The S&A Digest: Humor in the Subprime Mess

Humor in the subprime mess... Another look at the ETrade deal... "Overweight" on Intel... How Goldman prospered... Even the Canadians are mad...

"It is a very unusual situation. I have not seen anything like this, where nothing is traded... " said Chip Mason, CEO of Legg Mason, in reference to the market for mortgage-backed securities. Mason says it's the worst market for mortgages he's seen in his entire 47-year career. We've written extensively about what's happening in the market for real estate-backed securities...

And this morning, we found a short video on the Internet that does an even better job of explaining what's going on. We're not normally fans of watching online videos, but this one is well worth the four or five minutes of your time.

How bad are things? We were shocked at the price of two recent deals – the large land sales and the fire sale of ETrade's $3 billion in asset-backed securities. First, Lennar sold 11,000 lots to a Morgan Stanely real estate fund for $0.40 on the dollar. In the ETrade situation, the company was forced to liquidate a $3 billion portfolio of asset-backed securities for only $0.27 on the dollar to a hedge fund (Citadel).

These are Great Depression-type prices. Consider the analysis Andrew Sorkin, of The New York Times, did on the ETrade deal. Sorkin says only $450 million of ETrade's securities were risky stuff – like second liens and subprime mortgages. The rest of the securities – $3.6 billion – were investment-grade assets. And according to an October SEC filing, $1.35 billion of these securities were prime, first lien, residential mortgages.

Assume that only these prime mortgages have any value at all. Give the rest of the package a zero. Even in this extreme circumstance, Citadel bought $1.35 billion worth of prime mortgages for $800 million. That's more than a 40% discount. Assuming you hold a prime mortgage on your home, would you sell it for 40% less than its appraised value? I doubt it. Savvy financial investors are going to clean up, eventually.

Sean Goldsmith recently recommended the most conservative, best funded mortgage company in his S&A Dividend Grabber. This company has little subprime exposure, a pile of cash, and it's waiting for the time to pounce on cheap securities... This is the perfect environment. To learn more about Dividend Grabber, click here...

More signs of trouble: Close to $170 billion in convertible bonds, fixed-coupon debt with the option to switch to equity, have been issued this year – a record for the first 11 months. Convertible issues are nearing the 2003 record of $172 billion.

You will recall that we have been very skeptical that Goldman Sachs would be able to avoid the mortgage market disaster. Well, we may be wrong. As it turns out, according to a company spokesperson, Goldman Sachs "routinely shorts the securities it underwrites." We'll leave you to ponder the ethics of this admission. Meanwhile, we'll ask the obvious question: Why would anyone do business with these firms, under any circumstances?

Given the panic in the market, it's not surprising to see that insiders are heavily buying. Our own Inside Strategist editor, Graham Summers, reports: "In November, insiders bought $297 million worth of stock. This is close to the $330 million they bought in August before the 8% market rally. Insiders only sold $3.8 billion worth of stock in November. That's the lowest November amount since 2002. The top industries for insider bulls are homebuilders, regional banks, and oil & gas explorers and producers."

PSIA pick Intel (INTC, $27) was upgraded to "overweight" at Thomas Weisel Partners. When we recommended Intel (for less than $20) about 18 months ago, we were a tad more direct, calling Intel "The Best Investment In All of Technology, By Far."

How sure were we? "In terms of obvious, it doesn't get much better than this... Shares of Intel have never, in my experience, been cheaper on a valuation basis. Right now Intel, the premiere global manufacturer of microprocessors, is trading for around six years' worth of operating earnings, as measured by total enterprise value. In fact, Intel's shares traded at the same nominal price they do now (adjusted for splits) in 1997 – nearly ten years ago." Subscribers are up 43%.

Extreme Value pick Wal-Mart (WMT) is buying Japan... The mega-retailer raised its stake in Japanese retailer Seiyu to 95.1% from 50.9%. Wal-Mart gained managerial control and plans to gain full control in order to turn the money-losing operation around. Seiyu, Japan's fifth-largest retailer, has been struggling because the Japanese prefer malls and buy most of their food and everyday items from mom-and-pops.

Marty Whitman's famed value house, Third Avenue, has opened a research office in Singapore. We've commented before on Whitman buying Hong Kong property companies... but we admit we didn't realize he has purchased more than $9 billion in Asian investments – almost half the portfolio. Big positions include Sjuggerud Confidential pick Cheung Kong, Toyota, and Henderson Wharf.

Fannie Mae cut its dividend to $0.35 from $0.50 and raised $7 billion in a preferred issue. The company won't say how much it's paying on the nonconvertible preferred, but last week, Freddie Mac issued $6 billion at 8.375%.

New high: Berkshire Hathaway (BRK-A). The reason... The Berkshire Spread.

In the mailbag... The Canadians take us to task. In all of my face-to-face dealings with our fine friends to the north, I have found Canadians to be a uniquely easygoing, generous, and warm people. It is a "miracle" of our mailbag that even the Canadians have begun to insult us... How have we let you down, dear subscriber? Count the ways, here: feedback@stansberryresearch.com.

"If I was spending the dollars for Porters newsletter I would expect at least one Canadian recommendation from the wise man himself instead of being directed to the Canadian public for the answer. I am also a Canadian subscriber to Steve Sjuggerud's newsletter and it is also skewed to American investing although the Canadian investor is welcomed with open 'wallets.' I think that some Canadian alternatives (if applicable) to some of the American recommendations from the newsletters authors would make us foreigners feel a little more included." – Paid-up subscriber Andrew A. Riley

Porter comment: Truth be told, as a research group, we have dozens of Canadian recommendations. In fact, our promotional letters about opportunities in Canada have been mocked on at least one occasion by your newspaper of record, The Globe and Mail. Additionally, we've sponsored countless research trips into your fine country and we continue to cover both the Vancouver mining sector the tar-sands region very carefully. My query was specifically about Canadian coin dealers. If I must, then I suppose I should apologize for not being an expert on this myself. I've never bought gold coins in Canada, and I prefer to get information from people with real, direct, personal experiences. I'm sure the same is true of many of our readers. We got many excellent responses, by the way, some of which are below.

"I deal with, and only with, KITCO, based in Montreal. Type in Kitco.com and away you go. You can place an order on line or call them directly. They will honor all prices so long as funds received are post-marked the same day as the order. Product is shipped, same day as funds received, by Fedex. Doesn't get much easier than this." – Paid-up subscriber Dana D

"I've used Ebay since I can determine a fair price for PCGS graded coins from Van Simmons website. You have to pay GST but the postman delivers it right to you." – Paid-up subscriber Mark Pike

"Van Simmons, from David Hall Rare Coins. Him and his staff are very knowledgeable, helpful, and a pleasure to work with... " – Paid-up subscriber Nazir Khamis

"I had no trouble dealing with David Hall. Ordered the coins. Paid by VISA and coins arrived in two days." – Paid-up subscriber Andy Brockway

Regards,

Porter Stansberry

Baltimore, Maryland

December 05, 2007

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