The S&A Digest: Thanks for the 50-point rate cut

Thanks for the 50-point rate cut... Jim Rogers says it's a bad scene, man... www.Don'tPayYourMortgage.com... Bank of America yields more than 6% today... Wilbur Ross in the bond insurance biz... Bill Ackman: vindicated after six years...

 A quick thank you to our pals at the Fed for yesterday's rate cut...

From: Dan Ferris [mailto:dferris@goldbug.com]

Sent: Thurs 1/31/2008 10:14 AM

To: Ben Bernanke; Fed Governors; FOMC; hpaulson@sellout.gov; dubya@backtoTX.com

Subject: Thanks for the early birthday present

Guys,

Thanks for yesterday's 50-basis point rate cut. I look a lot smarter with guys like you in the market.

BTW, somebody told me you're really just destroying the currency and causing ungodly inflation and value destruction. If that's true, can you give me a little heads up on it so I can go sell everything and buy enough gold, guns, and groceries to last the rest of my life? Thanks.

Signed, still your best pal,

Dan Ferris

P.S. What's with that guy, Richard Fisher, from the Dallas Fed, who didn't recommend a rate cut? Can't you fire him and put some spineless guy in his place who'll play ball and help make stocks go up?

 S&A's Mike Palmer would like to interview readers who have owned one of our favorite stocks, Extreme Value and 12% Letter pick Realty Income Corp (O), for at least two years. To share your story, e-mail Mike at mpalmer@stansberryresearch.com.

 "We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene." It's no surprise, but Jim Rogers is bearish on the U.S. economy. He's putting more money in China. He likes high-growth sectors like tourism, agriculture, power generation, and airlines. And he's still long commodities and short investment banks. The latter, he says, are headed "way, way, way down."

 Apparently the rest of America doesn't share Rogers' optimism about China. The Morgan Stanley China A Share Fund (CAF) – a Chinese ETF – is currently trading at a 28% discount to its net asset value.

 You know those cheesy TV commercials that say you can get rich buying houses out of foreclosure? Well, now you can buy a kit that tells you how to walk away from your home if it's going into foreclosure. This is no joke. It's at www.youwalkaway.com.

Among other promises it offers about your "walk away plan," the kit says it can tell you "the exact amount of days you have to live in your house payment free." If nobody has any money to buy foreclosures, I suppose the only thing left to do is sell them a kit that tells them how long they have until it's time to get out. Thy glory, O America, is slain upon thy high places. How are the mighty fallen.

 On Tuesday, we wondered what, if anything, the CEO of the still-mighty Bank of America, Ken Lewis, was thinking when he offered to buy the once-mighty, now-fallen, Countrywide Financial for $4.1 billion. Lewis says he expects BAC to make $2 billion in annual after-tax profit from Countrywide by 2011, including cost savings and without a boom in refinancings.

I'll say this for Ken Lewis: His projection for Countrywide to become profitable three years out sounds a lot like Joel Greenblatt, one of the greatest investors of our time. Greenblatt says patience is a major source of competitive advantage for investors. At an investment conference in New York in 2006, Greenblatt told his audience, "Nobody wants to wait three years."

 As Lewis and Greenblatt might have predicted, the market wasted no time punishing Bank of America for its Countrywide deal. The stock now yields more than 6%. If there's nothing really wrong with BAC, there's no way it should be this cheap. If the business is unimpaired, it'd be like buying Coke or GE in 1982.

 Believe it or not, at least one Countrywide shareholder thinks getting bailed out by Bank of America is a bad idea. The SRM Global Fund, which owns 5.2% of Countrywide, says Countrywide's book value is $20, but that the BAC deal values it at only $8 per share.

If SRM is even a little bit right about Countrywide's value, then Ken Lewis is right about it being a steal... and Bank of America's stock really is a great buy right now.

 Billionaire and vulture investor Wilbur Ross said last night in a CNBC interview that if he were to buy a bond insurer, he would have to do so before a downgrade. "Once you lose a triple-A rating, it's hard to get it back." Maybe he's thinking of buying one of these companies after all... and sooner than you might have expected.

 MBIA, the world's largest bond insurer, reported its second consecutive quarterly loss today after writing down $3.5 billion worth of CDOs, those nasty, complex credit derivatives we mentioned Tuesday. The company lost $2.3 billion for the quarter, or $18.61 a share. Shares dropped more than 5% today to $13.20. In the press release dated today and released minutes after midnight, CEO Gary Dunton said the company's capital-raising efforts will offset any credit impairments.

 Hedge-fund manager Bill Ackman disagrees with Dunton. Ackman sent a letter to regulators yesterday estimating the two bond insurers will lose north of $12 billion each. Ackman's Pershing Square hedge fund is short MBIA and Ambac.

 Who would you trust in this situation? On the one hand, you have a CEO who has done his best to conceal everything that's wrong with his company and helped to run a potentially wonderful business straight into the ground. On the other hand, you have a hedge-fund manager who read 140,000 pages on MBIA and has spent six years getting at the truth, uncovering everything that's wrong with the bond-insurance business.

MBIA had Ackman investigated by Eliot Spitzer and the SEC. Ackman's photocopying bill for subpoenaed documents was more than $100,000. The SEC only recently sent Ackman a letter exonerating him, which he had to ask for multiple times.

On today's earnings conference call, MBIA only allowed questions to be submitted in advance through e-mail. This was MBIA's way of "taking the microphone away" from people who had "abused the privilege and ranted" in the past, said Greg Diamond, head of investor relations. Diamond labeled these people adversaries of the company, its employees, and its business relationships. He didn't mention any names, but we all know Diamond was talking about Bill Ackman.

If you're amazed at how long a major financial scam can go on in plain sight, think again. The U.S. dollar has been completely devoid of all value except that of the paper it's printed on since August 1971, almost 37 years. We talk about a weak dollar the way we talk about needing to drop 10 pounds before swimsuit season arrives. But if you think things are bad now, what will this debt-burdened, couch-potato republic of ours look like when the good-for-nothing U.S. dollar goes the way of the crooked bond insurers? Ken Lewis and Wilbur Ross won't be able to get us out of that one.

 New high: streetTRACKS Gold (GLD).

 Not much in the mailbag once again. Don't you like us? Or hate us? How can you possibly control the urge to give us hell or maybe get sluiced and tell us how wonderful we are? For Pete's sake, send us something worth reading at feedback@stansberryresearch.com.

 "[If Ken Lewis is right about making $2 billion a year from Countrywide, he] will have 'bought when there's blood in the streets' and will be looking like an investment genius. For the rest of us, I believe there's opportunity in a number of financial services firms who are financially strong enough and smart enough to survive and prosper. I have a sizable position in Steve Sjuggerud's pick TMA, which is up 42% from my purchase price about one week ago." – Paid-up subscriber Daniel Fylstra

Ferris comment: I can't know if Countrywide will work out. I doubt it'll wreck Bank of America, though it might hurt a bit. Getting Countrywide's $60 billion of deposits won't hurt. And it'll get to keep them, too, since they're thrift deposits. We'll check back with BAC in 2011 and see how it works out...

 "'Bush also bragged in his address about bailing out a few dumb borrowers. He even invited one to the speech, so he could put her on TV. If I were to become famous, I'd like it to be for something other than, "borrowed money he couldn't afford to pay back."' Amen to that brotha! Your awesome, Ferris!" – Paid-up subscriber Joseph

Ferris comment: Gosh, thanks. I'm just happy you realize it was me who wrote it. Some folks haven't yet grasped that I, Dan Ferris, write The Digest every Tuesday and Thursday, and that Porter Stansberry writes it on Monday, Wednesday, and Friday. (Truth to tell, Sean Goldsmith puts together the bulk of the material five days a week. Porter and I just wax rhapsodic on whatever he sends us.)

Regards,

Dan Ferris

Medford, Oregon

January 31, 2008

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