The S&A Digest: Take the Rolls

Take the Rolls... GM rolls over (finally)... Shoot the messenger... Radically higher oil prices?... The worst financial crisis since the Great Depression... Retirement millionaires...

I'd never been in a Rolls Royce before. But a new, shiny, black one was sitting outside our hotel yesterday afternoon. (Goldsmith and I are in New York for a series of meetings with financial website operators.)

"Hey, who gets to use the Rolls?" we asked the bell captain. Anyone who asks, apparently. Minutes later, we were in the back heading to lunch at the 21 Club. It was an incredibly smooth ride down 5th Avenue...

We're getting a lot of questions about our new high-income generating service, True Income. One of the questions folks have been asking is: Why would a company offer a bond that pays triple-digit gains?

Well, as Mike Williams has explained, the companies in the True Income portfolio actually pay a fairly low interest rate. For example, the Tribune Company is paying 4.875% interest every year on its $1,000 bonds, until the maturity date.

But the big gains from our True Income portfolio come from buying the bond for much less than $1,000. Today, for example, you can buy the Tribune bond for about $650. This increases your yield substantially. Instead of getting 4.875%... you're now getting 7.5% a year... plus you get a bonus capital gain of 54% at maturity.

The True Income strategy is pretty simple. We know how much we will be paid at maturity, we know how much we earn every day, and we know when interest is paid. The only thing left is the buy price. We try to pay the lowest price possible, in order to get the highest total return for on our investment.

Just a reminder, our charter subscription offer for True Income expires on Monday. If you are interested in giving it a no-obligation look, sign up before Monday and you'll save over $1,000.

Yesterday, shares of General Motors fell more than 11% as Wall Street finally woke up to the facts we've been pointing out for the last 18 months.

GM is already bankrupt... shareholders just haven't realized it yet... Quite simply, GM cannot possibly afford its overhead, its upkeep, and its interest expense. This company is upside-down. Its asset base cannot support its overhead – never mind any legacy costs.

– GM's Impending Bankruptcy, The Digest, January 11, 2007

Pointing out the huge problems in an iconic American company angered many, many subscribers. Here's a small smattering of the people who wanted to "shoot the messenger."

2/9/2007: "If it is soooooo obvious that GM is insolvent, why has its stock been upgraded today and it's near its 12-month high?? Are we missing something or is Deutsche Bank missing the 'obvious.'" – Paid-up subscriber Sandra

2/16/2007: "...How can GM be making overtures to buy Chrysler if they are going broke you stupid moron? Goes to show what an absolute complete moron you are." – Paid-up subscriber David Woodworth

3/3/2007: "You are so wrong about GM that I am willing to bet you your Rancho Santana Interest against any of my interests in Belize... GM is not in danger of bankruptcy as you keep saying without giving a good reason. And what if sales increase in China and the rest of the world with the current cost cutting?" – Paid-up subscriber Val Crick

5/4/2007: "With respect to your continual tirade against GM, what are your motives once you have pronounced that 'GM is dead!'... ? What country is your home, because I can't imagine an American taking such joy in attacking a long standing part of the business community. Very unprofessional and so unnecessary." – Paid-up subscriber Victoria Smith.

By January 2007, anyone who could read a balance sheet should have known GM could not escape bankruptcy. We've always believed publishing these unpleasant facts is the best way to serve our subscribers. Ignoring a painful truth doesn't make it go away.

We feel the same way about our recent reporting on Fannie Mae and Freddie Mac. If you can read a balance sheet, it's obvious the shareholders of these firms must be wiped out. We're not celebrating these facts... but they're far too important to ignore.

Oil hit an all-time high of $142 a barrel today, but the Russians think it's going higher... Alexey Miller, CEO of Gazprom – the world's largest natural gas company – believes we're undergoing "a great surge in oil and gas prices, which will end with prices at a radically new level." He also said OPEC has no great impact on prices... "Not a single decision has been passed of late that would really influence the global oil market." And Miller predicts his company will be the "most influential in the energy business," with a market cap of $1 trillion.

Legendary value investor Jean-Marie Eveillard thinks "this is the worst financial crisis since the Great Depression," and the recovery period will "take quite a while and be quite painful."

Eveillard blames the crisis on Greenspan's era of easy credit and no-document mortgages. To profit in these turbulent times, he's staying away from banks and brokerages, which are "disguised hedge funds." He said nobody knows what these companies are holding, and if you buy, you're buying blind. Eveillard did buy Extreme Value pick American Express. And he's heavily invested in Japan and Western Europe. He believes "the future lies in Asia."

Despite record oil prices and a struggling market, London auction houses are betting the art market will continue its surge. Christie's, Sotheby's, and Phillips de Pury are offering a record $654 million of contemporary art for sale next week. Only art that attracts the world's richest buyers – pieces by Jeff Koons, Francis Bacon, and Damien Hirst – will anchor the auctions.

New highs: none.

In the mailbag... Lots of stories from "retirement millionaires." We're developing a new advisory, aimed specifically at folks who see their "retirement" as an opportunity to greatly increase their net worth and life experiences.

If your retirement has led you to a far richer life (health, wealth, wisdom) than your career years, please let us know how you did it. We'd like to identify a few dozen strategies that have worked and help other people achieve their goals, even after they've "retired." Send your stories here: feedback@stansberryresearch.com.

"Thanks to The S&A Digest I have been shorting GM and rolling down my put contracts as I take my profits. It's like shooting fish in a barrel. Presently have GM DEC. 10 Puts." – Paid-up subscriber Zak Klemmer

"Am up about 80% since Nov. 07. Will probably be up 100% by the anniversary date. All from shorting. I like shorting. I take my queues from your newsletters. Hope to do the same next year. Thanks." – Paid-up subscriber Allen Whitmore

"I am 55 years old and working hard to make enough money to retire in 10 years. I have a nice (for me) size 401k and IRA portfolio. It will be close in 10 years to live the life that I want to. I took up with your research a few years back and have some nice stocks that you have recommended. I also have and have had some poor stocks that I chose myself listening to others. My problem is that I was raised very conservatively and continue to live my life like that. I am unable to gamble or play poker or any type of foolishness like that. I would like to buy the stocks that are a good bet in the long run. I own 2 stocks that your research has recommended that fall into that category at this time. Plum Creek Timber and Encana Corp. have been my ace in the hole." – Paid-up subscriber Danny Emel

"I retired in September, 1993, from a job as general manager of a manufacturing plant in New Orleans. I had spent just shy of 30 years with this company in sales, sales management, and the final 12 as a general manager. I moved back to the Louisville area, built and paid for a house for our senior years, got involved in some volunteer work through a Rotary Club and some other avenues, and I am currently working as a volunteer for SCORE (Service Corps of Retired Executives), helping would-be entrepreneurs as well as some existing businesses who may need some assistance. My money making hobby has been the stock market, and it has been fun making money grow with help from several of your newsletters as well as others. I have especially enjoyed using options and dipping my toes into the use of spreads, puts and calls, and covered calls. We are comfortably enjoying these years in spite of some of the ravages of age (I will be 80 in September). I still have a boat and enjoy fishing, and my wife and I have tried to keep our minds active through Elderhostel programs (we have attended 25 since retirement)." – Paid-up subscriber John Herzfeld

Regards,

Porter Stansberry

New York, New York

June 27, 2008

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