The S&A Digest: Clark on sale

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

As of 06/24/2013

Clark on sale... "Stagflation" again... Investors bullish... Fund managers bearish... Overcrowding in the Hamptons... Pickens SHORT oil... Ackman left hanging... Why Johnny Ferris and Johnny Goldsmith can't write...

 Reminder: Our discount on Jeff Clark's options trading service, the S&A Short Report,  ends tonight at midnight. Jeff already made several triple-digit return trades this year and expects plenty more. He told us yesterday, "I can't possibly construct a portfolio with more potential than what we have right now." To learn more about the S&A Short Report and take advantage of our discounted offer, click here...

 Former Treasury Secretary Lawrence Summers says, "We're a very, very long way from the 1970s."

Summers was commenting on the possibility that we are now living with 1970s-style "stagflation," the combination of inflation with slow, or negative, economic growth. He was asked about it because yesterday the Labor Department said consumer prices rose 4.3% over the last 12 months. And the Federal Reserve lowered the range of its economic growth forecast by half a percentage point to 1.3%-2.0%.

If investors are scared, they weren't showing it last quarter...

 Fidelity Investments, the world's largest mutual fund company, says net new client assets rose 32% in the fourth quarter of 2007 to $58.5 billion. The number of new client accounts rose 5% to about 18 million.

Fidelity's results seem to indicate fund buyers are bullish. That generally happens when markets are topping out, not bottoming. And yet...

 Meanwhile, Whitney Tilson from T2 funds just sent us this little snippet, quoted from a recent Merrill Lynch report: "Fund managers and asset allocators are the most risk-averse in more than seven years. A net 41% of fund managers say that they are overweight cash – a level last seen in the aftermath of the '9-11' terrorist attacks... Investment time horizons have almost shrunk back to extremes last seen in March 2003, while the number of investors adopting risk-averse investment strategies has hit new highs."

So which crowd is right? The individual investors pouring money into mutual funds, or the fund managers themselves, who haven't been this scared since they looked out their window and saw terrorists flying jets into the office building across the street?

I'm inclined to agree with the actions of Extreme Value mutual fund pick, the Longleaf Partners Fund (LLPFX). Longleaf's 2007 annual report indicates the Partners Fund is 99.4% invested in stocks as of Dec. 31, 2007. Among all three of its funds, Longleaf bought six new stocks and added to 11 existing positions last quarter.

On page 3 of the report, Longleaf's co-managers write, "The uncertainty of what the next six months will look like has Wall Street in knots. While we may appear stupid in the short turn, our long-term time horizon and that of our partners gives us the luxury to act based on how businesses will look several years from now, not based on whether fear will grip markets next quarter."

Longleaf is being greedy when others are being fearful. That's worked pretty well for them, with the Partners Fund returning about 13.5% annually since 1987 (before the crash of '87).

What do I do? I try to operate like an underwriter. The first thing an underwriter does is decide whether a particular risk is acceptable or not. Then, he decides how much he's willing to pay to take on that risk. That's why, with the headlines shouting recession, I've recommended retail-oriented stocks like Wal-Mart (WMT), Sally Beauty Supply (SBH) and even Sturm, Ruger (RGR), which has a solid brand name among retail gun consumers. I'd be willing to own 100% of these businesses, and I think they're pretty cheap right now.

I don't know how things will work out in the overall economy over the next 12 months, and I'm pretty sure no one else does. But I'm willing to bet Wal-Mart, Sally, and Ruger will be larger companies five years from now and at least as profitable as they are today.

 Jamie Johnson, heir to the Johnson & Johnson fortune, explains why the ultra-rich love recessions in an essay on the Huffington Post website regarding his documentary The One Percent:

Another subject I recently interviewed blamed what he called mere "centa-millionaires" for the breakdown in exclusivity of his elitist world. For him, the overnight stars of the seven-year bull market not only overcrowded private air travel, but also drove up the price of high-end real estate. Buying a third home in the Hamptons became a burdensome experience for him. As far as he was concerned, there was just too much urgent demand, and although he could easily afford the asking prices, he found the heightened numbers personally offensive.

 According to a TV news story I saw a couple nights ago, Warren Buffett has disowned his son Peter's adopted daughter for participating in the film.

 Oil investing legend T. Boone Pickens is now short oil and natural gas, believing prices will fall in the near term. Pickens expects oil to fall $10 to $15 per barrel in the second quarter. But he expects oil to hit $100 a barrel again in the second half of the year. Pickens also called natural gas prices "unusually high" and expects them to back off.

 Goldsmith found an old Barron's article that describes a 2002 meeting between MBIA CEO Joe Brown and MBIA short seller Bill Ackman:

As Ackman rose to leave, he recalls reaching out to shake hands with Brown, only to have Brown recoil, awkwardly jerking his right hand up to his shoulder. "I don't think so," he says Brown told him with a look of palpable disgust.

I guess people are a little funny about being told they're running their company into the ground.

 New highs: Anworth Mortgage (ANH), streetTRACKS Gold (GLD), PowerShares DB Agriculture (DBA).

 If you would like to tell us how bad our writing is or caution us against being arrogant enough to bring down an "empire" (I'm not making this up), write to us at feedback@stansberryresearch.com.

 "Today's letter from subscriber AK hit the nail on the head. Ferris and Goldsmith might be somewhat financially astute but they can't write. Can you imagine either penning a letter from the GM Chairman. Yeah, right! I'm afraid you are becoming arrogant. Arrogance has brought down empires. Don't let it happen to you." – Paid-up subscriber C. Ken Covey

 "It seems like such a waste of good talent, time, and effort to have to do an historical analysis of stock movements in order to show that you folks at S&A are not front-running on your recommendations. As I see it, anyone who believes such a blatant accusation is foolish to spend one red cent in subscriptions to such a publication, and your policy of a money-back guarantee makes it easy to just walk away.

"As for myself, in 35 years of investing, I have never found a newsletter worthy of my attention until a co-worker left his copy of Steve's True Wealth out for me to read. I was so impressed that I decided to invest in one of Steve's picks on his Recommended List; within 3 months I had turned a 45% profit. I currently subscribe to True Wealth and Dan Ferris's Extreme Wealth and I must say that Steve and Dan's observations, analyses, and comments carry me back to a time when my own late father-in-law used to talk to me about how to become a 'value investor'. Like so many other 'investors' I picked up a lot of bad habits in the mid to late 1990s... an interesting time because if you couldn't make money in that market, you probably had no business crossing the street by yourself. When the bubble burst, I was devastated (and quite a bit poorer) and I had lost all sense of direction; I had even vowed to get completely out of the market because I had come to believe that the small investor had no business in The Market. Your newsletters have provided the substance needed for me and my wife to get our portfolio back on some solid ground in a way which we have not been able to achieve in 35 years. I particularly like the fact that you concern yourselves with dispensing QUALITY above QUANTITY... the depth and breadth of your observations is slowly teaching me how to become a better investor while at the same time showing us where those gems are hidden. Thank you Porter, Steve, and Dan; thank you all, because in doing the job which you all do so well (and seem to enjoy so much) you are not just giving us all a loaf of bread... you are providing us with the seeds and the implements to plant our own gardens." – Paid-up subscriber Anthony P. Saglimbeni

Ferris comment: Anthony, I'm sure I speak for everyone at Stansberry & Associates when I say thank you for your kind and encouraging words. You're the reason we come to work every day. I hope you'll be with us for many years to come.

 "When you talk about the sub-prime situation, you use write-downs as though they were write-offs. We both know they aren't and many of the write-downs will ultimately be paid and never end up as write-offs. The sub-prime crisis isn't going to be anywhere near what you seem to be predicting. Why scare your readers by not drawing the above distinction?" – Paid-up subscriber Richard Egli

Ferris comment: Perhaps we, like most folks, paint black with too wide a brush. If so, forgive us, for it is embedded in our DNA. I agree, plenty of currently nonperforming loans will resume performance, and many more will be charged off now only to be paid in whole or in part later.

But if you want a reason to be skeptical, to quote Sam Zell, "Where are the owners?!" There's too little equity in most subprime deals, and this goes all the way down the line to the CDOs, which tend to sport piddling little equity. And think about it. If all a borrower has to lose is his reputation and he already had a lousy reputation before he got this loan he shouldn't have gotten, then what does he have to lose by walking away and paying nothing? Not much. Also, I keep hearing from people inside the banking and mortgage businesses that it's bad and getting worse with no end in sight.

And finally, subprime problems keep popping up in the oddest places. Since many companies didn't think this stuff very risky when they bought it, they're only just now breaking out the details on their exposures.

 "There are no insider buys of [$]600,000,000... worth of shares at MBI... These shares have been bought by Warburg Pincus in the course of them taking a stake in MBI and contributing additional equity financing as previously announced. KEWSONG LEE & DAVID A COULTER are the new directors acting on behalf of Warburg. Therefore, they show up in the insider buys statistics. However, it is just another statement of the same Warburg buy." – Paid-up subscriber Stephan M

Ferris comment: That's correct. All those transactions listed on Yahoo Finance were for the same $300 million transaction widely reported in the press. Thanks for the correction. Frankly, I can't believe anybody around here is using Yahoo Finance for anything. It's OK for what it is, but it's not a serious financial tool by any stretch.

Good investing,

Dan Ferris

Medford, Oregon

February 21, 2008

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