The S&A Digest: How the Pipeline Can Bring Us Triple Digits

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As of 06/21/2013

Bullish on heroin... Go long cattle... Short Goldman... Canadian gas... Make more in bonds than in stocks... Mommy, where does inflation come from?... Drugs in the pipeline give us a boost...

Our best commodity recommendation? Get long heroin. According to sources in Afghanistan, farmers there have replaced their traditional poppy crop with wheat. Inflation is looming – even for junkies. While we suspect we're a long way from a top in commodities in general, it does give us pause when wheat is a better cash crop in Afghanistan than poppies...

In a related idea, our friend Doug Casey is bullish on cattle. Soybean prices have risen so much that even marginal farmland is being planted with soybeans. Cattlemen are becoming soy farmers, and the increased slaughter rate has depressed beef prices. But... sooner or later... the newly rich Chinese and Indians are going to want to buy protein. And there's going to be a lot more soy than cows...

As I mentioned Monday, we sent a group up to Grant's Spring Conference in New York this week. Jim Grant, as you may know, is the most eloquent financial writer of this generation – with apologies to Bill Bonner. He is also a well-known "permabear" and deep value investor. His conference gathers New York City's elite investors, including top hedge-fund managers and value investing legends. You can judge the mood and sentiment of the markets simply by inquiring about Grant's attendance. Back in 2000, no one bothered going. But lately, the conference sells out.

The forecasts at Grant's conference were overwhelmingly bearish. John Paulson, who personally made $3 billion shorting mortgages last year, thinks we'll see $1 trillion in losses before this mess ends. We've only had $230 billion in losses to date. The reason for the losses is simple: leverage. Bear Stearns was leveraged 37 to 1 when it collapsed. And as Paulson pointed out, that amount of leverage is normal. Take a look at this chart (courtesy of Paulson). It shows the leverage employed by the major investment banks. He didn't want to single out any banks, so he assigned them letters (you can probably guess which they are).

In addition to enormous leverage, we're also seeing home-price declines accelerating and the pool of underperforming loans growing. Alt-A 60-day delinquencies and foreclosures are up 376.5% year over year.

Paulson outlined three steps he is taking to avoid losses: 1) maintain minimum exposure to equities 2) maintain a short credit position 3) prepare for long distressed opportunity. He's looking for the "fulcrum" security – the most senior issue that will benefit most during reorganization. These securities are usually debt offerings.

We're not sure which letter on Paulson's table represents Goldman Sachs, but it's up there somewhere. Goldman reported a 39% increase in its Level 3 assets this quarter. Level 3 is the toxic stuff: subprime mortgages, securities backed by commercial real estate, and other highly illiquid investments. Goldman is now carrying $96.4 billion of Level 3 assets on its balance sheet. The entire bank is only worth $76 billion.

You might wonder... What should I do with my own investment account to help protect myself against a cascade of bankruptcies in the financial sector? Maybe the bears at Grant's are right. Maybe the market is going to get a lot worse. One idea: Shift more assets into bonds and out of stocks. How? You might buy bond mutual funds, or, if you're interested in far bigger returns, you might try investing in individual bonds. Which ones? In our new publication, True Income (only available to S&A Alliance subscribers, for now), Mike Williams, our bond analyst, has recommended three individual bonds. If you hold these bonds until maturity, you'll make annual gains of 33%, 17%, and 23%, respectively. That's more money than you're likely to make buying the average stock in a given year.

While buying bonds and analyzing bonds can be tricky, we have a lot of confidence in Mike. At 62, Mike is, by far, the most experienced analyst on our team. In fact, he was working on bonds before I was born. And he acquired his CFA credential in 1990. At our editorial meetings, Mike always asks us stock jockeys a tough question: If I can make more money in bonds, which are legally required to return my capital, why would I ever buy a stock, which gives no guarantee whatsoever? Good question, Mike. And it's a question more individual investors should ask themselves, especially in this market.

We'll cover a few of Mike's individual ideas, in detail, in upcoming issues of The Digest. If you're as impressed as I have been with Mike's work, I'm sure you'll want to subscribe.

ConocoPhillips and BP are spending $25 billion to $30 billion to build a pipeline to carry Alaska's gas to Canada and the U.S. The pipeline will move about 4 billion cubic feet of gas per day. The first destination is the Alberta oilsands in Canada – the biggest proven reserves outside Saudi Arabia.

Alberta needs enormous amounts of natural gas to get oil out of the ground. Companies are currently pumping 825,000 barrels per day. That number is expected to quadruple by 2025. Tom Dyson recognized this trend last year (you can read his essay in DailyWealth) and he has two Canadian natural gas stocks in his 12% Letter that will directly profit from Canada's huge gas needs. To learn more about The 12% Letter, click here...

"The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices," former Federal Reserve Chairman Paul Volcker said in a speech to the Economic Club of New York. Sounds familiar, doesn't it? We said as much when the Fed began making loans to investment banks. If you want to know what's causing all the inflation, look no further than the Federal Reserve.

After 13 months of testing, we've finally launched our newest research service – The S&A FDA Report. Our medical specialist and veteran trader, Dr. George Huang, created a breakthrough trading technique for exploiting approvable letters – a government-triggered phenomenon in the stock market. Based on his proprietary technique, you can actually learn when the potentially biggest trades of the year will happen, months in advance. We've been covering Dr. Huang's system the past month in The Digest. Today, he discusses how biotech traders can make a quick 300%.

We're going public with Dr. Huang's new strategy in less than two weeks. In the meantime, we're offering Digest readers first dibs. And you only pay half price. To learn more, click here...

New highs: ArcelorMittal (MT), Plains Exploration (PXP), Sabine Royalty Trust (SBR), Stone Energy (SGY), XTO Energy (XTO).

In the mailbag... subscribers waiting with pitchforks for Sjuggerud; another Alliance millionaire; plus, a truly unique way to invest in Burma. Send your ideas and your condemnations here: feedback@stansberryresearch.com.

"There is a more direct way to invest in Burma, on a smaller scale, than buying property, which you may or may not be allowed to keep once the junta is overthrown. Buy contemporary Burmese artworks. These are amazingly cheap compared to comparable artworks from other parts of asia and laughably cheap compared to overhyped, less talented western artists. Like in Vietnam, most of the artwork is from classically trained painters heavily influenced by the French Impressionist style, but there are many talented more innovative artists and it (currently) is not rife with fakes and copies like in Vietnam. Once the country opens up for investment, or possibly sooner, prices should rise similarly to what has happened for Indian, Chinese and Indonesian art works." Paid-up subscriber Richard

Porter comment: That's a brilliant idea... provided you know what you're doing.

I'm impressed with the critical emails you publish, but I'll be curious to see if this one makes it into the digest... I think you should consider firing Sjuggerud. Why? His record over the last six months has been dismal... From this point forward, anything this guy says will be a signal for me to steer clear." – Paid-up subscriber Rick

Porter comment: While it's certainly true the last six months haven't been Sjug's best ever, no one we know has done a better job for investors over the last 10 years. Furthermore, no one in our industry does better, more insightful, and more original research. We're going to stick with him.

"Here's my vote on your best/worst editors. Worst Editor: Sean Goldsmith; Most useless Editor: Sean Goldsmith; Best Editor: Steve Sjuggerud. Another thing I was thinking about asking you is whether you would consider offering The Digest as a free service to non-subscribers – but fill the "free" one with Adverts to compensate, while subscribers would still enjoy the normal ad-free version. The reason being is that as a customer I have found that it's been the insight in The Digest that has kept me glued to your research services more than your ads." – Paid-up subscriber Nayem

Porter comment: No, we think The Digest is too valuable to share with non-paying folks. By the way, Sean Goldsmith compiles about 80% of the information you get in The Digest each day. And his last five Dividend Grabber recommendations are up an average of 13% since October. The market is down 11.4% during the same period.

"Ian Davis and Sjuggerud's article on commodities and stocks trends [in yesterday's Digest] was amazingly simple yet great! Really really good work!" – Paid-up subscriber Cym

"I tried several newsletters at the beginning. Some I continued past the total refund date and bought stocks based on their research. Others, I knew almost immediately that their newsletter was not for me. Then I signed up for True Wealth knowing I could get a refund if I was not satisfied. It was clear that this investment letter by Sjuggerud was different. Steve not only wrote about investments, but he gave directions for educating oneself about investments. As I became more knowledgeable, I decided to join the Alliance. That was several years ago. It was the best thing I ever did. Now my investment portfolio is over one million dollars." – Alliance member RT

Regards,

Porter Stansberry

Baltimore, Maryland

April 9, 2008

How the Pipeline Can Bring Us Triple Digits

By Dr. George Huang, editor, The S&A FDA Report

In an earlier Digest, I told you the story of Pozen (POZN). When the market sold first and asked questions later, shrewd investors pocketed a quick 200% in six months.

Today, I'll discuss the second catalyst that propels our FDA Report trades higher... in any market:

In The S&A FDA Report, we only trade biotechs with multiple drugs in clinical trials. The reason is simple: Positive news from these hidden pipeline drugs can create tremendous excitement and get the stock back on the right track.

The best example of an overlooked "pipeline boost" comes from biotech company Amylin (AMLN)...

Byetta, the diabetes wonder-drug from Amylin, was quietly progressing through early clinical trials when the company received an approvable letter for its lead diabetes drug, Symlin. The market was so focused on Symlin's regulatory delay that Byetta was all but forgotten. But in the next 12 months, as positive news from Byetta's clinical trials trickled in , investors realized their grave error...

Indeed, Byetta was the future of Amylin, not Symlin. Early traders who bought Amylin shares made 200%-300% gains in about 12-18 months. Today, Symlin generates measly sales around $100 million per year, while Byetta sales are poised to crack the $1 billion mark this year.

Good investing,

George Huang

P.S. I've developed a four-pronged strategy to trade on FDA events like we saw with Amylin. Using this system, you can pinpoint potentially lucrative trades - months in advance. Right now, I'm monitoring a trade I think could generate a minimum of 75% gains in the next year. Click here to find out more.

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