Urgent: This Is Your Last Chance

Warren Buffett's latest letter... Porter was right (again)... Subprime stress is soaring... 'Delinquencies' already at 2009 levels... Urgent: This is your last chance...

Well, Porter was right...

Over the weekend, investing legend Warren Buffett made no mention of gold in his latest annual letter.

Of course, that's not exactly a bold prediction. As Porter noted on Friday, Buffett has always misunderstood gold's real value...

Buffett is completely ignorant of gold's role in the economy. Gold is monetary ballast, not an investment. Gold is the standard against which other monetary schemes are measured. To date, all forms of human-built money have failed this test. Measured in that way, the utility of gold is immense: It provides a universal relief from the sinful wages of paper money.

Buffett, of course, prefers to put all of his trust in corporations – mostly large, American ones. In the same letter in which he castigated gold, he lauded technology giant IBM as being one of the best investment ideas of his entire career. You surely know that both gold and IBM have declined since... but did you know that IBM is down more?

Buffett made little direct mention of tech firm IBM (IBM), either, except to note that his company, Berkshire Hathaway (BRK), increased its stakes in each of its "Big Four" stock investments – IBM, credit-card company American Express (AXP), soft-drink icon Coca-Cola (KO), and banking giant Wells Fargo (WFC) last year. Berkshire owns 8.4% of IBM as of December, up from 7.8% at the end of 2014.

Buffett also made little mention of the recent market volatility or the declines in oil and commodities prices, other than to note that they could potentially hurt its industrial manufacturing businesses and its railroad business, Burlington Northern Santa Fe ("BNSF").

Speaking of railroads, Buffett singled out BNSF as one of the year's best performers. While most American railroads saw declining volumes and earnings, Buffett noted that BNSF maintained volumes and earned a record $6.8 billion in pre-tax income. From the letter...

After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year. To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge. It was money well spent.

BNSF moves about 17% of America's intercity freight (measured by revenue ton-miles), whether transported by rail, truck, air, water, or pipeline. In that respect, we are a strong number one among the seven large American railroads (two of which are Canadian-based), carrying 45% more ton-miles of freight than our closest competitor.

As is usually the case, Buffett also highlighted the strength in the company's insurance operations. He noted it produced an underwriting profit for the 13th straight year...

Meanwhile, our underwriting profit totaled $26 billion during the 13-year period, including $1.8 billion earned in 2015. Without a doubt, Berkshire's largest unrecorded wealth lies in its insurance business. We've spent 48 years building this multi-faceted operation, and it can't be replicated.

He also said the company had increased its insurance "float" – "money that doesn't belong to us, but that we can invest for Berkshire's benefit," as he put it – to an incredible $88 billion last year.

Finally, Buffett said Berkshire's "dozens" of smaller, non-insurance businesses did well, too. These businesses earned $5.7 billion last year, up from $5.1 billion in 2014...

Within this group, we have one company that last year earned more than $700 million, two that earned between $400 million and $700 million, seven that earned between $250 million and $400 million, six that earned between $100 million and $250 million, and 11 that earned between $50 million and $100 million. We love them all: This collection of businesses will expand both in number and earnings as the years go by.

In total, Berkshire Hathaway's earnings rose 32% last year to a record $5.5 billion. The company's per-share book value – Buffett's favorite valuation measure – increased by 6.4%. Berkshire's per-share book value has now grown at a 19.2% annual compound rate over Buffett's 51-year-long career.

Berkshire's collection of different businesses gives it a broad reach across the U.S. economy. While the company's performance isn't necessarily indicative of other companies in similar industries (like other railroads, as we noted above), this broad reach means it can be considered something of a "snapshot" of the U.S. economy. And according to Berkshire, things weren't all that bad last year.

All in all, if you're a fan of Buffett's annual letters like we are, you may find this year's edition a little light on classic Buffett wisdom. You can read it for yourself right here.

There are more signs one of Porter's most important predictions is coming true...

Regular Digest readers know Porter warned of problems in high-yield or "junk" bonds and energy debt months before these troubles made headlines. He has also predicted similar problems yet to come in emerging-market debt, student loans, and the growing bubble in subprime auto lending. As he wrote in the November 20 Digest...

The amount of super-low-quality auto lending is now surpassing the totals of dubious lending that peaked in 2006. Total auto lending in the U.S. is now more than $1 trillion – the all-time highest amount of debt tied to cars in the U.S.

Newsletter publishers like to say the "sky is falling" all the time about every small problem we face. But this isn't a small problem...

Today, subprime lending makes up nearly 40% of all auto loans. These loans will go bad. When they do, the industry will be completely devastated – every bit as bad as when the mortgage bubble popped. The size of the auto-lending business (more than $1 trillion in loans) means that when this happens (and it certainly will happen), the resulting damage will hurt the entire financial sector and our economy.

This weekend, the Wall Street Journal highlighted the growing troubles in auto lending, noting, "It isn't just energy loans. Problems also are popping up in banks' consumer-loan books, especially for autos." The article listed a number of concerning new data points.

According to Federal Deposit Insurance Corporation data, auto-loan "write-offs" – loans that banks believe will not be repaid – jumped 16% in the fourth quarter of the year.

Worse, loans that are 30 to 89 days overdue rose to 1.8% of total loans, suggesting more write-offs are coming.

As the article pointed out, it's important to realize that these numbers represent just the loans banks have kept on their books. These tend to be the "best-quality" debts. Many of the riskiest loans were originated by "nonbank" lenders – like Santander Consumer USA (SC) and GM Financial – or were packaged up and sold off to investors.

The data confirm this... According to the Federal Reserve, banks had just $384 billion in auto loans on their books at the end of 2015, compared with total outstanding auto loans of more than $1 trillion.

Ratings agency Fitch warned last week that delinquencies of more than 60 days on securities backed by subprime auto loans hit almost 5% in January. That is the highest since September 2009 and close to the record peak hit that same year.

In other words, stress in subprime autos is nearly as bad as it was during the worst of the biggest financial crisis since the Great Depression. And this is during a time when the economy is still officially growing, and government measures of unemployment and the job market are at their best levels in years.

What do you think will happen to these loans (and others) if the economy stops growing... or worse, enters recession?

We'll end today's Digest with something a little different. I (Justin) want to share a fact about Stansberry Research that might surprise you.

If you've been with us for long, you know we employ some incredibly talented folks. The résumés of our analysts speak for themselves... They've been top Wall Street traders, professional money managers, corporate executives, "Big Four" accountants, published researchers, serial entrepreneurs, and successful private investors, just to name a few.

If you know anything about the financial-publishing industry, you know that this alone is remarkable. Our analysts don't just write about investing and finance... they've lived it. But that's not what I want to talk about today.

Instead, I want to mention something else many of these folks have in common...

Like me, they were Stansberry Research subscribers before they were Stansberry Research colleagues.

For example, Stansberry Short Report editor Jeff Clark joined us in 2005 after retiring from his private money-management business at age 42. But before that, Jeff was also a Stansberry subscriber. Here's how he tells it...

I spent more than 20 years in the industry. During that time, I subscribed to dozens of newsletters... I paid for some of the most expensive research on Wall Street. I'm telling you... the best stuff came from Stansberry.

I was so impressed with the quality of Stansberry's research that when I decided to retire, I contacted Porter about publishing my own research. I didn't even consider writing for anybody else.

But Jeff isn't the only one...

DailyWealth Trader editor Ben Morris was a lifetime subscriber as well. As he explained to his readers this morning...

I was a lifetime subscriber to Stansberry Research before joining the company in 2012. I made the investment because of how much I was learning. I knew it would pay off in spades. (I was right.)

As I continued reading, Porter's integrity – and the integrity of the company – shined through in the writing. I knew it would be a great place to work. (Again, I was right.)

Several members of Porter's team were also subscribers.

Stansberry's Investment Advisory senior analysts Brett Aitken and Bryan Beach were both longtime Stansberry readers. SIA research analyst Mike DiBiase was a full Stansberry Alliance lifetime subscriber before joining us, too. From Mike...

Initially, I subscribed to just a single letter – our own, Stansberry's Investment Advisory... and Porter's philosophy of writing "what he'd want to know if our roles were reversed" rang true. His views of the world made sense. So I always made time in my busy schedule working in corporate finance to read anything that came from Stansberry Research.

I decided to become an Alliance member not long after to get access to all of the research of Stansberry's best editors. I was equally impressed with their honesty, thoroughness, and professionalism. These were people who were giving individual investors access to the kinds of financial research that typically only large institutional investors receive.

In total, nearly half of our research staff was a Stansberry Research subscriber before coming to work here.

Why do I bring this up?

First, as I mentioned before, it's rare in the industry...

These colleagues – some of the smartest and most successful people I've ever met – thought so highly of the work we do here, they not only subscribed to our research... they ultimately came to work here, too.

This is a testament to the quality and integrity of the work we do, and it makes me incredibly proud to say that I work for Stansberry Research.

Second, it's a chance to personally urge you to take advantage of an opportunity that ends tonight...

You see, if there's one thing all of us former subscribers agree on, it's that we wish we'd subscribed sooner... and taken advantage of everything Stansberry Research had to offer. As Extreme Value research analyst Mike Barrett put it in a private e-mail this morning...

Before I joined Stansberry in 2011, I was a subscriber for several years. I started with one publication, then added others. The mosaic of perspectives was what I found most valuable. I loved Porter's and Steve's big-picture analyses... Dan Ferris' in-depth coverage of individual stocks... Doc Eifrig's tidbits of wisdom... and (my favorite) Matt Badiali's coverage of interesting resource stocks with home-run potential.

Together, they were far more valuable for one simple reason: I couldn't have covered all of those same areas as well as each one of them did – and still had a life!

Without exception, our colleagues who became full Stansberry Alliance lifetime subscribers early on consider it to be one of the best investments they've ever made. And knowing what we know now, the rest of us would have jumped at the chance to become Alliance members from day one.

Still, we realize the Alliance is expensive... and at $25,000, many folks simply aren't yet in a position to join today.

But that doesn't mean you're out of luck. In fact, until tonight, you can take advantage of an even better deal...

As you've likely heard, we're closing our Stansberry Flex program to new subscribers soon. If you're not familiar, this program offers lifetime access to any five Stansberry Research products at a time, with the ability to swap – or "flex" – those publications when market conditions or personal needs vary.

Because Stansberry Flex didn't offer full lifetime access to all of our research at the same time, we could offer the program for a fraction of the cost of our full Alliance program.

Unfortunately, some subscribers took advantage of the program. They swapped their publications as many as 60 times per month... in essence, getting access to everything we publish without paying for the full Alliance subscription.

Rather than set strict limits on how many changes Stansberry Flex members can make each month, we're simply shutting the program down to new members. (Of course, folks who are already Stansberry Flex members will continue to receive the program for life, as promised.)

What does this have to do with you?

Because we want to be fair to longtime subscribers who may have already been considering a Stansberry Flex membership, we've opened the program to new members one last time.

This means until midnight tonight, you too can become a lifetime Stansberry Flex member for a fraction of the cost of a full Alliance membership.

Even better, we're offering a 30-day virtual "open house" where you can sample every service we publish for just $99, with absolutely no obligation to join Stansberry Flex if it's not a good fit for you.

If you're a serious investor who isn't yet in a position to join the full Stansberry Alliance program, you owe it to yourself to learn more about Stansberry Flex.

As my colleague Bryan Beach put it, "If Stansberry Flex had been available when I was a subscriber, I would have been all over it."

But don't take our word for it. Join our open house... read our research... and decide for yourself. Click here now.

Finally, a quick reminder... For the next 25 days, Porter is offering Digest readers the chance to try his highly acclaimed luxury OneBlade razor for FREE. Click here for the details.

New 52-week highs (as of 2/26/16): Sturm, Ruger (RGR).

Quiet day in the mailbag. Haven't we done anything to offend you lately? Let us know at feedback@stansberryresearch.com.

Regards,

Justin Brill
Baltimore, Maryland
February 29, 2016