Bill pays taxes in Britain, where part of his publishing business is based. But now those taxes are going up. Governments, of course, have to pay for their boneheaded bailouts and ‘stimulus’ packages somehow. And so like the Peronists down in Argentina, they target “the rich.”

The feds – both in Britain and back at home in America – have chosen an easy target… the rich!

In the public mind, ‘rich’ and ‘banker’ are inseparable. Like ‘corrupt’ and ‘politician.’ What’s more, the rich were at the scene of the crime when the financial crisis began. The rich were caught red-handed. It doesn’t matter if the ‘rich’ man earned his money from doing heart operations or selling vegetables. Every rich person is presumed guilty of the crime of the century. “Tax them!” screams the mob. Tax them! Tax them! Eat them.

And so, it will come to pass that ‘the rich’ are taxed. The money will be taken from them and given to… well… the rich. But these will be different rich people – bondholders… bankers… insiders… hustlers and anglers.

Such a move would likely mean bondholders would get a smaller piece of a new company that would emerge in bankruptcy with most of GM’s saleable assets. The bondholders, who own $27.5 billion in GM debt, had been offered 90% of the new entity’s equity in an earlier settlement proposal. That debt is now trading for as little as 8 cents on the dollar.

“What the government is doing is stepping them down and easing the blow,” Albert Angrisani, a turnaround executive who was assistant secretary of labor under President Ronald Reagan, told Bloomberg. By doing that, “they lessen the rights of the creditors in bankruptcy,” he said.

GM has until June 1 to turn its business model around, and that involves putting out two major fires: First, convincing the bondholders to exchange the debt into GM equity, and secondly, convincing the United Automobile Workers’ to make more concessions – the latter being more difficult without bondholders making a sacrifice.

Retirees owed health benefits would probably get more equity in the new company than bondholders, who would likely get only “a sliver,” Bloomberg reported. GM has been negotiating to reduce the $20.4 billion it owes to a union-run health care fund.

The $13.4 billion in funding previously provided to GM came in the form of secured loans holding senior status to other bondholders, which may make it easier for GM to force a restructuring plan on other creditors.

The equity stake idea surfaced on the heels of a report Sunday in The New York Times that the Treasury Department has told GM its goal is a speedy “surgical” bankruptcy, despite the company’s effort to restructure outside of court.

One of the plans the Treasury is considering would involve creating a new company that would buy GM’s better assets immediately after the bankruptcy filing. Bad assets would be left in the old company and liquidated, The Times reported.

A committee of bankers and other GM advisers are working to determine how much the restructured company might be worth in a debt-for-equity swap, anonymous sources told Bloomberg.

Banks and other creditors also have $6 billion in secured claims that would not be part of the debt-for-equity calculations.

While it is widely believed President Barack Obama favors bankruptcy as the most likely way for GM to become competitive, the government may prefer a quick sale of its stake to avoid criticism of what may be seen as a government takeover of private enterprise.

Critics have already accused the administration of teetering on the brink of socialism after the government took stakes in banks and insurance companies as part of its bailout of the financial industry.

A government stake, “means you essentially have a nationalized General Motors until such time as the government sells off its equity to someone else, which won’t happen for a while,” said Gerald Meyers, a professor at the University of Michigan Ross School of Business and a former chairman of American Motors Corp. told Bloomberg.

“The problem is it’s political. On the other hand, it’s a cheap way for the good GM to keep going and probably solidify its strengths,” he said.

Meanwhile, creditors of another struggling U.S. carmaker, Chrysler LLC, plan to make a counteroffer to the U.S. Treasury this week – possibly asking for equity in a firm combining Chrysler and Fiat S.p.A. (ADR: FIATY), Reuters reported.

The lenders, which include JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), were in talks with the government to reduce Chrysler’s debt by swapping some of it out for equity, new debt or a lesser amount in cash.

The two auto companies have been in discussions about an alliance that could see Fiat take a stake in Chrysler by the end of April.

Source: Government May “Nationalize” GM by Swapping Debt for Equity

On the other hand, when it comes to buying bonds, investors have one tremendous advantage: The corporations that issued the paper are legally required to pay the bondholders their interest and then return their capital – on time. It’s not optional.

Remember the movie, Goodfellas? There’s a scene where someone has borrowed money from the mob to expand his restaurant. He learns a painful lesson. The godfather gets paid, no matter what. As the movie explains in graphic language: “Economy goes bad? F*** you, pay me. Restaurant burns down? F*** you, pay me. Wife gets cancer? F*** you, pay me.”

When you’re a bondholder, the same rules apply. No matter what happens to the business or the stock price, you get paid.

The other good thing about the bond market is that most individual investors know nothing about it. As a result, there are tremendous inefficiencies, simply because most investors don’t buy individual bonds. Why not? They don’t know how.

Our newest product, True Income, makes individual bond recommendations, the way our other publications recommend stocks. But unlike stocks, the moment you buy a bond, you’ll know exactly how much money you’re going to make and when you’ll get paid.

Mike Williams, our analyst, is a 62-year-old CFA who’s been buying and selling bonds since before I was born. And he’s structured the product so subscribers will make big, triple-digit gains in fixed income – something most people believe is impossible. If you’d like to learn more about how Mike does it, click here.

Poor Henry Nicholas III, former CEO of Broadcom. He made the classic playboy mistake: He hired a personal assistant named “Kato.” Kenji Kato sued Mr. Nicholas last year for back wages and proceeded to spill his guts in his legal filings, which found their way to prosecutors pursuing him for backdating options.

According to Mr. Kato, Henry Nicholas was a one-man Tasmanian devil of bad behavior: He spiked the drinks of technology executives with Ecstasy without their knowledge, used thousands of dollars worth of illegal drugs while at work, and hired “prostitutes and escorts for himself and customers.”

Once, on a flight to Vegas on his private plane, Nicholas allegedly smoked so much pot, the pilot had to wear a gas mask! He must have been a fun boss, eh? Well, until the cocaine made him paranoid and violent. To keep the prostitutes quiet, Nicholas allegedly offered them money and threatened to kill them.

Our favorite commodities pundit, Jim Rogers, gave an interview to Bloomberg this week, and his story’s largely unchanged… Jim is still short all investment banks through an ETF. He’s specifically short Citibank and Fannie Mae.

Rogers also announced he purchased airlines. His reason… “Everybody’s very bearish.” He said flights are full, fares are increasing, and if you ordered a new plane today, you couldn’t get it for several years due to problems at manufacturers. Also, 24 airlines have declared bankruptcy and “bankruptcies are signs of bottoms, not signs of tops.”

In the last issue of my newsletter, PSIA, I compared the current real estate bust with the giant San Francisco earthquake of 1906. In that disaster, people set fire to their homes because they didn’t have earthquake insurance but they did have fire insurance. The resulting inferno destroyed 500 blocks – essentially the entire city. The earthquake didn’t cause most of the damage… the fires did.

The same thing is happening now in our mortgage markets. Home prices would probably stabilize. But the fraud and the crime that’s following the disaster is the real problem. No one will take responsibility for his actions. And that’s going to bankrupt just about everyone in the mortgage business.

SEC Chairman Christopher Cox thinks it’ll make everything all better if bond-rating agencies just put an “s” on the end of their ratings of structured finance products. One SEC commissioner objected to the plan, not because it’s just plain stupid, but because he said it was like putting a “scarlet letter” on those products. That’s roughly equivalent to worrying Britney Spears is getting too much negative press.

Regards,

S&A Research

The S&A Digest is written by Porter Stansberry, Dan Ferris, and Sean Goldsmith.

Source:  The Best of The S&A Digest  Saturday, June 14, 2008

Good day… And a Terrific Tuesday to you! It sure has been the weirdest weather for April that I can recall… We had a frost warning last night! UGH! Oh well… Onward and upward, as the Big Boss, Frank Trotter likes to say!

As we draw closer to the Fed rate announcement tomorrow, (the meeting actually begins today) I’m seeing more and more talk/speculation of the Fed announcing an end to this rate cut cycle after cutting rates 25 BPS. Hmmm… Interesting, don’t you think? I mean, come on, when has the Fed ever been that transparent? I know that Big Ben Bernanke said he was going to have the Fed be transparent, but he’s been in the Big Chair for a couple of years now, and there’s been no transparency to my knowledge… And I’m a Fed watcher, I’m a Fed watcher, watching rates go down.

This thought has the dollar swinging the hammer again… And every currency has taken a hit from the hammer overnight… Except for Chinese renminbi (CNY)… But then the moves there are so darn minuscule that it’s difficult to determine if it went up or down! HA!

Anyway… That’s the skinny on the move in the currencies overnight to a stronger dollar. These knuckleheads are forgetting something very important… The dollar’s fundamentals are awful! Forget for a minute about the interest rates being at the second lowest level for any G-10 country. Think back to the financing of the deficit problem I keep talking about. The recession going on… The housing meltdown… The subprime meltdown for banks/lenders and bondholders… A war… And you get a different picture for the dollar don’t you? Alright, it’s OK to bring back interest rates into the picture now. What you’ve got is a currency with awful fundamentals, and interest rates at 2%.

But… The markets don’t see it that way this morning… And I learned something long ago about fighting the markets… You lose! We just have to hope that calmer heads get a hold of the markets before the dollar rallies too much and the trade deficit goes even higher!

We begin to empty out the data cupboard today as the Case Shiller Home Prices report for February (two months ago!), is expected to show more rot on the vine with a 12% decline in prices.

And for anyone thinking that the housing meltdown has bottomed… The number of U.S. homes standing vacant has reached a record of 18.6 million. This is due to rising foreclosures. The 2.9% vacancy rate (vacant and for sale) represents a record in data back to 1956. OUCH!

We’ll also see the consumer confidence report for April, and it’s expected to keep the recent trend of weak confidence reports going… The Confidence Index stood at 64.5 in March, and the “experts” believe it will fall to 61.1 in April, which would be the lowest reading since 1993.

OK… We had another European Central Bank (ECB) member out talking hawkish yesterday; only this time it was the Top Cat – ECB President, Trichet. Let’s listen in to a snippet of his talk…

“It’s crucial that the Governing Council sets the appropriate monetary policy stance on the basis of no other considerations than the delivery of price stability in the medium term. The bank’s current policy stance will contribute to achieving our objective.”

That’s Central Bank parlance for… Beating Inflation is the ECB’s sole aim.

I’ve had quite a few people send me the column that appeared in Forbes titled: The Demise of the Euro. I’ve said this before, but for anyone that missed it… Here’s my take… I believe that this article is much like all the others we’ve seen announcing the end of the euro… They are all regurgitated. They have the same stuff each time regarding how Spain and Italy don’t like the “one policy meets all”, and they will leave the euro, thus causing the collapse.

Listen to me now, and hear me later on this… Spain and Italy should be thanking their lucky stars that they were ever invited to join the euro (EUR)! For once, these two countries, which had been known to have shaky finances, have inflation that’s at least in this atmosphere. They have budgets that are somewhat in line with the attempt to balance, and they have 80% of their trade among the other members in the Eurozone. Tell me again why these two are going to leave the euro.

OK… Onto other things… My friend the Mogambo Guru is back in rare form, after suffering a heart attack earlier this month. Yesterday he posted some very interesting numbers regarding the stock market rally… Let’s listen in to the Mogambo…

“And another horror is that the stock market went up, which is Pretty Freaking Strange (PFS) since Barron’s reports that the earnings of the Dow Jones Industrials went down, dropping to $225.53 from $234.49. This has produced the unbelievable price-to-earnings ratio of 57! Earnings are going down, but the stocks are going up! To a P/E of 57!

Un-freaking-believable!

“And not only that, but DJ Transportation index saw its earning drop, too, to $218.60 from $230.91, taking this index’s P/E to 23!

“And while the venerable S&P 500 has not yet shown any more deterioration in its earnings, the fact that the market went up made the P/E of this index go to a lofty 21! All of this in the face of deteriorating conditions and economic collapse! This is beyond incredible!

“How can you NOT run to gold in such crazy times? Ponder this question well, as a lot depends on your answering it correctly, much like when the minister asked you, ‘Do you take this woman to be your lawfully wedded wife?’, and you know how well that turned out. So, like I said, ponder it well!”

Ahhh… The Mogambo on a Tuesday! Folks it doesn’t get much better than that! You can read the entire article here.

Currencies today 4/29/08: A$ .9340, kiwi .7775, C$ .9875, euro 1.5575, sterling 1.9750, Swiss .9640, ISK 74, rand 7.5760, krone 5.1225, SEK 6, forint 162.15, zloty 2.2150, koruna 16.20, yen 104.10, baht 31.62, sing 1.36, HKD 7.7915, INR 40.40, China 6.9845, pesos 10.48, BRL 1.6865, dollar index 72.89, Oil $115.12, Silver $16.83, and Gold… $886.47

That’s it for today… Well… I began my last four weeks of cancer meds in my second phase yesterday. I don’t look forward to these four weeks, but I can’t dwell on it, so I’ll take it one day at a time. I go in for a scan this Thursday; they are still trying to figure out what that was that they saw on my rib two months ago. I’ve seen enough hospitals and imaging places in the past year to fill a lifetime. But hey! I’m here! And still full of you-know-what and vinegar every morning! In case you’re wondering why I’m telling you all of this… I receive a ton of emails from readers asking me to keep them up to date with my progress in fighting this cancer… So there you have it! And… I hope you have a Terrific Tuesday!

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