The S&A Digest: The Relief Rally Is Almost Over

Biggs is bullish... $170,000 in guitars... $122 oil... New CDOs, same as the old ones... We're not bluffing...

 The downturn in the economy means huge profits for pawnshops. And it's not just gas-station attendants and waitresses fueling the growth. A Philadelphia pawnshop reported making more loans to upper-middle class citizens and businesses. One local, high-end jewelry shop pawned $150,000 of inventory just to make payroll.

Investors are pawning gold and diamonds to cover margin calls on stocks. And a Grammy-nominated Philadelphia musician pawned 30 guitars, worth $170,000, to cover mortgage payments on properties he bought during the real estate boom. The Philadelphia shopowner makes loans at one-third the value of the asset and will sell after eight months.

 International Strategist editor Tom Dyson recently recommended a pawnshop with operations in the U.S. and Mexico. His readers are up 30% in one month, but Tom sees plenty more upside in this stock over the next few years. To read more about International Strategist and receive Tom's pawnshop report, click here...

 Hedge-fund manager Barton Biggs doesn't see much "gloom and doom." He believes the economy is "not as bad as you would believe from listening to the press and some of the Wall Street commentators." Biggs is calling for the S&P to top its October record this year and for commodity prices to drop as much as 30%.

 Oil hit $122 a barrel today.

 Tomorrow, the Credit Risk Committee of the International Association of Financial Engineers will hold a meeting in New York to address "The Need for Second Generation Models for Structured Credit Products."

According to Grant's Interest Rate Observer, the meeting's promotional material explained: "The overwhelming growth of the CDO [collateralized debt obligation] market over the past year has driven significant innovations in the modeling and pricing of structured credit instruments and CDOs." It's good that they're addressing this after seeing only $300 billion in losses from the existing generation of structured credit products.

 We may be reaching a market-clearing price for subprime mortgages... Asset manager BlackRock is buying a portfolio of subprime debt from UBS for $15 billion, a 25% discount. UBS made the sale after announcing an $11 billion loss and 5,500 layoffs.

 New highs: Comstock Resources (CRK), Aracruz Celulose (ARA), Sadia (SDA).

 Once again, we've been accused of lying. And once again, we're innocent. Give us your worst... feedback@stansberryresearch.com.

"You're bluffing again if not downright lying. Jeff's Motorola options are losing money. I bought in and am waiting for the 70% gain. I'll feel lucky if I break even." – Paid-up subscriber Maurice Jegues

Goldsmith comment: I'm afraid I'm not bluffing or lying, Maurice. Jeff recommended buying the June 9 Motorola calls at around $0.70. They hit $1.20 yesterday. That's a 71.4% gain.

 "Hope you've all been drinking as a fair number those emailing surely

 have... Social Security, Obama, Getting Stopped Out, GM ...and this and more are laid at your feet for the price of a subscription. My complaint? Labeling. Please correct the label on all critical, anonymous, emails to something more accurate like 'Anonymous Coward' or 'Unknown Twit'." – Paid-up subscriber Joshua Sharp

 "Speaking of 'living at the expense of others' in yesterdays Digest, I received my 'rebate' check yesterday in the mail. Our kind, helpful, government was so thoughtful to present me with a little chart, which explained that I was entitled to receive $1,200 because I was married, and then an additional $600 for the two children I have. They added it up for me and proudly displayed the $1,800 rebate amount that I deserved to receive. Of course, they then proceeded to reduce my rebate because, even though my wife doesn't work and takes care of our children full time, apparently I make too much money for my family of four. MY $1,800 entitlement was reduced to $38.41. Should I put it towards my mortgage? Or perhaps put 10 gallons into my car? You make the call. I gotta get back to work, so my neighbor can go to the mall." – Advisory Board member Mark Tobino

Regards,

Sean Goldsmith

Baltimore, Maryland

May 6, 2008

The Relief Rally Is Almost Over

By Ian Davis

There is an old saying that goes, "The crowd is wrong at the extremes, and right in between."

Most of the time, you want to invest with the crowd and join the prevailing trend. However, at stock market extremes (shortly before a peak or trough), when too many investors are lined up on the same side of a trade, it's time to start thinking about taking a contrary bet...

Last October, for example, a poll conducted by the American Association of Individual Investors (AAII) showed 68% of its members believed the stock market would be higher in six months.

This is extremely optimistic for individual investors, who are usually pretty well divided in their six-month outlook.

As the following chart shows, the stock market fell 10% over the next three months.

This Sentiment Indicator Says Renewed Weakness Is on the Horizon

Today, despite the shaky economy, individual investors are almost as optimistic as they were in October. Right now, 67% of individual investors believe the stock market will be higher in six months.

The S&P 500 is up 10% since March 17. However, just as stock markets never go straight down, they also never go straight up. In my opinion, this last month and a half has simply been a relief rally in an overall bear market.

Now that optimism is once again soaring to unusual levels, be prepared for a renewed decline in the major indexes.

 But that doesn't mean it's time to sell out and go hide in a cave. Even in a bear market, opportunities still exist.

In this environment, you should be invested in stocks that benefit from a weak economy... like discount retailer Wal-Mart, for example. So far this quarter, Wal-Mart has upped its first-quarter earnings expectations twice... And its stock is soaring.

Good investing,

Ian Davis

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