The S&A Digest: No stocks today

No stocks today... How to handle a recession... A bottom in the U.S. dollar?... A Super Bowl lock... A Comanche stock tip... The riddle answered...

The U.S. stock markets are closed today in honor of Martin Luther King Day. But... if they had been open, it seems likely stocks would have fallen sharply. Around the world, stock markets fell around 5%.

If the U.S. market continues to fall, what should you do? First, evaluate your allocation decisions. Do you have too much of your assets in stocks? Second, make sure to follow your trailing stop losses. Doing so will allow you to raise cash as prices fall, giving you capital to use later. Third, build a list of five to 10 businesses you've always wanted to own for the long term. Your chance to buy at a great price will probably materialize at some point over the next 12-18 months.

It finally happened... Fitch ratings downgraded Ambac, the second-largest bond insurer, to AA from AAA. And it may downgrade the company further. The downgrade "reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction," Fitch said. Now Ambac may be unable to write bond insurance, which makes up 74% of its business.

Signs of a bottom in the U.S. dollar... McDonald's is now a currency expert. The new McDonald's commercial shows three people in an office talking about the dollar tanking, until they realize you can get a McDonald's cheeseburger for a buck... to which they proclaim, "The dollar is looking strong."

Gamblers take note: The Patriots and the Giants are going to the Super Bowl. Vegas already set odds. Currently, the Pats are 13 to 14 point favorites. But the bookmakers admit this is a bigger spread than it should be. "We obviously make that line to get equal action on both sides. To do that, because of the perception of the Patriots, we have to increase their number more than usual," said Jay Komegay, sports book director at the Las Vegas Hilton.

As we've published, betting against the Patriots has been a lock for most of the season. This past weekend was no exception. With another touchdown in sight at the end of the game (a score which would have covered the point spread), the Pats decided to simply kneel and let the clock expire.

How bad could this recession become? The Baltic Dry Index is the best way to track shipping costs for dry goods, including coal, grain, and iron ore. Economists use the index to track global trade and growth. The index has been in freefall, down 30% since the start of the year.

New highs: none.

In the mailbag, a potpourri. As we requested, several subscribers told us they were pulling out of stocks. If you decide to throw in the towel, let us know so that we can track negative sentiment. (So far we've only gotten a handful of responses. Fear's not widespread... yet): feedback@stansberryresearch.com.

"I'm selling most of my stocks... I'm scared. This is as volatile as I've ever seen. Good with the bad, I'm getting in cash NOW." – Paid-up subscriber Allen Segall

"I am not giving up on all stocks. Some are still very good and undervalued... Dollar averaging is and has been one of my strategies for years. Yes, I have had some losers, but it seems like a lot of good stocks have been collateral damage in this controversial market. Some stocks that are good buys are P&G, JNJ, XOM, XTO, CVX, CAT, MTW & FPL. When you dollar average, in the long run it does not hurt...

"You are so right when you say, by the time the market bottoms, everyone is sitting on the sidelines w/ losses! Panic makes even wise people act stupid." – Paid-up subscriber Benjamin Franklin

Porter comment: You can manage risk in many ways. Averaging down works for people with additional income, who can easily increase their position sizes in high-quality companies whose shares have fallen. Cutting your losses early can work too, as you'll have plenty of capital to buy back in later, if the market continues to fall. The real trick is to know yourself well enough to know which type of risk strategy you should use and to have enough confidence in your investing to follow your plan.

"When the buffalo were plentiful, there were many scouts that promoted their genius. But when the great blizzard fell, the old Comanches knew which direction to go. They looked for that first buzzard and followed it." – Paid-up subscriber Richard Johnston

"I respectfully request that the Stansberry staff consider offering some advice to the many of us who have rolled our lifetime retirement plans into IRAs, and have funded Roths since they were offered. Regarding Steve's fantastic February issue, there was not much advice for me because of the assumption that the audience held all investments in unsheltered environments. As our younger BOOMERS come along they will have a lot of money to invest, yet very few analysts at any firm use a two-sided coin approach to their writing.

"On a final point, I would like to express my sincere appreciation to Porter Stansberry for two things that are very valuable to me. First, is eliminating the combative reads that are contrary to many of my generation's image of a professional whose words are worth reading. Secondly, and probably well attached to the first, I have really enjoyed the deep thought and insight Porter has given us regarding the challenging markets we face today. I began to respect Porter's insight when responses to the mailbag focused well on competent responses to good questions. Hopefully, this will continue so that the many people who share my viewpoint will feel that your products are right for us. Best wishes to all of the S&A who have such a challenging job." – Paid-up subscriber Charles

Porter comment: We do offer lots of advice that's useful for folks with tax-advantaged accounts. In fact, half of the feedback we get on this issue blames us for not considering the tax ramifications of our ideas, while the other half is like this letter. We research investments – hopefully great investments. We assume you'll review our recommendations according to your specific circumstances. Heck, we can't even do our own taxes, let alone predict what all of our subscribers' tax situations will require.

"Regarding the latest edition of True Wealth and the recent DailyWealth article by Dr. Sjuggerud (January 18th, Why I'm Getting Nervous About Gold for the First Time), there is one number that sticks out like a sore thumb to me: 2. That number is (give or take) the ratio (2:1) between the price of a PCGS-graded MS-65 St. Gaudens $20 gold piece, and the 'bid' price for an ounce of gold. That number is absolutely staggering! Historically, that ratio has topped out in 1988 at 13:1 - it may not go that high, but as you said previously, it has very limited downside risk. The public may be 'on' gold, but they don't appear to be 'on' pre-1933 MS-65 gold coins. To his credit, Dr. Sjuggerud mentioned this fact many times in the past, wrote a whole article on it earlier this year and still lists MS-65s as 'BUY' in True Wealth, but at this level, maybe this type of coin should be called a 'STEAL.' Thanks for the great research letters and daily articles - I enjoy reading them." – Paid-up subscriber Mike P.

"I am requesting that you explain after-hours trading. I am curious as to why there is such a thing. Are these people who have some special pull in the stock exchange????" – Paid-up subscriber Vicky Davis

Porter comment: No. Several discount brokers now offer "after-hours" trading to accommodate customers who trade nonstop. If you'd like to trade after hours, you can. Just find a discount broker who offers the service.

"For once, please try to be accurate. Warren Buffet compared his Tax RATE (17%) to his secretary's (30%). He made millions (from his low salary, dividends, and directors fees, etc) and she has a $60,000/year salary. The point Buffett makes is that it's Unfair for him to pay a Lower RATE than his secretary! That has nothing to do with his wealth... the vast majority of which is in Berkshire and as you point out, pays no dividends... therefore no annual taxes. Probably his Low overall tax RATE is due to mostly receiving dividend income/capital gains from his other personal holdings and his write-offs, including charitable, on his other sources of annual taxable income. Actually what Buffett says is not opposite what you say... He blatantly says it's Unfair for his (lower earning) secretary to pay a Lower RATE than him, who made a lot more 'income' than her...(however, he pays the rate he's legally required to... not 'what's fair' because that's not the current tax system!...) He's probably the most honest 'rich guy' in the USA!" – Paid-up subscriber SC

Porter comment: I recognize and have commented many times on the absurdity of our tax code and the myth that the government will ever "tax the rich" with income taxes. The fact is, extremely wealthy people, in general, do not generate income. They generate wealth through unrealized capital gains and tax-favored dividend and interest payments. Meanwhile, the very idea that individuals have an unlimited obligation to the state based upon their means or their incomes is absurd and should be anathema to Americans, whose nation was founded by men opposed to such an idea. That's why our original constitution specifically forbade an income tax. But... we don't live in America anymore. Now we live in Amerika, komrade.

"You continually sing the praises of Martin Whitman (3rd Avenue Value Fund) as a great investor. In the S&A Digest you say how MBIA is going be worth nothing. Yet Whitman continues to increase his stake in MBIA for the 3rd Ave Value Fund. Sometimes these deep value guys don't know when to give up." – Paid-up subscriber Rick

Porter comment: Both of us could easily be right. The common stock could end up worth nothing. And Marty Whitman's firm could end up doing very well on its investment. How? For decades, Marty primarily invested in distressed debt. It's very likely that he's also buying up MBIA's bonds. Owning a big position in the bonds and the stock will put him at the head of both groups in the event of a bankruptcy, giving him control over the company if it files.

"Porter, I have sent you probably more than 20 e-mails asking you or any members of your staff to recommend water stocks. Not even 1 of the reports for the alliance tracks a single water stock! What are you waiting for? Until every uncle Joe is investing in it? Until it becomes popular like oil or gold?" – Paid-up subscriber anonymous

Porter comment: We've never promised to cover everything... and water scares us. We think it's too popular already. We think the government will simply steal it from the folks who own it, if it ever truly becomes scarce. Considering that water has been either free or nearly free everywhere we've ever lived, we're simply not accustomed to thinking about investing in it. Maybe we're wrong, of course. But we're very comfortable being wrong about lots of stuff we don't recommend. It's hard enough to avoid being wrong about stuff you know something about...

"Do you calculate trailing stops at 75% off the highest closing price or just the highest price after you buy? Is the stop triggered when the price first falls to the stop or when the daily closing price is below the stop price? Do you adjust for dividends or fund fees?" – Paid-up subscriber Michel

Porter comment: Different editors set their stops for different stocks at different points, depending on their strategy. But we all use closing prices only. We only care about the prices after we buy. And we do include dividends.

"I appreciate the conversion of my subscription to PSIA from the Penny Stock Letter and would like to continue to receive the monthly PSIA in my e-mail inbox. However, I would like to not receive the S&A Digest in my e-mail. I don't have anything against it and generally enjoy parts of it, but it entices me to turn my thoughts to the market on a daily basis, which I have found is bad for my investing returns." – Paid-up subscriber Aleks

Porter comment: We hope you'll understand that handling any individual such request is easy and reasonable... but at the same time, it is impossible for the three guys who write and edit the Digest (Porter, Dan, and Sean) to handle all of the customer service needs of our entire subscriber base. That's why we employ a small army of customer-service reps, who've taken over the entire third floor of our building.

Note: These hard-working, college-educated people are not located in India. They're right here, where I can keep my eye on them. They all speak perfect English. And they're very nice folks. But here's the rub: To get customer service from us, you at least have to contribute one small, tiny thing. You must use our customer-service e-mail address... the e-mail address that's plastered all over the bottom of this e-mail. The one that says "customer service," not "feedback."

And, in your case, the most interesting thing about our customer-service e-mail link is it's located right above the e-mail link that allows you to cancel receiving the Digest, immediately, any time you chose, without having to even contact us about it.

"That would be a BEAR... ironic isn't it... Let us know how many readers got that one. I'm taking it on the chin, but I'm in it for the long haul and will use cash set aside for bargains as they come along this year... Damn those bears." – Paid-up subscriber Tony Massaro

"Sixty years ago my uncle told me how to run down a horse. You don't actually run, just jog along. The horse runs, stops, runs again until he is worn out – just standing and blowing. Sure, it takes a day or two but eventually you get the horse. Ten years later, I learned enough physics and biology to understand that two legs were more efficient in the long run than four. Two-leggers like man, ostrich, or kangaroo can really pile up the distance. The Marathoner dropped dead after his 26 miles, but then he ran full tilt the distance. Our Apache and Comanche routinely ran 90 miles without collapsing, covering 50 mile distances in a running style was a rite of passage." – Paid-up subscriber Ed Jones

Porter comment: That's right, Ed. The answer to my riddle "Which land-based mammal can run the farthest without stopping" is humans. Many Indian tribes had traditions of ultralong-distance running – more than 50 miles. And then there's Dean Karnazes of San Francisco. He has pioneered the sport of ultralong-distance running in the U.S. Dean has run 350 miles (over three days) without stopping. He has run 50 marathons in 50 days. He's a running fool... Here's an article about him.

Regards,

Porter Stansberry

Baltimore, Maryland

January 21, 2008

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As of 06/24/2013