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Weekend Edition

The Best of The S&A Digest
Sunday, November 30, 2008

About 10 days ago, George Huang, one of our biotech analysts, told his FDA Report subscribers to sell puts on a small biotech called Alpharma...
 
On Monday, he sent this update:
 
This morning, Alpharma's board came to its senses. It accepted the $37 per share buyout offer from King Pharmaceuticals. Alpharma shares jumped 6% on the news, but we fared even better...
 
Last week, we sold Alpharma January 35 puts (ALOMG) for at least $4 per contract. Most of you were able to fetch the same contracts for more than $4. The acquisition deal will close by the end of the year. So the January puts we sold will expire worthless. We will pocket the full $4, or $400 per contract. Considering the $700 in margin requirement per contract, we will make approximately 57% in just six weeks...
 
Nice work, George. His readers are waiting on one more deal to close before they collect another 50%. And if you put this trade on right now, you'll actually do better than that... To learn more about George's strategy, click here.
 
If you earn more than $225,000 a year, don't move to Britain... If re-elected, the current government will raise taxes for the highest bracket to 45% – the measure will be introduced on April 11. The current rate is 40% and hasn't been changed since Margaret Thatcher's government cut it from 60% in 1988.
 
Homebuilders are jumping on the bailout bandwagon, asking the government for a $250 billion stimulus package called "Fix Housing First" and arguing that markets won't recover until home prices bottom.
 
The homebuilders' proposal would offer buyers a tax credit equal to 10% of the home's value, up to $22,000, nearly triple the $7,500 credit Congress offered buyers earlier this year. Builders say the earlier credit didn't work because it wasn't enough and it had to be repaid. Builders also want subsidies on 30-year, fixed-rate mortgages for government-backed "conforming" loans to bring rates down to 3% for buyers in the first half of 2009 and 4% in the second half.
 
The homebuilders will be sadly disappointed to discover that for all of his power and willingness to help, not even Obama can reverse the law of supply and demand. You cannot cure a glut of homes by building more new homes.
 
Brian Sullivan, CEO of search firm CTPartners, predicts layoffs in the financial-services industry will accelerate in coming months, with job losses doubling to 350,000 worldwide by mid-2009. Reductions of that magnitude would equal 20% of the global financial workforce before the credit crisis began.
 
"This is the financial equivalent of World War II," Sullivan said. "It's unprecedented. You're seeing a seismic shift in the population of banking. Without the massive leverage that's been in the system, the business of some of these big investment banks simply isn't going to be there. You'll go back to the investment banks of the 1960s and '70s."
 
I think Sullivan is right, but not right enough. The excesses we saw on Wall Street over the last 30 years really began in 1978 when John Gutfreund became Salomon Bros managing partner and took the company public. Salomon was the first investment bank to go public. The rest followed. This structure allowed the bankers to privatize profits, while hedging all of their risk with the public. Tails we win. Heads you lose.
 
This will never happen again – at least not for 50 years. The public will not invest in investment banks, private-equity firms, or hedge funds. All of the remaining public structures (Blackstone, Fortress, GLG) will eventually collapse or go private. And without the public to backstop the losses and the risks, leverage will be permanently reduced.
 
Most of the activities of the financial sector are not profitable without lots of leverage. Financial sector employment will fall just as much as the leverage. And the sector will have to deleverage by at least 50% – probably more.
 
From a reader: I had a portfolio of junk bonds. Had I kept, I would have been down over 60%, with 20% of those defaulting... It's a crapshoot, and I can testify to it.
 
It's not a crapshoot – it's a market. Default rates on junk bonds could go as high as 11% in a recession. But that means 89% of them will still pay off. And bonds have a legal obligation to pay their coupons – unlike stocks, which can cut their dividends. It's our analyst's job to find the almost 90% of corporate bonds that will pay off.
 
Mike Williams, editor of True Income, has some amazing corporate bond opportunities in the pipeline. You can earn annual yields as high as 48%, and you have an almost 90% chance of retrieving your entire principal. Investing is a game of probability... and those are great odds. If you're still not convinced, we're offering five free months of True Income, but only if you contact us before midnight on Monday. Click here for the details.
 
Regards,
 
S&A Research
 
Porter Stansberry writes and edits the daily S&A Digest, which comes free with a subscription to one of our premium products.




Market Watch
Symbol Price
Change
52-Wk
S&P 500 1243.91 +0.1% +13.5%
Oil 37.81 +0.1% +4.0%
Gold 134.20 +0.3% +25.0%
Silver 28.51 +0.8% +69.8%
U.S. Dollar 80.02 -0.3% +2.8%
Euro 1.32 -0.4% -8.1%
Volatility 16.11 -7.4% -28.6%
Gold Stocks 556.96 -0.1% +32.4%
10-Year Yield 3.33 -4.3% -4.6%

World ETFs
Symbol Price
Change
52-Wk
USA 124.30 -0.4% +12.8%
Canada 30.38 -0.3% +18.7%
Russia 22.27 +0.3% +22.5%
India 37.26 -0.1% +26.3%
Israel 17.29 -0.1% +15.6%
Japan 10.72 -0.3% +8.4%
Singapore 13.53 +0.3% +17.9%
Taiwan 15.32 +0.5% +24.4%
S. Korea 58.08 -0.1% +26.8%
S. Africa 72.06 -0.2% +28.5%
China 42.59 0.0% +2.0%
Lat.America 52.38 +0.3% +12.0%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.83 +0.5% +15.9%
Big Pharma 65.30 -0.5% -1.2%
Internet 72.60 -0.5% +30.1%
Semis 16.28 -0.2% +26.8%
Utilities 31.15 -0.7% -1.0%
Defense 18.61 -0.3% +9.2%
Nanotech 10.01 +0.9% +0.6%
Alt. Energy 10.23 -0.1% -4.4%
Water 19.33 -0.3% +15.8%
Insurance 16.21 -1.5% +19.8%
Biotech 21.88 +0.5% +35.5%
Retail 19.47 -1.1% +24.4%
Software 25.41 +0.2% +27.4%
Big Tech 54.52 -0.1% +24.4%
Construction 12.90 -5.9% +9.0%
Media 13.86 -0.1% +20.6%
Consumer Svcs 67.61 +0.1% +22.8%
Financials 56.02 +0.3% +10.5%
Health Care 66.01 +0.1% +4.1%
Industrials 65.11 +0.1% +22.7%
Basic Mat 75.45 +0.7% +29.4%
Real Estate 54.21 +0.8% +19.8%
Transportation 91.40 -0.7% +22.6%
Telecom 23.08 -0.4% +17.8%

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