Bubble trouble in China... Buffett on the move... No, you don't own the mortgage... Introducing the "Berkshire Spread"... No, it wasn't really the chairman of General Motors (for crying out loud)...

Signs of a top in China. On the heels of Warren Buffett's move to sell his sole Chinese stock (PetroChina), the richest man in China, Li Ka-shing, is now selling too. He recently sold off $512 million of Cosco Holdings, China Shipping Container Lines, and China Southern Airlines. Li Ka-shing is now the second billionaire to dump China.

Want to make money on the coming bear market in Chinese stocks? Our own Tom Dyson, editor of The 12% Letter, says to watch the airlines:

"I want to short the Chinese airlines. The airline business is such a bad business to be in almost all the time in any country. The valuations on these stocks are absurd. In particular, China Southern Airlines (ZNH) and China Eastern Airlines (CEA)... They have gone parabolic and recently pulled back. These two airlines have high leverage, negative cash flows, an inability to hedge fuel costs due to government regulation, and high multiples (45+)...  Just what you want in a short sale."

Buffett on the move... Berkshire Hathaway bought almost 14 million shares of CarMax (6.4% of the company), the nation's largest used-car retailer, according to a Wednesday filing. Berkshire also added to its U.S. Bancorp, Wells Fargo, and Bank of America positions and bought 3.6 million more shares of Dow Jones. Berkshire sold shares of railroad operators Norfolk Southern and Union Pacific, but maintained its position in Burlington Northern Santa Fe.

An Ohio Federal District judge, Christopher Boyko, ruled that Deutsche Bank could not foreclose on 14 properties because the bank, which owned the mortgages through a collateralized debt obligation security (CDO), failed to prove they owned the properties. "The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate." If you think the mortgage crisis is bad now, wait until the entire CDO market (more than $6 trillion of mortgages) has its collateral wiped out by district court judges.

What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad ideas. Securitization is a mediocre idea. Re-securitization of already securitized assets into a CDO is a bad idea. Re-securitization of CDOs into CDO-squared is a really bad idea. So is funding a pool of long-term illiquid assets with very short-term funding in the so-called asset-backed commercial paper market. And... it is a horrendous idea to delegate most of the responsibility for assessing credit risk to a group of credit-rating agencies paid for by the issuers rather than the buyers of bonds.

– David Einhorn, speaking Oct. 19 at the annual Graham & Dodd breakfast (and quoted on Whitney Tilson's Value Investing Congress website). Einhorn manages the hedge fund Greenlight Capital and is a former board member of New Century Financial.

Subprime lender NovaStar Financial announced a $64.50 per share loss this quarter, down from a $2.91 in the year ago period. Shares plunged 59% to $1.87.

There's a new measure of fear in the financial markets... The Berkshire Spread. We noticed that as the mortgage crisis bloomed in about July, shares of Berkshire Hathaway began to soar. And, as things have gotten worse and worse in the financial sector (as is represented by the iShares Dow Jones U.S. Financial Sector Exchange Traded Fund), Berkshire has simply gone higher and higher, with nary a down day. The market knows: When companies get in trouble and they need to borrow billions overnight, only one guy in the whole world has enough money and savvy to write the check – Buffett. Interestingly, while the market is buying Buffett, Buffett is buying financials (Bank of America, Wells Fargo, and U.S. Bancorp). Right now, the Buffett Spread is trading around its all-time highs, close to 35 basis points.

The Berkshire Spread
Berkshire Hathaway vs. iShares Financials

New high: Berkshire Hathaway (BRK-A).

In the mailbag... When we published an article titled "More from the Chairman of General Motors" with my byline, we expected you to understand the piece was a parody. But many of you didn't get the joke. Although we're stunned and find it hard to believe, we nevertheless apologize for any misunderstanding. We'll try to make our future parodies as humorless and direct as possible. Send your complaints here: feedback@stansberryresearch.com.

"Shame on you! You do not have the right to send a negative letter about any company and sign it 'Chairman'. Much less, about a company having trouble financially like GM. Guess you thought it funny. Well, let me assure you that is not 'a funny'. I hope someone does sue you. Perhaps instead of playing God you should be praying for those in such trouble financially." – Paid-up subscriber Mary R. Kreiser

Porter comment: I've got a list of people who need my prayers. But if I tried to write down the names of all the people in the world who don't have a sense of humor or an appreciation for obvious irony, I could spend all day praying and not even finish 1% of the list. There's nothing I can do for these sad people. What's worse is that they seem determined to ruin the fun the rest of us are having. If you don't appreciate our work, you don't need to sue me, accuse me of 'playing God,' or to challenge my First Amendment rights. Just change the channel.

"Holy Schnit!! Are you kidding me? Your 'paid-up subscriber' Schnit actually thought the letter from the GM CEO could have possibly been real? And he was actually considering investing a 'quite a bit of money' in GM. My question is, how on earth does this guy even have 'quite a bit of money.' Did he inherit it, steal it or hit the lottery?" – Paid-up subscriber Dave Bayford

Porter comment: He wasn't the only one who didn't get the joke... sadly.

"I read with interest your readers comments about Dan Ferris and the performance of his Extreme Value picks. I, like other recent subscribers to Dan Ferris' Extreme Value have had quite a few 'bad' picks in recent months. It seems that I have picked a difficult time to dump my mediocre mutual funds and begin investing my retirement money myself. However, I will continue to renew my subscription to Extreme Value because I think that Dan presents a very valid, logical perspective on investing. He repeatedly states that his picks are for the long-term investor. Sure, I have some (okay, quite a few) picks from Extreme Value, and even more from his Penny Letter, that are down right now. But how can I sign on to a long-term investment philosophy and then bail out after one year? That doesn't make any sense.

"Given Dan's long-term success, I have every confidence that he will prevail. I refuse to be scared out of my long-term value investments by some short-term uncertainty in the marketplace. Maybe I'll regret this in a few years, but my guess is that most of these picks will come roaring back one of these days, leaving me with a smile on my face. Give the guy a break – don't invest in long-term value picks, if what you really want are short-term profit trades." – Paid-up subscriber Jane K.

"I became a subscriber on the strength of Sjuggerud being on your team. His dad Dave played center for the Menomonie Wisconsin basketball team that lost to Wausau in the final game of the State Championship in 1960. Steve followed his dad into the investment business, and I enjoyed the story about his guitar playing ability relayed through Mr. Butler..." – Paid-up subscriber Chuck Hinners

Porter comment: That's right. Steve's father, David Sjuggerud, was an all-state high-school basketball center in Wisconsin and went to the Naval Academy to play basketball. When he got there, instead of sending him to the gym, they put a football jersey on him and told him to catch passes from Roger Staubach. So, he played tight end and defensive end for the football team, including playing in the national championship game in 1963. The Menomonie community was so proud of Dave's athletic accomplishments, the local paper led a fundraiser each year to send Dave's mom to the Army-Navy football game so she could watch him play. Dave Sjuggerud became a fighter pilot and flew fighter jets over Vietnam. He's led a very interesting life. But... you got one thing wrong. Dave actually followed his son Steve into finance. After a career in the Navy and several senior positions with big defense contractors, Dave earned his CFP designation and began working with Key Financial Group.

Regards,

Porter Stansberry
Baltimore, Maryland
November 15, 2007

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