Who will bail out Uncle Sam?... Regions soars... Goldman and Merrill switch regulators... More companies you can't short... GM grabs its credit line... Calling a bottom in Microsoft... We lied, again...

In the midst of this orgy of bailouts, I'd like to pause, briefly, to point out the obvious.

Since 2000, our national debt has roughly doubled. Following the ongoing financial bailout, the federal government will have borrowed $10 trillion, mostly from foreign lenders. That's roughly $100,000 per family. And that doesn't include any of the future promises to pay for Medicare and Social Security. The money for that will begin to come out of the Treasury's general fund in about 10 more years.

We wrote it, did you buy it?

Brian Heyliger told his Inside Strategist readers to close out their Regions Financial (RF) trade on Friday. Subscribers made as much as 80% in less than two weeks.

Over the weekend, the SEC allowed Goldman Sachs and Morgan Stanley, the last-standing Wall Street investment banks, to convert from securities firms (regulated by the SEC) to deposit-taking lenders (regulated by the Fed). As bank holding companies, Goldman and Morgan will be forced to drastically reduce leverage and instead raise capital through retail deposits.

The move raises two interesting questions. First, who in his right mind would put his savings in either of these banks? And second, what will the Fed's banking regulators say about Goldman's accounting?

As I've pointed out repeatedly, Goldman's trading activities have burned through a tremendous amount of cash, funded by huge and ever-increasing amounts of borrowed money. And while the firm has reported profits year after year, its cash-flow statements show only soaring losses.

The government also widened the scope of its $700 billion bailout from solely mortgage-related securities to all "troubled assets." In addition to owning the vast majority of U.S. mortgages, the government will now take car and student loans, credit-card debt, and whatever else it deems "troubled" onto its balance sheet. Of course, this will cost far more than $700 billion – and it relieves companies of any accountability for their loose lending standards.

Finally, the SEC added another 30 companies with significant financial-service operations to the "do not short" list. The list includes General Motors, General Electric, and American Express.

Just after the SEC added GM to the no-short list, the company withdrew $3.5 billion from its existing credit facility. Of course, GM didn't borrow the money because it desperately needs cash – the company currently burns through $1.2 billion a month. It viewed the loan as a "prudent" liquidity play, according to GM Treasurer Walter Borst. The company feared it may not have access to capital in the future due to the fragility of banks. GM said it needs between $11 billion and $14 billion to fund day-to-day operations. It currently has $21 billion, not including its credit facility.

In the August issue of my newsletter, PSIA, I told my subscribers Microsoft (MSFT) was my No. 1 recommendation. I said they should establish a double position (8% of their portfolio) in the stock, if they could get shares around $25.

Over the last year, Microsoft earned $21 billion in cash! That's up 23% from last year's $17 billion. Very few American companies, outside the energy complex, have had a better 2008. And Microsoft doesn't deal in hard assets; it sells computer software, with almost zero marginal unit cost. Thus, Microsoft is one of the most extraordinarily capital-efficient businesses in history. It only spent $3.4 billion on capital expenditures last year, about 5% of revenues.

Where did the money go? Back to shareholders. It used more than $12.5 billion to buy back stock, and bring the three-year total spent on share repurchase to $60 billion. That's roughly 25% of the company's entire market capitalization (the total value of all its shares outstanding). Microsoft is going private at about a 12-year pace. It's also spent $11 billion on cash dividends over the period.

Looking only at the numbers, I would expect this company to be worth at least 20 times free cash flow, or about $360 billion. Today, Microsoft is trading for $235 billion. In other words, I believe the stock is worth at least 50% more than the market. With more than $40 billion in cash on its balance sheet, I believe Microsoft will either expand its share buyback program aggressively or launch another tender offer for its shares. While it's frustrating for long-time investors to see their investment flounder, I see this lull in the stock as simply a chance to put more capital to work in a very safe, very cheap, and solidly growing business – one of the greatest businesses of all time. And it's hard to be upset about that.

Microsoft, at current prices, is my strongest buy recommendation. I wouldn't hesitate to establish a double position (8% of your portfolio) if you can get shares around $25.

After trading below $25 last week, Microsoft announced a $40 billion stock buyback, 17% of the company, and raised its dividend 18%. Standard & Poor's gave Microsoft its highest rating (AAA) – the first company to receive the AAA rating in a decade.

Fellow technology giant Hewlett-Packard and athletic apparel company Nike also announced huge buybacks, $8 billion and $5 billion, respectively.

With the government buying up a bunch of worthless financial assets, now is the time to buy corporate bonds. If you don't know which bonds to buy, you should be reading Mike Williams' letter, True Income. Learn more about it, here.

One correction to Friday's Digest... The correct ticker for Tom Dyson's recommended company, Oneok Partners, is OKS. We apologize for any confusion.

New highs: Park Electrochemical (PKE), Kraft (KFT), Ventas (VTR), BioMed Realty (BMR).

In the mailbag... We're lying again. That's what we do, you know. In front of tens of thousands of subscribers, we engage in a nonstop fraudulent scheme to shine you on... How have we failed you, dear subscriber? Let us know here: feedback@stansberryresearch.com.

"You pride yourself on being honest, but you are perpetuating a lie with regard to the RIG shares, currently a HOLD on the S&A Oil Report. The shares were split, or perhaps consolidated is the term – and I must admit to my shame that I did not realize it until recently – and investors basically finished up with about 70% of the number of shares they used to have. So, having bought them at $90-odd, currently trading at $120-odd we're maybe break even but probably a little down. You cannot in all conscience continue claiming a 20%+ gain on them. I'm disappointed too, but I expect you to be straight with subscribers." – Paid-up subscriber Alan Northcott

Badiali comment: After the merger with GlobalSantaFe back in November 2007, Transocean's shareholders received 0.6996 shares of the new Transocean – and $33.03 in cash. You should have a balance of cash in your account from your shares of Transocean. Our actual return on the Transocean investment is about 17%.

"I'm a new subscriber and I'm totally amazed at what Brian Heyliger's recommendation (RF) did. I've never seen anything like it. Brian I'm setting by my computer until Wednesday night. I can't find the words to thank you. Keep up the good work." – Paid-up subscriber Ralph

"I love the idea of buying some Berkshire Hathaway. Unfortunately I can't afford (1) share even if it was still at $125,000. How can we buy BRK-A without forking out that kind of money? As far as I am concerned you can keep the rants comming. I haven't seen straight shooting like that since that last time I went to the gun range. I would appreciate your ideas on how we can start changing our government to keep them from completing the melting down our wonderful country." – Paid-up subscriber Larry W.

Ferris comment: Those expensive shares are the A shares. If you can't afford one of those, take a look at the B shares. Berkshire Hathaway B shares are equal to 1/30th of an A share, and trade for around $4,500 each these days. Check them out on Yahoo Finance under the symbol BRK-B.

Though a B share carries only 1/200th the voting interest of an A share, for my purposes there's no difference. You're not buying these shares because you want to use your vote to change the business. You're buying them because, at long last, here's a company where you don't need to worry about such things.

"Many thanks to you Porter, and to all your editors who contributed to the best and safest ideas. I am familiar with several of them because they are newsletter top picks for recent months, or for September, but it is great to get a sampling from others whom I do not know. Evaluating their recommendations and watching them fulfill their expectations will be very interesting." – Paid-up subscriber Charles

Regards,

Porter Stansberry
Hatteras, North Carolina
September 22, 2008

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