The S&A Digest: Lehman's best operator

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

As of 06/19/2013

What inflation?... Scalia's war... As poor as an Argentine... BUD moves to stay independent... The details of our bond strategy... The 'naked' shorting panic...

As my friend Bill Bonner likes to say, central bankers are like squirrels watching a bank robbery. They saw the whole thing happen, and it meant nothing to them. With inflation running at its fastest pace in a generation (food and fuel are up nearly 6% per month), Bernanke has about as much credibility on inflation as I've got on biotech stocks...

Watching the prices of commodities soar while the value of our dollar plummets against other currencies, Federal Reserve Chairman Ben Bernanke now says he will "strongly resist an erosion of long-term inflation expectations." Ha, ha, ha...

We will interpret that for you: "Look, we've printed enough money to bail out the banks and the brokers. We've wiped out 40%-60% of the value of our foreign debts. And as a result, the standard of living in America has probably fallen in half. So the poor middle-class Americans who have no protection against inflation are starting to squeal. We'd better turn off the presses for a little while or else we risk losing the confidence of 'everyday' Americans. After all, without the saps, we've got nothing..."

Out of all of the countries in the world, Argentina's economy ought to be booming. Argentina is the breadbasket of the Western Hemisphere. It has the richest farmland in the world and all of the infrastructure required to support large-scale, modern farming. But thanks to boneheaded export taxes set at 40%, Argentina's farmers have no incentive to work. As a result, the country is slipping back into an economic crisis.

Argentina's debt levels are now higher than in 2001, when the country crashed into the biggest sovereign debt default in history. It won't be long now before you can go to Buenos Aires again and buy a $2 million luxury penthouse apartment for $200,000 in cash. While that's terrible for Argentines, at least Americans still have a place to travel where their dollar goes far...

InBev, the global brewer behind brands like Beck's and Stella Artois, has offered $65 per share for PSIA pick Anheuser-Busch. Many of you hopefully, have benefited from this offer, as two years ago I made the strongest recommendation of my career – to buy BUD around $41. Making more than 50% in two years while the market has fallen isn't bad.

But I continue to hope that the deal will not go through, even if it means a short-term fall in BUD's share price. I believe BUD's business and brands are worth much more than InBev's. And I would rather not see our position diluted, despite the $65 price. I know how hard it is to find and buy great business at good prices, and I'd prefer not to sell.

And there may be a way out. If BUD can convince Grupo Modelo to merge with it (BUD already owns 50%), then the combined business would probably be too large for InBev to buy. The resulting corporation would own a majority stake in the market for beer in both the U.S. and Mexico, plus major investments in China.

Jeff Clark is a freak of nature.

I've spent the past 12 years in the investment publishing business... and I've seen advisors of all types. It's extremely rare to find one who is world-class at one discipline – be it analyzing oil stocks, currencies, trading options, etc.

Jeff is easily the best short-term options trader I've ever seen. But what has truly amazed me in the past nine months is his ability to generate fantastic income ideas for readers of Advanced Income. I guarantee you'll feel the same way after a few months of reading his unusual income strategies.

Jeff's latest trade is a way to safely earn a double-digit income payoff in just five months. You can learn about taking Advanced Income for a "test drive" here.

Justice Anthony Scalia says in a recent Supreme Court ruling, "America is at war with radical Islamists." To fight this war, Scalia wants to give the president the power to apprehend (kidnap, really) any person in the world and hold him captive for as long as the president desires, without requiring the president to give the captive any legal rights whatsoever. Centuries of common law dictate everyone has a right to "habeas corpus" – a right to your body. And legally you can't be arrested indefinitely without being charged with a crime. At some point, you must have the right to defend yourself – to appear before a judge and present evidence in your defense.

If we're at war with "radical Islamists," then why, I wonder, hasn't Congress declared a war? And if we're at war, then where are the armies of Islamists seeking to conquer us? The last time I checked, America was sending billions in arms and financial aid to prop up dozens of ruthless radical Islamic dictatorships – like those in Egypt, Saudi Arabia, and Pakistan. Meanwhile, we invaded one of the few countries in the region that wasn't governed by a religious fanatic. Saddam was just your average, CIA-backed tyrant. If we're really at war with radical Islamists, we sure seem to be fighting this war in a strange way...

The U.S. Constitution is very specific on this point: Habeas corpus can only be suspended in the event of armed rebellion or invasion. Two presidents have legally suspended habeas corpus – Lincoln, during the civil war, and FDR, during WWII. In retrospect, both presidents seemed to have abused the privilege. Lincoln arrested his political opposition. And FDR put Japanese-American women and children into internment camps – while many of their sons fought and died for America. Meanwhile, in the current conflict, the military plans to charge only about 90 of the 270 remaining detainees. Most of the rest, the military agrees, were probably arrested in error due to the bounties being paid by the military for Arabs in Afghanistan, all of whom were assumed to be "terrorists." Most, according to the military, are really "dirt farmers."

Fortunately, five of the nine Supreme Court justices disagreed with Scalia. And so, the president can't simply "black bag" anyone he wants around the world. The folks in Guantanomo Bay, some of whom have been there for more than six years, will either have to face charges or be released.

New highs: Opti-Canada (OPC.TO), Pioneer Drilling (PDC), International Coal Group (ICO), Keyera Facilities (KEY-UN.TO), U.S. Natural Gas Fund (UNG), Anheuser-Busch (BUD).

In the mailbag, more details about our upcoming bond research product, True Income. Plus, more of the "naked" shorting nonsense. Send your accusations here: feedback@stansberryresearch.com.

"Dan's comments regarding leaders, i.e. personal integrity and responsibility make you the kind of person I could call friend." – Paid-up subscriber Jim Cahoon

Porter comment: I found Dan's reply far more eloquent than my own words on the topic. And I can tell you from experience, Dan is a good friend.

"You say that you've shown True Income only 'to our S&A Alliance members.' I've not seen it, ever, yet I'm an Alliance member, who paid a lot for the membership. What's going on here? Or should you have said 'we've shown it only to a select few of our S&A Alliance members?' It (True Income) sounds like another winner, but something like that is hard to say based on no evidence." – Paid-up subscriber Mike Maus

Porter comment: From the looks of it, I'd say that we've got an Alliance subscriber who's not checking his e-mail or visiting the S&A Alliance website. I assure you, we sent copies to you and posted copies on the S&A website. Why not check for yourself?

Of course, if you're not receiving our e-mails, contact customer service at 888-261-2693.

"[Regarding the safety of bonds] do not ignore the $74 billion Argentina default in 2001. And those were Sovereign debt; issuers who were not ever going to actually go bankrupt; but merely decided by dictate to not pay their bonds." – Paid-up subscriber Anonymous

Porter comment: Yes, we're well aware of this risk. And that's why our publication will only cover U.S. corporate bonds, where the U.S. legal system applies. (At least for now... )

"I am interested in buying some bonds per your excellent new publication, True Income. I am, however, concerned about the affect of rising rates on any potential investment. Since we are entering what may be a prolonged rising rate environment, which financial theory and history suggest will be detrimental to the principal value of the bonds, what advice would you offer for navigating this area?" – Paid-up subscriber C.A. Jay

Porter comment: True Income covers bonds with short maturities (always less than five years and more often less than three years) trading at a wide discount from par value. These securities offer extremely high yields to maturity and capital gains at maturity. As a result, we don't expect rising interest rates will hurt the value of these bonds in any way. (The bonds to worry about are low-yielding, long-dated government bonds.)

"On June 6, you laugh at one of your members' feedback about naked short selling. I am frankly amazed that, as a professional who works, and makes a good living, in the financial world, you are not aware or, worse, in forced denial, of this fraud and the huge damage that has created to hundreds, if not thousands, of companies by financial criminals, over the past 10-15 years at least..." – Paid-up subscriber F.S.

Porter comment: We got a half dozen of these kinds of hysterical letters, which happens anytime the topic comes up. This is one of those topics that gets a small number of people completely fired up – and they seem to lose all their reason.

First, not a single, reputable CEO from a good company has ever complained to the SEC about "naked" short selling. Not one. Second, every company that has ever complained about "naked" short selling was, as closely as I could tell, either enormously overvalued, a penny stock pump-and-dump vehicle, or involved in some kind of major financial malfeasance. In every case, huge red flags should have told any reasonable investor: STAY AWAY.

Now, if you think you've got a stock that suffered from "naked" short selling that isn't in one of these categories, you'd better double check. I've looked at hundreds of them, and I've never seen any legitimate company "hurt." (I put "hurt" in quotes because there's no evidence short selling hurts anyone. Even if short sellers do drive the price lower in the short term that simply creates a better opportunity to buy shares for the folks who want to invest in the company. Giving people better prices to buy doesn't hurt them.)

So whether or not "naked" short selling happens from time to time isn't an important question. I'm sure there are instances where savvy investors want to short a stock and there are no shares available to borrow. Perhaps their brokers take a risk and allow the short with the expectation that they'll soon find some shares to sell in the market to hedge their exposure. I don't know, and I don't care. And neither should you. The fact that huge numbers of investors want to sell a stock short should tell you something about its likely intrinsic value. Any stock that's on the "naked" short list is one you should simply avoid.

And, like I explained the other day, any CEO who wants to get his company off the "naked" short list only needs to do two things: Buy his own company's stock at the market price and increase the dividend. The short sellers will cover like mad.

"In yesterday's Digest, you mentioned the new full-body scanners that are being introduced at several airports around the nation... If past history is any indication of what will happen in the future, I can be sure to be 'randomly' selected every single time I travel through those hubs... I should specify that am a blond, blue-eyed young woman... Let me submit to you that they have to look busy; now, they have a choice, they can either search the poor fat guy who hasn't showered in 3 weeks or they can search me, which one would you choose? Full-body scanners, here I come!" – Paid-up subscriber MT

"We are at war and things change during times of war. If taking a picture of this 76-year-old body helps, then be my guest. They won't look at It for long... " – Paid-up subscriber J Mayer

Porter comment: Didn't it occur to you to wonder what a body scan has to do with the safety of an airplane? They already have the ability to scan us for metal objects and "sniff" us for bombs. Besides, why bother searching someone like you at all? A 76-year-old American terrorist?

But what if the Transportation Security Administration isn't really looking for weapons? What if they're looking for anything else they don't want you to carry, like cash? Or contraband? Why not just call it a "checkpoint" and demand to see our "papers"? It's like Doug Casey says, we're all just a bunch of whipped dogs. It's a shame.

"DAMN IT, WHY WON'T YOU EVER RESPOND TO MY COMMENT THAT SELLING COVERED CALL OPTIONS IS ONLY FOR THE RICH. WHAT ABOUT THE AVERAGE INVESTOR THAT CAN IN NO WAY AFFORD 100 SHARES OF YOUR RECOMMENDATIONS? HOW THE HELL CAN WE SELL A 1/10 OR 1/4 OPTION FOR 10 OR 25 SHARES? ADVANCED INCOME RECOMMENDATIONS ARE WORTHLESS FOR THE 'LITTLE GUY.'" – Paid-up subscriber Wayne Starr

Porter comment: This brings to mind Ayn Rand's comment about the poor: "Don't be one of them." We tell Advanced Income subscribers that to get the most out of Jeff's strategy, they should be able to commit at least $10,000 to the strategy. And if they can't, we certainly offer many other low-cost advisories that don't have any minimum position size.

Regards,

Porter Stansberry

Villa Reineri, Italy

June 13, 2008

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