THE S&A DIGEST: New All-Time Highs, Not a Reason to Sell

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

As of 07/05/2013

Casey on government: too late to change the system, too early to line the bastards up and shoot them… base metal producers get "less cheap"… the bearish housing chorus.

Our resident quant, Ian Davis, has been crunching numbers for the past week. For the past two weeks, his numbers told you to buy housing stocks… (much to the chagrin of dozens of our subscribers who e-mailed us their displeasure – see the mailbag.) And once again, Ian’s found something that is, surprisingly, contrarian… and true. See today’s essay.

But first… we take a moment to enjoy the thoughts of our friend Doug Casey… "Aw, you know… Susan is a good liberal. But she’s not a great liberal," Doug began…

He was answering a question about public schools. "Susan" was Susan Estrich – one of two people he was debating at the New Orleans Investment Conference. The other person was Newt Gingrich, one-time speaker of the House, more recently a military pundit and probably a 2008 presidential candidate. Susan had been demanding that English be used exclusively at public schools in the L.A. area, where she lives. Doug had a much more elegant solution to the public-school problem in America:

"You won’t find the right to a free education anywhere in the Constitution because our founding fathers rightly considered the job of educating children a private matter. Public schools got started in Bismarck’s Germany, not in America. Bismarck realized to build a powerful central state he needed to indoctrinate the children. It worked. And American politicians, led, incidentally by the KKK, insisted we follow the model. Public education is like a giant toilet, one that’s got to be flushed. You can’t solve this problem, you’ve just got to get rid of it."

Listening to the debate, two things made a big impact on me. No. 1, Susan Estrich is a minor-league thinker and was badly outclassed by the other speakers on the panel. Not once during the debate did she answer the question asked; she was also the only panelist to interrupt another speaker, which she insisted on doing several times. Second, Gingrich is a very persuasive, top-shelf politician. It wouldn’t surprise me if he ends up as our next vice president. He’s attempting to make himself into a defense expert, because he knows how well fear sells. At least 20 times during the debate he cited the risk of another major terrorist attack. Newt even went so far as to claim that there is "a loose coalition of North Korea, Venezuela, and Islamic fundamentalists."

Meanwhile, Doug Casey, not running for office, had the best original ideas.

- On our political parties: "The Democrats have traditionally been the welfare party. The Republicans have traditionally been the warfare party. I hate both."

- On right and wrong: "There are only two universal moral laws: First, do all you say you will do. And second, do not aggress against others or their property."

- On our Constitution: "The Constitution is okay… but it’s a dead letter."

- On the mainstream media: "The bull market in gold will be over when there’s a picture of a golden bear mauling the New York Stock Exchange on the cover of either Slime [Time] or Newspeak [Newsweek]."

- On why he buys gold: "The gold I buy isn’t going to end up in a landfill somewhere with all of the other things I buy."

- On the economic intelligence of the average voter: "Twenty-five years ago, I was on Phil Donahue – that was back when Phil was like Oprah is today. A man in the audience got up and said he agreed with me, he was tired of paying so much in taxes. He said, ‘The government should pay for this stuff.’ The audience cheered."

- On the future of America’s government: "It’s too late to change the system. It’s fundamentally corrupt and too easily manipulated. On the other hand, it’s still too early to line the bastards up against the wall and shoot them."

Doug isn’t just an astute political observer, he’s also a walking encyclopedia on mining stocks. Click here to learn more about his top mining picks.

Our managing editor, Brian Hunt, warned us all about the base metal producers two weeks ago: "Porter, it’s amazing... these things are way too cheap." He was speaking in particular about Southern Copper, which was yielding more than 8% at the time. Today, The Wall Street Journal tells us Phelps Dodge will be acquired by Freeport-McMoRan (a major gold producer) for a 33% premium. I bet there are more deals like this. See Matt Badiali’s S&A Gold Report for our best bets. Says Matt of his top base metal pick: "In fact, my favorite recommendation in the world right now is one of the largest zinc and lead… When I recommended it, it was set to pay an 18% dividend in the next year."

Here’s another dividend that’s probably safe to grab… On May 1, 2006, Saks Inc., the owner of Saks Fifth Avenue department stores, issued a $4 cash special dividend. The stock immediately declined from $20.05 to $15.90, as you would expect according to financial theory. But then, as we’ve seen dozens of times over the last four years, the stock immediately returned to its pre-dividend price. It’s now trading for $20.39. Another $4 dividend will be paid to holders as of Nov. 30. The money comes from its $285M gain on the sale of Parisian department stores.

Anytime my wife needs to bring me down to earth, she opens our feedback e-mail account (feedback@stansberryresearch.com). Feel free to give her more ammo. It’s good for me…

Paid-up subscriber David Edwards focuses on our warts: "I have followed your PSIA newsletter for about one year. On many occasions, I have considered abandoning it… I have noticed quite a few careless errors, such as misspellings: On p. 7 of the 7/06 issue that Microsoft has $15 million per year in cash flow (I assume you meant billion). I have also seen a number of inconsistencies in your comments. In the 3/06 issue, you said it would be acceptable to put up to 25% of one’s portfolio in BUD, yet on other occasions you have stated that one of the most important investing principles is to limit each position to no more than 4 or 5% of one’s portfolio. Despite these and other objections, I continue to follow your stock recommendations… I have invested in 14 of your recommended stocks, and made money in 13 of them."

Porter Comment: Want a job as a proof-reader?

Paid-up subscriber Jack Reinhard speaks for many of you when he writes: "Neither the builders, nor Home Depot, will continue to recover… There is another 1 to 2 years of decreased demand for housing and materials related to housing. The current increase in stock values of Home Depot and the builders is a classic ‘Dead Cat Bounce.’"

Porter Comment: We’ve gotten dozens of e-mails like this… Most investors don’t understand that a temporary decline in demand (even if it lasts for a year or two) doesn’t really impact the intrinsic value of these businesses. Meanwhile, these stocks are down 50%.

DailyWealth reader David Williams informs us about a typo in one of our space ads and then insults us for good measure… "Geography 101 – Toronto is Canada’s most important commercial, corporate and banking center but it is no more the ‘Capital of Canada’ than New York is the ‘Capital of the United States.’… Why should I, or anyone, pay you for advice about Canadian investments if the author knows less about the place than a 7th grader in US public schools are expected to know about it? Such inattention to detail undermines the credibility of your publication. Repeating it on a daily basis for a week undermines the credibility of the publisher."

Porter Comment: Where’s Canada?

New All-Time Highs, Not a Reason to Sell

By Ian Davis

The recent CNBC countdown to a new all-time high in the Dow brought to mind similar celebrations for Dow 10,000 in March 1999. As a contrarian, I often look at media frenzies, such as this one, to help spot market tops. I decided to research the performance of the Dow after it reached new highs and new lows and found some surprising results.

-After new highs the Dow performs better then its overall average.

-After new highs the Dow performs better then it does after new lows.

RUNNING THE NUMBERS

The Dow Jones Industrial Average, on average, has returned 3.6% every six months since its inception. But six months after the Dow reaches new all-time highs, the index was up by 4.9% on average. This also is significantly better than the six-month return after the index reaches new yearly lows, which was only 1.5%. See Following Charts:

DON’T BE AFRAID OF NEW HIGHS

Based on my research, the Dow does well following new all-time highs. Just because the stock market is high doesn’t mean it can’t go higher.

UPDATE ON PREVIOUS PICKS

Two weeks ago, on November 6, I recommended Toll Brothers (NYSE: TOL). Since then, the stock has gone up about 4% despite its earnings estimates being reduced and pessimistic comments from its CEO about the near-term future of the real-estate market. I believe more strongly then ever that homebuilder stocks will perform well in the coming 12 months. Toll Brothers remains a BUY up to $30.

Last week, on November 13, I recommended Home Depot (NYSE: HD). Since my recommendation, the stock has gone up by about 5%. In last week’s issue, I said to buy Home Depot up to $38, and it is now trading above that level. I set the limit at $38 because I knew, below that level, there was a very good risk/reward ratio for owning the stock. I still believe Home Depot is going to do very well for the next six months, but officially, Home Depot is a HOLD unless if falls below $38.

Good investing,

Ian Davis

November 20, 2006

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