Lying like a finance minister... Creative hedge-fund accounting... Investment banks shorting?... How to use our newsletters...

About 10 years ago, I learned one of the basic lessons of global macro investing: The finance minister only lies. If you're holding emerging-market bonds and the finance minister says anything, sell. If he says, "We will not devalue," sell everything and go short. Yesterday, for no apparent reason, GM announced it has enough liquidity to survive 2008...

As any good trader knows, the first rule of trading is cut your losses. But Fortress Investment Group, the publicly traded hedge fund, has developed a new aversion to taking losses. Rather than marking down its investment assets, Fortress' CEO says, in effect, he's hanging on. "I think that the use of the word loss in this case is pejorative and actually not at all accurate. It's actually not a loss as long as we still own the investment, right? And since we have investments in companies that we think have a tremendous amount of value, it's a mark-to-market issue."

Citigroup analyst Rashad Fonti then supplied a badly needed dose of common sense: "You were almost $8 billion, (and now) you're down to less than a billion dollars. You didn't take the gains. The money was lost."

Societe Generale, the French investment bank, is going short. About 100 European stocks meet its three criteria for shorting – an expensive share price, worsening company accounts, and lack of "capital discipline" on behalf of management. On average, Societe Generale's short list has 20 European stocks. The number of U.S. companies that meet the bank's short criteria grew to 174 from 30. When even the investment banks are short, the market is sure to rally.

New highs: ArcelorMittal (MT), Aracruz Celulose (ARA), Plains Exploration (PXP), H&R Block (HRB), Petrobras (PBR), Occidental Petroleum (OXY), Chevron (CVX).

In the mailbag... the familiar sound of disgruntled and confused readers. Oh, how we missed you guys. Send your comments here: feedback@stansberryresearch.com.

"How can NOK be down 30% from its highs and us still be in it if we're using at 25% trailing stop? Maybe I'm not thinking about stops properly, but I thought a trailing stop would mean that I've set it 25% below whatever it's highest close is (after acquiring the stop of course). Is that right?" – Paid-up subscriber Rikki

Porter comment: My investment advice on Nokia has always been to use a 25% stop loss, not a trailing stop loss. The same is true for all of my "no risk" investment recommendations. Click to read my explanation of the difference between a trailing stop loss and a stop loss.

"In today's S&A Digest, Dan Ferris agreed with a correspondent that, 'If you don't know the business very well, you have no business buying a piece of it.' On that basis, what the hell is the point in subscribing to your newsletters? Does it mean I have to do the same research you do to validate it? Does it mean I have to wait for you to recommend a stock in a company of which I am 'very' knowledgeable? Seems silly to me to spend my money supporting you and yours, only to be told that I shouldn't rely on your advice – only on my personal knowledge of the companies in which I should invest." – Paid-up subscriber Mike Doyle

Porter comment: People use our research in lots of different ways. Clearly, the best way to invest is to buy a great company you know well, in an industry you understand, at a very attractive price. Unfortunately, that's not always possible.

Our research (we hope) helps educate our subscribers about companies that are very attractive across many different sectors. But we certainly wouldn't pretend to know everything about every company we cover. We hope our subscribers do their own due diligence, too – like reading the company's annual report, looking at its financial statements, and following it quarter by quarter. If you'll take the time to get to know four or five companies well each year, it won't be long until you're familiar with lots of companies and lots of sectors.

Regards,

Porter Stansberry
Baltimore, Maryland
May 14, 2008

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