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Porter Stansberry’s

Porter Stansberry’s Investment Advisory October 2005; Volume VII; 3

Investment Advisory

October 2005; Volume VII; 3

How To Profit From The Real World Wide Web

Here’s a safe and easy way to make 50% this year

INSIDE THIS MONTH’S ISSUE:

Satisfying China’s Appetite

Martha’s loss, your gain

Everything’s gaining value, except money

GlaxoSmithKline’s bid pays off

Probably the safest commodities play out there.

Thirty percent and still climbing…

Our June issue titled “What’s Ugly About Martha Stewart” highlight- ed the anticipated return of Martha Stewart Omnimedia’s celebrity founder. We said the stock was overvalued, and at the time, investors vehe- mently disagreed with us. Shares in her company continued to climb.

The anticipation behind her new show, The Apprentice: Martha Stewart, had investors buying up MSO shares, and the stock rose 22% in the month of August alone. In June, we said we believed this company would never be able to justify a $1.3 billion market cap. Even if Martha’s new reality television show proved to be a smash hit, revenue flow- ing into her publishing business wouldn’t produce very much in the way of profits.

Well, the show has flopped and investors are running.

It’s important to remember that the magazine publishing business is tough. It has low margins, and it’s the best business MSO has, by far.

Publishing is a business we know very well, and Martha’s was not worth as much as the market believed.

We were patient, and our persistence paid off. We recommended that investors wait until Martha Stewart Omnimedia (NYSE: MSO) was trading above $32 to sell short. It closed at $32.01 when you received our last issue. It was time to short. And we certainly hope you did.

MSO just closed at $22.76. That represents a 29% gain in September alone. And we’re not through. The stock should continue to fall. We think $15 per share represents a fair price at this point. If MSO hits the $15 mark, you should cover your position. Use a 25% stop/loss to lock in your gains.

The Appeal of Shipping

“I wish you would write about a tech stock!”

I’m starting to hear this more and more. The glamour of real estate seems to be losing its edge. People are ready to move on. They’re looking for a new story, a new trend. And that makes perfect sense. It’s in our nature to evolve and move on.

But if you pause for a moment, take a look around, and think about the world just a hundred years ago, what

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comes to mind? Peel away the layers of technology, the Internet, the PC, the television… all the way down the line. What are you left with?

You have nations and their economies, war and com- merce. These are the constants in the evolution of modern civilization.

In our Digital Age, in which every human desire is a simple click and several nanoseconds away from instant gratification, something so elemental as commerce – trade between nations – seems terribly outdated and inefficient.

But until we reach a stage of technological innova- tion in which the major staples of trade – things like corn, rice, soybeans, oil, in other words, basic commodities – can be disassembled, one molecule at a time, and instan- taneously beamed to another location, our current means for commerce will remain the most efficient.

This month’s recommendation extends from that exact principle. This business connects the world in ways technology never will. Countries were built on its founda- tion. Some of the world’s greatest fortunes were amassed through its means.

I’m talking about shipping, the transport of commodi- ties and finished goods from one port to another. One might think, with lightning fast courier services, airplanes, FedEx, UPS – a whole slew of modern transport services – that using ships to transport cargo would be antiquated.

That’s the furthest thing from the truth.

Shipping still serves as the circulatory system of global trade. Roughly 90% of the world’s exports are transported by ship.

Published by Stansberry & Associates Investment Research

Porter Stansberry, Founder

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DISCLAIMER: This work is based on SEC filings, current events, interviews, corporate press releases and what we've learned as financial journalists. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. Stansberry and Associates Investment Research expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. And all Stansberry & Associates Investment Research (and affiliated companies) employees and agents must wait 24 hours after an initial trade recommendation is published on the Internet, or 72 hours after a direct mail publication is sent, before acting on that recommendation.

The rise of shipping and the fortunes made from it, go hand-in-hand with the rise of nations. The largest empires in the world – Rome, Britain, the U.S. – came to greatness thanks to this investment. Think about it. You can have all the oil in the world, but it’s worthless if you can’t get it from point A to point B… if you can’t trans- port it from Kuwait to the U.S., or from Canada to let’s say… China.

As long as the countries continue to trade, there will be ships on the open seas to service their needs.

Everyone talks about China these days, and for good reason. China is in the midst of an industrial and informa- tion revolution all at once. What took the United States more than 150 years to achieve, the Chinese are accom- plishing in a few decades. They need timber for housing, steel for bridges, oil for the millions of new cars they now use in lieu of bicycles.

Most investors want a new trend, a new Internet, a new real estate bubble to cash in on. But most investors – and most analysts too, for that matter – overlook the biggest trend in the world right now – commodities – for the same reason they overlook shipping. They wonder how can you find growth in something so basic as copper.

This month’s company is every bit as potentially explosive as RFID technology or Voice Over Internet Protocol (VOIP), even though it specializes in one of the oldest trades known to mankind.

You should expect upwards of a 50% return on your investment from this company, over the rest of this year.

For Once… Oil Is Not The Issue

I stumbled onto this opportunity in a roundabout

way. A simple article detailing the effects of hurricanes and high oil prices on businesses like Carnival Cruise Lines started it all. The gist of the story goes something like this:

Stocks for major cruise line carriers tend to get ham- mered when oil prices rise. Many investors assume higher energy prices drastically affect a cruise ship’s profitability. This assumption certainly rings true for the airline indus- try. But it’s not necessarily the case for cruise ships. Fuel prices only account for roughly 7%-8% of a liners operat- ing cost. So this got me thinking: Do investors make this assumption for other large ships as well?

I found that the daily operating costs for the world’s

largest shipping companies are small compared to the

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daily rates they charge to move cargo. In other words, shipping is a high margin business, particularly the oppor- tunity I found this month. Its gross margins are 70% and it trades for slightly less than book value.

The balance sheet carries loads of tangible assets. Net income was up 36% from the first half of 2004, and that was one of the greatest years in shipping’s history. Even after a record setting year, the stock got hammered. But it’s poised to make a serious comeback over the next few months. Here’s the reason why.

Its share price fell thanks to a gross miscalculation. Projections for a significant slowdown in the Chinese economy proved false. This company’s success relies heavi- ly on China’s growth. Consequently, investors abandoned the stock earlier this year. The price is off 70% from its 52-week high. But the economic data coming out of China looks stronger than ever. If anything, China’s econ- omy will grow faster than the remarkable 9% it turned out in 2004. And this stock will rebound significantly. The 4Q has historically been shipping’s strongest, so there’s no better time to get in than right now.

Spoon Feeding China….

The company services China’s insatiable appetite for the world’s natural resources.

I’m sure you’ve read countless articles recounting China’s voracious demand for crude oil. But China’s needs certainly don’t stop there. Like countless industrial giants before it, China has set out on a global hunt for dry bulk commodities.

They’re consuming countless amounts of raw com- modities. I’m talking about iron ore, coal, grain, and tim- ber. The iron generates the steel used in their exploding construction and automotive industries. The coal fuels the nation’s insufficient power supply. Grain imports supple- ment the countless fields of rice swallowed up through industrial sprawl. And the timber will house and furnish China’s rapidly emerging middle class.

China imported 115 million tons of iron ore in 2002, 148 million tons in 2003 and 208 million tons in 2004. They’re projected to import 246 million tons in 2005. Those imports amount to around one-third of the world’s total iron ore production. According to a recent report, China’s steel sector alone has added the equiva- lent of the entire United States steel industry in the past three years.

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Imagine New York’s skyline, only bigger. That’s how Shanghai will look in the next thirty years. Its population already equals New York’s. And it’s only going to grow. The Chinese are moving from the fields to the factories. Coastal cities like Shanghai and Hong Kong lack the land for urban sprawl we see here in the United States. In fact, Shanghai sits in a marsh. So when you can’t build out, your only option is to build up. And that requires lots of steel.

Coal imports soared 59 percent to nearly 10 million tons in the first five months of this year alone. However, energy supplies can’t keep pace with economic growth. Scheduled blackouts are routine. Chinese factories are forced to slash production because of power deficits. In effect, energy shortages are inhibiting economic potential. China’s insatiable thirst for power led to blackouts in 24 out of China’s 27 provinces in 2004.

Nuclear energy will solve this problem. China cur- rently has eight new nuclear power plants slated for con- struction this year alone. It plans to build an additional 44 nuclear facilities in the coming years. A raw commodity fuels nuclear power as well. I’m talking about uranium. China will begin importing massive amounts of this mate- rial shortly. The world’s largest supplies lie in Australia and Canada. So more ships will be required to service this crit- ical need in the years to come.

Domestic grain supplies are running short. Demand continues to outpace supply. Reserve stocks are being depleted. And feeding 22% of the world’s population (1.3 billion people) with only 7% of the world’s arable land demonstrates only part of the problem. China’s growing middle class continues to consume more and more meat as part of their daily diet. Raising livestock requires mas- sive amounts of grain as feed. This will put more pressure on domestic production. Insufficient water supplies will also pose a significant problem. China’s now turning to world markets to meet their domestic needs. Expect this trend to continue.

Timber will be imported in large quantities as well. China’s supply of natural forests is scarce. Every new household will demand furniture. So China will continue importing timber from as far away as Brazil, West Africa, Indonesia, and Canada. And there’s only one way to trans- port logs over the ocean.

There’s an easy way to profit from this booming industry. And you don’t have to assume the great risks of buying commodity futures. You don’t even have to invest in Asian equities to take part. This stock trades on the

New York Stock Exchange. In fact, it’s the very first com- pany of its class to be listed on a U.S. exchange.

Shipping: The Real Network That Connects The World

Shipping can be broken down into three distinct cat- egories: tankers, containers, and dry bulk. Tankers are best known for moving the world’s oil supplies. They also carry chemicals and liquefied natural gas. Containers are used for finished products. Most everything we import from China falls under this category. And dry bulk vessels deliver the raw materials used in industrial production. Most everything China imports falls under this category.

We’ve selected a dry bulk shipping company. Of the three major shipping divisions, dry bulk receives the least amount of attention. Right now, most experts concentrate on oil. But over the last 18 months, the rates for dry bulk carriers have soared. And we believe they’re well posi- tioned to keep climbing.

Historically, dry bulk shipping rates increase throughout the second half of the calendar year as indus- tries restock inventories for next year’s capacity. This year has been no differ- ent. After an initial fall in the first six months, shipping rates are on the rise like we expected.

As I mentioned before, dry bulk shippers deliver basic raw commodities such as iron ore, coal, and grains. The dry bulk markets are driven by the eco- nomic growth in emerging markets, specifically China and India. Southeast Asia’s insatiable appetite for raw materi- als, especially iron ore, continues to fuel the demand for these shippers. As long as these economies continue to grow, the demand for ships to transport these goods will contin- ue to grow as well.

Let me quickly mention a couple of reasons I chose to analyze shipping dry bulk instead of oil. First, oil gets all the attention these days. Every day I seem to find another article analyzing crude oil and petroleum trans- portation. I’m not suggesting their prospects aren’t look- ing good. They may do very well over the next couple of months. Demand for oil doesn’t seem to be waning any- time soon. But I’m looking for something a little more under the radar. I’m looking for a great stock that isn’t

covered by every major investment bank. That’s where I think you’ll find the best bargain right now. That approach led me to this month’s pick.

Shipping rates are tracked through a pricing gauge known as the Baltic Dry Index. Experts consider the Baltic Dry Index as the leading indicator of demand for basic industrial commodities. Many also view the index, a reflection of world trade, as a key barometer to the overall health of the global economy. The index measures the cost of shipping commodities such as coal, grain, iron ore, and timber worldwide. As I’m sure you understand, China’s surging industrial economy has been the direct catalyst behind the robust demand for these resources. China’s imports, particularly of iron ore used in steel production, serve as the driving force behind the index’s price.

At the end of 2004, shipping rates were at an all-time high. The index peaked at an astounding 6,208 points. Take a look at the following chart to help put that number in proper perspective. The BDI didn’t start its dramatic takeoff until roughly July 2002. You’ll notice that’s roughly not long after the end of the Asian Financial Crisis.

Baltic Dry Index
Baltic Dry Index

You’ll also notice that since then, the BDI has dropped from its 2004 high to a two-year low of 1747 points on August 3. That’s roughly a 72% drop through the first half of this year alone.

Many attribute this decline to the Chinese economy cooling off. But that’s simply not the case. China’s econo- my grew 9.5% in the first half of ’05. And there are no indications of a major slowdown. It appears as if indica- tions of a massive Chinese slowdown were over exaggerat- ed. Speculators backed the wrong horse. Economists and investors feared that inflation combined with an emerging

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real estate bubble would spur Beijing into action. They predicted that government officials would cool off the Chinese economy. So far, that hasn’t been the case.

You’ll notice the BDI has rebounded quite well since July. The doubters are changing their tune. The BDI will make a significant push through the rest of this year, if not beyond. The index has made significant gains since hitting its low just a few months ago. This bodes well for shipping companies. The market overreacted on news of China slowing commodity imports. Consequently, the stocks of dry bulk shipping companies got slammed. But now these stocks are ready to make a significant 4Q rebound. It’s time to get in.

I think I should point out that times of high demand have produced layers of excess capacity. Shipping compa- nies usually order too many new ships when rates are high. And before you know it, empty ships are floating in ports. This market overreaction eventually causes revenues to fall and industry stock prices to recede. Historically, it’s been an excess of supply of ships that’s spoiled the ship- ping market, not a decrease in demand for shipping. So assuming the growth of the world fleet doesn’t outpace the growth in world trade, shipping companies will have the competitive advantage of setting the market price.

That’s exactly what’s happening. The world’s shipping fleet is projected to grow at an annual rate of 5% over the next three years. World trade growth is well above that number. It’s projected to maintain levels of approximately 8%. This bodes well for shipping companies.

This month’s recommendation is called Excel Maritime Carriers Ltd. (NYSE: EXM). They exclusively own and operate dry bulk carriers. They’re headquartered in Greece (the home of maritime shipping), but they’re traded here in the U.S. They are not new to the business. In fact, they are the first pure dry bulk carrier to be listed on a U.S. stock exchange. Excel listed on the American Stock Exchange in 1998 with a fleet size of 5 vessels. Since then, the business has continued to grow. With the support of two separate stock issuances in December 2004 and March 2005, Excel has successfully expanded their fleet to 18 ships. This allows the company to take full advantage of the rapidly expanding dry bulk market.

The expansion also reduced the average age of the fleet from 25 to 13.2 years. This is very significant for two reasons. First, younger ships are less expensive to operate. They run more efficiently and require less general mainte- nance. Second, younger ships are more reliable.

It’s very important to have a dependable fleet in such

a time sensitive industry. Older ships (16 years or greater) significantly increase the chances of breaking down en route. Ships that aren’t moving aren’t making money for your company. Furthermore, unreliable ships tarnish your reputation among dry bulk producers. Suppliers need steadfast companies to deliver their goods on time.

Imagine what would happen if the United States Postal Service failed to promptly deliver your bills month after month. You would naturally find another way to complete the process. Now imagine a ship carrying over $8 million dollars worth of iron ore calmly floating some- where in the south Pacific while it waits for a part to be flown in from the nearest port. Since the seller assumes the costs for shipping the ore, you can imagine their insis- tence that they secure a reliable carrier.

Shipping is a very capital-intensive business. Vessels can cost upwards of $50 million a piece. Hence, the barri- ers to entry in this business are quite high. But once you’re in, the margins are remarkable. Companies like Excel leverage the industry’s high entry barriers to profit hand- somely. Just take a look at the difference between the costs of running a ship compared to the price Excel charges its customers. This is what makes the business so appealing.

The approximate cost of operating a dry bulk carrier

on a daily basis is somewhere between $4.5 and $5 thou- sand dollars. The average daily rates Excel charges its cus- tomers approximately $23.5 thousand dollars a day. That’s

a 79% profit margin.

As I mentioned before, daily shipping rates are tracked through a pricing gauge known as the Baltic Dry Index. Changes in the index will affect the daily rates Excel can charge customers. Theoretically, a major crash in the index could drive daily rates below the $5 thousand dollar daily operating cost. But that’s very, very unlikely. The BDI would have to fall to 888 points to reach Excel’s breakeven point. The index currently stands at 3058, and it’s in an up-trend. That means the index would have to plummet nearly 70% before Excel would fail to record a profit. In fact, the BDI has only momentarily reached that level 4 times in the past fifteen years. That explains why Excel, a company listed in 1998, has produced six consecutive years of handsome profitability.

There are two main factors that could cause the BDI to fall. Either demand for dry bulk commodities plummets or a major increase in the supply of dry bulk vessels hits the market. I can assure you that neither are going to happen.

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Excel Maritime Break Even Point
Excel Maritime Break Even Point

I can assure you that Excel’s man- agement is top notch. Their policies are sound. They adhere to strict acqui- sition criteria when purchasing new vessels. They’re not reckless or greedy. Just last Thursday, I heard Excel CEO Christopher Georjakis reiterate his company’s conviction. He stated that Excel secures 30% of a vessel’s acquisi- tion value in chartered revenue before they even make the actual purchase. That shows me management’s respon- sible with their balance sheet.

The world’s shipping fleet is projected to grow at an annual rate of 5% over the next three years. World trade growth projections are well above that number. Analysts anticipate world trade to maintain levels of approximately 8%. And China’s economy, the main driver behind dry bulk prices, continues to steamroll forward. The IMF projects China’s real GDP growth to average around 9 percent in 2005. Analysts project the BDI to perform well in the second half of this year as China restocks its inven- tories of iron, coal, and other commodities.

And it’s worth noting that shipping companies are not totally exposed to fluctuations in the dry bulk market. They typically split their fleet into two types of employment. We refer to the first type as fixed employment or charter rev- enue. Ships operating in this capacity are essentially rented for a fixed price over a certain period of time. Those periods tend to be either 12 or 24 months. On the upside, this allows Excel to lock in a daily rate for assured future rev- enues. This also hedges the potential risk against a major drop in the BDI. On the downside, Excel can’t cash in if the BDI shoots up while the ship is under contract.

We refer to the second type of employment as the spot market. The spot market provides ships for immedi- ate delivery. Assuming a ship is available, it can be imme- diately purchased for the going market rate. This method allows Excel to take full advantage of a bull market in dry bulk shipping. Since operating costs are fixed (5K per day), increases in the BDI shoot profit margins even high- er for spot market ships.

Earlier this month, Excel successfully completed the transition to be listed on the New York Stock Exchange (NYSE). This is no small feat. The NYSE is the most exclusive U.S. market. And Excel stands as the only sole dry bulk carrier to call this home. This move will certainly expand Excel’s profile and increase investor awareness.

Excel also stands apart from its competition. First, its major competitors are private com- panies based in Southeast Asia. So you could either find a way to dip into privately-held Asian conglomerates, or you can buy this company.

If you want to take advantage of the booming dry bulk markets, this is pretty much your only option.

Other analysts are optimistic as well. Earnings per share are projected to increase 25% in 2006 from $2.83 to $3.78 per share.

Right now Excel is cheap. It’s trading at slightly below book value with a price/earnings ratio of 5.74. As earnings increase over the next 18 months, expect the share price to follow suit.

Excel’s share price has dropped 43% from its high earlier this year. Look for its stock to climb much further in the months to come.

China will continue to grow, and the shipping busi- ness will grow with it. I’m very optimistic on this compa- ny’s outlook for the remainder of this year. Even if it creeps back to half of its 52-week high from its current price, you’ll be making a 40% return.

Buy shares of Excel Maritime Carriers Lt. (NYSE:

EXM, $15.05) up to $17. Use a 25% stop loss (not a trailing stop loss) and be prepared to hold this posi- tion for at least through the rest of the year. We’ll take another serious look at the dry bulk markets at the end of December and inform you of our analysis.

Rising Oil = Rising Inflation?

What are you paying at the pump these days?

Here in Baltimore, a gallon of regular unleaded costs you a bit over three dollars. In fact, the cost of unleaded

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rose 44% in the third quarter. Translated, it cost me approximately $29.75 to fill up my four-door coupe three months ago. Today, a tank of gas runs approximately $43. Rising gas prices are taking their toll.

Oil prices affect much more than our monthly gas bills. Higher prices have a huge impact on the economy as a whole. Every product you buy off a shelf (Wal-Mart, for example) has to come from somewhere. Meaning, it has to be shipped (sticking with this issue’s theme). How do we ship the majority of goods across this country? You guessed it. We ship by truck. Higher gas prices drive the trucking industry’s costs up. Way up.

Unlike ships, fuel accounts for 25% of the cost of running a truck. Consequently, those costs get passed onto you, the consumer.

I say this for one reason. Moderate inflation may become more of an issue in the months ahead.

“In inflation, everything gets more valuable except money.” Our economy has produced low to moderate inflation over the past twenty years. Most people never think about inflation. They believe inflation rates work like interest rates – meaning, they’re fixed and utterly con- trolled by the Federal Reserve. They know it’s there, and “they know” it’s not serious. As one colleague put it: “It’s not something that could ultimately destroy me.”

I agree. It won’t destroy you. But if it does occur, it won’t be entirely pleasant either.

There are signs it’s already beginning. The core index, which excludes food and energy items, rose an unexpectedly large 0.4%, the biggest increase since a 1.5% climb in October 2004. It won’t be long before the mainstream press pays the issue more attention.

But for now, lets focus solely on oil. Oil prices alone are a great indicator of inflation. This fact has proven true time and time again. Over the past thirty years, the correlation between oil prices and the inflation rate have only experienced one major separation. That took place between 1974 and 1975. As the chart to the right indi- cates, the price of oil has continued to rise over the past three years without a major spike in inflation. It’s only a matter of time before inflation catches up. Based on oil prices alone (we’re excluding the China factor here) the inflation rate could reach 8%. The current inflation rate is 3.17%. I don’t think that will happen, but a moderate rise over time wouldn’t surprise me in the least.

Benjamin Graham notes that the stock market lost

money in 8 of the 14 years inflation exceeded 6%. This is just something you may want to keep in mind. Watch oil prices and interest rates. No one’s ever sure what the Fed will do next. But if history is any indicator, they’ve certainly made access to money highly attainable and relatively cheap.

Graham notes two specific inflation fighters: REITs and TIPS. Of course, gold offers another potential hedge as well.

Portfolio Notes:

We stopped out of QLT (Nasdaq: QLTI) in early August when the share price hit $8.12. Trials of drug Visudyne plus photodynamic therapy failed to reach its two-year goal in late-stage trials involving age-related mac- ular degeneration. Furthermore, growing competition gave us concern that QLT would lose market share. This set- back was followed by CEO Paul Hastings’ resignation this week over differences with the board of directors.

On a brighter note, shares of ID Biomedical (Nasdaq: IDBE) jumped 14.7% this month. The stock price took off following Britain’s GlaxoSmithKline Plc (LSE: GSK.L) bid to buy ID Biomedical for around $1.4 billion. The offer, C$35 for each ID Biomedical share, represented a 13% premium at the time of the announce- ment. We’ve done the valuation, and the offer is fair.

We think this is a good deal for IDBE shareholders. GlaxoSmithKline has both the experience and presence to lead IDBE through the FDA process for its many promising vaccines. The FDA approval process is something very diffi- cult to negotiate. You need an experienced bigger brother to take you through it. That’s exactly what GSK offers. Shares of “No Risk” pick Nokia (NYSE: NOK) continue to rise. The share price jumped another 6.8% this month.

Shares of “No Risk” pick Nokia (NYSE: NOK) continue to rise. The share price jumped another

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Good Investing,

Good Investing, Christopher Hancock with Porter Stansberry P.S. As you may have already noticed, Christopher Hancock

Christopher Hancock with Porter Stansberry

P.S. As you may have already noticed, Christopher Hancock is the primary author of this month’s PSI

issue. Christopher has been working very closely with Porter for some time, and is also the editor of the Asia Strategy Report.

In future issues, he will bring his considerable busi- ness experience and unique outlook to PSI.

Porter Stansberry’s Model Portfolio

Prices as of October 5, 2005

 

Ref.

“No Risk”

Symbol

Date

Ref. Price

Recent

Dividend

Description

Action

P/L

Exelon

EXC

Oct-02

$21.50

$51.48

$3.45

Most productive nuc.

Hold

155%

Raytheon

RTN

Nov-02

$29.00

$36.79

$2.46

Civil aviation

Hold

35%

Nokia

NOK

Jul-04

$14.65

$16.72

Profitable telecom

Buy

14%

Digital Insight

DGIN

Oct-04

$13.75

$26.23

Online banking

Hold

91%

ProQuest

PQE

Jan-05

$28.80

$36.52

$0.20

Digital publisher

Buy

27%

Valhi

VHI

Mar-05

$16.20

$17.55

Titanium holding Co.

Buy

10%

USG Corp

USG

Aug-05

$51.51

$66.25

Asbestos settlement

Buy

29%

RadioShack

RSH

Sep-05

$24.59

$24.22

$0.45

Huge buybacks

Buy

-2%

The “Next Boom” Walt Disney

DIS

Oct-03

$21.50

$24.23

Moviebeam

Buy

15%

Convergys

CVG

Apr-04

$15.71

$14.00

Global outsourcing

Buy

-11%

Journal Register**

JRC

May-05

$16.31

$15.36

$0.02

Compounding Machine

Buy

-6%

Malaysia ETF

EWM

Aug-05

$7.49

$7.25

East Asia rebound

Buy

-3%

Excel Maritime Medical Technology

EXM

Oct-05

$15.05

$15.05

Dry bulk shipping

Buy

NEW

Celgene

CELG

Aug-03

$18.00

$51.51

Thalidomide

Hold

186%

ID Biomedical

IDBE

May-04

$9.40

$29.29

Vaccines

Hold

212%

Antigenics*

AGEN

Nov-04

$6.52

$5.28

Cancer vaccines

Buy

-19%

Elan

ELN

Jun-05

$7.50

$8.21

Return of Tysabri

Buy

9%

QLT "Victim" Stocks

QLTI

Jul-05

$10.42

$7.52

Prostate therapy

Stopped Out

-28%

Martha Stewart Omn.

MSO

Jun-05

$31.69

$22.76

Overhyped publishing

Sell Short

29%

Current PSIA Average:

41.3%

2005 S&P 500

-1.2%

Please note: our investment philosophy requires limiting risk through the use of stop losses and trailing stop losses. Unless otherwise noted in the text, all "No Risk" recommendations use a 25% STOP LOSS. All other recommendations will follow a 25% TRAILING STOP LOSS strategy. NEVER ENTER YOUR STOPS INTO THE MARKET. KEEP SUCH INFORMATION PRIVATE.

Prices as of market close October 5, 2005. I want to make a quick note about our recent prices. I’m using the closing price of the day a stock is recommend- ed. I want to be clear here: this portfolio is not intended to represent the exact prices at which you could get in or out of a stock, rather, it represents the value of our insights at the time our material is published.

PSI's Model Portfolio does not represent any actual investment result. Our reference price represents only the price of our recommended securities at the time we wrote the recommendation. Our sell or "stopped out" price represents the closing price at the time a reasonable reader would have had the opportunity to sell – typically the day after such a recommendation is given.

* SPECIAL SITUATION: Buy Antigenics below $10, no stop loss. Keep your position size small -- no more than 2% of your portfolio. If the price increases by more than 100% before Oncophage results are released to the public, bank half of your shares. ** SPECIAL SITUATION: Because of its heavy debt load, Journal Register cannot be considered a "No Risk" stock, however its business model is attractive enough to warrant a wider stop loss. Use a 25% STOP LOSS -- not a 25% trailing stop loss -- on this security.

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