The S&A Digest: John Templeton, R.I.P.

R.I.P. Templeton... The future of publicly held investment banks... European currencies continue to fall... Sex and politics... Soros and marijuana... Who recommended that stock I bought?...

Don't miss the special guest essay (below) by our old friend Doug Casey. It's an obit only Casey could write.

Just a reminder... In observance of Labor Day, we will not publish The Digest on Monday. Take the time off to enjoy some college football. Also make sure to sign up for Jeff Clark's online video seminar. The deadline is 7 p.m. on Monday. In the video, Jeff will give away his No. 1 income-generating secret – which can produce $2,500 per day. Best of all, the video is completely free. To sign up, click here...

To put the current financial crisis in perspective... Since the beginning of 2007, Merrill Lynch has lost $14 billion after tax. According to the Financial Times, this equals about one-quarter of the firm's total profits, adjusted for inflation, made in Merrill's entire history as a public company since 1971.

We offer a prediction about investment banks: The past will be prologue. At one time, all of the major investment banks were privately owned partnerships. The partners risked their own capital and borrowed what they needed when necessary. "The public be damned," J.P. Morgan was rumored to have said.

But then... starting in the early 1970s... the banks created a new, public model. Why did they invite the public to the party? It was a way for the partners to get their capital out of harm's way (by replacing it with the public's money) while at the same time keeping the lion's share of the profits. On average, investment banks pay out about half of their revenues in compensation each year. Almost nothing is paid out in dividends.

Take Goldman Sachs. The firm reported $87 billion in revenue. It paid out $30 billion in cash compensation. But Goldman paid its shareholders less than $1 billion in dividends. And it has stacked enormous risks on the backs of its shareholders, too. While it was paying itself like a pig gorging at the trough, the savvy guys at Goldman lost $68 billion in cash and borrowed an additional $78 billion.

We've long questioned how Goldman can report bigger profits each year while its cash losses continue to soar. It's magic. Enron magic. The public takes all of the risk and gets almost nothing in return. Our prediction: Sooner or later, the public will come to its senses. All of the public investment banks will go bust or be taken private for a pittance. Either way, they will all be private once again.

Americans may finally be able to afford a London vacation again. The British pound is at its lowest level in 12 years against its trading partners. And it hit a record low against the euro on Friday. The currency problems were amplified by figures showing U.K. house prices fell at their fastest pace since August 1991 and retail sales are at their lowest level in 25 years.

"Here 4 DNC? Come get sexual with me," "Does the DNC make you hot?" and "Looking to service a young Democrat" are among the ads listed on the Craigslist Denver web site under "casual encounters." Ads for sexual encounters increased 80% to 763 posts since the arrival of the Democratic National Convention.

We know your feelings on George Soros, but the guy's not all bad. For instance, he just put up $400,000 of the $429,000 collected by a group championing the decriminalization of marijuana in Massachusetts. If the Soros-funded measure passes, possession of less than one ounce of pot would be punishable with a $100 fine. Currently, possession of a small amount can earn you a $500 fine and up to six months in jail. This isn't the first time Soros has backed marijuana. He started in 1996 by voting to allow medical marijuana in California.

In 2006, ExxonMobil drilled 30,000 feet into the ground... the deepest hole the world has ever seen. But back then, the price of oil barely averaged $70 per barrel. Pair this with the rising cost of drilling, and Exxon decided to pull the plug. After dropping $200 million into the famed hole, it left the project behind without any payoff.

Well, oil prices have surged since then, and Inside Strategist editor Brian Heyliger discovered a new company taking the "world's deepest hole" even deeper. The CEO thinks 2 billion barrels of oil may be down there, and one plugged-in insider bought $9.4 million in stock this month to show his confidence. It's a long shot, but if the company finds what it's looking for, today's investors will quadruple their money overnight.

To learn more about Inside Strategist and read about the drilling company, click here...

New highs: Plum Creek (PCL), Covidien (COV), H&R Block (HRB).

In today's mailbag a few tips on managing your portfolio... Send your questions to: feedback@stansberryresearch.com.

"Just to say thanks for the info. Einhorn's speech you printed concerning private profits and socialized risk gave a heck of a good insight to the financial institutions and their condition today. In the Great Depression of the 1930s, there was no regulation of markets or banking institutions. A bad stock trading day(s) dipped the capital caused banks to issue margin calls and resulted in a run on the stock market. The leverage at that time was that the banks loaned money for margin accounts that was larger than the individual's worth. A small dip in the stocks resulted in loans not to be payable. Nowadays financial firms are leveraged 30:1, which I believe is way beyond 1929 numbers. Oh sh**." – Paid-up subscriber Mike Cramer

"I am really new @ this, so help me here & then U can laugh about me later. MBIA is up over 90% since I took it on. I believe that Dr. Steve put this one up as a recommendation. Let Dr. Steve or who ever was the one who put it up as a recommendation to BUY. Many Thanks. My question is MBI is doing so well, I don't want to pig out on the run. I would like very much to take it for a ride as long as I can before running out of gas, so to speak. The EBS position is almost @ 30%. Again I would like to milk this one to & then get out before I get milked back!" – Paid-up subscriber Ken Winkler

Porter comment: Maybe it's me... but I'm always amazed how many of our subscribers will put their hard-earned capital at risk in stocks they don't know anything about – not even who recommended them.

My suggestion? Each time you buy a stock, write down on a note card the name of the company, the price you paid for it, the position size, the stop-loss strategy, and a few of the major reasons you want to own it. It shouldn't take more than 10 minutes a month to run your portfolio this way... and it will prevent a lot of costly mistakes.

Regards,

Porter Stansberry

Scotts County, Tennessee

August 29, 2008

John Templeton, R.I.P.

By Doug Casey

I wasn't sure whether I wanted to do an obit for John Templeton until I started reading some in the press. They all dutifully cover his investment acumen, charitable endeavors, sterling character, and such. No one had an unkind word to say about him. Nor do I, even though righteously defaming the inflated reputations of the dead has become something of a hobby for me. I actually met with him in his office in the Bahamas back in the late '70s and was immensely flattered that he had a copy of my book, The International Man, on his shelf. We spoke of the Philippine stock market, which I'd just looked into on a recent trip; he was having trouble getting meaningful data on it. He was a personable and nice man.

What I want to note here is a glaring omission in most of his obits that I consider at once suspicious and dishonest. In the Wall Street Journal, the long obit mentions he was born in Tennessee in one section, that he moved to the Bahamas in 1968 in another section (ostensibly to insulate himself from the rumor mill of New York), and that he became a British subject in 1968 in a different part of the article. The New York Times and Washington Post each only made similar brief mention of the fact he was an ex-American. All these papers seemed to treat the fact he renounced his citizenship as almost a tawdry matter of shame, best not discussed.

In point of fact, his renunciation of his U.S. citizenship was a major reason for Templeton becoming as wealthy as he was. If he'd had to pay the federal and state governments anywhere from 20% to over 70% of his income (depending on variations of the tax code over his working career), his wealth would have compounded at a much lower rate. On average, he seems to have compounded his investments around 15% per year. If he'd been paying taxes, the effective rate of growth would have been about half that much. The difference over the course of 50 years is stunning; in fact, 29 times higher.

American taxes, which Templeton had the prudence and courage to escape while it was still possible, are a major reason why the U.S. is having its lunch eaten by rising powers like the Chinese. Chinese taxes are low and, even then, few Chinese feel any moral compulsion to pay them. A Chinese of equal intelligence and vigor to an American should therefore be able to compound his wealth, in that high-growth economy, far faster than an American.

To make the point, let's give them both $10,000 and 50 years to compound it at a net of 7.5% for the American, and 15% for the Chinese. The difference, $371,897 versus $10,836,574 is shocking. Now consider the Chinese will devolve 100% of the money to his children. The American will pay perhaps 50% in death taxes once Bush's tax regime is allowed to expire in 2011, or more likely, repealed early on in Obama's administration.

Which is to say that the children of the Chinese entrepreneur will start out with a huge capital advantage, $10,836,574 vs. $185,949. If you think America has competitive problems now, just wait until the next generation.

Unfortunately, today's American John Templetons can't easily follow the master's example. If you renounce your citizenship under the new tax law, you'll first pay a huge exit tax equivalent to about half of your net worth for the privilege.

And things are getting worse, not better.

John Templeton, R.I.P. He was a wise and patriotic man to have denied all that he did to the state.

Regards,

Doug Casey

P.S. The September edition of The Casey Report includes a special report on the outlook for U.S. real estate... How bad things will get, how long the downturn will last, and how to avoid the immediate risks while capturing the imminent opportunities. We offer a three-month full guarantee to new subscribers. Check it out here.

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