The S&A Digest: The "fix" continues

The "fix" continues... Verizon: no respect... Wattles on the move... Whitman buys the drillers... "Superficial; asinine"... Readers celebrate our taxes...

"The fix" is in play. Financial stocks continue to rally. And the Fed is likely to announce another big rate cut this week. The question is: Will the "medicine" – easy money – be worse than the disease? If you own gold, the medicine might be very good for you...

As we said last week, another great way to play the rebound in financials is insurance companies. They collect money in today's dollars, then pay out premiums over time with devalued dollars. Insurance companies are the backbone of the greatest holding companies in history, like Berkshire Hathaway.

Dan Ferris recently recommended a holding company run by one of America's greatest investing families. This company owns everything from insurance to oil, and it's trading at a huge discount to its intrinsic value... You're essentially buying an excellent hedge fund for $0.75 on the dollar. Dan expects 100% gains for investors who buy now.

To learn more about this company and receive Dan's top recommendation, click here... We're currently selling Dan's Extreme Value at a discount, but the deal ends tonight at midnight.

Verizon (VZ) can't seem to buy any respect. Last year, revenues were up 6% and cash from operations grew 14% – to $26 billion. The company pays more than a 4% dividend and bought back about 4% of its shares outstanding last year. Meanwhile, the stock hasn't gone anywhere in a year and is now trading for less than five times cash earnings before taxes... making it one of the cheapest blue-chip stocks in the world. Either we're all about to give up our cell phones and our Internet access... or investors in Verizon are going to make a fortune at some point in the next few years.

Bad news for Circuit City (CC). Mark Wattles has taken a 6.5% stake in the company. Wattles is a well-known "vulture" investor who specializes in retail stores. You don't want to follow him into common stocks... but the senior debt might be an interesting play. Wattles takes over companies by owning enough of their debt and common stock to gain control in bankruptcy. About three years ago, he did the same thing with Ultimate Electronics.

Contrarians take note: If you think fears of a recession are overblown, the so-called "land driller" stocks are selling for 50%-70% discounts. They could soar if oil prices move higher.

Marty Whitman of Third Avenue Value has been involved in the sector for many years – he bought Nabors (NBR), the largest land-drilling company, out of bankruptcy years ago. More recently, Third Avenue acquired 21% of Bronco Drilling (BRNC). Last Thursday, Allis-Chalmers offered to acquire Bronco for $16.33 per share, a 22% premium. Third Avenue thinks the offer is laughable and plans to block the merger. At the time of the announcement, Bronco shares were trading for 0.89 times book value and just over three times cash flow.

Says humorist Dave Barry: "SAT tests are designed by huge panels of experts in education and psychology who work for years to design tests in which not one single question measures any bit of knowledge that anyone might actually need in the real world. We should applaud kids for getting lower scores."

It's still a bull market in farmland... Record commodity prices boosted farmland prices 14% last year to $2,160 an acre.

Here's a business that's wonderfully ruthless... Vulture lenders Econohomes and Destiny Ventures are buying foreclosed houses at fire-sale prices and reselling them to the previous tenants with discounted, no-money-down mortgages. The buyers are usually on the verge of homelessness and have no other housing options. Even so... I doubt this business will work out as well as the clever folks from Econohomes and Destiny Ventures expect. The idea of "buying" a home without a down payment is nonsense. Without a down payment, the "homeowner" doesn't own anything. What incentive does he have to make his payments, to keep the home in good condition?

New highs: none.

A very interesting mailbag today... One subscriber celebrates my tax bill while another calls my GM analysis "superficial" and my opinion about check cashing "asinine." What do you think, dear subscriber? Let us know: feedback@stansberryresearch.com.

"So, I invested in the insider code forex training course a month ago offered up by a third party advert [click here to read the ad]as Porter and crew were tongue lashed by the masses. A 30-day trial was offered up by the vendor to fully evaluate it and return the package and the complete cost would be refunded. Suffice to say it was 100% professionally done by an actual forex trader who makes his living from this market on a daily basis. As a technical chart trader for the past 27 years who has seen and thought he had done it all, I actually learned some new and very powerful professional deep pocket trading tricks that can be applied to the equity markets as well... 97% of the retail investing population cannot see past the end of their nose and the rest of us keep extracting money on a consistent basis from their wallets. Investing and trading should be a journey where you are constantly learning." – Paid-up subscriber David Kiessling

Porter comment: I'm pleased to know you were happy with the program and your purchase. As I explained, we debated whether or not to run the promotion because we didn't have any experience with the editor or the product. But the feedback we've gotten has been very good.

"You have said a lot of asinine things in the past; but your latest faux pas regarding why people use check cashing is simplistic and moronic. You were too superficial to see that GM is not simply a US company; but GM is an international company with significant growth areas. This is a perfect example where the sum of the parts are greater that the whole appears to be. Now you have ventured onto poor people who live where there is largely an absence of banks. Banks also charge monthly fees; hold checks for an inordinately long time before crediting cash – which has a cost factor to the poor; and discriminate against the poor with low or zero balances. I am from poor Caribbean origins who have made it; but I witness poor people in New York City every day and I have not forgotten my poor roots. It is difficult to understand this practice until you look beneath the surface and see that check cashing use is not by choice for the most part. Rest assured that I have dealt with poor people who use check cashing and they are not all lazy, simplistic, moronic or stupidly asinine." – Paid-up subscriber Bertram Val Crick

Porter comment: Yes, GM is growing rapidly in both Latin America and Asia. Unfortunately, though, these two areas remain very small in comparison to the U.S. and European markets for automobiles. Specifically, GM sold $110 billion in U.S./Europe and only $28.2 billion in Latin America and Asia. Thus its "emerging market" business now makes up about 25% of its sales.

Can these smaller markets save GM? I doubt it. They are far too small to make up for GM's big losses in the U.S. and Europe. As a result, GM isn't making a profit selling cars, globally. And even worse, GM's share of the world's car market continues to shrink, quarter after quarter. So while GM is doing well in Asia and Latin America, its competitors are doing even better. That spells trouble for future profitability in these markets.

Regarding check cashing, don't be absurd. Getting a free or very low-cost checking account is a relatively simple matter for millions of people.

"As bad as I do feel about the corrupt tax code system, I can't help but notice the amount of whining coming from you about how much you give. Punishment for success in this great country of ours being the normal, by you announcing that you are in the top tax bracket is probably not going to earn you any sympathy. We should all be so unfortunate. It is no wonder why you endorse Ron Paul and the Fair Tax plan. I agree, I do not come close to your contributions, yet, but I can only sit humbly and wonder what your pain must be like. By my calculations you give more back than I and my wife earn in a year! So needless to say I am not losing any sleep over your dilemma... Happy check writing as April is just around the corner." – Paid-up subscriber Matt W.

Porter comment: I don't "give" anything to the government. The government takes taxes from me through a giant bureaucracy, behind which stand men (and women) with guns and prisons. What you're celebrating is the plunder of a fellow citizen and the willingness of the mob to take whatever it chooses from real individuals. The more important question, the one you ought to ponder, isn't how much money I pay in taxes, but what effect these outrageous tax rates have on our economy and the willingness of entrepreneurs to engage in risk taking – the root of all wealth.

As both history and comparative analysis show clearly, the higher the tax burden on an economy, the slower the real increase to per-capita GDP. While the mob and you may celebrate this year's plunder ("happy check writing"), a huge and ever-growing government dooms America to slower increases in private wealth and, at some point, bankruptcy. Study the history of unlimited democracies that engaged in such class warfare. There's no free lunch – not even when I'm paying for yours.

"I am not happy about the manner the S&A Short Report comes in to me. What I mean by that is by the time I receive the information I cannot buy in because it is above the limit I am instructed to buy it up to. I can't chase the call or put. When I get a stock like SSTI, or a Long position, I have no problem with it. Your follow up e-mails are great, but they do me no good. Is there a specific time, when on Mondays your report will be out?" – Paid-up subscriber Al

Jeff Clark comment: S&A Short Report goes out every Monday between 2:00 p.m. and 3:00 p.m. EST.

Whenever market conditions dictate a change in the timing of the issue, I always send an e-mail to prepare subscribers ahead of time. For example, since last Monday was a market holiday, we alerted subscribers that The S&A Short Report would be issued on Tuesday instead.

Nonetheless, you still shouldn't be having much difficulty participating in most of the recommendations over the past two months (at least) since – in almost every case – the trades came back down into the buy range within days of the recommendation. The King Pharmaceutical calls ran above the recommended price but then came back down. The DR Horton calls traded below $0.75 for several days following the recommendation. PAL was a better buy one week after the recommendation. And the Citigroup February 25 calls were cheaper on Wednesday morning than they were when I recommended them last Tuesday.

The only trade you should have missed so far this year was the XLF February 26 calls I recommended on Tuesday. Those calls came back down on Wednesday, but didn't quite make it to the recommended price. You're not going to catch every trade – but you should be able to get into most of them. This is an extremely volatile environment. Opportunities appear and then disappear rapidly. I'm always looking for trades that have plenty of liquidity to allow all subscribers to get into them. And in most cases, it works.

Regards,

Porter Stansberry

Baltimore, Maryland

January 28, 2008

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