterly portfolio separately. I recommend that you examine the new S&A 16 (it will be published next week) and decide if the stocks in your existing portfolio are as high quality and/or attractively priced. No, I don’t expect subscribers to sell everything and buy a new portfolio each quarter. But I do think most people want to know, at least four times a year, how we’d build a new portfolio from scratch. It helps them to balance and maintain their portfolios.

"Thanks for the report card and being candid. It is what I have been asking for and I think the database tracking of all the newsletters will serve everyone well… To you and all your writers and staff, have a happy & healthy New Year! Hope to finally meet you, Dan and Steve at the Alliance conference." – S&A Alliance member Larry Cole

Regards,

Porter Stansberry

Baltimore, Maryland

January 3, 2007

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