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Weekend Edition

The Best of The S&A Digest
Saturday, January 19, 2008

Our government has added a new universe to its sovereign domain: Second Life. Second Life is a virtual world in which people – "residents" – interact with other "residents" via digital alter egos, or avatars. Yes, people really do spend entire days living in this digital world, setting up businesses and earning "Linden dollars," which is the virtual currency.
 
Recently though, Second Life was alerted to the fact that it might be in violation of Federal Reserve regulations, as Linden dollars could be construed as competing with U.S. dollars. So Second Life has had to change the rules of its universe... From its press release: "As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter."
 
And the rest of the story is even more amazing. Apparently, Second Life has seen a rash of Ponzi schemes – banks that were promising to pay 40% annual interest rates. "Some may argue that Residents who deposit L$ with these 'banks' must know they're assuming a big risk – the high interest rates promised aren't guaranteed, and the banks aren't overseen by Linden Lab or anyone else. That may be true. But... we can't let this activity continue."
 
So... even in the virtual world of Second Life, the Federal Reserve's monopoly remains intact. Their Ponzi scheme is the only one allowed...
 
In 1977, Jim Rogers rode a bicycle around Manhattan looking for a townhouse. The market for such high-end properties was "no bid" thanks to New York's soaring crime rate and near-bankrupt city government. He bought a huge, gorgeous brownstone for a little more than $100,000. Last month, he sold it... for $15.75 million. It's probably not the time to be buying New York real estate, if Jimmy Rogers is selling.
 
You might reasonably wonder why prices are headed higher, despite what various measures indicate is a slowing economy. There is one, and only one reason, dear readers: the actions of our own Federal Reserve.
 
This week the Fed "loaned" its member banks another $30 billion for 28 days at an interest rate of only 3.95%. I put "loaned" in quotes, because this week's giving follows the $20 billion disbursed on December 20. And all of this "lending" is in response to the horrendous amounts of capital lost in various mortgage schemes.
 
When a loan isn't repaid and is only followed with another, larger loan... it's not really lending, is it? Besides, even your grandchildren would be able to calculate this rate of interest (3.95%) is less than the present, official rate of inflation and far less than any bank could borrow money with in the markets today – that is, if they could borrow at all.
 
Don't you wish there were an entire federal agency dedicated to erasing all the mistakes you've made as an investor with collateral-free, below-market-interest-rate loans, which need not ever be repaid?
 
"At one time when I was a bit younger I thought I could trade myself to riches. It didn't work out quite that way. I had to resort to compounding or taking a very occasional big position. Over recent years I've taken a very big position in gold, and even that hasn't been easy. But I've had faith in gold. I had faith in gold back in the '70s, and I'll let you in on a secret – I have even more faith in gold today." – Richard Russell's Dow Theory Letters
 
As at least some of you know, Intel has been a core recommendation of my newsletter, PSIA, since early 2006. Sales fell short of expectations in the fourth quarter, and the company gave a tepid forecast for 2008 – which seems sensible given the macro headwinds that the world seems to be facing.
 
I don't have a forecast for global semiconductor sales in 2008 or 2009, but I didn't when I recommended Intel, either. I recommended Intel because it is the world's leading semiconductor company, it was incredibly cheap (and is incredibly cheap again), and I'm certain that in the future the world will buy more semiconductors than it does today. In other words, you don't have to be right about too many things to do well in Intel over time.
 
So... do I care that the stock has pulled back? Not really. We bought at a great price ($19.35). Even after falling close to 30% from its high, Intel is still trading above where I first recommended it.
 
Should you buy it now? Only if you're looking for a super high-quality, blue-chip company. And only if you're reasonable about the likely future returns and your holding period. Buying now, I think you're likely to make around 20% a year (on average) over the next five years.
 
Regards,
 
S&A Research




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