The S&A Digest: Whitman on bear raids

Whitman on bear raids... Driving less and getting older... Refueling in Mexico...

Goldsmith comment: The Internet is down at Porter's villa in Italy – I know, it's tough. He should be back online for Wednesday's Digest.

 Every quarter in Third Avenue's shareholder letters, seasoned value investor Marty Whitman offers investing genius. Porter started reading Whitman's letters when he began investing more than 10 years ago... and I haven't missed a letter since I started working at Stansberry Research almost two years ago. In his latest letter, from April, Whitman explains Third Avenue's heavy weighting in troubled financials...

As we've covered extensively in The Digest, Third Avenue owns shares of bond insurers MBIA and Ambac, and the firm recently bought into credit-services company CIT Group. To most, these stocks seem to go against Third Avenue's credo of "safe and cheap," but Whitman claims the worst is already priced in.

Instead of whining about aggressive short sellers like Ackman and Einhorn (who have both targeted the bond insurers), Whitman uses the negative sentiment to profit... "Net-net," he writes, "the bear raids seem beneficial for the Fund. The raids are beneficial if all they do is depress the prices of common stocks by propagandizing faulty analysis, e.g., Ambac and MBIA."

 As we reported last week, Alexei Miller, CEO of OAO Gazprom, the world's biggest natural-gas company, said oil would hit $250 in the "foreseeable future." Option traders are already making bets. At least 3,008 options contracts have been purchased giving owners the right to buy oil at $250 in December, according to Bloomberg.

 But another value legend, Bruce Berkowitz of the Fairholme Fund, thinks the big money has already been made in oil. Berkowitz cut his fund's oil position in half and moved the money into health care. His reasoning... He's driving less and getting older. "We're following the cash, and cash flows aren't as high [in oil stocks]." Berkowitz argues Americans want to maintain the best possible lifestyle for as long as possible. And that results in expensive health care.

 On the bright side, if oil prices keep soaring, we can always head to Mexico. According to the Associated Press, San Diego residents are shunning $4.61 a gallon gas and driving south to Tijuana, where gas costs $2.54 a gallon. Have any California subscribers made the trip south of the border to refuel?

 New highs: Opti Canada (OPC.TO), International Coal Group (ICO), Grey Wolf (GW), LaBranche (LAB), Pioneer Drilling (PDC), Keyera Facilities (KEY-UN.TO).

 Our inbox was full of habeas corpus and True Income comments. Porter will handle the former upon his return... feedback@stansberryresearch.com.

 "I'm very curious about the new bond research service soon to be offered, True Income. I have never bought bonds before, so forgive the question if it seems foolish. What are the minimum investments for the bonds you will be recommending? As a believer in position sizing, I would have a limited amount to invest in a particular bond. With stocks it's very easy to position size because I can just buy fewer shares. I would like to know if the bonds will be in my price range before deciding to subscribe to this publication." – Paid-up subscriber Todd

Mike's comment: The bonds we buy in True Income have a face value of $1,000... but the market determines their current price. So far, the bonds I've recommended have cost from $550 to $750 each. Many of our subscribers have successfully executed buy orders totaling between $2,000 and $5,000.

It is possible to buy one bond, but the smaller your order, the larger the "spread" you're going to pay. The bond dealer stands ready to buy at the bid price and sell at the ask price. The difference is the spread, his profit. Larger position sizes tend to shrink the bid ask-spread. As long as you stay below the "buy up to" price on the recommended bonds, you should be fine.

 "My broker does not list some of the bonds you recommend. How can I go about buying them?" – Paid-up subscriber Laurie Warren

Mike's comment: This is not surprising. Your broker would prefer to sell you "investment grade" bonds. But I assure you the bonds I recommend in True Income are available and traded. I encourage you to persevere and ask your broker to contact the firm's fixed-income specialist. The specialist will help you fill your order.

 "As an Alliance member, I found my automatic inclusion in the True Income subscriber list a real eye-opener. Like probably most of your subscriber base, I am a 'stock investor.' Sure, I know about balance sheets, income statements, etc, but I was (and will always be) a classic 'long': I want to invest in both growth and value, the future of American business, etc. Seeing your analyst's cogent arguments has given new life to my views on investing: the debt side is every bit as important as the equity, and consideration of such will make every 'home-gamer' infinitely more sophisticated. I guess the strongest endorsement I can give to True Income is that I have personally bought 80% of the recommendations, and it is the only S/A publication whose recommendations automatically flow to the buy side of my portfolio, unless they are vetoed on further analysis. Usually, it's the other way 'round..." – Paid-up subscriber RR

Goldsmith comment: So far, Mike has recommended five bonds, and his readers are up on all of them. Currently, three of his top-yielding bonds are paying 14.3%, 12.7%, and 12.3% annually. And these companies have enough assets to make payments no matter what happens. In other words, you will make double-digit yields every year while you own these bonds.

I think Mike's new service is the safest, best way to add huge income to your portfolio. We're currently offering True Income at a large discount, but only for a short time. Click here to learn more.

Good investing,

Sean Goldsmith

Baltimore, Maryland

June 16, 2008

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