"A 100-year flood"... Time to do nothing?... Three plays for tough times... Buffett's buying... Gold coins "soaring"... Kraft up 3.3% today... London's "SEC" bans all financial short selling... My recommitment to ranting...

A good friend e-mailed this morning and said, "I am deeply worried that we are in the midst of a 100-year flood, and things selling at ridiculous prices will get much cheaper yet." 

Another friend said, "The credit markets are looking much worse than stocks... and stocks are still falling... if everything falls another 10%-20%, why buy now?"

I think a lot of people feel that way. As a result, investors are building a mountain of cash.

Mutual-fund researcher TrimTabs says $88 billion has moved out of mutual funds this year, most of it going to cash. Global money-market assets have risen 32% since June 2007, and stand at $5.7 trillion, the highest level ever, relative to both GDP and equity market capitalization.

Corporate America has plenty of cash, too. S&P 500 tech, health care, consumer, and industrial companies have cash balances at 10-year highs, as a percentage of assets.

Sooner or later, all that cash has to go somewhere... but where? My guess is much of it goes into world-dominating companies like UPS, Procter & Gamble, Wal-Mart, Berkshire Hathaway and ExxonMobil. And eventually, it will reach the higher-quality names among riskier businesses that everyone is selling right now – like mining, oil & gas exploration, and some financials.

What should you do? Well, if you're anxious about what you own, maybe you shouldn't own it.

Maybe you should do nothing. If you have plenty of cash, big positions in world-dominating businesses, and a cache of physical gold to protect your purchasing power... then doing nothing is probably the way to go right now.

I've been trying to find the most anxiety-free investments for Extreme Value readers. I think physical gold fits the bill. Berkshire Hathaway does, too. Nobody understands risk avoidance and investing better than Berkshire.

Speaking of Berkshire, its 80%-owned MidAmerican Energy Holdings made a bid for a company in my hometown of Baltimore. MidAmerican offered $26.50 a share ($4.7 billion total) for the utility and energy-trading firm, Constellation Energy. 

MidAmerican CEO David Sokol says his company is constantly modeling all of his competitors in the utility business. At any given time, he can check the market price against his own estimate of intrinsic value. Constellation shares opened Monday at $56. They fell hard and fast Tuesday, hitting $13 around 2 p.m., and only recovering when the Fed announced it wasn't cutting interest rates.

Does this mean you should be buying utilities? If you know their intrinsic values as well as Warren Buffett and David Sokol, maybe so.

Both Porter and I have been telling you to buy gold. Today, that's looking like a good move. Goldsmith spoke this morning with Van Simmons of David Hall Rare Coins. Business is booming. Rare coins are in "extremely short supply." The really rare coins, costing $25,000 and more, are soaring. They're "impossible to buy." More generic items are holding close to melt value. Van thinks gold will probably settle down soon, but limited supply ensures pricing power for his products. At a show in Baltimore last month, he sold 95% of his inventory in two days. And in the past few months, he's only had three or four sellers, offering insignificant amounts. We receive no compensation for mentioning David Hall. If you'd like to contact Van, you can call David Hall Rare Coins at 1-800-759-7575.

Gold and silver are finally acting as they should. Yesterday, gold jumped 11%, its biggest one-day jump in 26 years. The precious metal is up another 6% today to $902 an ounce. Silver gained 9% to $12.75 an ounce.

Aside from the pure fear, gold may also be responding to the Federal Reserve's most recent actions. Last night, the Fed pumped $180 billion into the global banking system via agreements called "swaps." The Fed sends dollars to international banks, which lend them out for collateral, then send the Fed euros, for which there's less demand.

One question about the Fed's actions last night: Don't these other countries already own trillions of U.S. dollars? Why do they need more? Aren't they running surpluses?

Speaking of the kind of world-dominating businesses I think you should own now, Dividend Grabber pick Kraft (KFT) replaced insurer AIG in the Dow Jones Industrial Average. Shares gained 3.3%. Readers are up about 10% on Goldsmith's recommendation. Click here to learn about the Dividend Grabber.

While making 10% this year might not sound like much, consider the alternative... Lehman CEO Dick Fuld owned stock and options worth almost $1.2 billion last year. After his firm's bankruptcy, he sold his 2.88 million shares for 16 cents to 30 cents apiece, netting less than $500,000. If you're buying Goldman, Morgan Stanley, Wachovia, WaMu, Citi... or any other financial stock with an indecipherable balance sheet, you may wish to rethink that decision.

We're from the government, and we're here to help. Bloomberg reports the SEC "may require hedge funds to disclose their short-sale positions and plans to subpoena the funds for their communication records." SEC Chairman Christopher Cox said today hedge funds and investors managing more than $100 million should be "required to promptly begin public reporting of their daily short positions." The SEC will get "disclosure from significant hedge funds," regarding "past trading positions in specific securities," Cox said.

Legislators, like Senate Banking Committee Chairman Christopher Dodd, and regulators say short sellers may have contributed to a market crisis by spreading false information and using abusive tactics to attack companies. London's version of the SEC, the FSA, has banned all short selling in all financials until January 16, 2009. 

I wonder what the FSA and SEC will do about the much more pervasive problem in the stock market... bull raiders. Just think of all those people on the other side of those short trades, buying and buying and buying. And what about the gold bull raiders? They've colluded to shove the yellow metal's price up more than $100 in the last two days. Who's going to look into that crime?

Advertisement

Don't think we're the only country enjoying financial-merger madness. Today, U.K. bank Lloyds TSB Group agreed to buy Britain's largest mortgage lender, HBOS, for $22.2 billion. The offer is 58% higher than HBOS's close price yesterday. HBOS CEO Andy Hornby said of the deal, "We don't see the current turmoil as temporary. We believe the dislocation in the markets will be with us for some time." Maybe so, but in the long run, it's all temporary.

New highs: none.

If you'd like to complain about my "ranting" and tell us you're going to cancel your subscription if we don't stop getting it right, drop us a line at feedback@stansberryresearch.com.

"Stop telling the truth!!! Reading a NY Times or AP article is so much easier and reassuring than YOUR truth. Really, the nerve of you people to actually put forth an opinion based upon your experience and understanding of the world we live in via this free publication. I just can't handle the truth, or anything that I do not agree with for that matter. Who ever learned anything from listening to someone elses point of view anyway. Keep up with your rants and tirades and just maybe you will scare away the pansies and we can all be pirates again. What happens to all the collateral (mortgages,ect) that failed IB's, CB's, and AIG give to the Fed in return for liquidity? Obviously, we the tax payer get to buy them back, but does the Treasury or The Fed own it? Is it like what Ben Franklin once said; 'If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations which grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.' By the way, it seems as if Jeff's canary got eaten by a fat cat who needs to be chased by Dan's dog on the treadmill." – Paid-up subscriber Byron

Ferris comment: So far, you're the only one encouraging us to keep up with "rants and tirades." Thanks for that, though even I recognize there are limits. As for the collateral question, the Fed can hold onto anything it wants because it holds a monopoly on money creation and therefore can never go bankrupt.

Good Franklin quote. It started in 1913, and it's falling apart, decade by decade.

"I know everyone is worried to death about their investments and possibly rightfully so but I would like to say you and your staff have done a wonderful job of warning us of all of this mess. I would give you a pat on the back if I hadn't lost both arms in my more speculative trades. Oh well live and learn. Thanks." – Paid-up subscriber Dan

"I don't have a financial background and in fact, would be lumped in as a Joe Sixpack. But I have real world life experience. I started feeling funny about the way things were going in 2004. My brother and I started putting what otherwise would have been savings into metal instead. I sold my house in 2006, bought gold with the proceeds and have been renting. I then took a big leap for me and actually spent the big money to buy investment advice like yours. I really don't have a grasp of the covered call stuff so I use options and do put and calls on the various recommendations. I have a lot of money on various financial puts. I have lost profit on Merrill and Lehman puts due to getting out early for fear the Government would change the rules. What I really need to know from you guys is with all the talk concerning intervention on short selling, what, if any, impact that will have on put options?" – Paid-up subscriber Dan B.

Ferris comment: First, let me say, "Well played, sir." As far as the put options go, I don't know. However, it does appear to me that the SEC's focus right now is on punishing and inhibiting so-called "bear raiders." That's a bunch of short sellers who all short one stock, so it falls dramatically. I wonder if they'll go after all those bull raiders out there, too. They're obviously in collusion when they all buy the same stocks... right?

"I'm glad that I'm not the only one who is getting fed up with the nonstop barrage of negativity regarding our economic situation and countries (Amerika}, problems. Gene Szaj was correct in his assessment of The Daily Reckoning and where your letter has been heading with the constant negative editorials. I'm sure I speak for others when I say that we don't mind the facts being pointed out (after all ignorance is not bliss), but let's offer positive solutions and not become cheerleaders of doom just because we can revel in our rightness. Thanks Porter for recognizing his point. I look forward to changes and your teams continued insights." – Paid-up subscriber Rob Hickman

Regards,

Dan Ferris
Medford, Oregon
September 18, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame