The S&A Digest: Still hate Wal-Mart?

Still hate Wal-Mart?... The regulators swear, 33-to-1 leverage is safe... Curing a credit bubble with more credit... Not the first time?...

Do you recall the hubbub over Dan Ferris pounding the table on Wal-Mart? Every time Dan has recommended or re-recommended this stock (it was his No. 1 pick for this year), we have received a torrent of hate mail...

You have all now officially lost your minds... Dan's recommendation of Wal-Mart is an obvious pathological rage against anyone who he considers an 'intellectual,' which can be translated as anyone who doesn't agree with his position on Wal-Mart (By the way, his position on Wal-Mart appears to be on his knees in front [edited for tastefulness] wide open). It is a totally perverted view of how a successful capitalist enterprise works, which is what Wal-Mart is. The poor people of this country are worse off by virtually every measure available in the time since Wal-Mart became a national institution – but that doesn't stop Dan for a second.

– Paid-up subscriber Anonymous

The way Dan Ferris writes about Wal-Mart and you on Nicaragua, I wish there was a Nazi party in the U.S.A. that you guys could join and enjoy.

– Paid-up subscriber Mazdak Farhat

Wal-Mart, meanwhile, has continued to cut its prices and attract the growing ranks of value-conscious shoppers. Investors seem to appreciate Wal-Mart's tremendous efficiency and its ability to turn a profit while undercutting all of its competitors. The stock is up about 10% this year...

Many subscribers have pointed out over the years that using our newsletters and research would be a lot easier if they had a reliable way to know, in advance, which of our ideas would prove to be highly profitable. Yes, indeed. And if we knew for certain which of our picks would be the next Seabridge, we probably wouldn't bother going to the trouble of running a publishing company at all.

But we are only mortal. God does not whisper in our ear. And all we can do is put forth our best, honest efforts. However... We have noticed a certain tendency – a set of circumstances that very often leads to outstanding results.

From time to time... certain situations arise – like Wal-Mart – where our analysts are supremely confident, but our subscribers are utterly skeptical, even angry. In these situations, you'll find everything looks great on paper, but, even so, the whole of the market is deeply bearish. (Our audience, because of its size, inevitably mirrors the sentiment of the marketplace.) Whenever you see highly critical feedback about a highly recommended stock, you should buy with both fists. It almost always leads to big gains.

The government has decided to allow Fannie Mae and Freddie Mac to get back to work pumping up the prices of mortgage securities. Specifically, their regulator is allowing the firms to increase their leverage from 30-to-1 to 33-to-1. This decision was made in conjunction with the firms promising to raise more capital, around $10 billion.

The new capital along with more leverage will create an additional $200 billion in money earmarked to buy mortgage securities – which is great news for Wall Street. But keep this in mind: Bear Stearns went bankrupt mostly because it was leveraged 34-to-1 and suffering losses in its mortgage book. Extreme amounts of leverage can result in bankruptcy very quickly, despite relatively small losses in assets.

On a combined basis, Freddie and Fannie have less than $70 billion in equity. On this tiny sliver of capital, they own or guarantee 45% of all of the mortgages in the United States, about $1.7 trillion. Thus, a 5% loss in these mortgages would wipe out the entire capital position of both companies. Seems like a very risky way to organize the mortgage industry, doesn't it?

The root cause of the financial crisis, you might remember, is that a surprising number of Americans are no longer able (or in some cases, willing) to pay their mortgages. Why? Because as more and more credit poured into housing, home prices became unhinged from income. Where did the credit come from? The rapid growth of Freddie Mac and Fannie Mae's investment portfolios, mortgage buying that was funded by a correspondingly large increase in the amount of leverage both companies employed.

And so... given a bubble in housing prices, caused by a tremendous expansion of credit, brought about by two quasi-governmental agencies, how does our government propose to solve the problem? By allowing Freddie and Fannie to leverage their portfolios even more and spend still more money buying up overvalued mortgage securities! It's hard to be optimistic about their plans... isn't it?

We've been quoting Jim Rogers even more than usual lately... but we find his tirades irresistible. His latest idea seems even more useful than usual: investing in Taiwan. Rogers hopes a new government will improve ties with China and "merge" the economies. He's loading up on Taiwan ETFs.

I recommended Chunghwa Telecom (CHT) – Taiwan's leading telecom provider – last August in PSIA. We're up 40% on the trade. Dyson covered Taiwan six months ago in DailyWealth. You can read his commentary here.

I have to hand it to Goldsmith... I've taught him well.

His latest Dividend Grabber goes out today, and he's found a way to get 1.3 million acres of prime timberland absolutely free. We're often lambasted for our liberal use of the word "free," but I assure you – this company's timberland is worth twice its market cap. And it has a huge utilities business to boot. This could be the "special dividend" of the year. To sign up for the S&A Dividend Grabber, and receive Sean's latest recommendation, click here...

New highs: none.

In the mailbag... our critics celebrate my Monday crash. Go ahead, celebrate our mistakes, lampoon our bad ideas, and call us fascists. We promise to read whatever you write: feedback@stansberryresearch.com.

"I hope the Mercedes you backed into the garage door was NOT the new S550; Probably the best Benz ever made! If so, get it repaired and continue to enjoy it. I recently slid into a snow bank in Vermont with mine ($4000 in damage) and had to drive my Chevy Tahoe for a week. Sorely missed the Benz." – Paid-up subscriber D. Pipher

"Oh... Paw-tuh – I have a hard time believing this is a first for you. And... does your wife wail as much with the 'woe is me' complaint as you do? Looking forward to when you drive through your living room window." – Paid-up subscriber James Wood

Porter comment: That's just mean.

"While I enjoy The S&A Digest, I find your printing of your 'track record' at the end of newsletter actually makes me question your candor and capacity for self-disclosure. Your Top Ten examples are all several years old and your hall of fame fails to specify when these wonders were actually traded. The real question I have as I begin my subscription to the PSIA, is how are you doing now and in the relevant recent past. I realize you have to find some way to market your services but focusing on outsized gains from the distant past seems to be like the Notre Dame Football fans who seek to survive the current drought by harkening back to the 'glory days.'" – Paid-up subscriber Keith Edwards

Porter comment: The Top 10 list is based on the highest-grossing open positions from across our recommended portfolios. As you know, time is an important component of compounding returns, thus our highest-grossing positions tend to be at least a few years old. On the other hand, we do conduct a thorough review of all of our recommendations at the end of each year. You should use our search function on the website to find it – search for "Annual Report Card." It's published in The Digest.

"I have a great deal of respect for Jim Rogers but I find his quote in yesterday's Digest somewhat hysterical. Have Bear Stearns really been 'bailed out'? $2 a share (or maybe a bit more ultimately) does not seem like 'bailing out' to me. The shareholders, including all those Bear employees who held the stock, have basically been wiped out. As you mentioned in a recent Digest, even Jimmy Kayne is down from $168 million to $17 million or so – not exactly poverty stricken, but somewhat disappointing for him, surely? I rather think that instead of 'driving around in their Maseratis', there will be quite a few former employees taking the bus in future. If the Fed had not taken the action they did earlier this week, things could have become very nasty indeed. Pushing the re-set button and just letting the system collapse is not an option – that really would be disastrous for everyone – not just the big-wigs on Wall Street. I know that there are implications for the dollar, but what else could the Fed have done?" – Paid-up subscriber Mark Eaton

Porter comment: Bear Stearns was saved from bankruptcy, which would have left its shareholders with nothing, caused a panic in the repo market, and cost Wall Street firms billions. JPMorgan was put in a position where it can only make money buying a troubled rival with the help of $30 billion from the Fed. The real point, which you seemed to miss, is that Wall Street is allowed to make utterly foolish decisions (like lending money to a business that's leveraged 34-to-1) while the rest of us in the real economy have to suffer the consequences of inflation each time the Fed bails out these Maserati-driving fools.

Regards,

Porter Stansberry

Baltimore, Maryland

March 20, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame

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

As of 06/21/2013