The S&A Digest: More credit problems

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

As of 06/19/2013

More credit problems... New car sales plummet... GM heads toward bankruptcy... Vultures buying real estate... Florida buys a swamp, pays $9,000 per acre... Looking for retirement millionaires... The Miller Lite controversy...

American Express Chairman and Chief Executive Ken Chenault told the Wall Street Journal credit indicators have weakened "beyond our expectations." Considering expectations couldn't have been good to start with, that sounds pretty ominous. Plus, American Express has the highest credit quality among all credit-card issuers. The new firms are surely going to be hurt a lot worse... Capital One, for example, grew its loan book in excess of 20% every year between 2003 and 2007 – about six times faster than the economy. The quality of its loans noticeably declined, even before the credit crisis began. The company's return on assets back in 2003 was more than 3%. Last year, it was slightly more than half that, 1.79%. I suspect the figure will be negative in 2008, something that's very dangerous for a leveraged financial company.

Knowing that a record number of Americans can't pay their mortgages and have begun defaulting on their credit cards, it's not surprising new car sales are slumping. But it's shocking to see how fast and how far new car sales have fallen. New car sales are now running at an annualized rate of 12.5 million vehicles, the lowest level seen in decades and a huge drop from last year's 16.3 million vehicles.

Long-time readers will recall our warnings from the "chairman" of General Motors. He told us if the U.S. slipped into recession this year, GM would go bankrupt within 18 months. Many subscribers found these warnings ludicrous. Well, those warnings have become the conventional wisdom. Credit-default swaps are insurance you can buy against the risk of default in corporate bonds. The cost of buying such insurance on GM bonds has soared over the last month. Normally such insurance would cost $400,000 for $10 million in bonds. Now it will cost $2.8 million up front and another $500,000 per year. The pricing indicates a 70% chance GM will default. The Wall Street Journal asked GM to comment. A company spokesman said GM has sufficient liquidity for 2008. He declined to comment on 2009.

It takes a long time for most investors to learn to be excited about a crisis. But really, nothing is better for investors than the kind of credit crisis we're having right now. Nothing is being destroyed except inflated prices and overconfidence, which will leave us attractive prices and a fearful environment. That's exactly what you want to see before you make a major, long-term investment. I recommend keeping an eye on our recommended holding company stocks, like Leucadia and Loews. Experienced, long-term-minded dealmakers run these firms. At some point, they'll begin buying up troubled assets in real estate and finance. Watch what they buy.

Another very good holding company, PICO Holdings, just made its first real estate purchases since the crisis began. You might not recognize the company, but it owns huge tracts of land in Nevada and water rights. According to a very knowledgeable source close to the company: "[PICO Holdings] achieved the holy grail by getting voidance (water retitled from agriculture to municipal) to work in Nevada. Now they are planning on the eventual resurgence in Sunbelt single-family residential construction by buying very cheap tracts of land on the periphery of western metro areas, and working to secure adequate water supplies."

PICO has been buying up land around Fresno, California, where prices have fallen between 30% and 40%. And PICO plans to hold for a long time. Says the CEO, "We're finding that we should be able to hold these properties... for a time period that is much greater than any previous cycle we've seen in real estate." In other words, make sure you buy very, very cheap because it's going to be a long time before real estate turns around.

While private investors are focused on buying high-quality land at very low prices... Florida has decided to buy a swamp... for $9,000 per acre. In an effort to "clean up" the Everglades, the state is going to buy U.S. Sugar Corp. and close down its operations. The price, $1.75 billion, values the company's main asset – 300 square miles of land in the Everglades – for $9,000 an acre. As Sjuggerud reminds me, legitimate timberland in Florida costs less than $1,000 an acre. I've long suspected every time the environmental lobby teams up with the right politicians, someone gets rich. Meanwhile, we taxpayers get the bill.

Says our old friend Richard Russell: "A democracy thrives or dies on the intelligence, the interest, and the voting power of its citizens. If the people are too lazy or too ignorant to question where their money comes from or who benefits from the creation of their money, then they deserve what they get. What did we get? We got the Federal Reserve and the income tax and inflation and the loss of purchasing power of our savings (assuming we have any savings). That's what we got."

We need your help, dear subscribers. We're developing a new advisory service, a letter we're tentatively calling Retirement Millionaire. Retirement isn't what it used to be for many Americans...

Take my grandfather. He retired from the Air Force in the 1960s. I'd describe his retirement as classic "AARP." He didn't work. He rarely traveled. He favored the kind of polyester styles that were popular in the mid-1960s – and kept wearing them until he died in 2005. He had a favorite chair where he spent a lot of time, watched golf religiously, and had a cocktail every day at 5 p.m. He was comfortable with this very sedate lifestyle – and glad he didn't have much to do.

But this kind of life doesn't appeal to most Americans approaching retirement today (or many people who are already retired). Instead, a lot of people are using their "retirement" to get involved in a new career, move to a new place, or take up new hobbies. Some of my friends have "retired" only to discover they're making more money than ever before, simply because they changed their approach to life and work.

Take Dr. David Eifrig, for example. You've probably seen his name on the byline of the semi-monthly Health Report e-mails you've been getting from us. He first "retired" in the early 1990s from a very lucrative career as a derivatives trader for major Wall Street banks (including Goldman Sachs). While managing his own portfolio, he went to med school and became a doctor. Now, he's recently started his third career – working full time with us as the lead editor and analyst of our new publication, Retirement Millionaire. Dr. Eifrig wants to spend his "retirement" doing useful, educational, and challenging things. He wanted to have financial independence – to be free from financial constraints – while still being an integral part of several communities. He's writing this letter based on his own, first-hand experiences.

To help us develop this new advisory service, we're looking for other "retired" folks who have seen the quality of their lives (and their fortunes) grow after they left their careers. Specifically, we're looking for people who have added substantially to their net worth since they "retired." We want to show other retired people how they too can become retirement millionaires. We know many of you have made money in stocks. But others have made a second or third fortune in real estate or with a small business. Are you a Retirement Millionaire? How did you do it? How is your retirement different than the life you used to lead? What's your secret to living a fulfilling life after you retired?

Let us know your story: feedback@stansberryresearch.com.

In the mailbag... Outrage over my taste in beer. Plus, some good questions about our newest product, True Income, and some more ranting about habeas corpus. Send your questions, comments, or complaints here: feedback@stansberryresearch.com.

"I sure wish you hadn't divulged most of the True Income portfolio. Maybe one would have been OK, but not all of them and not the best. I'm still buying more of these bonds as I raise capital each month... Let me say this is one of the best services you have. You have the opportunity with very little risk to increase your investment by up to 100% over 3-5 years – WOW!" – Paid-up subscriber G. Shanklin

Porter comment: We only divulge the portfolio to new, paying subscribers. How could we not?

"Couldn't help but notice that preferred stock Thornburg Mortgage.Assets (TMA) is selling for less than any penny stock I have seen so far. Because this seems to be one more example of fallout from the sub-prime debacle, I surmise it would be not only amoral but also unethical to take advantage of this situation. I never bought any of their stock, but can't help wondering if the purchase of a few hundred TMA shares NOW might not be my ticket off the hamster track, out of the ghetto, or perhaps help to pay off my house by the time I reach full retirement should they rebound. Perhaps the karmic debt from such a move would outweigh any material advantage I might gain. However, I am curious what you think, honestly, in such crazy times as these. BTW, upon your advice 'Losing Her Shirt' fully divested herself of BSHF shares, for roughly the amount she purchased them. Many thanks again." – Paid-up subscriber Anonymous

Porter comment: I haven't looked at Thornburg since we stopped out of it (fortunately) in the middle of last year. However, I would be willing to bet if you try to read the company's SEC disclosures, you won't be able to achieve any real understanding of what you're buying... which, as I recall, is what got you into trouble the last time with that other penny stock. Here's a thought: Instead of constantly gambling in penny stocks, why not simply buy high-quality stocks that can earn you a reasonable return?

"Your answer to Hugh McKenney on the subject of 'habeas corpus' hit the nail right on the head. It's superb! It shows a high degree of integrity and honesty on your part. Man, you deserve that case of beer, and I'll add you to my list of favorite people."

– Paid-up subscriber Maurice Jegues

"Porter you are a breath of fresh air in the debate regarding the Supremes... What a perfectly succinct explanation of one of the wonders of ancient wisdom handed down to us by the intellectual giants who wrote the Constitution. Bravo." – Paid-up subscriber Lee Bruner

"I understood your premise on the importance of following the law outlined in the Constitution perfectly the first time. It is spot on... This is not a sometime strategy for this country. All I can say is, AMEN to what you have said. It is crystal clear for the vast majority of Americans. Laws do not waver nor change from one day to the next. Preserving those laws and adhering to them are what keeps this country a democratic nation. Keep up the good work and great thought provoking dialogue with us." – Paid-up subscriber S J Roberts

"First of all Porter's commentary on the Constitution was amazing! Second: Porter, you are 35... Were you born into a rich family or did you build all this economic-business-social position by yourself from scratch in 15 years? I truly doubt anyone with a 'FREE MIND' smart and capable, BUT without money and social position to begin with, will be 'let' to grow. Do you get my point?" – Paid-up subscriber "Cach"

Porter comment: Actually... I don't get your point. But I can answer your question about my background. My father was a mid-level executive with the Coca-Cola Company. My mother was a kindergarten teacher. I grew up in very average, middle-class circumstances. We had all of the things we needed, a few things we wanted, but nothing luxurious. We didn't buy new cars, go out to dinner, or take expensive vacations.

When I was 16, my parents didn't buy me a car; they paid for half of the used surfboard I wanted. But we lived in a nice neighborhood (Winter Park/Maitland, Florida). I grew up working hard to earn the things I wanted. Most of my peers were given whatever they asked for. Being "poor" in a rich neighborhood is a great recipe for building ambition in your kids.

"Give us a break! We all confirm you are well versed on the Constitution, but your choice of beer makes me question your sense of taste. Needless to say, now I'm wondering whether I should have bought wine on your recommendations." – Paid-up subscriber Phil Dinsmore

"There is a beer in New Zealand called 'Waikato Draught' that Porter might like to try. For those who are not accustomed it works like a laxative. Read into the recommendation what you like." – Paid-up subscriber Trevor Bolland

Porter comment: It's funny... We probably ended up getting more outraged e-mail over the Miller Lite thing than we did over the constitutional question that prompted it. While I do enjoy Miller Lite, I know it's not "fine" beer. I also enjoy many other beers with more flavor and higher prices. Bass is probably my favorite. But I was trying to be kind. I didn't want the poor guy to have to spend too much on what was clearly going to be a losing bet.

Regards,

Porter Stansberry

Baltimore, Maryland

June 25, 2008

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