Porter and Goldsmith in Vegas... Dyson on The Digest... $1.4 trillion in writedowns... Another mortgage lender down... Hedge-fund pioneer forecasts doom...

Goldsmith comment: Porter and I are headed to Las Vegas this morning to attend Freedom Fest, a conference that promotes free markets and free thinking. We'll be updating from the conference for the rest of the week. If you're attending, keep an eye out for us. Because we're traveling, I asked Tom Dyson to take The Digest reins today...

Contrarians take note... Michael Steinhardt, the hedge-fund pioneer whose funds returned more than 20% a year for nearly 30 years, said U.S. stocks will continue falling even as "contrarian" buy signals arise. Record oil and a credit crisis that caused more than $400 billion in writedowns is too much for the market to handle, according to Steinhardt... "There are genuine, solid, fearful reasons for a bear market here, and we're in the midst of it. I don't think we're at a bottom. I can think of only one quick fix, which is a dramatic, substantial drop in the price of oil."

What would happen if credit writedowns totaled $1.4 trillion? That's what U.S. hedge-fund giant Bridgewater is forecasting. The company doubts banks can handle the full extent of their losses, which are currently disguised as "mark to model" assets. "We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse," said the group in a confidential report leaked to Swiss newspaper SonntagsZeitung.

Cash America's second quarter closed June 30. Yesterday, the pawnshop and payday lender raised its earnings guidance for the quarter by about 20%... and said business was booming. Its shares went up 16%.

Pawnshops and payday lenders serve people with bad credit... like the unemployed, the indebted, and the bankrupt. They are the perfect businesses to own in hard times.

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Pawnshops also make money when gold rises. Gold makes up 50% of the average pawnshop's inventory... but that's not the reason pawnshops like high gold prices. The real benefit is bigger loans. Gold is the most popular collateral on pawnshop loans. When gold goes up, people take bigger loans, and the pawnshop earns more interest.

I've got a pawnshop operator in my International Strategist portfolio. We're up almost 40% in this position since April. Gold is on a journey to $2,000. We're heading into a period of stagflation. This gain is getting much bigger. To learn more about International Strategist, click here...

Another mortgage lender is going down... IndyMac Bancorp, whose shares have fallen 99% in the past year, announced it will fire 53% of its workforce and stop lending. Shares fell 47% yesterday and they're down about 11% today after regulators said the company isn't "well capitalized." It's currently trading at $0.44. However, it's yielding 140%. CEO Michael Perry said in a statement, "We don't expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets."

New high: Baxter International (BAX).

Making huge money on mortgage pain, investing in silver, and more in today's mailbag. We read them all, so keep sending them... feedback@stansberryresearch.com.

"I bought 100 puts of fre & fnm after reading analysis. Sold one third of the position after I made 400% in 30 days!!! Riding the rest. Man, you made my summer. You and your letter have been fantastic." – Paid-up "Happy" subscriber C.D.

"My $$$ are in a traditional IRA. I can't short (borrow) equities. Would you suggest buying long-term puts and rolling them?" – Paid-up subscriber Phil Gieseke

Dyson comment: I can't comment on your particular situation, but in regards to shorting stock, 90% of investors shouldn't do it. A number of our analysts recently recommended shorting (or buying long-term puts), but I personally think shorting takes a special emotional make-up and lots of experience.

Most people think it's just the inverse of buying. It's not. Markets rise slower than they fall. So shorts spend most of the time watching the market move against them. It's like betting against Tiger Woods. Ten minutes of pain for every minute of joy. Most investors don't have the stomach.

If you'd like to try this kind of trading, I recommend you start reading Jeff Clark's free e-letter, Growth Stock Wire. There's nobody as good as Jeff at this sort of thing. See what he's thinking about the market. You can also try his S&A Short Report. I believe it's the best short-term trading advisory in the world.

"You had mentioned investing in gold and particularly silver. I can only guess as to why silver in particular: 1) I don't believe that our government has a history of confiscating it, and 2) since it is so much less precious than gold, it should be easier to trade; like it is easier to get rid of money in smaller denominiations. If people don't have any money, how can they afford gold? Anyway, I am curoius as to your reasons. Aside from purchasing bullion, can you suggest some stocks to research?  Forgive me if it appears that I am asking for something with nothing... but maybe I am. I have been reading a number of your firm's newsletters since I started investing for myself a couple of months ago (great timing!) and have not seen any recommendations for silver (although Matt B. has made recommendations for gold royalties). I would appreciate your input." – Paid-up subscriber Matt Mazza

Dyson comment: I recommend Whatever Happened To Penny Candy by Richard Maybury. This book contains the best explanation I've ever read of gold, silver, and the role they play in finance.

Silver Standard and Pan American silver are the two senior silver stocks in the U.S. markets. It used to be, if you wanted to buy silver without doing any research, you bought those two. Now you can invest in a silver ETF too.

I steer away from the rest of the silver stock market. Betting on silver juniors goes far beyond betting on silver bullion prices. You end up taking 99% company-specific risk.

Regards,

Tom Dyson
Jacksonville, Florida
July 9, 2008

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