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Weekend Edition

The Best of The S&A Digest
Saturday, March 22, 2008

Most of the time, our newsletters are the regular fare: stock recommendations and updates. But from time to time, one of our editors will produce something that's truly extraordinary...
 
Tom Dyson has just completed an in-depth study of the Canadian income trust market, which is in the midst of a huge transition. Most of these companies are in trouble because new laws will take away their tax advantages. The corporate boards will respond by cutting dividends sharply. Most... but not all.
 
Most Canadian income trusts will have to convert to corporations by 2011. If investors are going to react so strongly to conversions, then I don't want to own those trusts, even if they pay 15% dividends. That said, there is one pocket of the income trust market I still want to own. Let me explain...
 
I spent the weekend digging through the tax data on dozens of income trusts. I found infrastructure-focused trusts have assets on their balance sheets called "capital cost allowances" or CCAs. These assets are tax shelters.
 
It costs billions of dollars to build a new skyscraper or lay a gas pipeline across the country, for example, and it takes years to earn a return on your initial investment. So the Canadian government gives out CCAs to these trusts as a reward for investing in Canada's infrastructure. After the 2011 tax deadline, these trusts will still be able to pay huge dividends by shielding their cash flow with CCAs.
 
If you're not yet a subscriber to Tom's 12% Letter, I can assure you, Tom's report on the situation in Canada alone is worth the price of an annual subscription. 
 
In June 1970, the sixth-largest enterprise in the United States and the largest railroad in the country, Penn Central, went broke. Like Bear Stearns, it lost the confidence of its lenders and it couldn't "roll over" its maturing short-term commercial paper loans.
 
In short, its lines of credit were called in. As such, more than $200 million of notes couldn't be repaid.
 
Fear spread on Wall Street that other lines of credit would be pulled, triggering a chain reaction in the commercial paper market. There was $40 billion outstanding (real money, back then). How would it be repaid? The Federal Reserve stepped in, ordering its member banks to supply "liquidity" to the market. The printing presses ran night and day... and the inflation super cycle of the 1970s began in earnest.
 
If you think we've had some inflation in our economy over the last five years, wait until you see what happens over the next five...
 
Left unanswered by the Bear Stearns meltdown are the real questions. Do we want our government to subsidize securities dealers? Do we want our government to have still more control over business, via its obvious power over banks and brokers?
 
Do we want the Fed picking winners and losers on Wall Street? Didn't we use to call governments that owned the banks and controlled the major industries socialists? Isn't that what they do in France?
 
It was 10 years ago that I met Jim Rogers for the first time. Sjuggerud and I sat next to him at a speaker's dinner in New Orleans. He was bullish on commodities and had just set up his own commodity index fund.
 
In addition to being an excellent speculator, Rogers understands more about the history of finance than just about anyone in the whole world. And he knows the Fed is making a horrible mistake with its bailout of Bear Stearns:
 
This man Bernanke was never elected by anybody, I don't know where he gets the audacity to spend $230 billion of our money to bail out a few friends on Wall Street... Who gave him the authority to do that? To destroy the dollar, to destroy our currency, to essentially destroy the American economy?
 
You can see the whole interview here.
 
We've been quoting Jim Rogers even more than usual lately... but we find his tirades irresistible. And his latest idea seems even more useful than usual: investing in Taiwan. Rogers hopes a new government will improve ties with China and "merge" the economies. He's loading up on Taiwan ETFs.
 
I recommended Chunghwa Telecom (CHT) – Taiwan's leading telecom provider – last August in PSIA. We're up 40% on the trade. Dyson covered Taiwan six months ago in DailyWealth. Click here to read his commentary.
 
I have to hand it to Goldsmith... I've taught him well.
 
His latest issue of Dividend Grabber went out Thursday, and he's found a way to get 1.3 million acres of prime timberland absolutely free. We're often lambasted for our liberal use of the word "free," but this company's timberland is worth twice its market cap. And it has a huge utilities business to boot. This could be the "special dividend" of the year. 
 
Regards,
 
Porter Stansberry




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