The S&A Digest: Barney Frank wants to pay your mortgage

Barney Frank wants to pay your mortgage... Bankers targeted the black community?... "China can go back to eating rice"... Do you own gold yet?... Those poor hedge-fund managers...

"We should care about people, not bankers..." I answered my cell phone one afternoon about two weeks ago to discover a recorded message...

The voice on the recording sounded like a black revival preacher. He claimed to be a representative of "the Ad-hoc National Network to Stop Foreclosures and Evictions." He explained mortgage bankers were targeting the black community by evicting homeowners. (Nothing was mentioned about the homeowners not paying their mortgages.) He invited me to attend a protest rally in Washington, D.C. at the Mortgage Bankers Association Annual Policy Conference. A few days later, driving through the predominantly black neighborhoods along North Avenue in Baltimore, I saw dozens of bright yellow flyers stuck on the streetlights carrying the same message and demanding an immediate moratorium on foreclosures and evictions.

Looking on the Internet, I found the group's website and a press release, featuring this quote by Sharon Black, a self-described "community leader" from Baltimore. "The foreclosures have devastated poor and working class neighborhoods here. The loss and suffering may not be as great as that felt by the people of New Orleans... but it sure feels like we've been hit with a hurricane too."

One of the things the folks from the "Ad-hoc National Network to Stop Foreclosures and Evictions" don't understand is the government is already on the hook for most of the mortgages in the United States. And it's already spending a fortune to prevent the spread of foreclosures and evictions. Specifically, last year, the Federal Housing Administration spent $158 million to keep lenders from foreclosing on defaulted FHA-insured homes. Barney Frank has sponsored a bill that would increase the amount of FHA-guaranteed homes by 2 million mortgages, or $300 billion worth of real estate.

And this is a tiny drop in the bucket compared to the number of "conforming" mortgages Fannie Mae and Freddie Mac have purchased and packaged as securities. These so-called "agency" securities carry a guarantee of principal: If the loans go bad, Fannie or Freddie must make investors whole. Last week, Standard and Poor's reported the total risk to Fannie and Freddie comes to 10% of GDP, or about $1.4 trillion. And a federal bailout of Fannie and Freddie would cost the U.S. government its AAA credit rating, not to mention cause a global run on U.S. agency debt.

The next president (whoever is elected) will face soaring foreclosures, insolvency at Freddie and Fannie, street protests against foreclosures, and a growing number of bank failures. It's not too hard to guess what's likely to happen next, is it? Turn on the printing presses, impose lots of new taxes and regulations, eat the rich. But... America is now the world's largest debtor nation. What will our foreign creditors and trading partners do if the dollar continues to fall? If the rice market is any indication, we will face dozens of additional export restrictions, as more and more countries refuse to accept the U.S. dollar in trade. I wonder what the "ad-hoc committees" will demand then? Perhaps a war to gain access to raw materials? Canada, be careful.

You think that sounds crazy, I'm sure. But listen to what U.S. Sen. Chuck Grassley told reporters yesterday: "If part of our problem is that the Chinese are going to eat meat and you've got to have corn and soybeans to feed the Chinese their meat, then why isn't it just as legitimate for the Chinese to go back and eat rice as it is for us to change our policy on corn to ethanol?"

Here you have a United States senator suggesting our most important foreign creditor should eat rice so we can power our SUVs with corn-based ethanol, the production of which actually consumes more energy than it produces. It's not often I'm surprised by the stupidity of our government officials. But this one got me. Grassley would be wise to consider that the Chinese can afford to pay higher prices for grains, because their currency continues to rapidly appreciate versus the dollar. Meanwhile, we're going to have a hard time buying rice if the Chinese don't lend us their savings.

I wonder what our readers make of these events – of U.S. citizens demanding to keep their homes even though they can't pay their mortgages; of U.S. senators demanding our trading partners stop buying our corn; of major retailers placing limits on the purchase of rice; of banks blowing up day after day; and of the dollar falling from one new low to the next. We've been advising people to buy gold and silver for at least the last five years as a hedge and protection against the risk of hyperinflation. Now, it has arrived. But how many subscribers, I wonder, have bought gold or silver? My bet? Less than 10%.

Oh, those poor hedge-fund managers... The mortgage crisis is now hitting Greenwich, Connecticut, the hedge-fund capital of the world. Foreclosures in Greenwich, where the average home goes for $3.1 million and the median income is more than $122,000 a year, have more than quintupled. On average, Greenwich has half a dozen foreclosures each month, but that number hit 34 in January. Unlike other parts of the country, homeowners in Greenwich are prolonging the foreclosure process, scrounging enough cash for last-minute payments. Maybe the government should bail them out, too...

New highs: Wal-Mart (WMT), Health Care Property (HCP), Health Care REIT (HCN), Ventas (VTR).

In the mailbag... Apparently the Friday happy hour came early this week for some of our subscribers. (As you know, we've long speculated that anyone who would bother to take the time to compliment our work via e-mail must either be related to us... or drunk.) We appreciate the positive feedback. Send yours here: feedback@stansberryresearch.com.

"I have subscribed to True Wealth for over a year now, and to PSIA for about 6 months. Both Steve and Porter have recommended solid companies to invest in. My investment in one of PSIA's 'secret society' companies is up 16%. It was also a 'forever' recommendation. I plan on holding that stock for the rest of my life... I buy one stock every two months, I have to be very careful about my investments. I use a full service broker so he told me to save a lump sum of money, choose a stock, then invest. If I had wanted to be in and out of the market, my broker told me he could set me up with a discount broker. But I wouldn't be able to get as much advice from a discount broker so I'm sticking with my full service broker. My individual subscriptions to True Wealth and PSIA don't cost any more than I would spend on a dress or similar item of clothing. Lately, I have subscribed to Advanced Income, which comes with a higher price tag. At first, I didn't know if I would be able to put the information on calls and puts to use. But Jeff tells subscribers exactly what to say to their brokers. I feel, over time, my broker and I will be putting some plays into action on advice gleaned from Advanced Income. Over the years I have taken many 1/2 courses from our local university. Advanced Income costs as much as a 1/2 course from our local university. For me True Wealth, PSIA, and Advanced Income are part of my lifelong learning plan. Money well invested. Thank-you, Steve, Porter, and Jeff." – Paid-up subscriber Jo-Anne

"I have been a S&A reader for about 2 years. I started with one report, added 2 more and now get about 5. I read the thought process for the recommendations and appreciate the rationale behind the recommendations. I started with a few positions and learned the value of the disciplined approach. My stock investments represent about 60% of my portfolio. 15% is in bonds, 19% is in real estate, and 7% is in a mortgage portfolio. Of the stocks, about 25% is in a S&A portfolio. That portfolio is up 13% since last August. I make several changes each month and try to follow Porter's disciplined approach. I limit my exposure to 2.5% for any position, many at 1%. I don't look for any homeruns. I book my losses and take a portion of the gains to preserve capital while the ride is up. I try to buy low, sell high and want to be a long-term investor. Long-term in my mind is 6 to 18 months. I re-evaluate each position as if I would be buying it on that day, would I or not. I know that there will be some stocks that will be there 5 years from now. The best thing that I have learned is the value of buying stocks that pay dividends. Cash flow supports the stock value. I also better understand the study of different sectors/industries and when to get into or out of them. I hope this helps someone." – Paid-up subscriber Frank Jay

"Over the last year and a half since I subscribed to your news letters I have done fairly well. Why? Because of the contrarian style of investing! My wife and I don't have wads of cash to throw at the market, so when you recommend a stock we do our due diligence. The number one thing that impresses me the most about you, is that you keep pounding into your subscribers heads, is to buy when everyone else is selling. Stay away from the herd mentality! Porter, you and your staff keep pounding this into your subscribers' heads and keep up the good work!" – Paid-up subscriber Phil L.

"First I like to say overall your team of writers do a very good job of highlighting potentially good investments... [But] to have a arbitrary 25% loss limited is not good risk management technique. As an example 25% stop loss on a utility stock is not appropriate it needs to be much tighter as you do not expect a utility to drop by 25% unless there is an issue with the fundamentals or legal issue (in most instances) so a tighter limit should give you the opportunity to avoid taking a larger loss if your analysis is right... I respectfully suggest that you consider incorporating the above or tweaking your current stop loss rule to at least factor in the stock underlying volatility. i.e. creating different % based on the stk. I believe it would provide a better risk management technique..." – Paid-up subscriber Rob

Porter comment: In my newsletter PSIA, I frequently adjust the stops of my positions based on the risk of the investment and our desired holding period. I know most (if not all) of the editors do so also. Even so, a 25% stop loss is a good place to start. With an initial allocation of 4%, a 25% stop loss puts 1% of your original capital at risk. If you use a trailing stop loss and the position moves up at all, your principal at risk can quickly fall to zero. Using stop losses and trailing stop losses must be done in conjunction with position sizing. The goal is to minimize the impact of any loss. Once you learn to avoid big losses, you'll find it's much easier to make money investing.

"Porter, Thursday morning I read on the CBS MarketWatch I receive from my broker that 'blue chip' GM had an upward spike. I gather they are not regular readers of your column, or perhaps their definition of a blue chip stock differs from mine. How on earth can GM be a blue chip stock?" – Paid-up subscriber Frank Cannella

Porter comment: Any idea how much money GM spends on advertising with CBS? If GM were sending me $100 million a year, I'd say it was a blue chip, too.

"As a paid-up Alliance subscriber, should I be receiving the Monthly Dividend Program in the mail or is this an additional subscription like Phase 1? I haven't received anything regarding this but I notice a reference to it in The S&A Digest." – Paid-up subscriber Mark

Porter comment: We made a promise to Alliance subscribers starting in 2003: You will get everything we publish, or decide to publish in the future, with the exception of our small-cap conference-call service, Phase 1.

Since then, we've grown from three or four publications to more than a dozen. We've added 30 or 40 employees. But we continue to provide access to all of our new products, free of charge, to S&A Alliance members. That's what we promised. If you log on to the Stansberry home page with your Alliance password, the Monthly Dividend Program is listed under "Investment Courses" on the left side of the screen.

There, you'll find the program, the Top 10, and our entire universe of monthly dividend paying stocks. We're sending out quarterly e-mails updating readers on our Top 10, and adding any new stocks we deem fit. You should receive that notification the first week of July. I encourage you to log on, read the course, and look at our Top 10 portfolio. It's already up close to 6% in about a month, and it's yielding 9.5%. You can read more about the Monthly Dividend Program here.

Regards,

Porter Stansberry

Baltimore, Maryland

April 25, 2008

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