Gold: how high?... Canadian timber: how low?... Playing Clue with Goldman... BHP's buyback... Sjug's yen call...

How high can gold go? Our friend and currency expert Chris Weber says $2,000 is his target. Sounds high, doesn't it? Well, maybe not. According to The Wall Street Journal, the inflation-adjusted all-time high price is $2,250. That's based on the metal's 1980 spike.

The Canadian dollar (aka the "loonie") is now worth US$1.10 – a price not seen since the 1870s. That's disastrous for price-competitive Canadian exporters – like the lumber and forest product industry, for example. We sent 12% Letter editor Tom Dyson up to Canada last week to poke around. Nothing creates outstanding investment values better than a 100-year currency storm...

"Merritt must be one of the ugliest towns I've ever been to. It's surrounded by beautiful forests and snowy mountains, but the town itself looks like a sprawling trailer park in a dust bowl. Tumbleweeds blew down the streets. It would have been a good setting for a spaghetti Western. In the center of town, there is a sawmill the size of three city blocks. A huge pile of logs occupied more than half the space. 'Excess supply,' I thought to myself..."

We'll have more of Tom's discoveries later in the week.

While Canadian paper mills are hitting bottom, one of Wall Street's "paper mills" has remained strangely untouched by the mortgage crisis – Goldman Sachs. By now, you must be familiar with our argument: Like a rubber ducky floating in a toilet, Goldman's stock must soon spiral down into the cesspool of the mortgage debacle.

What might explain Goldman's curious immunity from a big mortgage-related charge against its book value? We've learned the firm is setting aside more than $16 billion for this year's bonus pool. But... how big would the bonus pool be if Goldman were to take a big ($5 billion to $10 billion) write-off before the end of the year? We don't know exactly, but we would venture to guess: several billion dollars less.

Reuters reports that if Goldman doesn't take a big loss on its mortgages, Blankfein will get a $75 million bonus this year, up $20 million from last year. Goldman's co-presidents, Gary Cohn and Jon Winkelried, will get $70 million each. It's hard to believe shareholders would agree to pay one president $70 million... and Goldman's got two of 'em! Shareholders are about to get what they deserve...

Now that we've identified Goldman's motive for masking the size of its mortgage losses, we've been searching for the weapon. How has Goldman hidden its losses, we wonder? We've been playing a game of Wall Street Clue. "It was Colonel Mustard... in the library... with the wrench..." No, it was CEO Lloyd Blankfein, in the boardroom, with illiquid bonds that can't be priced.

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An entire category of financial assets (called "Level 3 assets") are so illiquid they can't be accurately priced. To make up for the lack of a true market for these assets – which include certain kinds of securitized mortgages – Wall Street uses computer models. (Reminder: When your broker starts talking about a computer model, grab your wallet.) Or, in other words, these big banks are allowed to "pick a number" for the value of these Level 3 assets. Guess which big Wall Street bank has the largest pile of Level 3 assets as a percentage of its equity? That's right, Goldman Sachs.

Inside Strategist pick BHP Billiton (BHP) said it would buy back $30 billion in shares if it wins control of iron ore producer Rio Tinto. BHP said the combined company would have "superior cash flows," and it expects annual savings of $3.7 billion a year. The buyback would be equivalent to 8% of the combined company and may increase the attractiveness of the deal by decreasing the number of shares traded.

We humbly suggest BHP Billiton's shareholders might be better served with a cash dividend, instead of a share buyback. We recall the bottom of the last commodity cycle, November 1998. Back then, oil was trading for $7 per barrel, and you could buy shares of BHP for less than $5. That was the time for a big buyback... But what did BHP's managers do in 1998? Rather than buy back 8.5% of the entire company, they paid a $0.30 per share cash dividend (6%) and repurchased a meager 2.5% of shares outstanding. Today, BHP's shares trade hands for more than $75 each.

BHP Billiton

Most management teams, like most investors, only have the desire to put capital to work in the wrong places, at the wrong times. As Barron's reported over the weekend, a new academic study discovered only about 25% of companies who actively repurchase shares perform better for investors than the S&P 500. And... most surprisingly... "The companies that used buybacks most aggressively actually generated the weakest returns over the course of the study period."

Sjug wrote it, did you buy it?

I expect that the Citibanks and the Morgan Stanleys of the world will seriously curtail their lending of Japanese yen. That means far less selling of yen, and far less buying of New Zealand dollars. The yen will stop weakening.
– August 2007, Sjuggerud Confidential

The Financial Times reported today that the carry trade is indeed unwinding. The global fall in equity indexes thumped high-yielding currencies, including the Aussie and New Zealand dollars last week. Meanwhile, low-yielding currencies – like the yen, up 3.4% last week – are soaring. Steve's currency trade is working perfectly. As we've said before, don't bet against Steve when it comes to macro calls. To see what else Steve is up to, click here.

New highs: CurrencyShares Japanese Yen (FXY), Sinovac Biotech (SVA).

In the mailbag... We debate tough questions like: What's the worst thing about GM's management? Send us your thoughts – we'll read 'em: feedback@stansberryresearch.com.

"Kiplinger says you are a scammer and misquoted them."
– Paid-up subscriber Howard Bell

Porter comment: This has been discussed... in some detail... already. And guys, take it easy on poor Fred Frailey. He says you've swamped him with e-mails and cancellations. I told him I'd "call off the dogs."

"I worked as a GM engineer for 33 years, retiring in 1993. During that time I routinely resisted union offers to join the UAW. I now realize that had I joined, I would have superior healthcare benefits and security during my retirement. GM has been totally unfair to its loyal salary workers in requiring salary healthcare givebacks that are greater than it requires from its union employees. I feel betrayed by GM's management." – Paid-up subscriber Donald M. Herod

Porter comment: Imagine how the poor shareholders feel. GM's shares traded near $60 in the early 1960s... and except for a brief interlude during the year 2000 bubble... never traded higher. Now, as you know, the shares are only "worth" half that amount. So, GM is down about 50%... over 45 years. Management's performance is absurdly bad, in every respect. That GM has lost its dominant position in the U.S. market to Toyota is one of the worst corporate debacles of the last 50 years. The board of directors and the senior executives should be tarred, feathered, and run out of the country.

General Motors

"Mr. Hatfield and I have a lot in common I believe... I don't understand options at all, but I have stayed away from them." – Paid-up subscriber Ed Swiatkowski

"I'm surprised you haven't followed-up on your Synovus Financial (SNV) since your recommendation. They have announced the spin-off of (TSS), that they have an 81% ownership in, and they plan to issue about .49 shares of TSS for each share of SNV. This equates to about a $14-$15 capital spin-off value, and provides a support base of about $19 per share for purchasing Synovus. Any comments?"
– Paid-up subscriber Gary Cook

Porter comment: Not beyond that we greatly respect Sjuggerud's ability to nail these kinds of macro-driven trades. We don't know how he does it.

Regards,

Porter Stansberry 
Baltimore, Maryland
November 12, 2007

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