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Weekend Edition

Porter Stansberry's check list to protect your wealth
Saturday, August 27, 2011

Our analysts have been shorting stocks all year. And readers are making a lot of money.  
For example, in the December 2010 issue of Stansberry's Investment Advisory, Porter recommended shorting homebuilder Pulte Group...
 
[W]e doubt the company will be able to earn enough money to pay the interest on its debts. Next year, the interest will total $222 million. It will also have to repay or refinance $397 million in debt coming due. That's a total of more than $600 million.
  
In 2012, it will have to repay or refinance $986 million in debt while paying another $204 million in interest...
 
The company has two significant assets on its balance sheet. Cash stands at $2.6 billion, though much of it is pledged as collateral for loans, as we described earlier. (The company's defacto cash cushion is roughly $800 million.) It owns nearly $5 billion worth of homes and land, which, at auction would probably fetch 50¢ on the dollar.
 
So... let's say the company's assets in liquidation are worth around $3.3 billion. Measured against these assets you'll find $6.7 billion in debt... That's not a situation which would produce a quick and easy, low-cost refi. Just like PulteGroup's homebuyers, the corporate subprime lending racket has been mostly shut down. Our guess? You'll see the corporate version of a foreclosure within 12 months...
 
Porter recommended shorting Pulte at $8.23. As I write, shares are about $4.24 – a 48% gain.
 
 To profit from the European crisis, Porter recommended shorting Deutsche Bank and Royal Bank of Scotland in his July issue. The thesis was simple:
 
Several years ago, when it established the capital requirements of European banks, the Bank for International Settlements (BIS) made an exception to the reserve requirements for sovereign debts. As a result, European banks were greatly encouraged to buy government debt, which enabled them to raise their leverage ratios and report far bigger profits.
 
The rub, of course, is these debts are not safe and will surely default. That will cost the equity investors in these banks all or most of their investments. These stocks, which are very liquid and trade in the U.S., should be easy for you to sell short and will provide a great hedge against the coming global volatility.
 
As Europe continues deteriorating, so will these two bellwether banks. The Deutsche short is up 23%. And the RBS short is up 48%.
 
 It seems like a good time to revisit what we look for in a short sale...
 
First, we look for heavily indebted firms that cannot service their debt (like our short sales of GM, Fannie, and Freddie). Second, we search out an obsolete company (think the recently bankrupted bookseller, Borders Group). The third thing we look for is Porter's personal favorite – fraud (WorldCom, Enron).
 
In his most recent issue, Porter recommended shorting a company involved in a massive fraud. You can learn more about it here...
 
 We thought it would be fun to match our "short selling check list" up against that of the world's greatest short seller, Jim Chanos... They're almost identical.
 
Jim Chanos founded the short-only hedge fund Kynikos Associates. He nailed the Enron and WorldCom frauds, profited from the decline in secondary education, and just went short China. Chanos looks for four different types of shorts:
 
1. Booms that go bust – Chanos defines a boom as debt-fueled growth where the underlying cash flows don't cover the cost of the debt.
2. Consumer fads.
3. Technological obsolescence.
4. Structurally-flawed accounting – In addition to the literal meaning (creative accounting that can overvalue a company's assets), this is a friendly way of saying fraud.
 
 Short selling is one of five ways we recommended you protect yourself today. The other four steps are...
 
1. Obtain a food source, like a co-op.
2. Make sure your family is safe from the threat of violence.
3. Hold cash.
4. Have a year's worth of living expenses in gold and silver.
 
Today, gold is trading just under $1,880 an ounce, down around $150 from the August 23 high of $1,918. More calls of the "gold bubble" bursting abound. As you know, we disagree. We view these corrections as buying opportunities. The European debt crisis is far from over. The European Central Bank will create some asset-buying program to save its banks. And the Federal Reserve will print more money to help the ailing U.S. economy.
 
 And let's not forget about silver... Earlier this month, we wrote...
 
Gold is soaring – and stealing all the headlines. But silver is still under $40 an ounce. Compared to where it was trading for most of the last three years, silver is cheap next to gold. We don't think this will last for long...
 
 The gold-to-silver ratio is still over 43. As silver continues to be viewed as a monetary asset, that ratio will approach its historical average of 16. Silver has a long way to run...
 
 There are plenty of ways to own silver. You can buy bullion, ETFs, or silver stocks. The different forms have different advantages. For example, silver stocks are more liquid than bullion... But if a monetary crisis hits, you'll be able to exchange your bullion for goods and services. While we can't say which form of silver ownership is best for you, we can tell you the cheapest way to buy it. Doc Eifrig discovered a way to buy physical silver for as little as $3. You can get the full details in Retirement Millionaire. Click here to learn more...  
 
Good investing,
 
S&A Research




This Week's Winners
S&P 500 Symbol Change
Vulcan Materials VMC +12.0%
Cerner CERN +11.9%
AutoNation AN +11.6%

Countries Symbol Change
Chile CH +2.8%
Turkey TKF +2.5%
U.S.A. SPY +1.6%

Sectors Symbol Change
Defense PPA +3.3%
Water PHO +3.2%
Homebuilding ITB +2.8%

S&P 500 Symbol Change
FOSSIL INC FOSL +23.8%
Vulcan Materials VMC +12.9%
Cerner CERN +11.9%
Countries Symbol Change
Chile CH +2.8%
Turkey TKF +2.5%
U.S.A. SPY +1.6%

Sectors Symbol Change
ETF Retail PMR +3.5%
Defense PPA +3.3%
Water PHO +3.2%

Commodities Change
Wheat +7.3%
Crude Oil +3.5%
Cocoa +3.1%

Date Range:8/18/2011 to 8/25/2011
This Week's Losers
S&P 500 Symbol Change
Hewlett-Packard HPQ -15.2%
Prologis PLD -9.7%
Sprint Nextel S -7.5%

Countries Symbol Change
Thailand TTF -2.5%
South Korea EWY -2.5%
Malaysia EWM -2.4%

Sectors Symbol Change
Gambling BJK -3.2%
Airlines FAA -3.0%
Oil Services PXJ -1.8%

S&P 500 Symbol Change
Hewlett-Packard HPQ -15.2%
Prologis PLD -9.7%
Sprint Nextel S -7.5%
Countries Symbol Change
Thailand TTF -2.5%
South Korea EWY -2.5%
Malaysia EWM -2.4%

Sectors Symbol Change
Gambling BJK -3.2%
Airlines FAA -3.0%
Oil Services PXJ -1.8%

Commodities Change
Gold -5.2%
Cotton -5.2%
Lean Hogs -4.3%

Date Range:8/18/2011 to 8/25/2011
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