Porter in Pennsylvania... Last chance for Phase 1 Investor... The world's best mutual fund... Siegel calls a bottom... Klarman buys Centerplate... Olympics hurt China... Citi ringtones...

Goldsmith comment: Porter's at his in-laws' cabin in Pennsylvania, so I'm on The Digest today. However, he did drive into town this morning so he could answer some of your mailbag questions.

The Wizard of Wharton, Jeremy Siegel, is calling the bottom... Siegel, along with hedge-fund pioneer Michael Steinhardt, runs the WisdomTree family of ETFs. On the fund's conference call, he said the market reached a "selling climax" on July 15 – the day the government rescued Fannie and Freddie. Siegel also scoffed at those who believe the S&P 500 is expensive at a price to earnings (P/E) of 22X - 23X. He argued that huge writedowns have caused a "valuation gap," and if you look at operating earnings (earnings purely from operations), the P/E is closer to 17.

Take everything Siegel says with a grain of salt... He preaches the efficient-market theory.

Value investor Seth Klarman, who laughs at the efficient-market theory, bought 2.25 million shares of Centerplate, which provides concessions to recreational facilities in the U.S. and Canada. We spoke with a former Centerplate executive, who passed along this information...

The twin problems with Centerplate as an investment are that (1) the operations are deteriorating rapidly and need to be turned around and (2) the performance contracts – the heart of the business – might be subject to rescission on any change of control... each contract is individual, and many are not disclosed (whether because the company chooses not to, or the entity doesn't have to), and the individual contract-holder's behavior could be difficult to guess, much less control.

While I'm sure Klarman is aware of these matters, his mind was probably made up after he saw how cheap Centerplate is. Centerplate is an $84 million company with $45 million in cash. Shares trade for 0.11 times sales and three times cash flow.

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Goldman Sachs expects the Olympics to temporarily slow China's economy. Restrictions on construction, cars, factories, and mining to decrease pollution and traffic will be a "short-term" drag. Most limitations are imposed in Beijing and five close provinces and cities, which generate about 26% of China's economic output. "These measures will likely lead to a visible slowdown in real economic activities, both production and consumption, in August and September,'' Goldman said in a report. Though activity will pick up in October, "we expect a gradually softening economic path in the second half of 2008."

Barron's released its top 100 mutual-fund managers of the year this week. Here are the top three...

1) ING Russia Fund (LETRX)
2) CGM Focus Fund (CGMFX) – managed by Ken Heebner
3) JHancock Large Cap Equity A (TAGRX)

But there's one hedge fund not on the list. Dan Ferris calls it "the greatest mutual fund in the world." Click the link to read Dan's DailyWealth essay on the fund.

Citigroup finally found a way to save its floundering stock... Citi ringtones! You can download your Citigroup-inspired techno ringtones, here...

Today is your last chance to get Phase 1 Investor, our exclusive biotech research service, at a huge discount. We believe biotech is one of the best places for your money right now. And Phase 1 editors Rob Fannon and George Huang have several picks in the pipeline set for major breakouts. The special offer ends tonight at midnight. To learn more about Phase 1, click here...

New highs: Baxter (BAX), Barr Pharma (BRL), Heartland Express (HTLD), Johnson & Johnson (JNJ), McDonald's (MCD), Health Care REIT (HCN).

Today's mailbag questions Porter's comments on the post office, Goldman Sachs, and even other subscribers. What will you question? Let us know at feedback@stansberryresearch.com.

"I just read The S&A Digest where you said that we could save taxpayers billions by eliminating the Postal Service. Sorry, but that wouldn't save taxpayers a penny because the US Postal Service is no longer allowed to take any money from the US government. All expenses, including retirement benefits and health care, are paid for out of revenue generated by the sale of postal products. This has been the case for several years now. You probably should just stick to giving investment advice......I hope you do better research in that field of endeavor! That's OK man, I still love you!" – Paid-up subscriber Rick

Porter comment: Ha, ha, ha... When the Post Office loses billions (like it has again this year) and when its pension fund runs dry (like it does every three or four years), do you think the government will simply let it go out of business? Sure, right after it lets Amtrak go bankrupt, which will happen after Fannie and Freddie go bust...

"I'm amazed at the real dingalings and dumbasses who are your 'paid-up subscribers!'  How do they get down the street?  And why did occur to them to sign up with you??? Just when I lose confidence in my own little faculties, I get such a boost from their letters. And many laughs from them, and your respectful, but right-on responses. I would love to share your wisdom with so many, but well... Since my son gets your publications, I highlight especially good portions of the Digest and send them to him. He calls me his "own little Reader's Digest." Y'all are a truly fascinating group, and you have integrity. What more can we ask?" – Paid-up subscriber Sandy 

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"August 1st you wrote:  After GM goes bust (we'd bet by the end of this year), which company's 'chairman' will start sending us private letters?  We know Goldman Sachs has a few secrets to share. The giant Wall Street investment bank has had a negative cash flow since 2001. And the cash losses have been enormous – roughly $200 billion. Goldman reported a $68 billion cash loss in 2007. Meanwhile, the firm keeps reporting record earnings, mostly from its trading positions... But no one outside the company really knows how it does it. How do you earn profits but consistently lose cash? And if you're really making so much money with all of your smart trading, then why do you need to borrow so much money each year? (In 2007, Goldman added $80 billion in debt.) The constant cash losses and additions to debt have taken the firm's leverage from the mid-teens to the high 20s. And the move has sent Goldman's interest costs through the roof. It's now paying over $40 billion a year in interest.

"Could you tell me where I can find verification for these comments?  Keep it simple. Thanks." – Paid-up subscriber Mike Searcy

Porter comment: Try reading Goldman's annual reports, which are available on its website and on the SEC's website. Or you could get a copy of the Value Line report on Goldman. Or you could look at an online database, like Yahoo Finance or Bloomberg, which will break out things like cash flow for you. Best of all, why not simply call up the company's investor relations office and ask them to explain it to you. It would be interesting to see what they say.

Regards,

Sean Goldsmith
Baltimore, Maryland
August 11, 2008

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