The S&A Digest: The View from the Helmand

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/21/2013

LNG collapses, finally... 'The worst is over... no really'... Bravo to Heebner and Weber... Kurzweil on solar power... Utopias... Taxes... Wrong about heroin?

Often times with investing, the most obvious trades take the longest to unfold. Here's one worth watching: the U.S. long bond. Why would anyone lend money to the U.S. for 30 years at an interest rate that's less than the current rate of inflation? Looking at our foreign policy, our deficit spending, and our enormous unfunded social liabilities, why would anyone lend to our government at all?

After bouncing off of the lows in yield it first hit back in 2003, we expect long-term interest rates will rise substantially over the next decade, as the U.S. government is finally recognized as a horrible credit risk.

We wrote it. Did you listen?

If you were trying to win a competition for the worst business idea, this one would be hard to beat... Cheniere Energy (AMEX: LNG) wants to spend billions to set up facilities for importing natural gas into the United States. This is utter madness. There's only one other country in the world, according to the CIA, that produces more natural gas than the United States: Russia. Cheniere's business plan is the equivalent of setting up a really big airport in Iowa to import wheat from China, on the basis that wheat costs less there. It just doesn't make any sense, given the abundance of natural gas in our country. Cheniere has no other business operations to speak of, no track record of construction projects, and almost no capital, except what's been borrowed...

– PSIA, June 2006

Over the last two years, the stock price of Cheniere Energy has fallen from more than $40 to less than $15. And according to research group Wall Street Access, the company has begun to wind up operations. "LNG last night announced the lay-off of two-thirds of its administrative and trading staff, the resignation of its president and chief operating officer, and the termination of its natural gas marketing program – at least in its present form. The firm believes this is the beginning of the end for the company, and that the [company] will be fortunate to sell itself to a larger integrated energy concern at a single-digit share price. They say the sooner, the better, as there are certain not-so-obvious problems with the story that could imperil its long-run viability. They conclude that LNG equity has no intrinsic worth, i.e. that the [company's] debt exceeds the present value of its expected future cash flow."

Richard Fuld, CEO of Lehman Brothers, told investors at the bank's annual meeting yesterday, "The worst is behind us." Fuld's beliefs mirror those of Goldman chief Lloyd Blankfein and Morgan Stanley chief John Mack, both of whom think the end is nigh. It's funny Wall Street CEOs are assuring investors the worst is over, while hedge fund managers are forecasting more gloom and doom. Wall Street makes money selling stocks, bringing companies public, and advising on takeovers – all actions that thrive in a bull market. Meanwhile, hedge fund managers make directional bets on the market and only eat what they kill. Who do you believe?

Bravo to fund manager Ken Heebner. Heebner's track record is unbelievable – more than 17% a year since 1976. You don't hear his name mentioned as often as other investors who aren't nearly as good at investing (but are very good at self promotion...) Last year, Heebner's CGM Realty fund was up 34%. How did he make money in real estate last year? He dumped his REITs early and put a lot of the money into Vale, Mosaic, PotashCorp, and Rio Tinto. Sure, they're commodity stocks, but they own land, so he put them in the fund. He also owns a big chunk of one of our long-time favorites, Annaly.

Bravo to Chris Weber... Weber told his subscribers to "sell everything" and buy precious metals last November. They avoided most of the bear market in stocks and capitalized on the 57% price increase in gold. We're not surprised... We've never seen Chris make a mistake investing. In his latest letter, released yesterday, Chris is bullish again. And he's advising his readers to take two specific positions in the equity markets. To learn more about Chris Weber, click here...

Here's a great reason to ignore all of the claptrap about carbon emissions, global warming, and Peak Oil. According to scientist, inventor, and 'futurist' Ray Kurzweil: "A new generation of panels based on nanotechnology (which manipulates matter at the level of molecules) is starting to overcome these obstacles. The tipping point at which energy from solar panels will actually be less expensive than fossil fuels is only a few years away. The power we are generating from solar is doubling every two years; at that rate, it will be able to meet all our energy needs within 20 years."

So, in 20 years, we'll all be "green" anyways since that will be the cheapest and most efficient way to generate electricity.

Always know what you're investing in... the exchange-traded fund MACROshares Oil Down Tradeable Shares (DCR) tracks the inverse price of West Texas Intermediate Crude oil. If oil goes up, this ETF goes down, and vice versa. Since April 4, this ETF fell 60%, but oil only increased 8%. That's because the fund has a special clause in its prospectus that most investors probably ignored... "[If the] Applicable Reference Price of Crude Oil rises to or above $111.00, at which level the underlying value of the Down-MACRO holding trust will be equal to 15% or less of the assets it holds on deposit and, in either case, the Applicable Reference Price of Crude Oil remains at that level for three (3) consecutive price determination days."

In English, if oil stays above $111 per barrel for three consecutive days, this fund's investors are screwed. Because the fund hit its trigger, it will be liquidated to current shareholders as of the close of trading June 25.

We borrowed this November 2007 Alan Greenspan quote from Prudentbear.com. "Markets are becoming aware of the fact that the decline in house prices is not stopping. I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon."

New highs: Comstock Resources (CRK), Wal-Mart (WMT), Pioneer Drilling (PDC), Sabine Royalty Trust (SBR), XTO Energy (XTO), EnCana (ECA), Covanta (CVA).

In the mailbag, it's tax time. And that means we've got mail from both ends of the political spectrum – the whipped dogs who think the IRS is a noble institution and the so-called "tax protestors," who are convinced they have no real legal obligation to pay taxes. Enjoy. And send your comments to: feedback@stansberryresearch.com.

"... Would that I could tell you about my 'big capital gains bill.' But 'the market' saw fit to punish me, not to reward me, this past year. And so your hated government is actually allowing me to stockpile some losses to offset some gains in the future. Bad, bad government, I'm sure. I'm really curious what a completely capitalist free market libertarian society looks like. No taxes, no regulations, no police, no fire department, no publicly-maintained highways, no municipal utilities, no National Parks, etc., so far as I can tell. But Big Military? Privatized? Financed by investors? Could you draw the picture of your Libertarian Utopia? I can't figure it out." – Paid-up subscriber James Wood

Porter comment: I don't know anything about Utopia (aka, nowhere)... but since the American Republic ended in 1913, our government has become far more expensive, belligerent, and interested in the private lives of its citizens. It has also abandoned nearly all of the traditional measures of good governance, such as sound money and balanced budgets. That's not to mention starting an untold number of foreign wars (Nicaragua alone was invaded 26 times in the last 100 years) and accumulating an estimated $44 trillion in debt.

But the worst aspect of an unlimited democracy is the contest it creates between various interest groups. Washington is now a bottomless trough – the kind that can sustain an endless number of pigs. The citizens have largely responded, as my friend Doug Casey says, "like whipped dogs." Now, instead of wondering why our country has the most repressive tax regime in the world, we roll on our bellies, kick our legs in the air, and pee ourselves in excitement over our meager tax credits and refunds... I would wager fewer than one in 1,000 Americans even know the original U.S. Constitution specifically forbade income taxes. If you read the Federalist papers, the writings of Jefferson, Madison, or Monroe, you will learn they rightly feared the powerful central government they created would eventually erode into the kind of limitless democracy – mob rule – that we suffer from today.

"I am NOT a 'taxpayer,' haven't been for twenty eight years now, ever since I read Supreme Court ruling in U.S. v. Flora: 'our system of taxation is based upon VOLUNTARY assessment and payment, not upon distraint.' I believe what the U.S. Supreme Court says and don't volunteer. Of course, I also know that my labor is 100% mine to do with as I please and that I can 'exchange' it for whatever I can manage to get for it, contrary to IRS belief that my labor is worth zero and that I therefore 'gain' or 'profit' when I exchange my labor for FRNs. On top of that, I also clearly understand that what is taxable is some income taxable 'activity' and that it is not income that is taxed but the 'activity' that is taxed. Have you ever asked yourself 'what is the ACTIVITY that I am engaged in that is income taxable?'" – Paid-up subscriber Marty

Porter comment: Good luck with your coming legal troubles, Marty. Clearly the IRS doesn't believe paying taxes is voluntary. And they've got guys with guns that will want to discuss this with you. For some reason, lots of our subscribers believe the claptrap you can find on the Internet about so-called legal ways to avoid paying taxes. These people are either incredibly self-deluding and/or incredibly naïve. Here's a question: If paying taxes is really voluntary, why are so many people in federal prison for not paying their taxes? Do you think they volunteered to go to prison, too? See this New York Times article for one of many examples.

"Why do you keep recommending using an Excel program or an outside source such as Trade Stops to follow your stops. Anyone whos using an online broker can set e-mail alerts right from their brokers. For a medium to long term trade thats all you need. If you go in once a week, or so, and update your stops your good. If you want more detail you can use any one of the many free online portfolio keepers and get charts and company news at a click." – Paid-up subscriber Ken Long

Porter comment: You can keep track of your stop loss points in lots of ways. If you're comfortable using your broker's website, that's fine. Personally, I'd never disclose my stop loss points to anyone. So for me, using Excel on my own computer is best.

Regards,

Porter Stansberry

Baltimore, Maryland

April 16, 2008

Editor's note: In response to our prediction of rising heroin prices – "go long heroin" – a member of the U.S. Army tasked with eradicating the poppies sent us his expert, eyewitness appraisal of the coming Afghanistan poppy crop. Caution: Subscribers who believe what the media tell them about the war on drugs may not want to know what the soldiers on the ground know. We're not even making a dent on demand.

The View from the Helmand

By Anonymous

Ok, I have a confession, I may be a Porter groupie, if there are any. As a fellow libertarian, few things over here provide me with such comedic relief as Porter's repartee and salient wit displayed in the Digest. Also, please thank him for me for publishing a list last year of must-read books. They have kept me busy during the down time here and have provided me with significant education along with additional firepower to really piss some people off myself. Hence my desire to become an Alliance Member, I'm dying to meet him and Jeff Clark. Of course it may be best for me to not meet them, lest I destroy my mythical image of them both!

Attached are a couple of pics taken within the last two weeks. The flowers are blooming on the poppy now and thousands of field workers are rolling in from North Afghanistan to prep the fields for harvest.

Once the flowers fall off, the remaining bulb will be pierced with razor blades, and the opium will be harvested. The opium is then transported to labs, typically in the mountains throughout the country and transformed chemically into heroin. Then transported by mule through Pakistan, Iran, and other surrounding countries with the end product all heading to Europe. Most heroin in the U.S. comes from Mexico, Thailand, and some South American countries. Almost zero comes from here.

As you'll see, the area is actually quite verdant during the poppy growing season and beautiful in its own right with the various colored poppies.

Oh yeah, don't let me forget about the marijuana. It, like the poppy, all grow here like corn grows in Iowa, and it is used to make hashish. You can actually smell the dope in the air when we fly over.

I must compliment the Afghan farmers. They are, without a doubt, quite industrious and may very well be the best farmers in the world based on the harsh environment and limited resources. It's not all drugs here though. They also grow a lot of wheat, grapes, melons, and some other alternative, crops though nothing pays like poppy. To wit, this year the Taliban, Al Queda, and their ilk are so short of money to fund their Jihad they are even helping with the harvest and plan to exact a 50% tax on the growers versus last year's 10%.

As for this year's efforts...

Almost all eradication efforts have halted in the Helmand because it's too dangerous to go in now though now is the time to hit them. Once the crops are mature the local defense of the fields literally turns into full-scale combat operations. And since the majority of the Taliban in the country operate in this area, things could get ugly real quick.

This information is first hand since I'm currently tasked to work in the antinarcotics arena here and could go on ad nauseam about the dirty politics that take place here in support of a dismal attempt to eradicate the drug. For the sake of keeping this from turning into a rant I shall refrain from further comment. Sans one last parting shot. Ironically in 2000, there was negligible poppy grown while the Taliban were in charge, since the Koran says it is considered "against Allah." Now, however, it appears Allah is all for it since this is a Jihad. Ultimately, heroin is the number one contributor to Afghan GDP and funds a tremendous amount of terror. Thus, the GWOT is also the Global War On Drugs. I'd actually be a buyer of poppy futures... bumper crop, increased prices!

As for printing my comments... I'm honored but must decline having my initials printed since I would hope there are others within my organization with the foresight to subscribe to your editorials. Unless, of course, Porter is willing to pay me to write my own letter to make up for the lost income that will befall me if anyone were to deduce my identity and unit? Come on, Porter, bring me home, my girlfriend says she misses me. Personally, I miss our puppy...

From afar,

Anonymous

P.S. The aerial picture is a small portion of the northern tip of the Helmand Province shot from our helicopter. The canals, which nourish the fields, were all built by the USA prior to the Soviet invasion. The Helmand is so vast you can actually distinguish it on a panoramic view of the Earth shot from space. Amazingly it's a green belt surrounded by desert. So honestly, tell me, how does anyone expect 30 tractors plowing, along with some plus or minus 200 Afghan National Troops/Police (this is the Afghan government's solution) patrolling the fields to even make a dent? My guess for this season's efforts is about .0001% of the poppy has been eradicated.

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