The latest data on housing is very unpleasant... At the end of the first quarter, nearly 4.4% of the mortgages in the United States were in default, up from less than 4% at the end of last year and up from 2.9% a year ago. Worse, these defaults are concentrated in a few markets, including Puerto Rico (8%), Florida (7%), and Nevada (6.5%).

Defaults are the first stage of the foreclosure process. Rising defaults indicate that foreclosure rates will continue to increase. (The foreclosure rate jumped to 1.39% from 0.58% a year ago.) There is a strong negative correlation between foreclosure rates and recovery values. The more property that must be auctioned, the lower the prices.

According to Moody's, 8.8 million borrowers have mortgages that exceed the value of their homes. As real estate prices fall, the number of these "upside down" borrowers will increase to more than 10 million by the end of next quarter. More and more of these people will simply walk away from their homes, which will continue the cascade of falling home prices.

I wouldn't be surprised to see the average price of a home in the United States fall by 30%-40% before we hit bottom. Most people consider this outcome impossible, but prices have already fallen that much in the worst-hit markets.

Looking at the credit data, it seems people have begun to stop paying their bills in order, from most expensive to least. Houses came first – that's the most expensive bill. Autos came second. (The largest independent auto-finance company lost $300 million last year on its $25 billion auto loan portfolio as defaults rose higher than 7%). What will be next? Credit cards.

Even though the interest rates are sky high on credit-card debt, the minimum payments are small, which is allowing people to keep borrowing. At least for now.

Equifax (a leading credit bureau) reports total credit-card balances increased 8.1% in the first quarter of this year – more than double the previous average rate of growth. Naturally, the steepest increases in credit-card borrowing occurred in the same states where the mortgage crisis is the worst. Credit-card balances rose nearly 15% in the first quarter in California and Florida and more than 20% in Nevada.

Like drug addicts, consumers cannot survive without more and more credit, and they're now turning to the most expensive and unreliable source. They will soon hit bottom. 

In the latest issue of my newsletter, PSIA, published today, I tell my subscribers how to profit from the coming collapse of U.S. credit-card debt, which now stands at $1 trillion. If you never read another issue of my letter, make sure you read this one. Click here to learn about a risk-free subscription...

At Grant's conference this week, Murray Stahl reminded the audience of the importance of anecdotal reasoning... Looking at the 460,000 homes not being built this year, Stahl guessed an average four people work on each house. That's 1.84 million lost jobs. And that doesn't factor in the construction managers, the mortgage brokers, the bankers, etc. We've yet to see a headline touting these numbers.

Stahl also gave a stock pick, the Beijing Airport. The stock lost 64% in the first quarter even though, "if you want to land a plane in Beijing, you're landing it there." He also said a German company recently bought the Budapest Airport for $2.7 billion. Beijing is a $5.4 billion airport, but the city is 18 times larger than Budapest.

The rarest of investment ratings was issued today by Goldman Sachs on the shares of Washington Mutual: Sell. Goldman expects WaMu, a savings and loan, to lose between $17 billion and $23 billion on its mortgage portfolio.

And speaking of banks... Billionaire Wilbur Ross is moving into regional banks, "I believe the next phase of the cycle will be the failure of depositary institutions." Ross told a conference audience that small banks are "the next thing we will be trying to go into." He notes that the biggest banks can raise money from sovereign wealth funds, but "Abu Dhabi and Kuwait are very unlikely to invest in small-town savings."

In today's essay, Dr. George Huang tells you how to double your money using the third exit strategy he's developed for his FDA Report readers. Click here to read more about George's strategy and how to subscribe to the S&A FDA Report for a big discount.

New highs: Plains Exploration (PXP), Stone Energy (SGY).

In the mailbag... The personal freedom/personal responsibility debate continues. Then there's some great feedback on two of our new products, Monthly Dividend Program and True Income. And the bag closes with comments about Jesus. Plenty of stuff to irritate, amuse, inform, and anger. Send your comments here: feedback@stansberryresearch.com.

"I do understand your general point about 'drug dealers, hookers, pimps' being 'capitalists.' However, I also have to say that at least the drug dealers are more Grim Reaper than capitalist. Does execution fit into Smith's Wealth of Nations? In an interview for History Channel's Gangland series, Frank Lucas (1970s Harlem heroin dealer extraordinaire) said, 'If I gone to college – business school – Donald Trump had nothin' on me. Nothin.' Except that Donald Trump's market signals are of the prce variety, not the gun muzzle type... it isn't hard to beat the competition when you beat 'em, or just execute them." – Paid-up subscriber Jared Johnson

"Porter, Initially I was inclined to let fly and call you a couple of names and cancel everything based on your response to the Legal Loan Sharking comment. Then I said to myself, as Libertarian as Porter may be, he might understand a little different explanation of the Payday Loan Biz that is not exclusively based on emotion... . At what point is the more advantaged responsible to the less advantaged in society, polite or otherwise... ? You Porter as well as I have a responsibility to protect those that are much less fortunate that we are... if we don't protect the individual then no ones rights are protected... It is the responsibility of those who take our citizenship seriously to prevent those that would take advantage of the less fortunate from doing so... If there was one serious flaw in our country today it is that so few take their responsibilities seriously... ' – Paid-up subscriber Peter Stephens

Porter comment: Any time we discuss matters of personal liberty, in whatever form, folks write in to us arguing that, for one reason or another, it's necessary and appropriate that they should tell their neighbors how to live their lives. And if their neighbors disagree, then for their own good, they ought to be subject to the full power of criminal law, i.e. arrested and put in jail.

But these arguments against personal liberty and personal responsibility always conflate the issue in question with other actions. For example, in the discussion about whether or not a woman should have the right to charge money for sexual favors, readers immediately claimed we were defending white slavery, rape, or violent pimps. It seems obvious to us that those are completely separate matters. All of those crimes involve the use of force. Likewise, in the discussion about pawnshops and payday loans, folks wrote in complaining that we were defending con artists and preying on retired people. Again, that's something entirely different – that's fraud.

Prostitutes, drug dealers, and pawnshop owners – on the whole – aren't forcing anyone to do business with them or defrauding anyone. As such, there's no logical reason to make these activities criminal offenses. Obviously, there are boundaries to these kinds of behaviors, but those are civil court matters (like zoning, licensing, etc.), not criminal matters.

Contrary to the arguments of many subscribers, there is an objective standard of morality in the world: First, do not aggress against another person or their property; and secondly, do all that you have contracted to do. These are the founding principles of a free and civil society. When criminal law is used in a crusade of subjective morality, it not only undermines the respect afforded the law in our society, it also leads to more real crime. See the "war on drugs."

As for my obligations to my fellow citizens, I have an obligation to leave them alone and allow them to lead the lives they choose. And they have exactly the same obligation to me. I only wish the folks in Washington would live up to their end of the bargain, don't you?

"Oooooh... Oh-Paw-Tuh! I must have missed the call for best and worst analysts. So I'm a little late, but here's my assessment: for personality, you are worst and Sjuggerud is best. Ferris is not to far behind Sjug, but he has roamed into political speculations that are irrelevant to his recommendations every now and then. Sjug sticks to economics. So he is tops. You are at the bottom because you make your ideology fit your prejudices. Or vice-versa. For value, Sjuggerud is best, Ferris was second, and you – I'm sorry to say – are not worst, but are next to worst. If I hadn't bought Nokia, you'd be worst. I can't always follow Sjuggerud, since my only funds are inside an IRA; but he knows how to spot an uptrend, and I've lost very little by following his advice. Most of the time I've gained. Although Ferris was spectacular in a bull market, I've now got a dozen of his recommendations that are down... down to the point that SS would sell them. But I'm following Ferris. He says 'wait three years.' So I'm gutsing it out. We'll see then what I think. You, on the other hand, have managed to wipe out my investment 8 out of 10 times. Even so... you're not the worst. That honor goes to Graham Summers. I lost money one EVERY recommendation of his that I followed. He was persuasive, but consistently wrong. Probably I should have bought only those recommendations where he DIDN'T persuade me. What's fun to watch is the Peter Principle in action: you have risen to your level of incompetence, and you don't have a clue that it's happened. It's fun to read your self-righteous responses to legitimate criticism. Keep it coming!" – Paid-up subscriber James Wood

Porter comment: My track record speaks for itself. And Graham is no long with us.

"Thanks for including your water polo coach's adage in your remarks on Mike Armstrong. It gave me a dandy early morning laugh, edging towards a genuine chortle. And if you've ever had an early morning chortle, well... " – Paid-up subscriber Mike McCormack

Porter comment: Just to reiterate... that's a true story. The coach was chewing me out in the middle of a game because I'd turned the ball over three times in a row. "Don't worry Porter, no one is completely useless. At least you can serve as a bad example..." I sure hope my son didn't inherit my utter lack of athleticism.

This [Monthly Dividend Program] is the best most complete advice on investing I have ever received. I am a chairmen circle member and an Alliance member. I started at a low point in Wall Street Underground. I have read almost everything Van Tharp has written and I really like Chris Mayer's new book. However this is the best. Thanks." – Paid-up subscriber Barry Kinneberg

Porter comment: Thanks for the compliment. If you'd like to see what Barry is raving about, click here...

"I really enjoy the new issues of True Income you are BETA testing, and the concept of earning dividends and capital gains on Corporate Bonds. It forces me to think longer term (2 to 5 years so far). Plus I know the exact length of time I will need to hold, what my exact return will be, and still earn double digit returns annualized as long as the bonds don't default. That's where trust in Mike's recommendations comes in. My greatest worry is that most other investors won't recognize the beauty of this method of investing and you'll have to discontinue publication down the road. At least I'll have lots of nice recommendations in my portfolio by that time." – Paid-up subscriber Jim Battles

"At the risk of stating the obvious, your [S&A 16] portfolio is overweight Porter. 7 Porter picks vs. 1 Dan Ferris and 1 Sjug. Arrogant much? I vote to let Brian Hunt pick the portfolio without Porter's input. Nothing against Porter, I own 5 of his 7 picks and think he is easily your most eloquent writer, but give me a break." – Paid-up subscriber Robin

Porter comment: Brian does pick the stocks... He simply happens to think mine are the most defensive. Given the bear market, these make the most sense right now.

"I liked Steve's DailyWealth today about keeping up with the Joneses and not being able to take anything with you. There's a motto to live by and it goes like this... 'One life twill soon be past, only what's done for Christ will last.' Be blessed." – Paid-up subscriber Alan

Porter comment: Luckily that's not true... Or else I'd have long since been tortured by the Inquisition, my books would have been burned, and Christian crusaders would still be running around the Middle East killing thousands of civilian Muslims. Oh... wait a minute... maybe you've got a good point.

Regards,

Porter Stansberry
Baltimore, Maryland
April 11, 2008

Pharma to the Rescue
By Dr. George Huang, editor, The S&A FDA Report

In every FDA Report trade, we look for three possible exits, any of which could double our money in 12 months. I told you about the first two here and here. But the most explosive one-day returns come from the final exit strategy...

Faced with dwindling pipelines, expiring patents, and a fickle FDA, desperate Big Pharma companies simply can't say no to a good, cheap biotech bargain buyout.

Major pharmaceutical companies, starving for new drugs to fill their pipelines, swoop in and scoop up companies that have been hit with an approvable-letter setback. This results in incredible payouts for investors.

Let me show you how this works...

At the end of 2006, MGI Pharma received an approvable letter for Saforis, a drug to treat mouth ulcers from chemotherapy. Clearly, the market was disappointed.

Add on concerns about the stalling growth of its top-selling drug at the time, Aloxi, and MGI stock was hovering near multiyear lows of about $17 per share. Selling for three or four times sales, MGI Pharma was a steal. (Similar companies typically trade at seven to nine times sales.)

Unknown to investors, MGI Pharma received multiple acquisition offers throughout 2007. But the board turned them all down, knowing a better offer would come along.

And it did...

In December 2007, Eisai, a Japanese pharmaceutical company, offered to buy MGI Pharma for $41 per share, about $3.9 billion. The buyout represented an easy double for traders who got in after the initial approvable-letter setback about one year earlier...

Triple-digit biotech buyout premiums are the norm, not the exception. Given the nature of our trading strategy, we'll be hunting down the most likely candidates on Big Pharma's shopping list.

And next week, in the final essay of the series, I'll show you that some of our biggest trading opportunities lie in the weeks ahead...

Good investing,

George Huang

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