Freedom Tower for sale... More signs of a bottom for homebuilders... Start playing the lottery... Angry about JOE... Look up vituperation... Ian on the Yen…

Signs of a bottom in homebuilders… M&A activity among homebuilders has slowed to a halt. Between 1992 and 2005, there were 150 deals. Last year, public companies only completed two mergers or acquisitions.

You'd expect to see a bottom in homebuilding stocks at the top of the real estate market. (Expensive land leads to fewer new homes.) Right now, U.S. REITs are the priciest they have been in two decades. Major institutional investors are dumping shares of REITs following Blackstone's record-breaking purchase of Equity Office Properties. "Sam Zell (founder of EOP) is probably the shrewdest operator in this field that there is," said David Dreman, who oversees $21 billion at Dreman Value Management in New Jersey. "If he's selling, I don't think I want to be a buyer."

According to the U.S. Commerce Department, 40% of American households believe they can accumulate $500,000 more easily through the lottery than by saving. Historically, cultures with paper currencies and the accompanying inflation it brings experience a steady loss of faith in saving and investing, which is replaced by a culture of speculation and gambling. This lowers the value of hard work, family bonds, and corporate loyalty… and eventually erodes the key institutions of civil society. It can create a "live for the day" culture that's often violent and revolutionary.

The Port Authority of New York and New Jersey, owner of the World Trade Center, is putting the Freedom Tower up for sale. The Port Authority hopes to sell all or part of the $3 billion tower to… hedge funds, who else?

There were no new highs in our recommended portfolios on Friday.

In the mailbag: After a brief holiday hiatus, the anger is back.
Hundreds of you, at least, are furious with us for charging more for different types of content. While there are certainly good business reasons for having different prices, there's also a functional reason: When we publish information about small companies or stocks with tight "floats" (a limited number of shares available for trading), we must limit the number of subscribers, otherwise it would be difficult – or impossible – to use our research.

True Wealth, for example, is our most widely circulated newsletter. It has more than 50,000 readers. We can't cover small stocks in this newsletter because doing so would skew the market, and it would be nearly impossible to put Steve's ideas to work.

On the other hand, Sjuggerud Confidential only has a few thousand subscribers… so that's where Steve publishes his small-cap ideas. Its higher price limits the number of readers. This upsets some of our subscribers, who've labeled our marketing "bait and switch." Nothing could be further from the truth. We've always delivered what we've promised to our subscribers – and a lot more. But buying True Wealth doesn't entitle you to what Steve decides to publish in Sjuggerud Confidential. And, by the way, Sjuggerud Confidential isn't necessarily better than True Wealth – it's riskier and features small-cap opportunities that can be difficult to buy. 

Hopefully, most of you understand why we have to categorize our research in this way… And hopefully, you all think that both products are well worth what we charge for them. But, if you don't, you can always ask for a refund. Although we don't want to lose any subscribers, we'd rather part as friends than have you think less of us. Angry or not, send your comments here: feedback@stansberryresearch.com.

"In response to one of your reader's rants on imports vs. domestic vehicles. Where the vehicles are screwed together is less important than where the company is located. At the end of the day, your Toyota dollars leave the economy of the U.S. and go to the Japanese. It's a big part of the trade balance and national debt. So when you buy your import, just don't deny you are helping the other country's economy at the expense of ours and contributing to the demise of our industrial ability. In Toyota's little heart of hearts, when they look at the American consumer, their thoughts are 'Tora, Tora, Tora.' As Americans, we have the right to choose. That is freedom, just realize the price of your choices." – Paid-up subscriber B.J. Talbott

"While I enjoy your stock analysis and find your approach to investing well-reasoned and quite helpful, your credibility suffers when you crow about a one-day spike in a stock, such as occurred with JOE on Tuesday. Yes, we own JOE and think it's a good value. But it jumped $5 a share due to some speculative excess on Tuesday morning, when you took the opportunity to remind us how brilliant it was of Ferris to recommend it. Of course, you failed to mention that the stock gave back most of those early gains by the end of the day, and as of Friday's close we now find it $2 below its level on Tuesday before the price spike. What sayeth thou now?" – Paid-up subscriber Chuck Jay

Porter Comment: Our "crowing" was a recognition of Dan's outstanding insight – last July. He pounded the table on his land-holding companies at the exact bottom of the real estate market last year. He also recognized the value of St. Joe (JOE) back in 2002, when he first recommended it to our subscribers. We even wrote a book about the opportunity in land-holding companies… and gave copies of it away. (I remember dozens, if not hundreds, of people sending us angry letters telling us we'd misled them. They didn't believe you could buy so much land for so little. They thought we were making it up.) In any case, Joe's $2 moves or its $5 moves don't influence our analysis. Or our decision to give Dan some of the recognition he deserves.

"If your going to go along with that nut, on global worming, than there may be no hope for you… besides they all talk as if global worming is a bad thing, even if its true, witch it is, but not are falt. Its been global worming for 10s of thousands of yrs., so what, as if humans can do something about it, witch the liberals would love us to beleave, that way they could tax the crap out of us, 'some more,' those nuts are driving me crazy!… they cant even predict the weather for today or next, on and on, mother nature takes care of itself… did you know that they harvisted grapes up north above and in greenland. not now its ice..." – Paid-up subscriber Vaughn Tripler

"I am not happy with my paid membership. So far, you haven't sent anything except ads for other services. Why buy from them? What are you providing? So far, nothing. This has been nothing but a rip-off with a lot of junk e-mail to go with nothing I have been able to use." – Paid-up and "pissed member" Mark Howard

Porter Comment: I think this happens to many new subscribers. They sign up for a newsletter and then, suddenly, they're getting The Digest, DailyWealth, and The Growth Stock Wire… but they don't get the newsletter they paid for until several weeks later, based on the monthly publishing cycle.

We need to do a better job of sending all new subscribers a full issue right away and of introducing our e-letters. If you're a new subscriber, go to our website (www.stansberryresearch.com) and click on your newsletter. You'll have instant access to the most recent issue, all of the back issues, and all of the special reports.

Then, as you begin to receive our free e-letters (which go along with your subscription), simply decide which ones you like to read and cancel the rest by following the instructions on the bottom of our e-mails. Canceling the free e-letters won't cancel your subscription.

"If it is soooooo obvious that GM is insolvent, why has its stock been upgraded today and it's near its 12-month high? Are we missing something or is Deutsche Bank missing the 'obvious'?" – Paid-up subscriber Sandra

Porter Comment: How do you think Deutsche Bank makes money? By giving stock tips to individual investors… or by arranging financing for huge industrial firms like GM?

"I'd send some vituperation if I knew what it meant… Dang, you sometimes use such big words!" – Paid-up subscriber Richard Egli

Porter Comment: I recommend dictionary.com.

Regards,

Porter Stansberry
Cockeysville, Maryland

The Japanese Yen Is Undervalued
By Ian Davis

On September 22, 1985, France, West Germany, Japan, the U.S., and the U.K. all agreed to a radical revaluation of world currencies. On that day, these countries signed the Plaza Accord, stating that they intended to devalue the U.S. dollar in relation to the Japanese yen and the German deutsche mark through intervention in the world currency markets.

Between 1985 and 1987, the yen appreciated by 100% relative to the U.S. dollar. A similar revaluation could happen again soon.

Today, the yen is even cheaper relative to the U.S. dollar than it was in 1985. Furthermore, the amount that Japan exports as a percentage of its GDP is higher today than it was in 1985, before the yen was revalued. Recently, House Democrats made headlines, claiming that Tokyo was artificially depressing the value of its currency and calling on the Bush administration to pressure Tokyo into reversing this "weak yen policy."

Trade-Weighted Yen

As you can see from the following chart, on a trade-weighted basis, the yen is the cheapest it's been in more than 37 years.

Yen Purchasing Power

Another way to value the yen is to look at its U.S. dollar exchange rate in relation to the purchasing power parity between the two currencies. Purchasing power parity attempts to equalize exchange rates between two countries based on the theory that in an open and efficient market, the value of identical objects should be the same in every country.

In practice, purchasing power parity is difficult to calculate. One problem lies in trying to find a comparable basket of goods within different countries. Another problem lies in the fact that price levels are not necessarily uniform. In one country, energy may be more expensive than in another country, but transportation may be cheaper.

The following chart shows the U.S. dollar to yen exchange rate relative to its purchasing power parity. The purchasing power parity has been adjusted slightly to account for the historic premium goods on island nations tend to demand relative to other, less import-dependent nations. When the chart is above zero, the yen must weaken relative to the dollar to bring the basket of items into parity. Similarly, when the chart is below zero, the yen must strengthen relative to the dollar for parity to exist.

The Big Mac Indicator

Similar to the purchasing power parity indicator, the Big Mac indicator compares prices across currencies… specifically, those of the Big Mac. The benefit of using a Big Mac is that it is a global product with relatively constant input costs that are easily tracked and quoted.

Conclusion

The last time the yen was this cheap, its value relative to the U.S. dollar doubled. The yen may not appreciate as much as it did in 1985, but I believe that going long the yen will be a safe bet over the next couple of years.

Editor's note: Ian Davis, our resident quant, has been making recommendations in The Digest since November. Below, you'll find his track record.

Good investing,

Stansberry & Associates Top 10 Open Recommendations

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