The S&A Digest: Let the bond insurers fail

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(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/24/2013

Let the bond insurers fail... Microsoft is cheap... Wall Street Meltdown... High-school math for grown-up companies... The difference between a stop loss and a trailing stop loss...

Goldsmith comment: Porter is taking Traveler to the doctor, so I'm on The Digest.

 Bond King Bill Gross and hedge-fund manager Bill Ackman are both urging the government not to bail out bond insurers (aka "monolines")...

Gross: "That the monolines could shoulder this modern-day burden like a classical Greek Atlas was dubious from the start. How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world's sixth-largest economy? How could an investor in California's municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation's largest state with its obvious ongoing taxing authority? Apply the same logic to the gargantuan size of the asset-backed market it has insured in recent years – subprimes and CDOs in the trillions of dollars – and you must come to the same logical conclusion: this is absurd."

Ackman: "[W]e understand that the banking industry counterparties to the bond insurers would prefer to avoid taking these... risks back on balance sheet – particularly at a time when their balance sheets are strained by subprime and other losses that have not been hedged... there are no such free lunches available in the capital markets."

 Why do these two financial wizards oppose a bailout? Well, Ackman stands to make billions from the demise of bond insurers. But more importantly, a monoline bailout is just another bailout for the banking industry. Oppenheimer reports that 45% of the exposure to monolines is held by only three banks: Citigroup, UBS, and Merrill Lynch. If monolines fail, these banks are in for hard times, but there's not much risk to the larger financial system.

 PSIA pick Microsoft (MSFT) shares are as cheap as they've been since the company went public on March 13, 1986. After falling 12% on news of the Yahoo takeover, Microsoft is now trading for 15.6 times earnings. Porter's portfolio has some other technology stocks that have been overly battered in this year's global selloff. These blue-chip companies are laughably cheap. To learn more about PSIA, click here.

** After reading this, you'll know why ratings agencies change their credit estimates every month. They're using high-school math to analyze the most complex businesses in the world. In his blog, www.bankstocks.com, financial whiz Tom Brown criticized the analysis of Sean Egan of independent ratings agency Egan Jones...

"When it comes to Egan Jones' assessment of the bond guarantors, here's what passes for number crunching: Egan told me that he looked at each guarantor's subprime mortgage and second lien exposure, and simply assumed 30% loss across the board. He then added up his estimates for all the guarantors, and arrived at $80 billion. Then he multiplied that by three, on the assumption that the rating agencies require three times anticipated losses to maintain a AAA rating. Then he took the result, $240 billion, and rounded it down to 'over $200 billion' because it was such a big number.

"I kid you not. Sean Egan has done the impossible. He's managed to make S&P and Moody's look like models of analytical rigor by comparison."

To read the rest of Tom Brown's criticism, click here.

 Check out this hilarious Wall St. Meltdown music video to the tune of Billy Joel's We Didn't Start the Fire.

 New high: MFA Mortgage (MFA).

 Thanks for your help with contacts in Brazil. We got some very useful responses. Now it's back to the diatribes... feedback@stansberryresearch.com.

 "What is the difference between STOP LOSS and a trailing stop?" – Paid-up subscriber J. Blaine

Goldsmith comment: You set a stop loss on the purchase price of a stock. For example, if you set a 25% stop loss on a $10 stock, you sell when the price drops below $7.50. You adjust a trailing stop loss with upward movement in a stock. If you buy a $10 stock and set a 25% trailing stop loss, and the stock moves to $12, you sell if it drops below $9 ($12 times 0.75).

 "Good luck young man. I only wish you had a bad experience with stocks such as I had when I first started investing. I ran right out and bought Lucent and GE. You can't loose in the market can you? Well two months later Lucent was worth half of where I had bought and GE just sort of stood there. I then started reading, reading, studing and reading. Also subscribed to True Wealth and well the rest is history. I'm a much better investor, entertained by SA Digest and all I can say is Dr. Sugg finds investments I would have never of thought of and yes, Dr Sugg's TMA pick absolutly ROCKS! One of many of his incredibly excellent investment ideas. But young man, I think Porter should have told you to be careful, use discpline, stops and divsification. Not everything will work so well as TMA has." – Paid-up subscriber Steve

 "Reading today's Digest I thought I would relate an event. I am a CPA and my wife is a doctor. We DO NOT carry balances on credit cards. We make interest – we don't pay it. Anyway, I was 3 days late with my Exxon payment this month ($68.00) as I was out of town on business. I have carried an Exxon card for 30 years and I don't think I have ever been late on a payment. Anyway, I get a nasty letter from a Collection Agency. Excuse me? ExxonMobil made world record profits and they jump on a guy with a 30 year history of on time payments for being late 3 days!? Something's going on... and I'll bet it gets worse." – Paid-up subscriber Ross Reynolds

 "Regarding 'Is this the big one?'... History seems to teach that, if the bottom falls out of the economy, the last thing that will happen to a society infected with epidemic stupidity is that it suddenly gets wisdom. Quite the contrary. It would not surprise me to see our "leaders" launch a full fleded witch hunt to hold to account people like you who are so rich and successful only because they are in league with the devil and, of course, stealing from the common man as well. If you think our society is bonkers now, wait untill people get really scared." – Paid-up subscriber K.H.

Regards,

Sean Goldsmith

Baltimore, Maryland

February 11, 2008

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