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The S&A Digest: The Best Countries to Buy for the Next 40 Years
Tue, 20 May 2008 22:43:11 +0000
The S&A Digest: The Best Countries to Buy for the Next 40 Years
May 20, 2008

The S&A Digest

Hair of the dog... French prostitutes... Professional snitches... Pickens: $150 oil... Third Avenue bearish on China... Is BRIC still a buy?...

When the Federal Reserve cuts interest rates, or bails out Bear Stearns, or takes any kind of action, the market reacts instantly. The reaction is essentially the market's guess the sum total of all the individual guesses in it about the future consequences of the Fed's actions. But the market's reaction and the real economic consequences are two different things.

Talk to any Fed governor or any Fed official who's up on his history. They'll all tell you the same thing. Fed actions are like getting pregnant. Everyone reacts, there's a baby shower, and the news travels fast.

But the baby doesn't arrive until nine months later. In several months, maybe a year or more, you'll learn the real economic consequences of the Federal Reserve's numerous interest-rate cuts and other "liquidity-enhancing measures."

And here's something nobody including, notably, Warren Buffett will point out to you about the Fed: Its track record is absolutely miserable. When it lowers interest rates, all it's doing is making money cheaper than it would have been. The Fed's own vice chairman said so earlier today in a speech: "...the policy easing the Federal Reserve has put in place over recent months will begin to show through more in reductions in the cost of capital and the greater availability of credit."

Cheap money encourages self-styled financial geniuses to make leveraged financial bets... bets that are highly certain to blow up sooner or later.

Thus, the Federal Reserve purports to be able to fix the effects of massive leveraged speculation by providing raw material for more of the same. Hair of the dog, I suppose.

Where will the Fed's garbage capital go next? Gold? Stocks? China? Brazil? Tech (again)? Blue chips?

Inflation makes people desperate the world over. In Paris, where a 32 square-foot apartment can cost more than $900 a month, tenants students in particular are sleeping with landlords to make ends meet. According to some estimates, 40,000 French students prostitute themselves.

In the U.S., financial desperation strikes a more Orwellian cord: professional snitching. If your information leads to an arrest, police programs will pay you between $50 and $1,000. Some jurisdictions give bonuses if a weapon is recovered. Police stations report phones are ringing off the hook. According to one officer, "Usually you deliver the money in an unmarked car and meet [the informant] somewhere. But these people come right to the office and walk right through the front door."

It's no surprise natural resource funds are the best-performing sector of the year, up 13%. But you probably wouldn't have guessed real estate investment trusts (REITs) are No. 2, returning 7% for the year. Low bond yields and a dismal 2007, when many REIT indexes fell 15%, are driving the price increase. Because REITs pay the majority of their earnings as dividends, their high yields (currently more than 4.5%) are attracting investors.

In less than two months, we're up 14% on one of our REITs in the Monthly Dividend Program. But no matter what sector of the market outperforms, our MDP Top 10 portfolio will prevail. We've split this portfolio between REITs, oil & gas, bonds, and stocks... and each investment pays you a monthly dividend. The average yield on our portfolio is more than 9%, and we're up 10% in less than two months. Click the link to learn more about the Monthly Dividend Program.

T. Boone Pickens is calling for $150 oil.

The world's most famous oilman talked up his book this morning on CNBC. He says the bull market in oil comes down to just two numbers: The world can't produce more than 85 million barrels of oil per day. The world wants 87 million barrels of oil per day. The world's second-largest producer, Russia, is now experiencing a production decline. The Saudis can't pump any more oil. Forget hedge-fund speculation and the value of the dollar, that's what it all comes down to.

Oil at $150 would mean even bigger profits for Matt Badiali's S&A Oil Report. He's already sitting on huge gains for the year. He's up more than 200% on Brazilian oil giant Petrobras (PBR), 125% on Stone Energy (SGY), and 110% on Occidental Petroleum (OXY). And he expects his latest recommendation is worth 140% more than current prices, solely based on the oil it has in the ground.

Right now, Badiali's in Canada looking for the next triple-digit winner. Click on the link to learn more about the S&A Oil Report.

At least now I have one real investor on my side regarding China. Marty Whitman's Third Avenue Fund now owns shares of FXP, a China short fund, and EEV, an emerging-markets short fund.

New highs: Aracruz Celulose (ARA), ConocoPhillips (COP), Comstock Resources (CRK), Chevron (CVX), EnCana (ECA), Petrobras (PBR), Occidental Petroleum (OXY), Plains Exploration (PXP), Transocean (RIG), StatoilHydro (STO), Valhi (VHI).

More on Obama, taxes, and other government conspiracies... plus an actual question about investing! Send us more at feedback@stansberryresearch.com.

"Relax and enjoy the political farce. Unless Obama carries at least one southern state, he cannot get enough electoral votes this fall to gain the presidency. Thus, I expect him to pull out all the stops on wooing voters in Alabama by changing his first name to 'Al'." Paid-up subscriber Joe

"Dear Stansberry Boys, Your analysis of Obama and his policies is like a lot of your research... on the 'very lite' side! While I am quite sure that any Democrat would be receiving your damnation... have you noticed that Obama has Paul Volcker as an advisor... and that Warren Buffett has just fully endorsed him? These people have a hell of a lot more financial credibility than kneejerk politikal bs from You. Why don't you stick to finding some good investments... the things we pay You for... and keep your nonsense opinions to yourselves over lunch in downtown baldimore!" Paid-up subscriber SC

Ferris comment: I bet you $100 you couldn't tell us what Barack Obama has said is "one of the greatest moral challenges of our generation." He's only said those words about one subject, a very popular subject today. (The answer to this riddle is comically stupid and shows Obama's utter dearth of integrity.)

"Can you imagine the utter admiration I have for those that can effectively and efficiently manage their affairs so as to be economically productive as well as fiscally responsible? Avoidance of taxes is not illegal (it is tax evasion that is illegal), it is a moral and financial RESPONSIBILITY. If you have extra money to the point that you are thinking about paying taxes that you do not owe, instead of paying unowed taxes, use those funds to support private charity work. Further, it is not those that Martha unfairly labels 'cheats' that have shifted the burden, it is the politicians that have shifted the burden of taxation onto the population. Martha Don't squawk to Porter. Contact your Congressman and let them know that you don't like paying the taxes that they require of you." Paid-up subscriber Kurt Schultz

Ferris comment: Taxation is theft.

"To what extent does or should share dilution concern an investor? I'm looking at RGLD and the outstanding shares have exploded from about 13 million to 33 million in a few years. How do we determine if this is a good or bad thing?" Paid-up subscriber Anthony Jovanovich

Ferris comment: If a business can continue to make investments that generate high returns on equity, then it can justify issuing more shares to finance those investments.


Dan Ferris
Medford, Oregon

May 20, 2008

The Best Countries to Buy for the Next 40 Years
By Ian Davis

The U.S. is currently the world's economic powerhouse, with the largest gross domestic product (GDP). GDP is "the total market value of all final goods and services produced in a country in a given year." Right now, the U.S. GDP dwarfs the second largest - Japan's - by a factor of three.

However, a 2003 Goldman Sachs research report, Dreaming With BRICs: The Path to 2050, predicted the upcoming dominance of four emerging-market economies (Brazil, Russia, India, and China i.e. the BRICs) over the G6 (France, Germany, Italy, Japan, the U.K., and the U.S.). Here's an excerpt...

"In less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms"... "Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050."

So, how has this prediction panned out so far?

The following chart shows the performance of the Datastream Total Market BRIC Index since this report was first published.

The Performance of "BRIC" Since 2003

The Datastream BRIC Index is up almost 700% since the beginning of 2003, and the BRIC nations are experiencing enormous economic growth.

In fact, the slowest-growing economy out of the four BRIC nations has been Brazil's, whose GDP increased by 22.5% between 2006 and 2007. The fastest-growing BRIC nation was China, whose economy grew by more than 30%. The U.S. economy, on the other hand, has grown by a meager 4.9%.

And of the Datastream country indexes with the best returns over the last 12 months, the four BRIC nations have led the pack (despite a steep correction at the end of 2007).

But predicting a global hierarchy over the next 50 years is nearly impossible...

The Goldman Sachs report relies heavily on multiple assumptions that may be faulty. For example, the report assumes "the BRICs maintain policies and develop institutions that are supportive of growth." The BRIC nations do not have a great track record of economic freedom... so we'll see how supportive of growth they remain.

Even the report's authors admit anything could happen: "There is a good chance that the right conditions in one or another economy will not fall into place and the projections will not be realized. If the BRICs pursue sound policies, however, the world we envisage here might turn out to be a reality, not just a dream."

However, the report has proved itself prescient up to this point, and a number of very bright analysts and investors are embracing the idea of the global shift. Jim Rogers, for example, has spoken about the end of U.S. dominance.

So, if you're looking for an investment that you can put away (and ignore) for 10 plus years, a BRIC ETF may be a good choice for you. (Just remember that this investment is volatile and speculative. Don't invest more than you can afford to lose.)

You have a choice of three different BRIC ETFs. My favorite one is the iShares MSCI BRIC Index Fund (BKF) because its holdings are fairly evenly divided between the four BRIC countries. The other two EEB and BIK are heavily weighted toward China and lightly weighted toward India.

Good investing,

Ian Davis

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