The S&A Digest: Customers' yachts

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

As of 06/27/2013

Customers' yachts... Adjustable mortgages to reset en masse... Credit-card receivables are next... The fate of Joe Consumer...

Top hedge-fund managers' average take home pay was $657 million last year, according to the liberal, it's-not-fair-so-take-their-money bean counters at United for a Fair Economy. Few words in the English language are more frightening to me than "fair." I know what it really means... It would be far more honest for those bean counters to call their lobbying group "United for More of Your Property."

Fred Schwed had it right in 1940, when he wrote the classic book about how Wall Street really works: Where Are the Customers' Yachts? The story never changes: It is a much better business to sell investments than to make investments. And that's not really surprising. The shocking thing about Fred's book and the latest excesses of private equity/hedge funds is that so many otherwise reasonable people leapt at the chance to pay 2% of their assets and 20% of their profits to managers, some of whom did nothing more than buy a single stock. It's a form a madness... that's very lucrative and highly entertaining. But there's certainly nothing about it that's unfair.

Remember when your mortgage broker told you that adjustable-rate loans always have lower rates than fixed mortgages? The average rate on a one-year adjustable mortgage surged to 6.51%, the highest since January 2001, up from 5.84% last week. Adjustable rates are now higher than 30-year fixed rates for the first time in this cycle.

The higher rates have arrived right on time. Dan Ferris explains: "Starting in October 2007, approximately $522.5 billion worth of adjustable-rate mortgages will reset through December 2008. That's a little less than $35 billion a month on average. But October 2008 is the biggest month, when $50.7 billion will reset. January 2008 ($44.7 billion) and April 2008 ($46.4 billion) are big months, too."

My working hypothesis is these ARM resets, tougher lending policies, higher mortgage rates, and an environment that's generally more credit restrictive will finally push the U.S. consumer over the cliff and the U.S. economy will follow. Joe Consumer has held the economy together for a long time and through some incredible excess. Everyone who has predicted his demise has been wrong, wrong, wrong. We'll be watching credit-card default rates. Our bet: Once Joe Consumer can't refinance his house anymore, he'll soon have trouble paying off his card. That's when we'll know he's really in trouble.

New highs: none.

In the mailbag... Where does Ian get his numbers? He tells all, below. Send us your comments, your questions, your praise, and your insults. We read all of your notes: feedback@stansberryresearch.com.

(Please do us one favor... Contact our customer service team for assistance with your account: customerservice@stansberryresearch.com. We're grateful for each subscriber... but it's simply impossible for us to handle all of your needs personally.)

"Where does Ian get his numbers on housing inventories – the ones that lead him to say that inventories have come down in the past 5 months? These numbers contradict those reported in almost every other news story that I have read – I'm curious how Ian came up with them... It seems to me that his conclusion – that inventory has decreased to about 7-1/2 months from over 9 months – is approximately backwards; I think that the conclusion of the piece – that we are near a bottom in homebuilder stocks – might be a bit backwards also." – Paid-up subscriber PJ

Ian comment: My numbers on housing supply are from the U.S. Census Bureau, at www.census.gov. Maybe what's confusing you is the fact that yesterday's existing home sales number came out, which was, in fact, down. Regardless of sales though, housing supply is also down.

"So we finally discover that there is at least one area where Porter is not willing to give us all the benefit of his opinion – his religious beliefs. Come now, Porter, why be so uncharacteristically coy? Would it be the fear of mass cancellations by all those subscribers who believe in God? Or is it the fear of cancellations from all those atheists if they were to discover you harbor religious beliefs? As a self-proclaimed atheist myself, I would never let your religious views deter me from reading your stuff. You have made me a great deal of money over the last few years and I really couldn't care less if you choose to believe in an imaginary father figure in the sky or not."

– Paid-up subscriber Mark Eaton

Porter comment: What could be more boring or less useful than writing about my religious views?

"Was it your group that suggested recently buying as many shares of BUD as possible? I am wondering if that was a good move." – Paid-up subscriber YM

Porter comment: I recommended buying a lot of Budweiser (BUD) shares in the spring of 2006... at a considerably lower price. So far, it seems the recommendation was a good move.

Regards,

Porter Stansberry

Baltimore, Maryland

August 29, 2007

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