The S&A Digest: Financial hit bottom?

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

As of 06/25/2013

Financials hit bottom?... Buy Asian real estate... More big subprime write-offs... Sovereign wealth funds: a disaster in the making... High praise for PSIA?...

Signs of a bottom in financials... T. Rowe Price and Legg Mason doled out $1 billion since June to increase their stakes in Goldman Sachs, Morgan Stanley, Lehman Brothers, and Bear Stearns. British multibillionaire Joseph Lewis has continued to build his $1 billion position in Bear Stearns, which he began accumulating in September.

Goldman Sachs has been buying Japanese real estate for a decade, but the bank recently raised $2 billion to invest in real estate across Asia. The money will come from the bank's balance sheet – no leverage. Steve Sjuggerud has been hot on Asian real estate for years. In fact, his Sjuggerud Confidential Japanese real estate play is currently his No. 1 pick for subscribers. To read more, click here...

12% Letter pick McDonald's (MCD) hit an all-time high today. It increased same-store sales 8.2% on cappuccinos and $1 double cheeseburgers in the U.S. and chicken in Europe and Asia... Analysts estimated 5% sales growth. McDonald's has increased its sales for 55 consecutive months. Tom's readers are up 50% on the recommendation in a year.

Extreme Value pick Wal-Mart (WMT) will expand in China at more than 30% annually, as the world's largest retailer won government approval to open its 100th store. Wal-Mart currently has 94 stores open in China, and opened 24 just this year. The company has invested $230 million in China since opening its first store in 1996, and it buys close to $18 billion of goods a year from mainland factories.

UBS announced it lost another $10 billion in subprime U.S. mortgages, bringing its total losses to more than $13 billion. That's roughly two years of profits. Ironically, the losses came from buying packages of U.S. subprime mortgage debt that had been rated AAA – so called "super senior" CDOs.

As might have been apparent to even a casual observer, buying subprime debt in 2005 and 2006, no matter how well packaged, wasn't a prudent thing to do... and certainly doesn't seem like something a Swiss bank ought to have done. With its capital ratios impaired by these losses, UBS has canceled its dividend and gone, hat in hand, to wealthy Asians... The bank will now pay 9% a year on close to $10 billion in convertible debt that the Singapore Investment Corp. (a sovereign wealth fund) will have the option to exchange for roughly a 10% stake in the company in two years. Yes, this will significantly dilute the other shareholders. And yes, it's awfully hard to earn a profit as a bank when you're paying 9% a year for capital.

These kinds of deals are admittedly wonderful for sovereign wealth funds, which are now seen as paragons of investing. But... we wonder... how would you like to be the largest investor in a bank that's made such woeful capital allocation decisions and stands ready to dilute its shareholders at any moment? We suspect, much like a man who promises to marry his mistress, UBS may find itself unable to be any more faithful to its new shareholders than has been to its last.

And while we have no doubt that sovereign wealth funds will be great for Wall Street, we wonder how well they will do for their ultimate owners – the citizens of Singapore. It has long been our experience that the farther a dollar travels from the pocket of the man who earned it, the more likely that dollar will be lost, stolen, or bled dry by fees. The idea of a sovereign wealth fund is an investment banker's dream: These are dollars won through trade, deposited into central banks (in exchange for local currency), and left for the government to manage. This isn't merely "other people's money." This is money that never belonged to anyone in the first place. This is money that ought to disappear into the endless hole of human perfidy. We bet it does... and faster than most people expect.

New highs: Covance (CVD), Sally Beauty Holdings (SBH), Covanta (CVA).

In the mailbag... the whiners return! Finally. Also, we share a smattering of the rare bits of praise we've received over the weekend. Apparently, some of you got into the eggnog... Send your comments here: feedback@stansberryresearch.com.

"You're beating up the Administration for trying to help. What's a Government for, if not for that? You are just fortunate enough to have a scam that works (a subscription mill, nothing more, nothing less)... So, my advice is: knock it off. If you really want the world to suffer the biggest recession it's ever seen, just let the 'free market' have it's say. It's not a pretty picture. And finally, this whole idea of a free market is garbage anyway: it never was & never will be. There will always be a government that gets in the way. Thank goodness!" – Paid-up subscriber Steve Dansker

Porter comment: Oh, golly... I didn't know the government was here to help. That changes everything! Just forget my previous objections. From here forward, I'll embrace everything the government decides to do. I'll see nothing beyond their obvious good intentions. Measuring results? That's for suckers. Doubting the honesty of politicians beholden to special interests? That's un-American. And refusing to go along with a system that taxes me at a far higher rate than my neighbor and constantly threatens my First Amendment rights? How could I have ever been so obtuse?

"Interesting how you 'pure capitalists' complain about any help for the little guy, but never about interference from the Fed (e.g. lowering or raising interest rates – where is that listed in the Constitution?) which bails out hedge funds and other wealthy financial people. According to you, less government is best, and when greed and malfeasance affect the mortgage business (and other businesses – like Enron) because of less govt. oversight, it's the little guy's ignorance – can't blame those who take advantage of those less fortunate!" – Paid-up subscriber Joann Slate

Porter comment: You've got it all wrong, Joann. I'm no more in favor of the Federal Reserve than I am any other federal agency. I agree that the Fed is a giant scam designed to socialize the risk of making loans and help finance the Federal deficit. It's utterly immoral and was never authorized by the Constitution, which specifically gives Congress the right to "coin" money, not print it.

"You Rock. I've only been a member for less than an hour; but, I must inform you how much I love your honest, informed, cynical candor." – Paid-up subscriber Denise

Porter comment: Okay, Denise. Put the liquor down. You've had too much...

"Your piece on [the most recent PSIA recommendation] was one of the best written analysis of a stock I've ever read... seriously... amazing..." – Contributing editor Dr. David Eifrig

Porter comment: Some will surely dismiss my decision to publish praise from one of our contributing editors. But Dr. Eifrig was a Wall Street derivatives trader from Goldman Sachs before he left the Street to become a doctor, which makes his comment noteworthy: He knows what he's talking about when it comes to investments. Furthermore, he has been following my letter for several years... but this is the first time he's ever sent me a note like this one.

Finally, I believe my most recent recommendation is one of the two or three best investment recommendations I've made in my entire career. I'm not surprised he recognized it as being very good. If you don't read my letter... I can tell you in all sincerity, this is a recommendation you shouldn't miss. Click here to learn more about how to become a subscriber.

Regards,

Porter Stansberry

Baltimore, Maryland

December 10, 2007

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