The S&A Digest: Why You Want Exxon to Make More Money

Porter returns... Just charge it... Thornburg buys, again... Buffett on Focus... Ferris on big government... More on the blond wind-up doll...

We got our first frost last night. And I noticed something this morning. The toaster smells different when it's cold outside. I thought I was imagining it... but I swear, I remember that smell... of many cozy mornings, wrapped up in sweaters…

As you know, I took two days off last week after my trip to New Orleans. But I had a few tidbits from the conference that I wanted to share. First, Commander's Palace is every bit as good as its reputation. If you go, order the lamb chops – they're the best thing on the menu right now – and get a bottle of the 2003 Beaucastel Chateauneuf du Pape. As you'll recall, 2003 was an exceptionally hot year in France – perhaps the hottest August of all time. The wine is incredibly concentrated. It smells like honey. And it tastes even better.

Speaking of wines... Last night, I cracked open a bottle of 1982 Bordeaux. The bottle was a gift from Jeff Clark. My wife and I had been waiting to drink it for months, since my wife was pregnant. We opened it at about 3 p.m. yesterday. It smelled like an old barn. It didn't smell spoiled... It just smelled raw... not like something I'd want to drink. But three hours later... the cherry came out. And by 9 p.m., I was sipping one of the greatest wines of my life. Thanks, Jeff... It was a fantastic gift, probably the best bottle of wine I've ever tasted.

Now... onto investing. As you know, I'm working on a new product – Stansberry Focus. Unlike most investment newsletters, which are designed to produce new ideas for you to choose from each month, Stansberry Focus intends to do nearly the opposite: offer you almost no new choices each month, but instead focus your attention on a very limited number of "high confidence" ideas. This, by the way, is how the world's best investors actually do it. Says Warren Buffett:

"I will only swing at pitches that I really like. If you do it 10 times in your life, you'll be rich. You should approach investing like you have a punch card with 20 punch-outs, one for each trade in your life. I think people would be better off if they only had 10 opportunities to buy stocks throughout their lifetime. You know what would happen? They would make sure that each buy was a good one. They would do lots and lots of research before they made the buy. You don't have to have many 4x growth opportunities to get rich. You don't need to do too much, but the environment makes you feel like you need to do something all the time."

Revolving consumer credit reached $915.67 billion in August, up 8.1% from July, as more and more people use credit cards to pay off mortgages. This short-term fix is only delaying the inevitable... bankruptcy or foreclosure. And with the holiday season around the corner, you can bet consumers will give their plastic a workout. This will lead to one thing... default. Famed Merrill Lynch economist David Rosenberg calls credit-card default the "next skeleton in the closet." It's bad news for the economy, but great news for buyers of charged off credit-card debt. These companies buy bad debt for pennies on the dollar, then try to collect. The margins for these companies are huge, and they're only getting bigger. Goldsmith recommended one of these companies in his S&A Dividend Grabber.

Don’t forget… we're offering our Inside Strategist advisory at a steep discount right now. If you're interested in following significant amounts of insider buying - which we consider one of the world's best buying indicators - click here.

Garrett Thornburg, CEO of former 12% Letter pick Thornburg Mortgage (TMA), bought $9.5 million in stock last week. This brings his total purchases since late July to more than $22.2 million. The large purchase could signal a bottom in the share price, but don't be too certain. Thornburg did lose more than 60% of his money on the way down.

New highs: Aracruz Cellulose (ARA), streetTRACKS Gold (GLD), Icahn Enterprises (IEP), Coca-Cola (KO), McDonald's (MCD), MFA Mortgage (MFA), Microsoft (MSFT), Arcelor Mittal (MT), Annaly (NLY), Nokia (NOK), Petrobras (PBR), Pogo Producing (PPP), Royal Dutch Shell (RDS-A), Sangamo BioSciences (SGMO), Silver Standard Resources (SSRI).

In the mailbag... Having dinner with Ann Coulter taught us something we didn't know: It's not an act. She really is a genuinely disagreeable human being, who seems deeply disturbed. Writing about Ann Coulter reminded us of something we already knew: When faced with choosing between a set of facts and their own prejudices, most people will pick their prejudices every time. Send your comments, prejudices notwithstanding, to: feedback@stansberryresearch.com.

"While there is no requirement that you agree with Ms. Coulter on any subject under heaven, neither is there one that you denigrate and ridicule her for not sharing your expertise or opinions. As you yourself stated, she is a constitutional lawyer, something that I'll wager cannot be said of more than a very few of us, and no doubt the barriers to entry were higher than most of us would expect. Furthermore, it is always poor form to 'put your foot in it' publicly. Agree with her or not, you run the risk of alienating somewhere around half of your subscribers by 'picking on the girl', as it were. Poor form indeed. It would be wise to avoid that in future." – Paid-up subscriber Raoul Simon

Porter comment: You're quite right about one thing: Ann Coulter doesn't need help denigrating herself. She does that quite well all by herself on TV. Unfortunately, she acts the same way in real life too – which was quite a surprise. I expected her to be dynamic and charismatic in person. She's not. She's churlish. Even childish. My comments about Ann, though, really have nothing to do with her political opinions or her off-putting behavior. Ann Coulter's latest attention-grabbing idea is that giving women the right to vote was a mistake. She claims the 19th Amendment, ratified in 1920, is the root of big government. Without it, says Ann, we wouldn't have the problem of big government or free-spending, weak-kneed liberal politicians.

That's utter nonsense, as she should well know as an expert in constitutional law. The root cause of big government in America is the 16th and 17th Amendments, ratified in 1913, which allowed for federal income tax and the direct election of U.S. senators, respectively. The 17th Amendment ended the United States republic, which began in 1789, by removing the last check against the tyranny of the majority. The 16th Amendment made it possible, for the first time ever, for that majority to tax all citizens at the same time on a nearly unlimited basis. These two amendments set in motion all of the abuses, wars, and crimes our government has perpetrated over the last (almost) 100 years. You may note, as Ann Coulter does not, that these amendments radically altered our form of government and added substantially to the power of the state long before women gained the right to vote. Those pesky facts…

"Male pigs all! The lady said she didn't know finance and economics didn't she? Yet you typical arrogant Libets who claim to know everything don't know how to be graceful when someone falls on the knife at your feet [dinner table]. OINK!" – Paid-up subscriber Bill Yaun

Porter comment: No, it wasn't her lack of knowledge regarding history, finance, and literature that disturbed me... It was her utter lack of curiosity that I found so unappealing. She seemed like a human slogan to me... like a kind of wind-up children's doll. Pull the ring on the string and hear Ann Coulter say nonsensical political claptrap, offered without thought, and, really, without much conviction. There is a difference, you know, between invective and conviction. Someone who knows the facts and is confident in her beliefs rarely shouts at or insults an intellectual opponent.

"I have written you previously about Steve Sarnoff, and while you have no direct connection to his service it is sometimes a fine line and most people dont realize it. I have been bombarded with the most blatant false advertising I have ever seen... his so called record that he publicizes over the past six months must be a complete fabrication because I am a subscriber and his statements of phenomenal returns do not jive with the subscriptions that I receive... and somehow I dont think that he is selling two different portfolios. Please tell your readers to stay away! BTW: I live in Costa Rica and thoroughly enjoy your sarcasm as well as MOST of your services. Keep up the good work." – Paid-up subscriber Randy Berg

Porter comment: What "fine line" are you talking about? We don't advertise for Sarnoff. We don't endorse Sarnoff. And he most certainly doesn't work here. Having never read his product, I can't say whether or not he's good or bad at picking stock options. But I know the advertising he conducts is an embarrassment to our industry. And I've asked his publisher, repeatedly, to knock it off. I've also warned all of our readers about his advertisements, which are comically misleading, several times in the past.

Regards,

Porter Stansberry

Baltimore, Maryland

October 29, 2007

Editor's Note: Our colleague Dan Ferris fired off this essay to us this morning as part of an e-mail discussion our editors had regarding the new taxes the Canadian province of Alberta is levying on energy companies operating there.

Why You Want Exxon to Make More Money

By Dan Ferris

Many competitive advantages have been regulated into existence by the increasing burdens of laws, taxes, and government regulations.

If you want to see it in black and white, take a look at ExxonMobil's income statement. Its tax rate is already through the roof (40+%). The problem in the oil industry isn't that ExxonMobil is making too much profit. It's that it's not making enough profit. If it were making MORE profit, you'd be paying less at the pump (its profit margins would eventually shrink, too, as oil is a miserably competitive business). ExxonMobil pays higher taxes than most other companies in the industry, even though it's a far less profitable business (owing to various excise taxes you don't find in other industries).

Moody's is another example of what I mean about the government suppressing competition and making things more expensive for everyone. The ratings agency operates within a moat created by the U.S. government. It is one of only seven Nationally Recognized Statistical Ratings Organizations (NRSROs) recognized by the U.S. Security and Exchange Commission. The other six are S&P, Fitch, Dominion Bond Ratings, A.M. Best, and two Japanese companies that the SEC added this year: Japan Credit and R&I. (You see how careful the SEC is not to allow too much domestic competition?)

It's alleged that the credit markets wouldn't know what to think if the ratings business were open to more competition, that it would be too confusing for debt investors to have five or 10 different ratings companies. The exact opposite is true. Competition would, like an ebb tide, reveal who was swimming naked much more effectively than onerous Sarbanes-Oxley Act overhead burdens or new government committees, like the Public Company Accounting Oversight Board.

Like Alberta's new oil and gas taxes, Sarbanes Oxley merely gives certain companies – mostly the larger ones – another advantage over their (smaller) competitors. The small ones can't afford the overhead, so they delist, effectively shutting off their access to public capital markets, entrenching their larger competitors more deeply. Allowing only five firms to rate North American securities just means no one is watching the watchers. It's like giving a congressman a free credit card and setting him loose at Hooters.

Let me ask you this question: If there were 20 ratings organizations, and not five, would Enron have been rated investment grade by all 20 of them just six days before it declared Chapter 11? Egan-Jones, an independent (non-NRSRO) credit-rating agency, was telling investors months ahead of time that something was seriously wrong at Enron. In the aftermath of Enron, Egan-Jones pointed the finger at Moody's and S&P, and now it's no longer allowed at the table to talk about how securities are rated in the U.S.

It's worth thinking about who's really getting tough with whom the next time some politician promises to tax Big Oil some more.

Good investing,

Dan

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