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Ep 161: The Hedge Fund Mirage

Ep 161: The Hedge Fund Mirage

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Frank Curzio: How's it going out there? It's Wednesday, December 12th, and I'm Frank Curzio, your host of the S&A Investor Podcast, where I write down the headline and tell you what's really moving these markets. So I'm watching the "Fiscal Cliff Special" on CNBC on Tuesday, watching my buddy, Jim Cramer. He's in Washington interviewing senators.

I have to tell you, it's real disappointing. And I worked for Cramer for a little bit over four years; I know what he's good at and what he's not good at. I know Cramer; pretty much he's very good at being the center of attention. He's awesome on Mad Money when he's buying a sell, pressing a button, he's talking about stocks. It's fantastic; it's great.

Yeah, he's awesome in the morning, the morning shows when he's talking about stocks and the news just released. And he's talked to so many CEOs. He does so much research on all these stocks, it's great just getting his opinion. He's always – he has a photographic memory, and he remembers stuff that happened three years ago. It's amazing.

But he's terrible on things like The Apprentice, where someone else is center stage, and he's secondary where it's Donald Trump. And he was on the first few years of The Apprentice. He wasn’t on this year because he just – it just doesn't work for him. And I'm seeing him on CNBC now. And he's in Washington, and it's Tuesday and they're doing a whole special on the fiscal cliff. And I gotta tell you, it's disappointing.

You know Cramer does interviews on his show, Mad Money. They're awesome, especially when he's interviewing guys on the Wall of Shame. I mean it's great because whenever a CEO came on his show, we'd prepare questions and everything from a – as a research analyst. And we'd research the companies and everything. Of course a CEO's gonna come in and talk great about his company.

If they missed that quarter after Cramer endorsed them, he would go absolutely ballistic. It was fantastic. We used to love it. It was pretty cool. You know sometimes it's pretty cool seeing people get pissed off. I don't know, just sometimes I think that's cool. But and he'd put them on the "Wall of Shame" and he'd trash the guy, and he's terrible, he's horrible, just because he, basically told Cramer that things were great, and they really weren't and he'd go after them.

But now, I'm watching Cramer interview these senators. And some of these guys, they're congressmen. Man, forgive me for saying this, but they look like they're gonna die in six months. They can't even talk, some of these guys, they're so old. And I'm not putting them down, believe me, I'm not. I feel bad saying that. But half of them don't even know what the fiscal cliff is.

I really believe that. They just talk, "Yeah, we gotta get something settled." It's like all the Democrats going to a meeting and all the Republicans go into a meeting and say, "Okay, this is what we need." They all come out and say the same thing. "Well, we gotta get this done and we gotta get this done. And we're looking for these taxes to get cut. Entitlements, Obama doesn't want to touch this.

Republicans are like, "We're not gonna give too much to that." I'm – but serious, if I'm there asking those questions. I'm going after these idiots like crazy." That's what he should be doing. Man, he would be all over the place. Imagine he's just going after these politicians. So what's the matter with you guys? Don't you understand that you're being hired for your constituents, right? That's why you have a job.

And your constituents are saying that, "We want a deal now, and you won't give it to us." And how amazing is that? People think, "Oh, after the election we had to get this done." This started in December 2010. And that's when Obama now says – you know, he pushed back Bush tax cuts to this year, to the end of 2012. We've had all this time to discuss so many issues. And I know there's an election there and you can't do much.

But man, you guys really can't get together on something this dumb? I mean, really. People – and you say, "Well, it's dumb Frank. It's gonna affect whatever." I think Wall Street Journal put in like $450 billion, 3.5 percent a GDP. Guys, we don't – it's not a cliff. It's not a cliff. If we don't get it done on January 1st, you're not gonna see a 50 percent increase and they're not gonna take 50 percent more of your salary.

That's not gonna happen. It's not a cliff. It's not Y2K; you're gonna die if this happens. No. But man, you know you watching CNBC and they have nothing to talk about, nothing at all to talk about. Why? 'Cause the earning season's over with. We had the jobs report last week. There's no economic data on slate for Tuesday, right. So they're like, "Yeah, Tuesday's great. Let’s just dedicate it. We'll send Cramer out there to interview people."

And he's throwing them softball questions. "Will you veto this bill, Mr. Corker? What do you think about the –" come on Cramer, go after these guys, man. And you're in Washington talking to these guys. The whole world hates politicians 'cause they can't get together. Go after them. That's what we want. Pretend these guys are on your Wall of Shame.

When I worked for Cramer, Cramer used to have the Wall of Shame. It was great. Every CEO they used to talk to – of course the CEOs are on Mad Money and they'd say, "Cramer, my stocks are great. Things are great right now." And if they missed that quarter, forget it, Cramer used to go nuts. It was fantastic. And I like when people get pissed off sometimes, and it was really funny.

You know he put them on a Wall of Shame and that was it, for two months, three months to the next big quarter. He'd rip these guys apart. He hated people going on the show, telling them – even analyst. If an analyst gave him stocks and said, "Listen, I like this," and he did that research and it didn't meet those estimates, or the stock happened to crash, he'd go ballistic. He'd go crazy.

Man, this whole fiscal cliff thing, it's like – yeah, and it's our fault because they make us so concerned with it. And people watch this stuff. That's why the Wall Street Journal is dedicating a section to it. That's why CNBC has a clock, 19 days left. I mean, really, anybody just sick of this fiscal cliff stuff already? Let's get on with it, get on with it.

We all know it has to be solved. It's not really that difficult, really. I mean each party doesn't want to concede so much. That's why you don't – it seems weak. Just get together. That's what everybody wants. Just get together, get this over with. I hate ranting about this, but man. But I mean I wish there was some crazy news today and we could trade off it. But it's all about the fiscal cliff. It's unbelievable.

I don't know about you, but I am totally sick of it. But man, Cramer, come on. Get in there. Ask those crazy questions. I know you got it in you. Anyway, I'm not picking on Cramer. You know I love him. He gave me a good – I wouldn't say he gave me my start. But, yeah, he definitely benefited my career. I like him. I just wish that if you're gonna go to Washington, I wouldn't send Cramer. I just don't think that's his strength.

I think he's better off just being on CNBC, talking about stocks and going crazy and CEOs and stuff. When it comes to the politicians, I was just surprised. I thought he'd ask somewhat tough questions, but you know, again. Sorry to rant about this. Just sick of the fiscal cliff. And, really, it's doing nobody, nobody any good. It doesn't do anything with trading stocks or make you smarter, educate you. It's just all B.S. and, yeah, I'm just getting sick of it.

Anyway, I have a great podcast for you today. My guest is Simon Lack, author, managing partner at SL Advisors, J.P. Morgan for over two decades trading income derivatives with foreign exchange. He's been everywhere, quoted everywhere, Wall Street Journal, Financial Times, Economist¸ on CNBC, Fox Business, you name it. Most of my guests are in the media a lot, which is pretty cool.

He's gonna talk about interest rates being too low, why he likes equities over bonds, how investors can manage their risk heading into the fiscal cliff. But Simon also wrote a fantastic book we're gonna talk about, basically, blowing up the hedge fund industry. I love it. Great conversation; it's gonna be about a 15, 20-minute deal. Awesome. Simon's a great guest, real smart. You'll see.

Next, gonna break down the markets. You see more good economic data outta China, right. My favorite piece of data, electricity output rose 8 percent year over year. That's a crazy statistic. Anyway, that's the economic bellwether. It's saying that the economy's doing good. More people are using electricity. Hong Kong Index trading at 16 year high. Good news for commodities, right. We should be having a decent week.

Overall, stocks have been having a decent week. I didn't see huge, huge moves, but it's been up, what, four or five straight days. And I'll just touch up on the fiscal cliff mess again. I hate talking about this. I just went over this whole rant. But it is impacting stocks and will continue to do so until we get a deal in writing. And he's gonna tell you just how to trade around it a little bit, be safe.

If we don't get any resolve on the issues, stocks may get hit a little bit. But I think we'll finally come out with something. It's just frustrating that this has been going on for so long. We're gonna talk about oil as well, talk about that great interview with Matt Badiali last week. A lot of people are subscribing to his newsletter. $39.00 for the year, guys. If you want that deal, fcurzio@Stansberryresearch.com. Last time I'm gonna mention it.

And Matt writes their Resource Report. But he sent me an interesting note about the Bakken, major discovery there, a major discovery. And I'm gonna read that note to you, for it's very good news. Ah, I wouldn't say good news, but it's huge news for people who are "We're short oil." I think it's actually good news, but a basically new discovery.

I'm gonna read that e mail that he sent me. He told me he wants me to read it on the air. And I'll also take some of your questions today. We got a good podcast altogether, right. Those plantar fasciitis questions, a ton of feedback on this, including one guy who said, he told me, "Stop bitching, Frank. You're 40-years old. Stop complaining. I never seen someone complain so much."

Maybe you're right. I just – it is painful. I got about 50 e mails, people who have the same problem. They're like, "It's the worst pain ever." It is, yeah. I'll stop bitching, though, you're right. Also, I'm gonna talk Apple, what to do now with the stock. I went to listen to the conference calls, tax selling, great questions this week, guys. fcurzio@stansberryresearch.com.

I'm gonna start doing the question segment almost every podcast. So just send me any questions, comments, feedback, whatever you want. I'm getting so many, so many good questions; it almost makes sense to do a Q&A segment on every single podcast. So send them in. Again, fcurzio@stansberryresearch.com.

And, finally, guys, it could be one of my most important and best educational segments, and I don't say that often. And what I'm about to tell you, it's gonna change the way you think about large cap stocks forever. I know a lot of you guys own those McDonald's, Coca Colas, which we're gonna talk about in an interview with Simon.

I'm gonna make a case why there's a much better alternative than these large cap stocks, buying them right now. A real case – I've been doing a lot of research on this the past two weeks. I haven't seen anybody talking about this. It's gonna be a fantastic – I can tell you, one of the best educational segments. You'll hear it towards the end of the show.

But first, let's get to my interview with Simon Lack, and here he is. I want to welcome first-time guest, Simon Lack, to the S&A Investor Podcast. He's managing partner at S.L. Advisors, also author, over 20-year veteran of the markets and has been quoted at almost every financial media outlet that you could possibly think of. Simon, I want to thank you for being on SA Investor Podcast.

Simon Lack: Frank, thanks for having me on.

Frank Curzio: I'm real excited about this interview. First of all, I want to go over – I want to start with the author part. You recently wrote a book, The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True. I want you to explain your book a little bit 'cause I want to follow up with, but why don't we start there.

Simon Lack: Well, you know I spent many years as a hedge fund investor. And the last seven or eight years I was doing that, we were investing in the business of hedge funds. So we would provide feed capital to new hedge funds and we'd get a piece of the business, because we understood that investing in the business of hedge funds was better than being a client of the hedge fund.

Then when I left J.P. Morgan in 2009, I sat down and did the math, and I found out that in spite of the fact the hedge funds have a great reputation for being profitable and making lots of money for investors. If you do the calculations, it turns out that all of the money ever invested in hedge funds would have been better off in treasury bills.

And it's quite a shocking result, but it's what happens when all of the good returns are generated with not many clients. And so in the '90s, hedge funds were great and the investors did really well. There just weren't that many investors. And success breeds copycats and follow-ons. And as all the money flowed in, the returns went down.

And so, in 2008, for example, the hedge fund industry lost all of the profits they'd ever made in history for their clients. And so, it's really the industry is overcapitalized. So it's a controversial view, but the math is what the math is, and nobody had told the story. I was in a position to tell the story because of my background and so I thought it would be fun to write about it.

Frank Curzio: Did you lose a lot of friends when you told this story?

Simon Lack: You know it's surprising. Most people say that to me. But to the credit of most people in the hedge fund industry, they're a pretty open-minded bunch and a fairly intelligent group of people. And so not everybody agrees with me, but I honestly speak at hedge fund industry conferences fairly regularly.

In fact, I'm gonna be at the GAIM Conference in Boca Raton in January. I'm giving the keynote address there, talk about my book. And probably once a month I give some sort of presentation. And so, no, you'd be surprised. I probably have more friends in the hedge fund than I used to have.

Frank Curzio: Pretty cool. Well, let's talk about the hedge fund business today. I don't know if it's a coincidence, and I don't want to be skeptical here. But over the past couple of years, you've seen hedge fund performance really come down. It hasn’t been that good, and they complain in the markets.

But is it a coincidence that we're seeing Roger Nachman, whatever his name is. He came out and, basically, got caught insider trading. And now, we're seeing insider trading pros like crazy all through the hedge fund industry. Does this have a lot to do with returns or just a coincidence, or why are hedge funds actually underperforming over the past year, two years, all of a sudden?

Simon Lack: I think it's the size of the industry. A lot of hedge fund strategies rely on arbitrage. They rely on inefficiencies in the market and being to exploit those. And so, that by definition, inefficiencies are limited, right. The world is not completely inefficient. And so, as you had assets go over $2 trillion, there's just only so many efficiencies and mispricings for hedge funds to exploit.

And that's why they’ve been increasingly trying to find the market and just go along when it's going up and short when it's going down, and that's really why it hasn’t been working. But, fundamentally, the hedge fund industry's overcapitalized. That's really what people are wrestling with today.

Frank Curzio: Well, talk a little bit more about the hedge fund industry in terms of maybe asset allocation. A lot of hedge funds that I know are just in Europe like crazy. The banks had to dump a lot of assets because of new regulation, and a lot of the hedge funds are able to go out there and buy assets for pennies on the dollar all because it was almost forced selling like it was in 2009.

Are you seeing that among a lot of hedge funds? Or are hedge funds going more into bonds here? And what's going on with the equity story? If you could, just talk about the allocation of what you're hearing out there with hedge funds.

Simon Lack: Well, it's extremely varied. I mean there's many thousands of hedge funds, and I think that the most successful managers are those who have the flexibility to go to where they see the opportunities. So there may very well be some great opportunities in Europe with banks having to shrink their balance sheets and sell off assets. And so I wouldn't be at all surprised if the hedge funds that are in those areas are doing really well.

And, in fact, they were, of course, great hedge funds and they were happy clients. It's just that the aggregate result haven't been known. So the people I know who were happiest with their hedge fund investments don't have that many. They just have two or three hedge funds where picked them and really sort of stuck with them and had some good insights.

You know in terms of equities, yes, of course, since 2008, everything has been driven by macro issues, whether it’s the Euro crisis and, more recently, the fiscal cliff here, the debt ceiling a year ago. And that tends to make stocks all move up and down together, which if you're trying to figure whether one's gonna outperform another, it makes it harder to make money from that. But I think that's just a manifestation of the fact that's there's too much money in the hedge fund industry to begin with, looking for good returns.

Frank Curzio: That makes sense. Well, today, you're a managing partner at SL Advisors. What are you doing with your cash today? So we hear how much everyone hates stocks and equities. What are you doing with your cash today? Are you seeing some inefficiencies in the market today where you can just say, "What, it's a good time to buy stocks because it seems like –" it doesn't seem like, but even if you're looking at sentiment indicators, there's a lot of people out there, they just don't trust the stocks right now. I would think that would have to be an advantage, right.

Simon Lack: Yeah. I mean people are very nervous about stocks. There was actually an article in the Wall Street Journal on Tuesday talking about that. So what we do is we don't run a hedge fund, first of all because, obviously, that would not be so cool having written that book. But what we do do is we focus on investment strategies that generate income, but without using bonds.

Because, really, the big issue today for every investor is that bond deals are too low. The returns are negative after inflation and taxes. And so how do you generate income in a world where it's government policy to keep rates so low that, in effect, there's a wealth transfer going on from savers to borrowers. And so we invest in different strategies to do that.

We invest in high-dividend yielding stocks, so portfolios of stocks that have very, very long histories of stable dividend growth, household names, like Proctor & Gamble and Johnson & Johnson and ADP and McDonald's and Coca Cola, companies that you won't wake up tomorrow and say, "Boy, what have these guys done? I'm nervous about them."

So we invest in portfolios like that. In some cases, we run it with an equity market hedge on top to take out a lot of the equity market volatility. We also run a strategy that invests in Master Limited Partnerships, which are a terrific asset class for high network investors looking for 5 to 6 percent yield with distribution growth built in.

You know it's the sector that's generated, historically, are the 10 percent annual returns. You get a K-1, not a 1099, so it's only for people who either do their own taxes comfortably or have tax accountant who's gonna process them. But, in my experience, the K-1s are well worth it. So that's what we really do. I think that the equities absolutely should be part of everyone's portfolio.

In fact, I really think that everybody should look at fixed income and bring down their fixed income allocation as low as they reasonably can. And we don't have – I purposely don't have any money in corporate bonds because I think bonds are just guaranteed to return less than inflation over the long run.

Frank Curzio: We're [break in audio] talking to Simon Lack, managing partner at SL Advisors. I want to get a little bit more into the strategy that you're using right now, where you said, "Okay, we like to buy stocks where you go sleep at night, McDonald's –" and even if that's Coca Cola. But it seems like, especially over the last couple of years, there's been a mad rush into a lot of these stocks.

I think McDonald's, outside of this year, the previous two years, I think was the best Dow performer, up over 100 percent. But if you're looking at the fundamentals of these stocks, you're seeing that McDonald's is trading at probably 7 times forward earnings, Coca Cola, 16 times forward earnings. Do you see a shift, maybe, out of these stocks into – you mentioned MLPs, which is a good strategy.

But, are you seeing, maybe, a switch or a future switch out of these large cap stocks into maybe something – another area of dividend paying, maybe into smaller caps that have been paying – have a history of paying dividends over 10, 20 years that also provide that 4 percent, 3 percent yield. Because it seems like these stocks, buying them today, are a little expensive now that they went up so much.

Simon Lack: There's some of that, but if you look over the long run, stable stocks, they have a beta less than 1. So, in other words, to convert their financial math, stocks have less volatilities in the market, seem to outperform the market over time, and so there's an additional reason to invest in those. And you know there's a great statistic, which is that given where bond deals are today, if you had $100.00 invested in ten-year treasuries, they yield about 1.6 percent.

You take the $100.00 data of those ten-year treasuries, you only need to invest $22.00 in stocks which currently yield around 2 percent, and you take that 2 percent yield, which is, of course, above the yield on the ten-year treasury, 4 percent annual dividend growth. And $22.00 you've invested in stocks will get you the same return as the $100.00 in ten-year treasuries after tax. You've got $78.00 left over which you can just put under the mattress or put it in treasury bills.

And so you can sorta create your own bond portfolio, using a combination of equities and cash that has, really, I think, much less downside risk. I mean as stocks go down 50 percent, your sort of homemade bond portfolio with $22.00 in stocks. You'll lose $11.00 and you don't have to sell that anyway. You'll have lost 11 percent. If treasury yields move up about 1.25 points, you’ll lose 11 percent on your bond portfolio.

So the way to look at stocks is in combination with cash, which obviously doesn't earn money, but it gives you risk-taking capacity on the equity side. And so that's really how we look at that. So big caps like McDonald's and Coca Cola and so on, will – and IBM – they may move in and out of favor with resale investors.

But, over the long run, these are companies that have very long histories of repeatable earnings, open high returns, and equity. And so I think that, as an investor, as opposed to somebody who's looking to trade back and forth into the hot idea, as an investor, I think it's absolutely the place for people to be.

Frank Curzio: Well said. I like the way you put everything in perspective there about holding things long term. Now, I want to talk to you something about short term. Where we have this fiscal cliff coming. CNBC actually has a countdown now; Wall Street Journal has a little part dedicated just to –

Simon Lack: Yeah, yeah.

Frank Curzio: Are you concerned about this, because people believe it's actually a cliff. If it doesn't happen, everyone's [break in audio] 50 percent of their paycheck [break in audio] which is not the case. But we really want to see this resolved. Are you setting up your portfolios, doing [break in audio] your strategies, are you worried about the fiscal cliff at all?

Simon Lack: I mean it's a big issue. What are we doing – we have just a little bit more cash, perhaps, than we might otherwise have. Mostly that's because names that we are and have hit price targets and we've sold, so we're not sort of out of the market because of that. It's a slope, not a cliff. I mean, of course, they will ultimately resolve it. It many run into January. It is affecting GDP today. And that was one of the reasons that we found ourselves selling certain things.

There's so many companies are providing guidance that's a little bit more cautious. It's certainly affecting investing decisions. I think the way it gets resolved is they'll do a deal, they'll, obviously, raise taxes on the top 2 percent, maybe a little bit of a [break in audio].

So they'll have some spending cuts so they can show they're doing something, and then there'll be a big commitment to do more in the future. And I'm actually not that optimistic that you're gonna see substantial changes in the long-term budget outlook in the U.S. 'Cause, honestly, people – if you look at voters and opinion polls, we're all worried about the deficit, but nobody wants to see cuts in entitlements or tax increases to resolve that.

And you don't have the potential for interest rates to fall further and offset the effect of any further sort of fiscal drag that may come from more austerity. So, when Clinton was president and he raised taxes to reduce the deficit, bond yields came down. They're really not gonna come down from this point. So I think that we'll dodge the cliff; they'll resolve it. I wouldn't expect any sort of substantial revisions for the long-term fiscal outlook for the U.S. though.

Frank Curzio: And I want to end with this, which I'm interested in. In your macro outlook for, say 2013, do you think that we're going to see strong GDP growth? Do you see interest rates rising? I mean, eventually, they are gonna rise, but a lot of people who were predicting that in 2012 are not seeing it.

Now, it seems like the feds are doing everything they can to keep them as low as they can through 2014. But it seems like 2013 is gonna be a real critical year. Do you think we're gonna see a good year for U.S. or are you worried? You see recession possibilities, a lot of fear in the marketplace? What do you see for 2013?

Simon Lack: I'm basically an optimist. I think GDP growth will probably be 2 percent. As a risk, it could be a little bit lower than that. I don't think you'll see a big spike in interest rates. I think the feds are just gonna keep rates as low as they are now for the foreseeable future. I think that there's always the risk that rates drift up, but I think that you can avoid bonds just by being – just by expecting rates not to change because they're already yielding below inflation anyway.

So I think that it's never good to bet against America. I mean I'm an immigrant, you can tell, and I've been here 30 years. It's always been right to bet on America succeeding. And so, fundamentally, that's what we do. We just do in ways that we don't borrow any money to investing companies. We invest in companies with low debt. And that way, you have the luxury of waiting things out if you get some nibs and bad news.

Frank Curzio: And the last question here. I just read something interesting, and this has been going on for a long time, 'cause you say you invest in companies with little debt. What about the cash concerns where we see a record amount of cash on the balance sheets, but you're seeing a lot of that cash overseas?

Does that influence any of your trading strategies where – Apple, it seems like they're gonna make an acquisition – what is it, 70 percent of their cash is overseas, it seems like they'll have to do it overseas. Or if they bring it here, they're gonna get taxed. Does that factor into anything? Or do you think there's gonna be a situation where they're able to, basically, bring these taxes in and maybe get a tax break later on? 'Cause I think that could be a huge catalyst for stocks.

Simon Lack: Yeah, you care a lot about how much cash a company has on the balance sheet and, clearly, what they're gonna do with it. I think that if Microsoft paid a special dividend or returned some of that cash that they have, people would be less concerned about another big acquisition. Yeah, you care – are they gonna overpay for some diluted acquisition or are they actually gonna return it to investors.

I think that many companies who have cash overseas are waiting to see some better tax environment to bring that back. And, probably, there will be some sort of tax repatriation ¬¬deal to do that. So I think that it's – your companies have more cash than they probably need. But a lot of it is waiting on the sides for some tax resolution.

Frank Curzio: Well, Simon, I guess we'll leave it there. Great interview. I could talk to you all day. I really enjoyed it. Anybody out there, definitely pick up his book. It's interesting. The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True. Simon, I want to thank you for being on this show. I learned a lot today and, hopefully, you'll join us again soon.

Simon Lack: I'd love to. Frank, thanks for your time. You take care now.

Frank Curzio: Take care. All right, great stuff from Simon. Smart guy, real smart guy. I love the fact that, yeah, he's been around the hedge fund industry all of his life, telling you, "Hey, those 20 percent fees add up, especially when you have a year like 2008." Definitely I'm gonna purchase his book and read it.

I think it's just this is the first time I actually looked at it and it's the first time I actually met Simon. I saw that I was gonna interview him, I did some research on him. I was like, "Wow, this guy seems pretty cool." I thought he was cool, but tell me what you think.

Again, send those responses at fcurzio@stansberryresearch.com; send us feedbacks. The podcast is about you. I send that feedback back to Simon and Simon will definitely come on again, if you want to hear some questions, what he wants to say again. I could've talked to him all day, just love learning more about the hedge fund industry from an insider. So it was a pretty cool interview, I thought.

Anyway, let's get to the markets. So some positive news out of China. Shanghai Index, what, at a four-week high; strong retail data; autrisity uses – which is an economic bellwether, positive. Also factory output positive. And I sense in the past – I don't see China getting much worse, when you put things in perspective.

Yeah, even the biggest bears on China, I can't see people – I'd love to get Chanos and see what he says on China. He's probably still crazy – I don't know if he's crazy short of taking profits here. But you look at 7.5 percent growth. It's down from 12 percent. Hey, we're not talking about stops, we're not talking about earnings. We're talking about GDP, and it's down from 12 percent in just two years. That's a massive, massive decline.

And if you think about it –the U.S. is growing what – 2 percent, 3 percent. China's had nearly 5 percent decline in GDP in two years, guys. That's a massive, massive move. You really think if they go 6 percent it's almost like a recession for them. You know they're gonna do everything in their power to stimulate the economy. Maybe that's not good, maybe it's terrible. Who knows?

I'm not debating the ethics of them stimulating the economy. I'm saying that they're gonna do everything they can to prop up GDP, which is gonna be good for mining stocks and growth in general. And that's the growth engine of the world, China, right. It's been slowed down like crazy. And you look in FXI since September. It's up over 20 percent. That's the ETF, the 25 largest companies in China.

I was telling you guys last week and the week before, that's the way to play it. Don't go into China. Again, it's very difficult, individual stocks which is small caps. I'll never touch a small cap China stock again. But those are the 25 largest companies in a ETF, and that thing's ramping right now. We've seen a huge move. I wouldn't tell you to buy it now. It's up nicely.

And ETF, 20 percent move's a big deal. I'm just – you know, a stock pick here with good earnings that can go a lot higher. Mayer it does go higher, but it's definitely trending higher. And turning to the fiscal cliff, again, I had a big rant on it. I don't get it sometimes, the politicians – they're voted in by their constituents. We all know taxes are gonna be raised.

We all want a solution, yet our politicians are still fighting. They're not doing what their constituents want. Just get it done already. Man, get the deal done. And get something on paper. Even, the biggest companies in the world support the GOP are expecting much higher taxes. They just want something in writing already.

But, again, it's just a bunch of idiots. I can't even listen to a politician on CNBC anymore. I just can't. I can't even – as soon as he speaks, I get disgusted. I want to reach out and strangle the guy. I can't even listen to them anymore. Just don't go on CNBC interview. Stay in the room and solve the problems. Stop getting your press time and your air, getting your name out there. Just shut up.

Nobody wants to hear from you. We all want to hear a solution. That's it, stop doing the interviews. Anyway, just stocks, I tell you, I continue to see amazing deals in the small cap space. And when you talk to Simon about inefficiencies, it's quite amazing. Just so many inefficiencies and maybe you're seeing the hedge funds and people are saying, "Well, you know hedge funds are coming out. A lot of money's coming out of stocks. _________ tax selling. I don't believe them.

Yeah, there's always good Decembers, right. It's just a bad December. It was tax-loss selling. I don't know. I just don't agree with that. It may be a little bit, but not to the point where it's crazy. I think maybe hedge funds are just – they had a bad year, maybe they're preparing for redemptions. Again, people don't know that they had a bad year till they get their statements, till they send out those letters.

And when they do, they're like, "Wow, the markets up and you're getting killed this year. You underperformed by 7 percent, and I'm paying you 20 percent fees. Is that crazy?" You saw Simon how – you know, those fees. And after fees, you're making no money in hedge funds. I mean they're making a fortune off of you. So, again, you might see a lot of redemptions there.

Maybe they just want their stocks to have that cash so that they're not forced to sell. But, either way, it's creating so many opportunities in small cap stocks. I couldn't believe it. If I didn't look – and I just looked at the fundamentals – and I'd see that the stock – I'd be like, "Wow, the stock should be trading at a certain level."

And it's trading a 30 percent discount to where I think it would be. And just like I'm looking at a football spread, and before I look at the spread of the game, I'm looking at, say the Patriots just blew out the Houston Texans. And before the game starts, I'm like, "Wow, I betcha the Patriots are favored by 4 points and some." And it turns out they were favored by 5. But it’s almost like you look and the Patriots are favored by 35 points.

I'm like, "Wow, this is crazy. How'd it happen? Even though they did win by 35 points." But the point is, there's just there's a lot of inefficiencies I'm seeing, and we're enjoying it, man. The last six months have been really cool for my newsletters and just great – a lot of great ideas, which is a lot of fun right now, so it's just a pretty cool time for small caps. And I'm enjoying it.

Again, I'm seeing a lot of ideas. And I think, guys, if you're interested in small caps – even if you're not interested in mine – find yourself a small cap newsletter writer and I'd go out there and definitely look at this sector, because I'm gonna over it in my educational segment. I'm telling you, I'd rather be in small caps than large caps right now, and you'll see the stats in my educational segment.

I want to bring up one note from Matt Badiali, which he sent me. He's talking about oil. He was on last week. He's the editor for the S&A Resource Report. The Continental Resources – I don't know if you heard of that company, guys, a premier player in the Bakken. So they just completed successful well into the third bench of the shale called the Three Forks, which is part of the total Bakken Shale.

Now, this is what Matt says about it. He says, "Bakken is actually a layered series of shales, and the third bench is deeper than the others. The well went down two miles and then ran horizontally for nearly another two miles." Guys, that's incredible. I mean it's like drilling down 35 football fields and then drilling 35 football fields horizontally. It's insane.

And I saw this technology, and they're just starting to drill two miles down because they're able – not only are they drilling that far, they're able to pinpoint where the oil is, which is astonishing. So he said, "It came in strong, producing about 950 barrels of oil per day." And he says – just bear with me with the stats here.

If we do some simple math, assuming it keeps $60.00 per barrel after producing and shipping costs, this well gushes about $60,000.00 per day, over $10 million in the first six months, but it's production will probably decline, so they'll only produce about $15 million or so in the well in the first year. Okay, throwing a lot of numbers out to you. Not really too important, the numbers.

But, more important, he says, "The third bench, it wasn’t even part of the oil estimate for the Bakken. So the success of this well just opened up a whole new area Bakken." It's not even in the fact of their estimates. So you're seeing this produce more oil than we ever did in 15-year highs. And we're still finding oil in new places.

We're not drilling two miles down yet. Only in a couple of places. In the Cline shale and in Utica, I believe. And now, in the Bakken. So we're seeing us drill deeper and deeper, but the technology's telling us exactly where the oil is. Guys, it's just amazing. Imagine drilling two miles down. Forget it, the peak oil theory is gone, it's gone.

So it's just amazing that we still continue to discover oil. There's a lot of new shale areas. I thought – I want to thank Matt for sending that note. But it doesn't bode well for oil prices. But, if you notice, oil price is coming down, right. And the market's doing pretty good. Usually, the market follows oil prices. You see the market come down, oil prices come down, usually correlate. They're not, and I expect that to continue.

I think oil price is gonna come down and it's be really good for the economy. People always say that, but it's not necessarily good for stocks. You know, see oil prices come down, stocks usually get nailed. It's not the case right now. You're seeing that disconnect. Oil is coming down. It's good for businesses, good for everybody. It's just interesting. Also, very, very good for our economy.

So we're gonna continue to see that happen. And, again, I think we'll see $70.00 a barrel not too long from now. I don't think we'll go under $60.00 because they can't really produce under $60.00 in the Bakken and in the Eagle Ford. But I think we will see $70.00 pretty soon. Now, I want to take some of your questions. Again, I'm gonna have a Q&A in every podcast. So you can send me questions. fcurzio@stansberryresearch.com.

Let's start with Alex. Alex says, "I have plantar fasciitis ten years or so. Worst pain I've ever had. And I've been shot." That's what he said. It's funny because I actually mentioned that. I said that last podcast. He goes, "I had the shots, the shoe inserts, the stretching exercises, the works. Didn't have the pull-back socks at that point, so I haven't tried them."

He says, "M recommendation: Take a good hard look at your shoes. Every pair, make they're designed how your feet are actually built. Every shoe company makes different assumptions about the average foot. Some shoes simply are not made for your foot." And he's exactly right. But it's definitely better now. It's just my back is still killing me, which I'm not complaining. I don't want to get any e mails.

I really got like 50 people e mailing me that they had same as me, plantar fasciitis. But the reason why I pulled this question. He says, "But I really wanted to write about. And it's the bigger question, but I gotta throw it at you." He goes, "Anyway, you will frequently refer to things you've learned along the way. My hunch is that you are still learning and you are still along the way.

"So when do you know you've learned something? When do you realize that you've learned a lesson? When do you recognize – utilize this new wisdom? Does it have to gel? Does it happen immediately with big losses or you're getting gains? I'd be curious to get your thoughts so I can apply it to my investing and my lifelong self-educating."

I have to tell you, Alex, it's a good question. I love my job because I learn something new every day in my research process. For me, it's pretty cool because in small caps and working for Cramer for such a long time, I basically research every single industry, all stocks out there, which is cool. Some people are just focused, especially sales site analysts, maybe it's just infrastructure companies with over a $5 million market cap.

Their job is to write about ten stocks all the time. They know that industry better than anybody. For me, when I write, I have to know every single industry. If I'm talking biotechs, technology, oil, shale, gas, all these industries I have to learn about, which is pretty cool.

But on a stock level, look, you always – my best feeling when I have a stock pick is when I actually pick a stock, I say something's gonna happen, and it happens and it goes up, and everybody makes money. It's great. But a lot of times, you have to be careful 'cause sometimes people, they're like, "Yeah, I'm gonna buy this stock." And it goes up for the wrong reason and they still kinda take credit for it.

It sounds weird and people are like, "Hey, I told you so." But it – for me, I like to get the whole thing right, especially with one of the biotechs I just mentioned. I saw the concerns. I told everybody, "Don't worry about these concerns. This is gonna happen," and it happened. And people are up 50 percent in three months, which is pretty cool.

On the downside, what I've learned, basically, in 2011, it's a different market. The whole market changed. You have to trade situations. If you noticed my trading style – my style this year, compared to – anyone who's been with me for the past ten years – I've done a lot of trading this year.

And we – I've booked profits like crazy because we're not in the market where stocks, you could buy them and hold them long term, and three years from now, it'd be much higher. There's massive 30, 40 percent swings in these stocks sometimes. And if you have stop losses, you're gonna get triggered. So, yeah, we were able to trade so many situations and take 30, 40 percent gains in three, four months and then buy these stocks back.

So, again, it's always a learning process and you're always gonna be humbled by your loser. You're always gonna learn much more from your loser than your winners, and you always remember your losers a lot more. At least I did, which may be wrong. Maybe I should remember my winners more.

But just make sure you understand the reason why you got it wrong. That's the most important thing, just so you don't make the same mistake twice. And that's it, which is pretty cool. So, hopefully, that answers your question.

The next question is from Mike. He said, "Frank, I'm a subscriber to your newsletter, a regular podcast listener. Based on your recent podcast, I'm interested in taking advantage of a special offer you have to Matt Badiali's Research Report." Again, Matt's selling his newsletter for a full year for $39.00. If you're interested, send me an e mail, fcurzio@stansberryresearch.com.

"Also," he says, "I hope your foot problems get much better. I turned 60 myself this year and work to keep in shape with biking, yoga, some free weights. You will learn soon that you can keep in pretty good shape, but you have to scale the intensity down a notch, just an adjustment. Do not pound your joints like you used to. Be well. Mike."

I appreciate that, too, because I'm starting to realize that where I'll get in the basketball court and I want to cover the fastest guy. And I'll just – I'll play hard and I'll play good against them. But when I get home, man, I can't even walk. So I'm at the point, at that level right now, that I have to realize I am 40.

Even when I work out, I put a 30-pound vest on and pushing a guy's F 4 pickup through his parking lot. I'm 40 now. I should be doing that at 30, so I have to take it easy. But, yeah, I appreciate that. James says, "I'm sorry I didn't get to meet you at the Alliance Conference. I have two topics off of feedback on today. I'm taking your advice and have begun a process of listening to analysts' calls."

These are conference calls, guys. "Here's some observations. One stock that was recommended from an S&A writer –" he didn't say who or what stock. But basically, he says he listened to the conference call, read the transcript. He learned a little bit from the prepared text, because you can listen to the conference call or you can read the transcript.

He goes, "I learned a bunch from the analysts' questions –" because after the analysts ask questions and then – on the conference call, which is cool. "So the biggest learning was when the CEO was, he was going to cut the dividends. When I read the transcript. I concluded that he was not going to cut."

But then James says, "When I listened to him, I knew he was gonna cut because he's a former CEO, he knew the CEO speak," and he said, "I knew they were gonna cut." And he goes, "Unfortunately, I did not sell the stock and it dropped 25 percent. So the lesson is listen to the call, even if you read the transcript. There's far more information in the question versus the prepared statement."

I try to pound into your heads to listen to conference calls because 15, 10 years ago, you weren't able to listen to conference calls. This was only for analysts. Now, everyone's on the same page. They give you a real-time update. Remember when they report the call, they're reporting what happened three months ago. But when they're on the call, they tell you what's going on maybe the first month or the next quarter and how business is. It's a significant advantage.

I go over this with Stephanie Link, who says she loves to the calls. I like listening to them. A lot of times I'll read the transcripts, as well, because I don't have time to listen to all of them. I'd rather read through a ton of them. But it's very, very important. And, James, I have no idea why you didn't sell the stock when you had – you figured that they were gonna cut the dividend.

You know what happens with a lot of these stocks when they cut the dividend. It doesn't even matter why, even though sometimes it's good news. They're preserving their cash. The stocks will get hammered. You made that mistake, which is cool, but, James, you're right. You should be listening to the conference calls, also reading the transcripts.

Guys, it's absolutely free. Just go to company's website investor. It's investor presentations, go to investor relations. It's right there, it's very important. It's your money. Believe me, I'm telling you, man, you gotta educate the hell out of yourself with these stocks. The next question he asks, James asks, is about Apple. How fairly priced would Apple be if it was valued only for its iTunes store and the apps store? In other words, if they stopped manufacturing, what would the service side be worth? Thanks."

I have to tell you, I did an educational segment on Apple and I was dead wrong. I thought it was a screaming buy and it's down like 100 points. So I've probably had about four or five educational segments on Apple. I'm probably 50/50, but the last time I was wrong. I will tell you this, though. The services side is relatively nothing. You say, "Well, we generate so much money."

You gotta remember the company was a $500 billion market cap. It generates a few billion dollars on the services side. It's worth relatively nothing. It's the hardware sales where they make a ton of money on. iPhone, I think it counts for 35, 40 percent of sales. And then you have Macs and iPads a little bit less than that.

But on the services side, no, it's all the hardware, which is important. And it's a good question because they have to keep revolutionizing their products, maybe come out with the Apple TV to really justify this valuation. And we'll see if that's gonna happen. I just think they're gonna report blow-out, crazy numbers in the next quarter.

I think they're selling iPhones like crazy, I think they're selling Macs like crazy, and I think the stocks definitely gonna pop from here. And everyone's gonna say, "Wow." They're still seeing that 30 percent growth and you'll see 600 pretty soon. But you're just seeing a massive selloff here and people just giving up on the stock. But, again, I don't know if I'm the right guy about Apple 'cause I've been wrong before.

But as for the services side, yeah, it's really – it would be a huge deal to a smaller company. But the fact that their market cap's like $500 billion, the services accounts for a very small percentage of the overall revenue. All right, next question's from Kevin. "It's a good show again this week. I really do believe on a long run on uranium."

I just did a whole segment, probably a couple months ago, saying that Japan – a lot of people are just canceling the uranium projects, coming off uranium and nuclear. Then other people are telling me, Matt was saying, "Oh, you know they have, that Japan has that." You gotta worry about Japan because the population and the people are totally against nuclear.

So it's hard to push nuclear as a cheaper source when the whole country's like, "We don't want it." At least that's what I hear from my sources in Japan. If you're listening to this, Japan – I have a lot of listeners out there – send me an e mail and you can say if I'm right or not. But from what I hear, people are dead against nuclear after what happened.

So he says he likes CCJ should end up looking well. I think CCJ is the player. There's a lot of smaller, tiny players. Matt Badiali really likes this sector. He thinks it’s gonna turn around. I just – I'd rather buy these stocks 20 percent high – I mean they're down probably 80 percent – and see some kinda ground there or base. But, right now, I just don't see it.

And Kevin also said that he came across this article in __________. I wonder if you might comment on next week's show. Basically just pointing out there could be some unwinding of leverage positions. Also, isn't it come with the mutual funds and other large investors who adjust their portfolios at the end of the year, to lock in gains, trim losses, assuming we haven't had a market crash by next week. So will you comment?

And, Kevin, I'll be honest with you. Even for my Phase 1 portfolio, what I like to do at the end of the year is adjust my positions. I look and get rid of a lot of dead weight. It clears my head. Stocks that haven't really worked for the year and maybe they'll pass 18 months. And I think I sold out of five stocks in my Phase I Newsletter. I think we have 20 positions in there, maybe a little bit more.

So some people do that. But, right now, I think you could pick up a lot of stocks and buy. A think a lot of that selling's probably mostly done. You're seeing stocks rally right now. But, yeah, I think most of it is – at least from what I'm hearing is – and I mentioned this earlier, a lot of hedge funds, they had a terrible year. They're gonna prepare for redemptions.

So if they don't see those redemptions, you're gonna see a lotta cash go into the market. But, other than that, we've seen good Decembers before. It's just, this December, a lot of this has to do with the fiscal cliff, so I wouldn't be too concerned on massive selling over the past – the next couple of weeks to year end.

And the last e mail is from Thomas. Thomas says, "Dear Frank. I am based in the UK. I'm a Flex Alliance member, which, at the time, meant that I had Phase 1 for 12 months, which has now expired. I was __________ to hear that you have an offer for $3,000.00 at the moment, but I cannot find it at all as directed in the podcast."

Anyone who wants that offer for the $3,000.00 for the Phase 1, again, I usually sell that newsletter for $5,000.00, and we're running a special. Go to investorradio1.com. It's investorradio1.com. You could read the whole entire story on that link or just to the body and click. I'm getting a lot more orders than I thought I would. A lot of institutions and credit investors listen to this podcast.

Again, if you don't have $15,000.00, $20,000.00 to invest in stocks, don't buy this newsletter. It's not for you. But that's all I'm gonna say about that. But he says, "I have to say that I've been a little disappointed with administration at Stansberry, as I was approached last year with a deal for the full Alliance membership, which offered no discount for the fact that I already paid for my Flex Alliance.

"In fact, if you read the correspondence, I was given conflicting information, which seems almost dishonest at the time, and it has left a sour taste. I'm also a little disappointed that Flex Alliance members don't appear to get new services, which is one of the promises that tempted me in the first place." And he says, "Regards, Thomas."

Thomas, I'm gonna tell you something. Right now – and I did e mail him back with this response here – is we're growing. We're doing very well in our business; we're hiring new people. And that's no excuse, but maybe just something might’ve happened on that end. If anybody wants a subscription to any newsletter, send me an e mail, fcurzio@stansberryresearch.com. I'll get you the best deal. That I promise.

Another thing is, when it comes to Flex Alliance, a lot of people ask these questions. Flex Alliance just allows you to purchase four newsletters, I think, at the same price. We have a bunch of newsletters. We have 20 newsletters. And it allows you to buy certain newsletters, four of them with a certain subscription. That's a Flex Alliance.

An Alliance member gets all our products, except for Phase 1, which is the newsletter I write. And that's our biggest subscription. Now, Alliance is cool because once you pay, you're in it forever. You have to pay that price and it's fine, forever. And it goes up every year. But the thing to Alliance is Porter just started two or three new newsletters. And you get access to all the beta issues.

We start sending them to our Alliance member before we actually launch them and start selling them. And we say – and we get our feedback from the Alliance members, which is tens of thousands of people. And they say, "Hey, you know what. This is good. We like this. It's gonna work." So that's a benefit of being an Alliance member.

But as for the process of our customer service, I apologize. I sent you an e mail personally. But, again, if anyone wants a newsletter to S&A, please feel free to give me a call, and I'll take care of you. I think that everybody should own a newsletter at all times. It doesn't mean you have to have one from S&A or one of my newsletters.

It could be from anybody out there. It'll just help you with the opinion, explaining things. That's my opinion. Everyone should own some kinda financial newsletter. If it's anything S&A related, be sure to send me an e mail, fcurzio@stansberryresearch.com.

All right, guys, let's move to my educational segment. I told you it's gonna be very important. You guys pay attention to this. I've been doing a lot of research over the past two weeks, and researching small cap dividend paying stocks. More important, small cap dividend paying stocks that have raised their annual dividend for more than ten years. And that includes small caps that raised their dividend for 20 years, 30 years, 40 years, 50 years.

Usually, you see the McDonald's and the Coca Colas on this list. I thought I'd find maybe a few companies. I found over 100 small cap companies. I'm identifying small cap as under $5 billion, okay. And you could say $3 to $5 billion is more midcap, but I'm identifying small caps under $5 billion. Now, why is this important. And you're looking at it like conventional wisdom.

I think the days of owning large cap Dow components, staples that pay high dividends. You know, you own them forever; you'll be fine. In 30 years you'll be able to retire. I really think those days are over if you're looking at right now to the next 20 years. And you're looking at McDonald's, I don't want to buy McDonald's right now. I don't like McDonald's right now.

I don't like buying at 17 times per earnings. I liked it better when Tom Dyson bought it in his 12 percent letter. He's up 125 percent since 2008. Yeah, that makes sense. Now, you're up huge. You're collecting those dividends. That's cool. But you're looking at McDonald's, they're barely gonna grow their top line going forward. They're having trouble.

And just like every large cap stock right now. Coca Cola trading at 16 times forward earnings, guys, forward earnings. Do you really want to own – you want to own Wal-Mart at what, 14, 15 times earnings with only a 2 percent yield right now. I mean is that the stock you want to own today and hold it for 20 years. I don't know, man. I argued against that.

But all the times that I tell you – and, again, now, I'm arguing this. You have to realize this flies into the face of some of the greatest value investors in the world, this educational segment. And maybe I'm wrong and I'm a dummy. I don't know. But you're supposed to buy these dividend stocks and hold them forever and compound that interest. It adds up and it's great for your retirement.

Now, I just don't really agree with that. And people who bought Coca Cola, Wal-Mart 20 years ago, I would argue that they're not rich because of that yield, and they're rich because of the capital gains. And those stocks surged. Of course, compounding those yields, of course that helped. Absolutely. But, mostly, capital gains. If you look at Berkshire, the stock was $8,800.00 20 years ago. Yes, I looked it up.

Today, trading at $130,000.00. It's a 1300 percent gain. And you're rolling over those dividends over the past 20 years. Of course, yeah, you're worth millions now. We have to have that with the capital gains. I mean making 2 percent, 2 percent, 2 percent, 2 percent, come on. Minus inflation, what are you gonna do? You're losing money, right.

So if you think about it, do you really want to buy the Wal-Marts and the McDonald's today and hold them for 20 years, 'cause that's what? Every conservative portfolio manager and the value guys are telling you to do. And I'm a value guy, and I'm telling you I think it's a terrible strategy. Now, the reason why I'm telling you it's a terrible strategy is because I – in my educational segments, what I show you is comparative analysis.

You don't want to look at a stock and say, "This is terrible." You want to look at it and find a better alternative and say, "Wow, I'm not gonna buy McDonald's. I think Burger King looks ten times better now." I don't know if it does. I'm just saying. Maybe you want to buy another restaurant stock or you want to buy Darden. I don't know. Whatever it is, whatever restaurants, a Buffalo Wild Wings.

The company got nailed. Maybe it still has growth, still opens stores, much more growth potential at McDonald's. Now it's cheap. I don't know. I'm just saying when you put it all together you say, "Wow, McDonald's isn't growing. They're trading expenses. Maybe Darden's cheaper, growing a little bit faster, paying a dividend and insiders are buying."

So I would say, "Hey, buy Darden instead of McDonald's." I don't know, but I always try to tell you when it comes to researching you have to use comparative analysis. And this I'm comparing to buying McDonald's and Coca Cola, the reason why I think it's a bad move, I'm comparing this to this new investment class that I've been researching.

And that's the small cap dividend paying stocks. Okay, hear me out first 'cause in the small cap. You're gonna say, "Frank, you're really comparing small caps to McDonald's." So hear me out. Again, when I say small caps, I'm referring to companies who are less than a $5 billion market cap.

Now, there's a ton of companies in this class that pay more than a 2.5 percent yield, that have been raising their annual dividends just as long. Caterpillar, IBM, McDonald's, Coca Cola, just as long. Except these companies have much more growth potential. They have solid balance sheets generating a ton of free cash flow and, more important, is they have the possibility to be taken over.

Nobody's buying Coca Cola, nobody's buying McDonald's, guys. It's not gonna – they acquire people. But these smaller companies, they can get acquired. But do you really think you're gonna see McDonald's double from here? Intel, Coca Cola, Berkshire, double from here. If you're looking for income, yeah, these are relatively safe stocks that I'm talking about, these small caps.

Again, don't let the small cap class fool you. And they’ve been paying dividends – again, now I did this research – paying dividends for more than 20 years. So they have more growth potential, takeover potential. And they're cheaper than McDonald's and Coca Cola right now, trading at 17 times earnings. And what would you rather own?

So in my next Small Stock Specialist issue, I'm recommending three of these stocks. I don't know if you follow Dan Ferris' newsletter. He has dividend – what do you call it – world dominating stocks. He has all the world-dominating stocks in section of his newsletter where he – he has his own stocks that he recommends, and then certain portions he has whatever, 12 or 15 stocks of the world-dominating stocks.

I'm gonna provide a different way for people to generate income instead of buying the McDonald's and Coca Colas, because I don't think they're gonna provide the returns you need. Not at these prices. You're buying – really, you're gonna buy them trading at a 20 percent premium. The S&P 500, again, people made their living buying these stocks mostly on a capital gain and on the dividends.

Now, you see even dividend taxes are gonna be raised and the capital gains. Do you really think that McDonald's – you're gonna buy a company that sells burgers for 34 times earnings. I mean I wouldn't. I'm not even paying 17 times earnings. But that's what you say if you think McDonald's is gonna double from here. I just don't see it.

So these stocks are long-term plates. You've seen me trade a lot this year. These aren't. They're not volatile stocks. These are stocks I want you to hold longer than five years. It's gonna be a new segment in my newsletter, small caps dividend plays. And for all of you out there, don't worry. You're still gonna get my aggressive picks, like biotech, technology, energy, like I always provide.

You have to – I love speculating. I'm seeing great ideas, but just this portion of the newsletter, some of these stocks, I feel like they're forgotten. It's right in the middle of – they're not speculative small caps and they're not the large caps. They're right in the middle, especially trading for $2 billion or $4 billion valuations.

They're paying 3, 4 percent yields, just fantastic opportunity. Low betas and you don't have to worry about the volatility, but stocks where you're gonna be able to compound it. But not only that, they give you the chance of maybe being the next Wal-Mart, being the next Archer Daniels. Remember these stocks were mid cap stocks before becoming the leading giants that they are today.

You know, the Pfizers, much smaller companies 20 years ago, even Berkshire. This session gives you the chance to earn the same yield, buy cheaper stocks. They're safe, they're generating a ton of income. Again, don't use small caps and say, "Wow, this isn't safe at all." And when you see these stocks – I just couldn't believe there were 100 on this list that raised dividends annually for longer than 20 years. It's just amazing.

I couldn't believe there's that many stock on the list. Fantastic companies, a lot of them that you've heard of. I just think it's a better alternative than McDonald's and Coca Cola, based on my research. I could be wrong. I don't know. But just I'd rather own these than buying those other stocks, those expensive valuations.

But if you're an investor looking for yields along with possibility that these small stocks could become the next Wal-Mart or Microsoft or even get taking over, then I suggest reading my next issue. It's coming out next week. I promise it's gonna be one of the most important issues I'd ever write as a newsletter editor. That's how much I love this idea. So subscribers have a lot to look forward to.

Anyway, I'll end with that. Thoughts or comments, e mail me, fcurzio@stansberryresearch.com. Yes, I'm still offering a special rate for my newsletter. It's getting a ton – a lot of people subscribe to newsletters. I really appreciate it too. And, again, I don't want to make this podcast pitching, me pitching newsletters all the time. A lot of people are purchasing newsletters. It's fantastic; it's great.

People who purchase newsletters, be sure to give me your feedback, especially if it's – whatever, Matt's newsletter. I love getting the feedback. For my newsletter, it's under $50.00 for the entire year, for the entire 2013. That's a special I'm offering, fcurzio@stansberryresearch.com. Again, e mail me if you're interested.

Okay, guys. I want to say one last thing here. I can't believe the Monday night football game is going to be the Jets against the Titans. Holy cow. I'd rather watch Gossip Girls or watch the movie The Campaign again. I don't know if you saw that. It's probably the worst movie ever. Will Ferrell, I think by far, his worst movie anyway.

But it should be a fun game, the Jets against the Titans, one that I will certainly be watching. Anyway, any comments or questions, fcurzio@stansberryresearch.com. Also check out our site at stansberryradio.com. We have transcripts. You can go back, listen to the podcast, interviews. Fantastic, provide a lot of information on the site. And, also, you can follow me at Twitter at FrankCurzio. Thanks again for listening, and I'll see you in seven days. Take care.

[End of Audio]

12/12/2012
with Simon Lack

Episode Snapshot

Hedge fund manager Simon Lack gives an insider perspective on the hedge fund industry.

Simon Lack spent most of his 20-year plus career in the hedge fund industry. Then he wrote a best-selling book explaining how investors would have generated higher returns in treasuries compared to most hedge funds - after you factor in fees. Today, Simon is managing partner at SL Advisors. On this week's Podcast, he talks about the risks of investing in hedge funds. He also talks fiscal cliff and shares some of his favorite ideas to buy right now.

Get Frank Curzio's discounted Small Stock Specialist newsletter at www.investorradio.com.

Get Matt Badiali's discounted newsletter at http://pro1.stansberryresearch.com/11895/.

This Episode's Guest

Simon Lack

Following 23 years with JPMorgan, Simon Lack founded SL Advisors, LLC, a Registered Investment Advisor, in 2009. Much of Simon Lack’s career with JPMorgan was spent in North American Fixed Income Derivatives and Forward FX trading, a business that he ran successfully through several bank mergers ultimately overseeing 50 professionals and $300 million in annual revenues. Simon Lack sat on JPMorgan’s investment committee allocating over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds, two private equity vehicles that took economic stakes in emerging hedge fund managers. Simon chairs the Investment Committee for Wardlaw-Hartridge School in Edison, NJ, and also chairs the Memorial Endowment Trust Investment Committee of St. Paul's Episcopal Church in Westfield, NJ. He is the author of The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True, which received widespread praise from mainstream financial press including The Economist, Financial Times and Wall Street Journal. Simon makes regular appearances on cable TV business shows discussing hedge funds and investing, and is a CFA Charterholder.

Website: SL Advisors

Ep 164: Why Stocks Will Fall 25% This Year
- 01/02/2013
- with Richard Suttmeier
Ep. 180 One-on-One with Rick Rule
- 04/24/2013
- with Rick Rule
Ep 167: Get Ready for $150 Oil Prices
- 01/23/2013
- with Dr. Kent Moors
Ep 172: This Famed Bull is Taking Profits
- 02/27/2013
- with Dr. David Eifrig
Ep 174: The Three Biggest Technology Trends In The World
- 03/13/2013
- with Patrick Cox

Ep 161: The Hedge Fund Mirage

Episode Snapshot

This Episode's Guest

Simon Lack

Ep 164: Why Stocks Will Fall 25% This Year

Ep. 180 One-on-One with Rick Rule

Ep 167: Get Ready for $150 Oil Prices

Ep 172: This Famed Bull is Taking Profits

Ep 174: The Three Biggest Technology Trends In The World

Ep 164: Why Stocks Will Fall 25% This Year

Ep 167: Get Ready for $150 Oil Prices

Ep 165: Why America Will Never Be Energy Independent

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