The S&A Digest: Learn to love bear markets

Learn to love bear markets... The bailout continues at Lehman... How much paper can the Fed print?... Jim Rogers goes long airlines... Rodriguez is still holding cash... Ed Seykota's banjo... WaMu celebrates...

"So... what's your best trading idea right now?" About four years ago, Jeff Clark flew in to meet with us about writing a trading service. I knew he was a famous investor, market timer, and a 20-year veteran of options trading. You don't survive 20 years of options trading without being exceptionally good at it. I was very interested to meet this West Coast legend... but I had no idea exactly what Jeff was trading at the moment, so I asked him.

"Well, I'm shorting XM Satellite Radio right now, but the best trade in the entire market is shorting Martha Stewart. The stock is running up on the anticipation that she'll be let out of jail. Of course, that's not going to change the fact that it's a woefully overvalued stock and a terrible business. The day she gets out of jail, the stock will fall by at least 20%..."

For his part, Jeff was a subscriber to our letters, but he had no idea what was in my personal portfolio. And he couldn't have known what I was planning to write about in my next letter. I was shorting shares of XM Radio in my own account, and on my computer was an almost-finished research piece directing my subscribers to sell short shares of Martha Stewart's stock.

Our top two ideas were almost identical. And that's a true story.

While I certainly don't come up with nearly as many trading ideas as Jeff does – and I would in no way consider myself even half as good a trader as he is – it's remarkable how many times over the years when I'm working on a really good short-term idea, he's working on the same thing.

And that's true again right now. I spent seven pages of my most recent newsletter telling investors how to do well during a bear market – by selling covered calls on high-quality, super-safe, stocks. (My newest covered-call position is up about 9.9% today. Also, readers are up about 2.4% on the matching short-sell recommendation... And that's on the first day.)

Meanwhile the headline of Jeff's latest essay in Growth Stock Wire was Mortgage Your House and Buy as Much of this as Possible. And Jeff's top trading idea, while slightly different than mine, is based on the same exact strategy I'm following. If you're not familiar with the covered-call strategy, see Jeff's essay from last week's Growth Stock Wire for the basics.

Yes, we know markets have short memories, but this is ridiculous... Lehman Brotherspackaged $2.8 billion in debt, including leveraged-buyout loans, into a new investment vehicle called "Freedom." Amazingly, $2.26 billion of the debt received investment-grade ratings, which allowed Lehman to use the security as collateral for a loan from the Fed. You won't hear it described this way, but what's happening on Wall Street right now is an enormous bailout. No one else would have accepted this security as collateral. And you have to wonder just how much paper the government is willing to throw at the problem. There could be as much as $1 trillion in bad mortgage debt. There's nearly that much short-term corporate paper. And there's at least another $1 trillion in outstanding credit-card debt too – and there's no collateral at all behind those loans...

Our favorite commodities bull, Jim Rogers, had a front-page Barron's interview today. Rogers told the same story (long agriculture/China, short banks), but gave some specific stocks this time. He's still short investment banks through the Amex Securities Broker/Dealer Index (XBD). He's short Citigroup (C) and Fannie Mae (FNM). He's also short some U.S. homebuilders, including Lennar (LEN). Meanwhile, he's a big fan of international airlines like Lufthansa, Austrian Airlines, and Japan Airlines. He's bullish on the renminbi, and his only exposure to emerging markets is through China and Taiwan.

While many famous value investors have spent their cash hoard, famed value investor Robert Rodriguez is still holding 40% of his $1.8 billion FPA Capital Fund in cash. Even with the handicap, his fund returned 0.4% last quarter, versus the S&P's 9% loss. Despite his cautious stance and his positive performance, his investors are still leaving. The fund lost 12% of its assets since last year. That's one of the great secret ironies of mutual-fund investors. They all leave, just when they should be buying.

Interested in trend following? Ed Seykota, the system-trading pioneer, composed a bluegrass song outlining the basics of his strategy. Check out The Whipsaw Song here...

New highs: none.

In the mailbag, a reader on the scene in Hawaii reports on what Washington Mutual is doing with its latest cash infusion. Spend it while you've got it, I suppose. Send your comments here: feedback@stansberryresearch.com.

"'Contrary to the arguments of many subscribers, there is an objective standard of morality in the world: First, do not aggress against another person or their property; and secondly, do all that you have contracted to do.' I hope people realize the importance of the above for the sake of their growth. May be it would be good to mention the book 'whatever happened to justice.' Self-responsibility is hard to come by. Humility even harder. Thank you for good investment ideas." – Paid-up subscriber Dino Orucevic

"Reader P.Stevens sez: 'You Porter as well as I have a responsibility to protect those that are much less fortunate that we are.' Sez eye: Just another way of saying 'From each according to his ability, to each according to his need.' Who is John Galt?" – Paid-up subscriber Jerry Lane

"I'm glad to see Washington Mutual is putting their 5B in new cash to good use. They picked up the tab for 600 of their most effective (?) employees and family for 4 days and nights at a 5 star resort here on Maui. I believe it was called a incentive trip. Included in the totals are rt airfare, some first class; $700+ per room / per nite; outings; spa treatments;awards banquet; and a 'gala' Awards? What, for the person who lost the least amount of money? Gala theme - Hooray, we're still alive. Go figure." – Paid-up subscriber Mark in Maui

Regards,

Porter Stansberry

Baltimore, Maryland

April 14, 2008

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