The S&A Digest: More bank losses

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

As of 06/21/2013

More bank losses... More future bank losses... Time to buy in Miami?... Global oil consumption... How to get started, safely, in stocks...

Bank of America (BAC) reported earnings of $1.21 billion for the just-completed first quarter – a 77% decline from last year, as the company set aside $6.01 billion for bad loans. Results included a $1.31 billion trading loss and $2.72 billion in costs for bad loans. BAC missed analyst estimates, and shares are down 1% on the news.

Nonperforming loans at small and mid-sized U.S. banks have almost tripled this year, reaching levels not seen since the savings-and-loan crisis of the early 1990s.

We wrote it, did you listen?

All of the deadbeat borrowers who can no longer use their mortgages as an ATM are now piling on credit-card debt at a record pace. Equifax (a leading credit bureau) reports total credit-card balances increased 8.1% in the first quarter of this year – more than double the previous average rate of growth. Naturally, the steepest increases in credit-card borrowing occurred in the same states where the mortgage crisis is the worst. Credit-card balances rose nearly 15% in the first quarter in California and Florida and more than 20% in Nevada. Like drug addicts, consumers cannot survive without more and more credit, and they're now turning to the most expensive and unreliable source. They will soon hit bottom. –PSIA, April 2008

Last week, Gary Crittenden, chief financial officer of Citigroup, said he believes consumer credit is the single biggest risk to the banking sector and general economy. In this month's PSIA, I recommended shorting a company that will fall even more than Citi once consumers start defaulting on their credit cards. To learn more about PSIA and take advantage of this short opportunity, click here...

Go long Miami... We've been covering the unfolding bust in Miami real estate for several years. Watching the prices and the deals, we think the time to buy might arrive late this year. South Florida real estate market analyst Jack McCabe says the condo backlog now equals more than five years of inventory. More than 24,000 units are for sale, and another 19,000 units are under construction. Only 1,000 to 2,000 units are typically absorbed each year. Prices have fallen 20%-40% from their highs, but McCabe thinks another large drop is coming soon. We expect to be able to buy high-quality Miami Beach condos with water views and luxury amenities for around $250 per square foot (prices peaked in 2005 at more than $1,000 per square foot.)

Oil trades for more than $117 per barrel, and for the first time China, India, Russia, and the Middle East will consume more crude than the U.S. The International Energy Agency estimates the emerging markets will consume 20.67 million barrels a day this year, a 4.4% increase. Meanwhile, U.S. consumption will fall 2% to 20.38 million barrels a day. We doubt oil prices are going anywhere but up. Look at the chart below (courtesy of U.S. Global Investors) showing international oil consumption per capita. Every country's oil consumption exploded following the industrialization of that country... except China. China has not even begun to whet its oil appetite. T. Boone thinks we'll see $125 oil, but according to this chart, it could go much higher.

Oil Consumption and Industrialization, 1900 to present

New highs: Covidien (COV), Valhi (VHI), Covanta (CVA), EnCana (ECA), Stone Energy (SGY), Transocean (RIG), International Coal Group (ICO), Pioneer Drilling (PDC), Comstock Resources (CRK), ArcelorMittal (MT).

In the mailbag... a letter from a real, bona fide international heroin dealer. Plus, our best advice for new investors. Send your comments and questions here: feedback@stansberryresearch.com.

"In the 1970's I purchased and flew back to St. Louis 30 tons of confiscated opium from Kabul, Afghanistan and 19 tons from Saigon, Vietnam. At that time the US was desperately short of Codeine Phosphate for antitussives and mild analgesics. Nixon had put the Turks out of business with a 40 million dollar bribe to stop the French connection to Marseille, and India could not provide adequate supply. As Director of Special Projects for Mallinckrodt Inc, we cleaned out the custom houses around the world of confiscated opium (including Lahore, Pakistan, Bangkok, Thailand among others). You will not stop the growing because it is just too lucrative. The climate is perfect for Poppy, and there will always be smugglers who will take the chance because of the great returns. Or to put in your words, the retun on investment is great but it is a high-risk business. The troops in that part of the world tend to shoot first and ask questions later. Mallinckrodt was one of three licensed bulk manufactures of narcotics in the US. I still believe the right idea would be to stockpile codeine phosphate rather than have heroin floating on the open market. If you can convince the Feds and Bill O'reilly I will brush up on my Farsi!! Next year after I sell my last business I hope to write up some of the fun escapades and negotiations in a little tome which I have tentatively titled Reflections of an Opium Buyer." – Paid-up subscriber R.W. Kent

"Mr Stansberry, as a current sub. (I say current, because it won't be long) In your S&A report you tell us to go to this and that (the this and that are totally worthless to us) expecting to get your 'astounding new info' and all we get is why we need to pay $$$ for this and that by buying another subscription! Its a continual click here and click there – on & on!!! I have 3 other associates who belong and they are just s fed up with your ;underhanded methods – YOU GOT US ONCE BUT NOT AGAIN – Oh by the way, in one of your recent pub. you mention the 'Secret California' what ever – It must be really a secret – No one can find it???" – Paid-up subscriber Laura Lee

Porter comment: I wonder what you've been reading? My newsletter is called Porter Stansberry's Investment Advisory. I don't know anything about the "S&A Report" you're referring to. As for your description of our business as "underhanded," I'm at a complete loss. Almost every other company operating in the financial markets would fit your description: mutual funds pile on assets, which increases their fees and reduces your returns; investment banks take money from corporations and then hawk you their shares at absurdly overvalued prices; hedge funds gouge customers with truly outrageous fees, etc. On the other hand, all we do is produce independent information and sell it for a small nominal fee to investors who want to make their own decisions. And, after they've read our research, if our readers decide our information isn't good enough for them, we're happy to refund their money. How is any of this "underhanded"?

"I am more comfortable with stock options than selling short. When you, or any of the other writers recommend selling short, do you see any problem with substituting with a long-dated put option?" – Paid-up subscriber Dan B.

Porter comment: You should only do the kind of investing you're comfortable with. Using options can certainly increase the upside potential of a short position. On the other hand, options premiums are incredibly expensive right now, making a plain short sell a much more efficient use of capital.

"As a member of several stock advisory dailies, I bought 5 Hot stocks during the last 4 months. Everone of them is now over -25%. One over -48% and one over -68%. Some advise! Lost 135.000. – until now in 4 months. I am very reluctant to buy new 'Hot stocks!' What can I do? Buy real estate? That will prbably go down another 40% in the next 6 months also. And now what? I need to make interest to secure my pension fund and 4% at a bank is not enough. Any advise?" – Paid-up subscriber Dr. Albert

Porter comment: I've always believed the overwhelming majority (say 90%) of individual investors who buy individual stocks lose money investing – at least at first. Most never learn to make money in stocks, either. They quit before they've learned the skills they need to prosper. I've written several different essays about how to get started in stocks. But I can recap the basics quickly enough here. (This advice, by the way, is not intended for any individual subscriber. This is simply the advice we'd offer to all newbies. If you're just starting out in stocks, we highly recommend you sit down with a certified financial planner to go over your individual situation.)

First, do all you can to avoid losing money when you get started. Ignore all "hot" stocks and stock tips. Look for proven companies, whose businesses you can easily understand. Find those companies paying a reliable dividend and that can buy back all of their shares for less than 10 years worth of cash profits. (From across our portfolios, we're currently recommending several stocks that fit this bill: Wal-Mart, Verizon, Hershey, Exxon, Duke Energy, American Express, Realty Income, just to name a few.) Don't put more than 4% of your investable assets into any one stock. Use a trailing stop loss. That way, the most you can lose on any stock in your portfolio is 1% of your portfolio, which is a loss everyone can afford. Build your portfolio over time, putting your money to work in great stocks as they fall into your price range. If, over the course of six to 12 months, you buy a dozen super safe stocks, you will have put 48% of your investable assets to work. That's enough until you've gained some experience. Don't worry you'll still make a lot of money, even with only half of your portfolio invested. It's one of the great ironies of investing: You'll actually make more money overall with safer stocks, simply because you won't suffer any big losses.

If you need to generate additional income, try selling calls against the shares of your high-quality portfolio. Without too much trouble, you should be able to generate 10%-15% of additional income annually. Assuming you've bought very safe stocks to start with, a covered-call strategy can be safe and lucrative. (We publish Advanced Ihttps://secure.stansberryresearch.com/PRO/0804BTRQUISP/EBTRJ428/200804REN-QUI-SP.html ncome, which offers advice on safe options strategies, like covered calls.)

With most of the rest of your portfolio, I'd recommend sticking with safe, income-producing bonds or bond funds. We're launching our own bond letter, True Income. But you can also find many reasonably priced, highly diversified bond mutual funds. Additionally, I highly recommend you set aside at least 10% of your net worth in precious metals. I prefer plain bullion coins, but other knowledgeable investors prefer rare coins.

Using safe stocks, short-term bond funds, covered calls, and precious metals you should be able to build a completely bulletproof portfolio that earns you 10%-12% a year in income with another 6%-10% in capital gains. No, you won't double your money, at least not overnight. But you won't lose your shirt either. Plus, you'll be earning more than most professional investors.

After two or three years of profitable investing, if you still have an urge to speculate, then take 5%-10% of your portfolio and try it. Chase all the hot stocks you want. What you'll find, I'm quite sure, when you account for all your winners and losers, you’ll end up making more money following safe strategies.

Regards,

Porter Stansberry

Baltimore, Maryland

April 21, 2008

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