The S&A Digest: Chatting Up Pesticide Smugglers in Brazil

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

As of 06/24/2013

The IRS and blackmail... Russell on why gold is going higher... Merrill's latest goof... An oil BDC worth buying... Hooray for panic... We've been attacked... Dyson on Brazil...

"How many people here have an offshore bank account?"

This is one of my favorite gags at investment conferences. From the podium, I ask the audience about their offshore bank accounts. Amazingly, several dozen people normally raise their hands. "Don't tell anyone," I remind them. The hands fall faster than they were raised, and the audience laughs.

There's nothing illegal about having an offshore bank account. And keeping one is smart if you enjoy having a financial "life raft." I'm a big advocate of keeping a pile of money somewhere and not telling anyone about it. It just feels good knowing, no matter what happens, I've got a back-up plan. I started my secret "pile" after a brush with Maryland's state tax authorities in 2001. They decided I hadn't paid enough in taxes, even though I'd filed honestly. So they confiscated my bank account and my brokerage account – essentially all of my liquid assets. I found out about the action via a letter from Bank of America. "Sorry, all of your money is gone..."

I wouldn't have believed this could happen, unless it had happened to me. Thankfully, I had friends – lawyers and accountants – who were willing to help me. I got my assets back after about six months. It turned out Maryland owed me about $1,000 in tax refunds. But they wouldn't pay me because the statue of limitations had passed! Funny how the rules never apply to them, isn't it?

Even though most people who have offshore bank accounts keep them primarily for financial privacy, not tax avoidance, Sen. Carl Levin (D-Michigan) and his friends at the IRS are determined to dig through the private affairs of thousands of Americans who have offshore accounts. (That's why you don't want to raise your hand at a conference when I ask if anyone has offshore accounts... )

LGT, in Liechtenstein, is one of the oldest private banks in Europe. The royal family has owned the bank since 1930. It is a very reputable, totally legitimate institution. Despite these facts, the tax authorities in Germany and the United States agreed to pay more than $6 million to a former employee of LGT, who stole customer data from the bank and then blackmailed LGT by threatening to sell the data to various tax authorities.

Describing the affair, Prince Alois of Liechtenstein said, "We cannot allow fiscal interests to override the principle of the rule of law." But apparently the IRS doesn't have any such qualms and happily abetted both theft and blackmail to obtain these stolen records.

Watching our government partner with a known criminal to violate the sovereignty of another country and pilfer its banking records, all in an effort to dig through the private affairs of its own citizens... It's hard to believe. And it makes me wonder what else the American people are willing to suffer at the hands of The Authority.

As you well know... inflation is here. Oil is at an all-time high, hitting $102 a barrel yesterday, and food prices are soaring. Yesterday's new low in the dollar – the euro is now worth more than $1.50 – means the market is pricing in yet another interest-rate cut. Our recommendation, once again, is to buy gold... like we've been saying since 2003. No, we don't think it's too late. Gold is only now becoming an object of interest for institutional investors. And you won't hear any discussion of it yet at cocktail parties... unless you're at my house.

Richard Russell, the 80(plus)-year-old dean of the financial newsletter industry, has been bullish on gold for a long time, too.

"Below I show a monthly chart of gold which takes the metal back to 1998. It's truly amazing, but people tend to see what they want to see. Here on this chart we study the early part of what could be one of the greatest bull markets in history, and all we hear about is 'gold was up two dollars today,' or 'gold was hit by a big five dollar drop in late trading.' Somehow, under a blanket of orchestrated denials and ignorant comments, the great bull market in gold has placed blinders over the public's eyes. Show this chart to anyone, but leave off the identifying heading, and ask them what the chart might represent. They'll come up with all variety of answers. But see if anyone comes up with gold as an answer. 'What's that? You say it's gold? I can't believe it. Nobody told me that gold was rising like that – and blah, blah, blah.' The higher gold rises without attracting mass attention, the greater the potential for the gold bull market. After all, gold has risen this far literally without public participation. What happens when the public finally becomes interested?"

Do you need another reason not to trust Wall Street's big banks? We don't. But we're constantly amused by the conflicts in their business model (serving one client, while selling the other down the river) and by the huge, poorly understood risks they take with their shareholders' money. We're also a bit jealous knowing the men in charge of these ticking time bombs earn so much money... and wear such great suits. And so... we follow the carnival on Wall Street like a youngster at the circus, our eyes wide with disbelief...

Merrill Lynch released a report last week saying the bank messed up its cash flow numbers for 2005, 2006, and 2007. The "error was due to an adjustment that incorrectly reflected cash flows received from certain customer transactions. The adjustment resulted in an overstatement of cash flows received from derivatives financing transactions (financing activities) and was offset by a corresponding overstatement in cash flows used for trading liabilities (operating activities)." If anyone at Merrill Lynch really knows what that means, we haven't seen any evidence of it. When the people running the company don't want you to know what their disclosures mean, sell... as fast as you can.

Like all real investors, we applaud panic. We enjoy nothing more than a real solid bear market. Why? Because we're buyers, not sellers. We wait for good opportunities to put our money to work, and we have no desire to cash out. It's never hard to find something interesting when other investors are scared. Look at the financial sector right now.

Anything related to finance has been crushed, regardless of any facts. Take business development companies (BDCs), for example. Much like private-equity firms, BDCs raise capital to invest in various companies, then pass the profits to investors. Most of the companies have nothing to do with mortgages and most of them never touched any of the hugely expensive deals Wall Street is struggling to close. Some of them, in fact, only finance commodity-based businesses, like oil exploration firms. So... while these stocks are technically financial firms, their earnings are driven by oil prices, not interest rates.

Tom Dyson covers one such energy BDC whose share price has floundered since last year, thanks to the mortgage mess. Meanwhile, oil and coal have soared. As a result, this BDC is now yielding more than 12% and continues to raise its dividends. To learn more about Tom's 12% Letter and where to find his BDC write-up, click here...

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New highs: Chunghwa Telecom (CHT), EnCana (ECA), Petrobras (PBR), Stone Energy (SGY), XTO Energy (XTO), Peyto Energy (PEY-UN.TO), TNS Inc. (TNS), Wal-Mart (WMT), streetTRACKS Gold (GLD), PowerShares Agriculture (DBA).

I was hoping for some vicious feedback to get the heart pumping while I'm down here in Florida. Instead, we've got questions about gold coins, write-offs, and someone falsely accusing me of a screw-up. Whatever it is, we want to hear it... feedback@stansberryresearch.com.

"Porter, thanks for your great recommendation on VVR. I feel like my balls have been cut off and handed to me on a platter. Maybe you should spend more time doing research and less time trying to sell your products. How in the heck did you miss it that bad? I can't wait for you to tell me I screwed up in some way. Excuses are not what I pay to hear. I admire someone who will step up and take the heat for a bad call... and I will do the same. A quote from your recommendation, 'it's just like cash.' At the very least, don't say something is 'just like cash,' if it has the potential for the bottom to drop out. I don't remember my cash dropping 30% in two months. I'm not drunk, but I wish I was." – Paid-up subscriber Terry

Porter comment: Terry... you've got the wrong guy. I did recommend VVR briefly during the summer, but closed out the position for a profit in about a month.

In Steve's February 15 issue of True Wealth, he advised readers to sell VVR. The total return at the time he wrote was -7%, including dividends. Steve said: "VVR is about to start shrinking its dividend... This is because it holds loans that are generally tied to the prime rate. As the Fed cuts rates, the prime rate goes down, too. So the dividend that VVR can pay out goes down. We need to close this position."

"I've seen frequent mention of buying US Gold Coins. How do you sell them and who can you recommend to certify the grade???" – Paid-up subscriber Bob Silvor

Porter comment: I'm no expert when it comes to coins. So far, I've only bought them. I haven't sold any yet... and I doubt I ever will. I buy bullion coins and I keep them as my preferred form of savings (it seems a lot smarter to save gold instead of paper currency). But I've been told that selling on eBay is relatively easy. And my coin dealer regularly quotes buy prices, so I could sell back to him if I wanted.

As for coin grading, that's a topic I know even less about. But from what I can tell, you only want to trade in PCGS-graded coins. So if you want to get a coin graded, you should contact PCGS.

"I think I understand the difference between 'write-downs' and 'write-offs.' But it appears a lot of correspondents from all type of publications do not. Can you please clear this up, once and for all. Please issue a list of all major banks and institutions and specifically identify against each whether their position is a 'write-down' or a 'write-off.'" – Paid-up subscriber Bernard

Porter comment: The question regarding the language is simple: Banks write down the value of an asset when the market price decreases. They write off the value of an asset when it becomes permanently impaired or sold at a loss. As far as a list of all the banks and all of their write-downs and write-offs... I don't think it would be very helpful to investors. What would be useful is to figure out which banks offer the biggest discount from reliable book value. The problem is, if the banks themselves don't know what their assets are worth, how can we?

Regards,

Porter Stansberry

Baltimore, Maryland

February 27, 2008

Editor's note : Dyson is still reporting from Brazil. He’s preparing essays for DailyWealth – you can see the most recent here – but he still had time to drop us a note.

Chatting Up Pesticide Smugglers in Brazil

By Tom Dyson

I'm at a serious handicap here in Brazil. I can't speak Portuguese. So I'm not picking up the usual information nuggets I get from taxi drivers, shopping assistants, waiters, and bus passengers in other countries. However, I've still met some interesting people.

I sat next to a girl on the bus yesterday. She spoke excellent English, even though she'd never met another English speaker in her life. I told her Brazil felt expensive to me. Prices here are similar to prices in the U.S., it seems. Her family owns a large soybean farm, or "fazenda." She told me her father takes her to Paraguay to go shopping. She buys clothes, shoes, and music. He buys farm equipment, guns, and pesticides.

"We use one toxin," she said. "This toxin costs $100 per gallon. In Paraguay, it costs half price. The problem, you have to smuggle it back to Brazil. They cost you if they find it."

News of my arrival into Lucas do Rio Verde, a small town in the heart of Brazil, spread fast. I arrived at 10:00 in the evening. The next morning, the phone rang next to my bed in the hotel.

"Hello, senhor Thomas," said the voice.

"Hello," I answered. Then there was silence, followed by an aborted attempt to speak English, and a frustrated sigh.

"Speak Spanish?" said the voice. "Yes," I said.

"I have a farm for sale. Would you like to see it? I can pick you up in 10 minutes."

We drove to the farm. This family is unhappy about the growth of Lucas. Now its farm is too close to town, said my guide, and thieves keep stealing the copper wire in the irrigation scaffold.

"The last time it happened, we found cigarette butts, footprints, and tire tracks at one end of the field. We knew they belonged to the thief. We told the police, but they didn't do anything about it. It's happened three times now. Each time it costs us $7,000."

I also had a long chat with the clerk at the front desk of my hotel. He didn't speak a word of English... or a word of Spanish. But he had a computer. We communicated using Google Translator. You enter a phrase and it translates it for you.

"This town is very boring."

"I work every day."

"I have nothing else to do."

"Your driver is here."

"Enjoy your dining."

"Thank you."

Good investing,

Tom Dyson

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