The S&A Digest: Our technical disaster

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

As of 06/25/2013

Our technical disaster... A $726 billion problem… China bubbles… The most shorted stock in America... "It's not my fault" syndrome... On strip clubs...

As most of you know, we had severe technical problems with our webcast last night. If you don't know what I'm talking about, that's probably best... It was an unmitigated disaster. Clearly, we don't know what we're doing, yet, with online video. The person responsible for this mistake has been placed in a stockade and pelted with rotten fruit. Later, like a Saudi rape victim, he will receive 20 lashes.

Seriously, we apologize for our failure and for the irritation we have undoubtedly caused. We e-mailed everyone who signed up to see the video about the problems, which we're still working to fix. We'll let you know when there's a solid solution in place (and only after we've tested it thoroughly).

Goldman Sachs estimates that the mortgage crisis has already caused $66 billion of losses at the world's banks and that losses in credit markets worldwide could hit $726 billion.

Subprime borrowers face an average mortgage increase of 26%, or $400 a month, according to title firm First American CoreLogic. (But not if our Nanny-in-Chief, George Bush, can do anything about it…)

Homebuilder D.R. Horton joins the ranks of the desperate… The company sold a 7,000-acre plot of residential land outside of Phoenix at $10,000 an acre. The sale was a 60% discount from the land's peak price, but D.R. Horton was still able to book a profit. It purchased the land for $7,000 an acre in 2004.

How to measure the extent of the China bubble? Let us count the ways. Here's one: Ping An Insurance is close behind American Insurance Group in the race to be the world's second-biggest insurer in terms of market capitalization. Ping An's shares trade for 41 times earnings. AIG trades for 9.2 times earnings. And AIG collects nearly as much in premiums per month as Ping An does all year.

Measured by average trading volume, Virgin Mobile is the most shorted stock in the United States, with 136% of its float shorted.

New highs: Berkshire Hathaway (BRK-A), Covance (CVD), Plum Creek (PCL), Aracruz Celulose (ARA), Intel (INTC).

In the mailbag… A reader endorses the Bush Bailout because, he says, it's "practical." Another reader critiques our first attempt at making an online video. (Hey, at least it worked for him.) And what's wrong with strip clubs? Dump your negativity here: feedback@stansberryresearch.com.

"I think there are many very practical reasons to provide a sensible rescue plan…

"1) The economics of foreclosure are a financial disaster for the mortgage holder, especially if they end up owning a empty house as is very likely in this economy. Much better to keep the present owner in place, even at the cost of a considerable up front haircut."

Porter comment: Much better for whom? For the so-called owner? The real owner of the property is the person at the other end of the mortgage security. The idea of a mortgage, you'll recall, is that the property serves as the collateral under the terms of the contract. If you can't pay your mortgage, you lose your house. It ends up on the auction block. This clears the market and allows the economy (and wise investors) to prosper. It penalizes the foolish. Bush & Co. seek to reverse this process by illegally interfering with a valid contract. They might protect hundreds of thousands of homeowners, but they will cause harm to everyone who has provided the capital for those mortgages – and that will hurt all of us the next time we seek to obtain a mortgage.

"…2) While plently of speculators took advantage of the situation to buy houses they should simply lose, there are many buyers who were seduced by mortgage and sales broker hype into buying what they couldn't afford. If they are in possession and trying to pay their mortgage, they are deserving of protection from what is not only a disaster for them personally, but for the economy."

Porter comment: This is precisely the kind of claptrap that's destroying our great nation. Since when do Americans blame other people for their own actions? It's not your fault you're fat – it's McDonald's fault. It's not your fault you smoke, it's R.J. Reynolds' fault. It's not your fault you're bankrupt because you haven't saved a penny in your whole life, it's your mortgage broker's fault. This line of thinking represents the supreme antithesis of the America way of life. The idea of rugged individualism has been completely usurped by the stunning power of the nanny state.

You're trying to tell me that someone without a mental handicap had no idea they were probably paying too much when they bought a house in 2005? Give me a break – that's utterly impossible. And what is this nonsense about not understanding the terms of a mortgage? If you don't understand it, don't sign the contract. Furthermore, fixed-rate mortgages have been widely available at very generous rates for the duration of this bubble. There aren't any legitimate excuses – many people simply have made terrible financial decisions. They deserve the consequences, as do the people who made bad loans. I can't see any legitimate role for the government to play given these circumstances.

"…3) Dumping millions more empty houses on the market might be possible with a proper subsidy program is simply going to delay any possible recovery in the new housing market. Since we may be heading for a serious recession that would be particularly bad news, since housing construction is the most powerful counter-cyclical weapon available to the government. The solution involves, it seems to me, a public corporation like that used during the Savings and Loan crises that provides the incentive to mortgage lenders to take less than their contract provides. Might be a payment up front of say 5% of the mortgage amount from the gov't corp. to the mortgage holder in order to get an agreement to re-write the present mortgage (or provide a new one) at a rate the owner can afford – permanently. The gov't corp. could get a second lien so as to recover eventually. There are many other possibilities from this basic model. I know this kind of solution will make many of your right wing toes curl. But, for better or worse, we aren't in the 19th century, Dorothy." – Paid-up subscriber Paul Marcus

Porter comment: I can't make heads or tails of what you're suggesting here, but I can tell you the best and surest way to move the economy forward from this problem is to allow the market to clear, which will require lower prices and the write-off of bad debts. Any solution that extends these bad debts will only bail out the lenders. It will do nothing to aid the borrowers, who would have never taken on these debts if they could have afforded the properties they've purchased. See the Japanese economy from 1991 until about 2003 for an example of what will come next. Like it or not, there is a huge oversupply of housing. The best way to deal with it is to allow real estate prices to fall.

Your comment about my "right wing toes" curling only reminds me of how poorly informed most Americans remain about the true nature of government. The real battle in our country isn't between the left-wing Democrats and the right-wing Republicans. The battle is between those who support the government, both right and left, and those (like Ron Paul) who do not.

"Concerning the webinar… 1. I loved the knowing looks and nods that Rayburn repeatedly offered Steve throughout the interview... made me laugh every time. 2. Did anyone else picture Steve as sounding like Napoleon Dynamite. Aside from picking great investments, does Steve have any special skills... you know bow hunting skills, nun-chuck skills, computer hacking skills? Vote for Pedro! 3. How did Rayburn know that there was going to be 'a more direct way to play this, right?' I mean, I know everything is scripted but isn't it supposed to at least look like an interview? 4. Did anyone else think they were sitting just a little too close? It almost looked like they were playing footsies... scary." – Paid-up subscriber HC

Porter comment: Regarding the seating arrangements… yes. That's the first thing I said when I saw the video, "Why are you guys sitting so close to each other?"

"To anyone including Jeff Clark who would advise investing in a strip club, I first would question their integrity and then I would ask them how they would like it if they walked in the door and saw their daughter or wife up there striping for a living. Get real if that's the best you can do please cancel my subscription." – Paid-up subscriber John Rouster

Porter comment: I can assure you that there's nothing wrong with Jeff's integrity. He is happily married, attends mass regularly, and is a great father to two beautiful young children. Jeff made it very clear in his Growth Stock Wire commentary that he wasn't personally interested in buying shares in a strip joint. On the other hand, we're investment analysts, not Puritan preachers… or Muslim fundamentalists. And we have thousands of subscribers. It's a safe bet that at least one or two of you guys have been to strip club at some point in your life.

I'm not ashamed to admit that I've been to strip clubs from time to time under what I would say were appropriate circumstances. My wife even came along once when a large group of our friends went to Rick's in New Orleans. We had a good time. The dancers certainly didn't seem oppressed or exploited in any way – they seemed like nice girls who were having fun.

I've hired women who have danced in the past (not for dancing, just to be clear) and I dated a woman once, many years ago, who was a dancer – she was gorgeous! All of the strippers I've known personally were decent people who were putting their talent to its highest and best economic use. I don't fault them… or judge them. That's the beauty of a free and open society: People with different ideas about what's right and wrong can coexist, as long as each allows the other to pursue their own happiness.

If I have a daughter, I'm hopeful that she'll be able to use her brain more than her body to make a living… But if she chooses to be a dancer, then my only concern is that she be a good one and that she enjoys it. It is not for me to decide how anyone else should live his or her life. Every day you have is too precious to waste.

"Porter, I loved the video of the subprime mess. I was laughing out loud and my husband came into the room and asked me what was so funny. So, I sent it to him so he could also have a good chuckle. By the way, thank you for the Alliance Conference. The Fairmont Mayakoba was beautiful, the speakers were enlightening, the food was delicious, and it was a pleasure getting to put faces to names. I only spoke to Jeff, Dan, Matt, George, Kristin and Tom, plus a quick intro of myself to you, but it was great seeing everyone and talking to other Alliance members. Everything was first class, so Thank You." – Paid-up subscriber Sharen Kirkham

Porter comment: Sharen, you're very welcome. I was honored and flattered that so many subscribers made the trip. It was a very special moment for me. This was the first Alliance meeting my parents have ever attended.

"Almost a month ago I signed up for Jeff's S&A Short Report. I want to believe that I can do this, scary as it can be. The very first recommendation I receive is to buy D.R.Horton CALLS – not puts! How can this be right?!? I've been paying attention!! The housing market is tanking!! So you tell yourself that you're paying him for his genius and you do it. At $0.60/share. Later that day they went crazy, all over the place. Freaked. Sold them back for $0.30. Whew. That was close. Then there's an update... hold on he says. Yeah, right. Sure, buddy. Every few days I'd look at their price... sure enough. Toast. Geez, what was I thinking signing up for this? Yesterday, I chanced a glance at DHI and... it's up. Holy cow. And then there's an email from Jeff, just like he promised, telling us to sell half our position. I'm a stubborn old woman who is still shaking her head and laughing at herself for NOT doing what she was supposed to. No one to blame but myself. That old woman IS, however, anxiously waiting for Jeff's next recommendation... and plans to play by the rules this time. No more doubting you or your methods. I don't know how you do it but please keep doin' it. I've got my seatbelt on and am ready for the ride." – Anonymous

Regards,

Porter Stansberry

Baltimore, Maryland

December 7, 2007

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