The S&A Digest: The floodgates open

The floodgates open... "The crisis is over"... Bonds yielding 70%-100%... What to buy now: metals, insurance, banks, asset managers... About the tax "rebate"...

Sjuggerud calls the end of the liquidity crisis: "The LIBOR rate actually fell below the fed-funds rate (which hasn't happened since 2004). This is a dramatic signal that bankers trust each other again... that they'll lend money to each other again at favorable rates... and most importantly, that the liquidity crisis is over."

What does this mean? Governments have opened up the floodgates. Behind closed doors, promises have been made. The result? A new wave of "liquidity" – otherwise known as paper money.

My best advice: Buy gold. Even better, buy silver. The more money the Fed has to print, the higher metals prices will move up. Or, if you prefer the relative stability of operating companies, look for insurance companies, which get paid in today's dollars but only pay out claims later, with greatly devalued dollars.

Some of the best insurance companies operate as private holding companies – also known as "Secret Investment Societies." You can read my full report on these largely unknown, high-quality companies, here.

Another way to make a killing without taking on too much risk? Consider so-called "junk" bonds. Yes, low-yielding government bonds won't do well given all the inflation that's coming. But high-yield bonds can make you more than enough money to cover the hidden costs of inflation.

We're working on a beta issue of our new bond-focused newsletter, True Income. Our analyst, Mike Williams, has found two exceptional deals, where you will earn more than 70% in a little more than two years – in bonds. The bond market is much more inefficient than the stock market for one simple reason: Most institutional investors are forced by the rules of their fund companies to sell bonds that fall below a certain rating. It doesn't matter if the company in question has wealthy backers (like Sam Zell, in this case), holds plenty of assets, or if the Fed has begun to spew out money like Bronx fire hydrant in August. They've got to sell.

As a result, you can now buy short-term bonds with plenty of interest coverage for yields to maturity as high as 100%.

As the money wave arrives, so do the rumors of big deals. Legendary "vulture investor" Wilbur Ross is said to be bidding for U.S. mortgage insurer Ambac. Another billionaire, Carl Icahn, is plunging into bank stocks. Icahn bought 9.77% of Texas bank Guaranty Financial Group (GFG). The $443 million bank makes commercial real estate, mortgage, and homebuilder loans. Shares are down 31% since December.

People in a position to know tell me foreign investors are about to launch a series of $100 million deals to buy up entire condo buildings in Miami. And... a multibillion-dollar mortgage investor told me last night there are huge pools of "quiet" capital now at work in the banking sector, buying up high-quality assets that have been badly mispriced.

In the mortgage sector, we've recently recommended Redwood Trust (RWT) and Thornburg Mortgage (TMA). In banking, Sjug is bullish on the smaller regional banks, via an ETF. All of these picks have rallied sharply this week.

Another solid idea of how to "dip your toe" into the beaten financial stocks without taking on too much risk: Consider the asset managers. Running mutual funds is a fantastic business and is a good inflation hedge. (As inflation pushes up stock prices, these firms' fees increase because they're tied to assets under management.)

One analyst we respect greatly, Chris Mayer, is recommending Cohen & Steers (CNS). Talk about cheap: With $1 billion under management, CNS has seen its share price fall in half and is now trading for only eight times cash earnings before taxes. It boasts annual returns on equity in excess of 30%. (I'd encourage you to learn more about Chris Mayer. He's one of the very few stock analysts who don't already work for me that I read regularly. He's also got a good new book out, Invest Like a Deal Maker.)

Finally... a word about the beleaguered homebuilders. As I told my subscribers in November, when I recommended the stock, there's only one homebuilder you should consider buying – NVR. We're up 33% already. At these prices, the shares are a hold in my book.

Want to make $50,000 next year? Buy futures for a team you think will go to the Super Bowl. In December, Terence Gelke bought Giant futures, when the Giants were a longshot. He paid $1,000 for six tickets. The Giants made it to the Bowl, and now Terence is sitting on six tickets worth 50 grand. Steve Sjuggerud got tickets to last year's NCAA championship game the same way. Read about it here…

Today, I learned that my government, which sees fit to take 35% of the money my company earns each year and 36% of the money I earn from that business each year, will now take a large chunk of this tax revenue and redistribute it directly to people it deems worthy via a tax "rebate." Most of the families who are to receive $1,200 checks will not have contributed much, if anything, to tax revenues. (Families with incomes above $150,000 will receive less; families with incomes above $174,000 will receive nothing. More than 90% of all income tax revenue comes from families who earn more than $174,000.)

What the government does to the English language never ceases to amaze. How can you give a rebate to people who don't even pay taxes? How can you "rebate" money you've already spent?

According to Bill Clinton and Arnold Schwarzenegger, who have apparently studied the matter, poor people in America spend close to $8 billion per year on check-cashing fees and payday loans. More than 20 million Americans do their "banking" via such outlets, typically paying around $40 simply to cash a check. These are the kind of folks the government will soon be sending checks to.

I have a humble suggestion to make. Please don't send my hard-earned tax dollars to deadbeats who are too lazy or too stupid to avoid paying $40 to cash their friggin' government handout.

Where is America headed with these kinds of policies? Zimbabwe comes to mind. The nation has just issued it's first $10 million note. Best line in the press release: "As monetary authorities, we once again assure the nation that we are in full control of the currency situation."

New highs: none.

In the mailbag... a stock tip, more Soros bashing, and a question about who writes The Digest. Answers below. Send your questions and criticisms to: feedback@stansberryresearch.com.

"Porter, I have been reading your S&A Digest for sometime now. Occasionally, I read reader responses questioning the value of this or that newsletter. Fourteen years ago, after having a bad experience with a Merrill Lynch broker, I realized that if I was going to acquire any wealth through investing I would had to do it myself. The first few years I struggled to find good investment opportunities because initially I was not a well educated investor. After a few years of struggle, I had the realization that I needed to approach investing like a business instead of as a hobby. I realized that I needed to think of quality investment magazines and newsletters as a kind of necessary capital expense for running it as a business. In determining how much to spend annually, I initially set a ratio of 0.5%-1.0% of the portfolio value as an initial guideline. As my portfolio has grown (at a ten year 15% annualized rate), I have reduced the ratio to about 0.4%-0.6%. Using this ratio approach has helped take the emotion out of newsletter purchase decisions and allowed me to spend sufficient money on quality and (sometimes) expensive newsletters, which in turn, have enabled me to add at least 7% additional performance to my annualized returns. In other words, spending 0.5% annually has allowed me to add an additional 7% annually. Now, after more than ten years of "on my own" investing experience, I believe that anyone starting out who tries to manage their own investments without sufficient expenditure in quality investment periodicals is doomed to mediocre or poor returns." – Paid-up subscriber Charlie Wright

Porter comment: Buying good newsletters that offer thorough fundamental research on high-quality stocks and giving yourself a financial education is a far more efficient way to invest than buying even the least expensive mutual funds.

While this is true, it can be difficult to accomplish. We know, as publishers, that the public will buy exactly the wrong letters at exactly the wrong time – what I've labeled the financial publishers' paradox. The key to avoiding these pitfalls is to build a relatively diversified portfolio (15-20 stocks) of very high-quality, long-lived businesses (that pay dividends) when you can buy shares at a very attractive price. If you work hard to avoid buying risky stocks – even if they have a great story – you'll be successful.

Charlie, you deserve a lot of praise for earning 15% per year over 10 years. That's a remarkable annualized return. Maybe you should tell us what you're buying now...

"Just knowing that you gave Soros the time of day, I am not going to renew my subscription. Thank you for letting me know." – Paid-up subscriber Keith Fauci

"I have a suggestion. Don't ever mention Soros' name again as it is early in the morning and I might lose my breakfast. Just indicate the comments are from one wealthy hedge fund manager who hates America and all she stands for except for the fact he can spout off while making massive profits as a result of the capitalist system and political and financial freedom created by our founders. How's that for turning a lemon into lemonade. The guy literally makes me want to vomit." – Paid-up subscriber Dan Brooks

Porter comment: This happens every time we publish the word "Soros." The context of our publishing doesn't matter. Just to reiterate: We only cover the things Soros says and does that might be important to the financial markets. We don't endorse his political activities (or even know anything about them).

"American Capital Strategies (ACAS) announced they will be buying back $500 million worth of common in 2008 because the stock is trading below net asset value. They do not do mortgages, they finance businesses. At the current price just under 32.00 their 4.19 dividend forecast for 2008 would yield over 13 pct on an annual basis. Talk about Extreme Value!" – Paid-up subscriber James Sloan

"My friend 'The Professor' (a real professor, who is always wrong about markets) on Monday of this week stated flatly that the economy was doomed. 'I think we're just now seeing the beginning,' he said. This emboldened me as I failed to sell into the panic. He has yet to buy gold. I'll send updates on The Professor's next prognostications." – Paid-up subscriber Shawn McGuire

Porter comment: No one I know, outside of the gold bug community, has bought gold yet. That's why I think we're a long, long way from a real top in gold or silver.

"From the 3rd paragraph of The S&A Digest: 'A few wise souls take advantage of lower stock prices. They come out richer and happier. You don't see Buffett selling. He's buying. He's not a weak long. My pick Winthrop Realty (FUR) isn't selling. Winthrop CEO Michael Ashner isn't a weak long, either. He's buying real estate and real estate debt... and raising new equity to buy more.' OK. I get it. But, what do you (or Porter) recommend the average guy like myself buy stock with? I don't have additional cash to take advantage of these opportunities. Maybe I should have maintained a more cash-rich position leading up to this opportunity." – Paid-up subscriber J.D.

Porter comment: Yes, indeed. The best mutual-fund managers we track have up to a 50% cash position when there's nothing attractive to buy and generally hold at least 20% of their net asset value in cash or cash-like instruments. To make great long-term investments, you first must have "dry powder" to buy when prices fall to absurd levels.

"I too am selling futures on my earnings for half of what Randy Newsom is asking! I'm sure all of your investors are interested." – Paid-up subscriber Kelly Sonderegger "software engineer"

Porter comment: Are you sure you want to sell 4% of your lifetime earnings for only $25,000? Seems like a pretty good deal for the buyer.

"I am not sure who is writing today in this Digest at open. Please mention your name before we read or else I will delete it quickly." – Paid-up subscriber Rey

Porter comment: Beginning this year, we've asked Dan Ferris to handle editing The Digest on Tuesdays and Thursdays, leaving me with Mondays, Wednesdays, and Fridays. We've been signing off at the end of each Digest, just to remind readers. And, of course, when we make comments on the mailbag, our names appear. But... if you'd rather not read any of them... that's fine with us.

Regards,

Porter Stansberry

Baltimore, Maryland

January 25, 2008

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