SEC: 1, Porter: 0… Buffett's prediction… Buy drug stocks… Fees or taxes?… Reviews of our new website… Live from Miami Beach…

Warren Buffett: "I don't think you'll necessarily see a contraction of credit or the Fed stepping on the brakes. I think you might see an [external] event, a shock to the system, that causes a huge widening of credit spreads and a cheapening of equities. This would be good for Berkshire because we have money to take advantage of this..." – From Whitney Tilson's notes on Berkshire Hathaway's annual meeting last May.

As the markets continue to take a beating, many stocks admired for their growth potential are now making their way into value portfolios. In fact, Kevin Rendino, manager of the $8.62 billion BlackRock Basic Value Fund, is "overweight" shares of drugmakers for the first time since 1994. We reached the same conclusion halfway through last year.

The cost of shipping dry bulk commodities – iron ore, coal, wheat – hit a new all-time high last week. The Baltic Dry Index, the best indicator of shipping costs, closed at 7,007, up 103% in the past year.

PSIA pick Nokia (NOK) will use PSIA and Extreme Value pick Microsoft's (MSFT) PlayReady digital rights management technology to boost the use of mobile entertainment. The software allows Nokia users to share protected content. Analysts expect entertainment services for cell phones – music, video, TV, etc. – to grow to $38 billion by 2011… up from $18.8 billion in 2006.

Company of the day: Shutterfly (SFLY) hosts a website where users can upload digital photographs and share them with friends. In addition to selling individual photos, Shutterfly also puts together photo books, calendars, greeting cards, and other personalized goods. Shutterfly is a $670 million company trading for 68 times earnings, 4.6 times sales, and 4.08 times book. The company has $110 million in cash and less than $3 million in debt.

New highs: Gen-Probe (GPRO) and Raytheon (RTN).

Today in the mailbag we have more on... college. Apparently, our comments changed a mother's outlook on life. We also have a Miami real estate agent reporting on the state of affairs down there. And of course... the usual drunks. Weigh in at feedback@stansberryresearch.com.

"You say you can't support new taxes. How about fees? I live in Oregon, where the legislature has just enacted a dizzying new round of fees. Why? Because they are legally prohibited from raising taxes – laws that we the voters have enacted. Fees are technically not taxes. Sounds good to me! NOT! Anyone for Belize?" – Paid-up subscriber Marty

"Your recent e-mails have caused me to re-evaluate my past. I have a 15-year-old son who is convinced that for a living he wants to be a video-game designer first and owner/developer second. We fight constantly about how much time he spends playing games and investigating the field online. He is an avid reader, but chooses mostly offbeat fantasy books instead of his schoolbooks. He does well in school, but he is academically very bright and I don't want him to 'waste it.' I keep on him to keep his grades up so that he can get into one of the best computer science schools around. He has already proven to have an entrepreneurial spirit: He invests his money in some long-term growth stocks and has placed vending machines at local shops. In the last two weeks, [reading] these 'college' e-mails, I have started thinking differently, or maybe how I used to when I was younger. I have always believed that it is who you are that takes you on your journey. Thanks for the re-education. I think I will let my son have back the control of his future, and I will be there for advice and support when he needs it. In other words, I think it is time for me to get out of the way. Thanks for the wakeup call." – Paid-up subscriber Terri Miller

Porter comment: Sounds like you're a great mom. As long as the boy is reading, he's going to do well. I spent five times as much time reading those kinds of books when I was 12-16 than I did anything else. College might help your son achieve his goals... but it's surely not the goal itself. The goal, as you know, is to have a rich and rewarding life doing what you enjoy with people you love and who love you in return. Thanks for your letter.

"Super new website! I especially enjoy the new search feature (which I requested a few months ago, but my message never did make it into the Digest). It's nice that you only need to log in once to get to all your subscriptions, special reports, and e-mail alerts. Also, 'my subscriptions' and 'account information' were all correct. Thanks for always trying to find a way to improve and keep those investment ideas coming!"
– Paid-up subscriber Dean S.

"Watch what happens if oil reaches $100 a barrel. You'll see rivers of oil flowing out of the Athabasca tar sands and American oil shale." – A million-plus barrels/day is a river, don't you think? Working out of the Athabasca region at several of the large plants, I get to see how it flows every day."
– Paid-up subscriber Stephen Borsy

"Love your informative newsletter. Must tell you that, as a realtor on Miami Beach, I am seeing an upturn in activity. You know real estate is local. Our neighbor across Biscayne Bay, Miami, although only a few miles away, is light years away when it comes to real estate. Miami has over 10,000 condo units ready to open in the next year… [I]n Miami Beach just a very few projects will open, one of which, the very successful Canyon Ranch Living, is nearly sold out. [With] so very little new construction, resales make up the bulk of the inventory for sale. I do a lot of work in the Akoya just south of Canyon Ranch at 6365 Collins Avenue. My 3-bedroom, 2.5-bath listing on the 35th floor, with direct ocean and city views, has had over three showings a week for several weeks now. Two three-bedroom units in the building have gone under contract in the past month, one of which has closed – the first three-bed units that have closed in almost a year. But the people looking are still trying to catch the bottom. They think the sellers are finally ready to accept any price, and the sellers are standing firm. The units that have gone under contract were below what I would call market price, and the others for sale are listed at much higher prices. As markets turn, we go from no activity to a flurry of folks wanting to get the best price. That is where I think we are now. From here the desperate sellers are all taken out and as higher-priced units go under contract and prices begin to rise slightly, we'll be off to the races again." – Paid-up subscriber Ed

"Thank you for the work that you do and the pleasure you give me to enjoy it... I know S&A has an above-average group of very intelligent and financially resourceful individuals... I would call it 'A very interesting and circular family,' including Porter's sharing of the beginning of S&A and his association with friend Dr. S, who I refer to as 'Mr. Sugar' in a friendly and respectful manner among family and friends... ah, and Mrrs. JC and DF and indeed all the very able… younger, and very financially astute men and women... In my own very humble way, I want to encourage you to continue to do what you do with 'passion' and dedication for the benefit of all of us... and when the choice comes be as positive, fair, and grateful for the blessing that we have to live here in the North American continent, arguably, The Best Mother Land in the world... Investing... is less to do with money… don't you think?" – Paid-up subscriber Federico

"Dear Porter, College, shit fire, I know you cannot publish this, so this is why I am giving you my opinion. I went to engineering school only because that is what my high school advisor said I should do based on my achievement test results. OK, that is what I did. Finished with honors, working 20 to 60 hours a week at a job to pay for school. Zero social life. Why? This was my ticket to get a job. Obviously, not necessary for those who have a little capital and understand markets. Cannot complain as I finished a director for a Fortune 500 company making the big bucks. Looking back: I never once needed to use the engineering math in the real world. Laplace what? OK, I know many of you don't have a clue about Laplace Transforms. Point is, I never used them once after school. Bigger point is that I could have never entered into the corporate world without the degree. It was/is the price of admission. Had I known then what I know now, I would have gone to the Alaskan pipeline and made more money in four years than my first 12 years out of college. Of course, if I knew what I have learned as a Pirate Investor/Alliance investor when I was 18, none of this would have happened and I would be flying in today to take you to somewhere VERY nice." – Paid-up subscriber Terry Easler

Porter comment: Thanks... that's a great compliment. It was probably lost in the hyperbole... but at least part of the reason I bring up this topic frequently is because I wish our society had more respect for educated people who DIDN'T go to college. Two of my best employees don't have college degrees. They're smarter than me. And they've worked harder than most people ever will. You shouldn't have to waste four years and $50,000 to get a good job in America. Experience? Sure, of course. But a degree? To me, it's only a waste of time for most people, assuming they've educated themselves about our culture, our history, our language, our ethics, etc.

"After reading a lot of the argument about education and experience, it is clear to me that most of the writers do not know the difference between getting an education and learning a set of skills, or as I think of it, becoming a skilled mechanic ranging from perhaps a neurosurgeon to a shade tree mechanic, with many gradations of skill between. They think that if they get a degree in accounting, mechanical engineering, etc. they have received an 'education' when in fact what they have learned/received is a skill. This is not to knock getting a skill. After all, without some degree of skill, handing out the fries or spraying the urinals are the options. So frequently, we find guys (less so with women) with degrees and even multiple degrees who lack a rudimentary knowledge of moral behavior, personal integrity, the ability to see another's diametrically opposed view on religion, politics, forms of government, personal behavior, etc. to one's own as valid and worthy of respect for want of a cultural education. In the cultural world of art, music, literature, theater, they are 'strangers in a strange land'… Ray Bradbery… who's he? Tschaikovsky? Some communist, I guess. Shakespeare? He wrote some murder mysteries, didn't he? Plato? I like paper plates… no cleanup. History of Rome… ancient stuff, what's that got to do with anything? We end up with a class of people who can save our lives with a quadruple bypass if needed, create astoundingly complex software, send vehicles to roam around Mars and send back great photos, [but] can't carry on a conversation beyond sports statistics, which beer is best, and how to barbeque lamb chops. Education is about who we are and our relation to other people, about what produces happiness, satisfaction, contentment, commonly called 'philosophy;' the things that are the essence of life. Without 'education' the striving for more and bigger just enables more and bigger toys and like all toys, after playing with them for a while, we inevitably ask, 'Is this all there is?'" – Paid-up subscriber Fred Coburn

"Mike Totty asks about investment companies. In 1997, I put $2,000 into an Oppenheimer value mutual fund. In 2000, I closed the account with only a small loss. Securities are issued to be sold. Sales people are hired to sell them. The rest is just details. I quit using so called 'full-service brokers' when discount brokers became available. When online brokers came into existence, I changed to an online broker. I came across some interesting numbers in some old files. A newspaper clipping from May 4, 1988, says there were some 460,000 brokers registered with the NASD then. Recently, I saw an item that said there are some 77,000 brokers now. I don't know that those numbers are any more accurate than my guess that there are upwards of 10 million people [who] now use online brokers in this country. I suggest if Mike Totty still wants to find out for himself how to use a full-service broker, he better do so very carefully and with a small amount of money. I know two people that benefited very well from using a broker, and I do not know anyone that has won a lottery so maybe the chances of finding a good broker are better than the chances of picking a winning lottery number." – Paid-up subscriber Norton Nielsen

Dear subscribers:

I received some very bad news late last week…

I've lost the first round of my long battle with the SEC. And I didn't just lose… it was a knockout. According to Judge Garbis, my side of the story is "preposterous." His decision excoriates me. My lawyers say they've never seen such a personal opinion before.

I find the decision heartbreaking and devastating. I was confident we would win this lawsuit for one simple reason: I was telling the truth. I never gave a moment's thought to the possibility that we could lose.

If you're not familiar with the basics of the case, let me review what happened, briefly.

In May 2002, more than five years ago now, I interviewed Steven Wingfield, the head of investor relations at U.S. Enrichment Corp. (USEC). USEC is a unique company, with close ties to the government. USEC had been spun out of the U.S. Department of Energy and sold to investors in the mid-1990s. Its most important and potentially valuable asset was the "megatons to megawatts" contract the government got it with the Russians. As the Russians were taking apart some of their nuclear weapons, they sent the uranium to USEC, where it was made into fuel for nuclear power plants. But there was one small, but critical, problem: The original deal with the Russians was based on a fixed price for the uranium. Uranium prices fell in the late 1990s, which meant USEC was paying too much and losing money on its primary fuel source. The company had begun negotiations with both governments to make the contract based on market prices. Once both governments approved the deal, USEC would begin receiving uranium from Russia at a big discount in price, which would make the company profitable again.

Over the course of an hour, Wingfield and I discussed all of these issues thoroughly. So… what's the lawsuit about?

What's really at stake in this case is what happened next, at the end of our hour-long conversation. If you believe me, at the end of our conversation, I told Wingfield that, unfortunately, I wouldn't be able to write about his company because it didn't fit the criteria for inclusion into my newsletter's model portfolio. That upset him – I guess he felt like he'd wasted an hour talking to me. He told me I was making a big mistake by not recommending USEC. Wingfield then told me about an upcoming presidential summit (something that had not been widely reported in the press yet, something I hadn't heard about before) and indicated that the required government approvals would be made at this meeting. His exact words were that the deal would be "finalized" and that I should "watch the stock on May 22."

Wingfield's version of the events is almost identical to mine, except he says I brought up the presidential summit, to which he vaguely replied that the USEC deal might come up. He says he never said anything about May 22.

Interestingly, we found (and presented as evidence) that two Bank of America analysts were told that the Russian deal could be finalized in May.

Using the information I had, I wrote one of the most aggressive marketing pieces that has ever been published in our industry. I knew I had very valuable, very specific information. I wanted our subscribers to have it. But I didn't want to get Steven Wingfield in trouble. So, in the report, I withheld his name, calling him a senior executive. And, on May 13, I blind copied him on an e-mail I sent to all of Agora's publishers, telling them about the report and asking for their help in marketing it. Thus, Wingfield knew, as soon as May 13, exactly what I'd written about our conversation and knew that I was planning to publish my report widely.

Wingfield never asked me to change a single word in my report. He never contacted me to tell me I'd gotten the story wrong, that I'd misunderstood him. USEC never put out a press release stating that my story was false. Even when the stock soared in the days leading up to May 22 and the press contacted the company to inquire what was behind the jump, no one at USEC mentioned my report or claimed it was fraudulent. In fact, no one at USEC ever denied my report until after my first SEC deposition, when it was discovered that I did not have a tape recording of the phone interview. Only after they knew there was no "dress in the closet," and only after the SEC launched an investigation, did USEC and Wingfield begin making their denials.

Three weeks after the presidential summit, USEC announced government approval of its new contract. In the three years between my report and my SEC trial, the share price of USEC went from around $7.50 to more than $20. During much of this time, the company also paid an 8% annual dividend. Anyone who bought around when I made the recommendation and held (as I recommended) could have done very well.

What Happens Now

The Garbis ruling is very unlikely to be overturned on the facts of the case. The appeals court almost never weighs in on the facts. Thus, for the rest of my life, I will probably bear the burden of having a federal court judge call me a liar. I never thought I'd end up with that on my résumé. My hope is that someone at USEC or perhaps another analyst that's familiar with the story will come forward. I believe eventually I will be able to clear my name, simply because the truth always comes out.

Meanwhile, we will appeal based on the law, which we think Garbis has interpreted badly.

Should the SEC be allowed to sue a journalist for writing about a stock, even if you assume the journalist gets his facts wrong?

I was sued under a law that's supposed to limit the SEC to investigating actions that take place "in connection with the purchase or sale of a security." But, we sold a report, not a security. And, if you didn't like our report, you could have simply asked us for your money back. No part of our transaction with our customers involved a security… or even personalized investment advice. Our work was merely a written report about a possible investment. Additionally, as you know, we never buy the stocks we write about and we've never sold any security, at any time… so the matter of the SEC's jurisdiction is "ripe" as the lawyers say. The SEC contends that selling a report about a security is tantamount to selling a security.

In all of the case law Garbis cites against us, the publishers are not disinterested. They all have direct connections to the security in question, they are so-called "pumping and dumping" cases. We should be able to prove that the SEC has no place in regulating pure speech about securities, assuming the author is genuinely disinterested, i.e., assuming the publisher does not own shares.

Why do we believe the SEC shouldn't regulate people who merely write about stocks?

We know that regulation will stifle speech and ideas. It will make it more expensive and risky to publish information and opinions about stocks, thus there will be less debate.

The First Amendment established a uniquely broad protection over pure speech because words alone don't cause harm. We shouldn't regulate what people can say, even if they're wrong or we disagree with them. Our case is a great example of why the government shouldn't regulate pure speech: The judge wasn't on the phone during my interview with Steven Wingfield. There was no recording of the call. So, how can he possibly rule that one of us is definitively lying?

Meanwhile, the market will quickly and efficiently punish any publisher who is truly fraudulent – especially when he is reporting about something as vitally important as other people's investments. If the USEC deal hadn't gotten government approval in roughly the timeframe I said it would, no one would have bought another newsletter from us again. On the other hand, our readers know that we can't be right about every prediction we make. How in the world could we publish newsletters if every time we got something wrong the SEC sued us?

Whether we win or lose our appeal, I don't expect this ruling to have any impact on our business. I think most people understand it's simply a case of "he said, she said."

I will continue, for as long as I am able, to do the things I love to do: write and learn about finance, help people be better investors, share great stories, serve the interests of my subscribers, motivate and reward employees, and earn profits for my partners.

My career has been a lot of fun so far… notwithstanding all the damn lawyers.

Best regards,

Porter Stansberry
Baltimore, Maryland
August 6, 2007

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