The S&A Digest: Summer break on Wall Street

Summer break on Wall Street... "Who's On First?"... Another big oil discovery... Lehman's garage sale... Condos on sale in New York... A discussion with Jim Rogers... Buffett's brain... Compliments on my brisket...

The moneychangers have fled the temple. They've scattered themselves across the beaches of Long Island and New Jersey. Wall Street is on hiatus. Expect the market to be quiet until after Labor Day.

As for ourselves, we have far less expensive tastes in second homes. We have once again fled to Scott County, Tennessee, one of the poorest counties in the state. Here, you can still buy good mountain ground with timber, water, coal, and natural gas for around $2,500 per acre.

A solid country meal – fried chicken, homemade collard greens, buttermilk biscuits – costs about $3.50. A few generations of Stansberrys have homes here... It's like a family reunion each summer. Some of us even have all our teeth.

Says famed Harvard economist Martin Feldstein of the ongoing rapid decline of home prices: "It's simply not clear – at least to me – what will stop this self-reinforcing process." Not a word was said about who created these problems. I imagine all the well-heeled economists now meeting with the Fed governors in Jackson Hole this week are doing an economic version of "Who's On First?"

The government and its economists conspired to build a false prosperity through huge increases to mortgage lending over the last decade. Just look at the outrageous growth of the balance sheets of Fannie and Freddie. Now the facade has worn thin. And the debts must be repaid.

What should happen? Pity the uneducated or delusional people who trusted their mortgage broker. Hang the political leaders and the bankers who encouraged reckless borrowing. What will happen? The government and its economists will do everything they can to postpone the inevitable, which will make the problems worse.

S&A Oil Report pick StatoilHydro discovered between 100 million and 125 million barrels of oil and 141 billion cubic feet of natural gas off the coast of Norway. So much for "peak oil."

More bad news for Extreme Value short recommendation Lehman Brothers: South Korea's top financial regulator said Korea Development Bank should take a "cautious" approach to buying overseas banks: "We welcome any efforts led by the private sector to go global, but it may not be proper for state-owned financial institutions to lead the role and take on excessive burdens," he added.

But the private sector doesn't want Lehman. Private equity has only shown an interest in Lehman's wholly owned asset manager, Neuberger Berman, not the three partially owned hedge funds – GLG Partners, Ospraie, and DE Shaw. GLG and Ospraie have veto power on a sale of Lehman's stakes in them, and they could buy the stakes back at bargain prices. DE Shaw declined to comment.

Also, insiders are rallying to oust CEO Dick Fuld by year's end. Shares are down about 5% today. Dan's readers have made 65% on the short.

In Barron's, Eric Sprott, chief executive of Sprott Asset Management, a Canadian firm specializing in natural resources, highlighted a coal stock we have a long history with...

Our biggest coal holding is James River Coal [JRCC], in Virginia. They just reported their results for the second quarter, which wasn't a particularly good one. They lost money. Because of contracts, the coal they are selling today, or that they sold in this last quarter, they sold for $50 a ton. The coal they sell for next year will get $130 a ton. They are losing money – maybe $3.60 this year – but their results will get better with each quarter from here on. The shares are trading at about two times cash flow. We have calculated that the company could earn over $10 a share next year, and the story could be even better in 2010.

Billionaire Steve Cohen of SAC Capital agrees. His hedge fund bought 775,000 shares of the coal producer.

Byron Wein, head of $5.5 billion hedge fund Pequot Capital, sees opportunity in pharmaceuticals, biotech, oil and gas exploration, and Brazil. He wouldn't mention particular stocks because his "managers are restricted [in their trading], and in this kind of market, they don't want to be restricted." He recommended buying the Pharmaceutical HOLDRS Trust and iShares Dow Jones U.S. Technology.

Wein also had an interesting view on Wall Street compensation... "But in the period from 1982 to 1999, the compensation in financial services expanded much more rapidly than it did in any other field. I don't know that a securities analyst is a whole lot smarter than a lawyer at a major law firm, and I don't see why securities analysts or investment bankers should be paid so much more. So I think there's going to be a convergence of compensation."

High pay in the financial sector has been a huge driver in New York real estate prices. Now you can add fewer foreign buyers to the real estate market's woes. Over the past two years, foreigners purchased about one-third of all condos. But according to one real estate consultant, the continued chaos on Wall Street coupled with a strengthening dollar will mean falling prices: "As the US economy weakens [foreign buyers'] importance to the market becomes more heavily weighted. But while important they are not enough to offset the weakness."

Tom Dyson recently talked shop over drinks with legendary investor Jim Rogers in Singapore. Read about it in today's DailyWealth.

New high: Covidien (COV).

In the mailbag... My mother asked me to publish at least one nice note from a subscriber. Truth be told, we get far more positive feedback than negative. But we find the negative notes far more entertaining... So those are the ones we tend to publish. Good or bad, we promise to read what you send us: feedback@stansberryresearch.com.

"I really appreciate what I have learned from you guys over the past several months of market unrest. I feel that I am becoming a much wiser investor. Unfortunately, only a portion of my portfolio is open to me to invest using the tools and advice you have given me – much of it is locked into the 401k of my current employer. With only the Fidelity family of funds to work from, do you know of any effective resources I can use to guide me in investing those funds wisely? Thanks for the education... and the enjoyment!" – Paid-up subscriber Bob Parry

Porter comment: Yes... our old friend Alex Green (investment director of the Oxford Club) has recently written an entire book about his Gone Fishin' Portfolio strategy, which exclusively uses Fidelity no-load funds. Click here to preorder the book on Amazon. It will be in stores next week.

"One of these days you will offend someone so bad they will terminate you. I would advise you to travel in an armored car with plenty of security especially in Tennessee... individuals in the country, especially this part, do not take to people like you Porter. You have not paid your dues for the privilege in living in this great country... I am not even sure if you do not set up your own subscribers... I know you have all of these disclaimers but it really is only your word." – Paid-up subscriber Bernie

Porter comment: I'm not sure what "dues" you mean. Judging by the amount of taxes I've paid over the last 10 years, I should have received a "platinum" citizenship.

As for trusting us not to "set up" our subscribers, the SEC spent years investigating us for the same thing. When the agency couldn't find any evidence, it sued us for something else, alleging we'd fabricated an interview as part of a stock report. We have always denied the allegations. Despite the government's offer to settle the case, we've been fighting it in court since 2002.

I can assure you, if we were doing anything like you suggest, we would be out of business. None of my partners would do business with me. None of my employees would work for me. And none of our long-time subscribers would support my business. We don't buy any of the stocks we recommend to our readers. We maintain total independence to avoid any possible conflict of interest and any allegation of wrongdoing.

"This morning on CNBC Buffett said that Fannie & Freddie were to big to fail. How is it he says they will go to zero but are too big to fail? He may be a billionaire investor but with comments like that it appears he's loosing his grasp of reality. Of course one of the e-mails pointed out he's in his 80's and for all intents and purposes he won't be around to live with the effects of the impending disaster." – Paid-up subscriber Bob Domino

Porter comment: Nothing is wrong with Buffett's brain. It's your understanding of bankruptcy that's sub-par. Fannie and Freddie are too big to fail. The government cannot allow the value of their debts to fall apart because their bonds are held as reserves by the world's largest financial institutions, including other central banks. So the Treasury has promised to stand behind all of Fannie and Freddie's bonds.

However, in most cases, corporations that accept this kind of government assistance must suffer bankruptcy, which wipes out the value of their shares. Buffett was saying what we've been saying for months: In the event of a government bailout, there will be no residual value in Fannie and Freddie's stock. Their share prices ought to be zero.

"Specific Congressmen deserve a tongue lashing, but athletes who attain a silver certainly do not deserve the same. Is your performance perfect every day? Are you the absolute best in the world at what you do? Sorry, but I do not think so. However, by surrounding yourself with those that are better, you also improve. I think you owe an apology to all the athletes... even those who were not able to attain a medal at all." – Paid-up subscriber Paul J. Keck

Porter comment: I wasn't passing judgment on anyone else's medals or accomplishments. I was explaining that, for me, coming in second place has always felt like losing. I'm not interested in second place. And the people I admire aren't either.

"Enough about stocks for the moment. Yesterday we had a party for a number of close friends and I decided to use Porter's recipe for smoked brisket. We smoked two at once and followed the recipe to the letter except for adding some hickory to the smoking wood. Since one of the briskets was about 11 pounds we smoked it at about 200 degrees for 14 hours. The results: the most tender and flavorful brisket we have ever eaten - and that includes famous places like Goode and Company barbeque in Texas. Most of the guests went back for seconds. The party was truly a success. Thank you Porter for the recipe – it produced great results and an abundance of favorable comments!" – Alliance member Bob Clark

"I like the way that you, Porter, interact with your clients. It's refreshing to hear someone speaking his mind, even though it's from a bully pulpit. Printing and responding to the occasional a--hole is just not done in today's society. And you and your colleagues have some good ideas re investing & trading as well." –Paid-up subscriber Ed

"Congressmen need to be insulted. They have forgotten they work for the people." – Paid-up subscriber JYB

"I really enjoy your Digest and found the Gay Barney and Dumbass Dodd part really hilarious and CORRECT! So people only wrote in to complain about the Gay remark and not Dodd being a dumbass? Common sense tells me that being called a dumbass is much more inflammatory than being called gay (when you are). No argument that Dodd is a dumbass? that is funny!" – Paid-up subscriber Justin Tracy

Porter comment: You can't argue about the obvious...

Regards,

Porter Stansberry

Scott County, Tennessee

August 25, 2008

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