Well, here we are. After two days of nonstop activity, we're all moved in. The kitchen and living room are all set up.
The house feels great. There's a seven-acre park out front. Nothing between us and the horizon, which is decorated with 9,500-foot Mt. McLoughlin in the distance and the 3,700-foot Roxy Ann Peak nearby. It's like the feeling you get at the beach, when you stare out at the ocean. It's a big, clean slate you can paint on with your imagination.
Given what's going on in the world right now, it takes a good imagination to invest safely. The Gulf of Mexico oil spill disaster alone has created a crisis of large proportions... and so ought to create an opportunity of equal proportion.
BP has a cap on the damaged oil well in the Gulf of Mexico. The latest report says the cap is approaching the upper limit of its ability, catching nearly 15,000 barrels per day. The U.S. Geological Service thinks somewhere between 12,000 and 19,000 barrels per day are gushing from the well. BP is building two relief wells nearby. That should finally stop oil from spilling into the Gulf of Mexico, but the wells won't be done until August at the earliest. A Coast Guard admiral says cleanup efforts will last well into the fall. I expect it'll be years before we know the full extent of the damage. I think it's also probable a year from now, the news media will barely remember the story.
In the Extreme Value Model Portfolio, I've got three stocks that have been hurt by the oil spill. Two are fantastic buys right now, and one is a World Dominator stock, the No. 1 competitor in its industry, and one of the best-managed, most profitable companies in the world. It's paid a dividend every year for more than 100 years, and raised its dividend every year for 26 years. It gushes free cash flow. It has a rock-solid, triple-A balance sheet loaded with cash and relatively little debt. It's trading for less than nine times 2010 earnings estimates. Great companies rarely get this cheap.
The incredible thing is, I have four more dirt-cheap World Dominators just like this one in the portfolio. They were left behind in the great garbage rally of 2009-2010. Now, they're the only good deals left in the stock market. My World Dominator picks are listed on the back page of every issue of Extreme Value. They're some of the greatest income stocks in the world, too. One of them has raised its dividend every year for more than five decades. To sign up for Extreme Value and get access to my one-of-a-kind list of World Dominator stocks, click here.
The total insurance liability for the Deepwater Horizon explosion and oil spill is estimated between $1.4 billion and $3.5 billion so far, according to the Wall Street Journal. The insurance industry seems to have lucked out... maybe 20% of the losses to date are covered losses. Even if the $3.5 billion upper limit turns out to be accurate, that's a far cry from the $41 billion cost of Hurricane Katrina.
The insurance industry also dodged a bullet when volcanic ash shut down major airports in Europe. Closing the airports helped avoid large business interruption liabilities.
The industry is now likely to raise prices for property coverage on oil rigs, as well as liability insurance for deepwater drilling. The best underwriting firm I know is W.R. Berkley. I recommended this stock in early 2008, and it was one of the only ones to finish up the year in the black. It ended 2008 up about 5%, while the overall market fell 38% that year. If anyone will be able to take advantage of superior pricing on difficult-to-price risks, it should be W.R. Berkley.
Berkley was one of the insurers on the oil rig that blew up. Its liability was $25 million, but after reinsurance kicked in, it owed just $5 million. Berkley says it'll raise oil-rig premiums by 40% now that it has a better understanding of what could go wrong. Berkley is probably worth two times book value, but trades at just 1.12 times book and less than 10 times earnings.
Jeff Clark has a good take on post-spill opportunities, too. One of his favorite oil indicators is screaming "buy." Jeff saw the exact situation set up last July, and readers made a huge gain in just two months. In addition to his buy signal, Jeff sees strong support for the oil sector at current prices... Oil stocks are trading near their lowest prices in a year. To take advantage of this setup, Jeff recommended "the epitome of a low-risk trade." This simple options trade could return up to 140% in a couple months, with little downside. S&A Short Report readers can access Jeff's latest issue for more information. If you're interested in subscribing to Short Report and accessing Jeff's triple-digit oil trade, click here...
We wrote it, did you buy it?
McDonald's is paying a 3.5% dividend... And the dividend is doubling every four years. At this rate, you'll be making a 7% yield in 2014 off today's price. McDonald's is the perfect stock for compounding. You can't feed a family for less money anywhere else. McDonald's is the cheapest place to eat in America. So McDonald's booms in recessions... which is why its stock price rose in 2008 while the rest of the market was crashing. McDonald's is a stock I want us to hold forever. – Tom Dyson, April 2010, The 12% Letter
Today, McDonald's announced global same-store sales rose 4.8% in May. Gross sales increased 5.5%. The company is continuing to see strong growth in its McCafe coffee drinks. Tom's readers are up around 30% on the trade.
We knew institutional investors would find creative ways to distribute income if the government raised taxes on "carried interest" – a form of incentive pay in the hedge-fund world. It turns out billionaire hedge-fund manager Eddie Lampert is the first to find his way around higher taxes (at least publicly). Lampert's ESL Partners distributed about $829 million of stock in Sears Holdings, AutoNation, and AutoZone to him on June 2. And the fund will transfer more shares to Lampert by the end of July. Because he's taking direct ownership of the shares, Lampert will only be taxed at the capital-gains rate of 15% when he sells the stock (the ordinary income tax rate is 39.6%). If there's anything Wall Street is good at, it's financial innovation. And this potential spike in taxes would be catastrophic to profits. We guarantee major investors already have dozens of ways to distribute their income to avoid higher taxes. To the professional investors reading the Digest, how are you handling the problem?
New highs: ProShares UltraShort Euro (EUO), Fairfax Financial Series C (FFH.PR.C).
Porter plans to respond on Friday to the Robert Prechter interview published by our Daily Crux service. But several readers have sent in their views of it. Send your comments to feedback@stansberryresearch.com.
"Regarding your interview with Prechter. Well done, it goes against your beliefs but you printed it anyway. It is my observation that most insights into the markets have some validity but not always to the extent anticipated. Prechter may be wrong but he is no lightweight, and I expect that he will be right to some degree at least.
"A recent observation by David Rosenberg on an article in The Economist points out that 50% of U.S. debt is due in the next 3 years. This means that 50% of the debt is dependent on shortish term interest rates as this debt is going to need refinancing. In other words, they do not really want to go down the inflation route as they cannot inflate away 50% of their debt. Either interest rates and inflation must stay low or they must convert this short term debt to long term debt." – Paid-up subscriber Humphry Hamilton
Ferris comment: There is no alternative to inflating it. You must consider the path of least resistance politically as we approach those maturities. Also remember, with an event everyone sees coming, the ultimate effect is anticlimactic. It's the anticipation period that's valuable, and then only to smart speculators.
"Kudos to S&A and the Daily Crux for 'printing' the interview with Prechter. While not a fan of some of S&A's marketing tactics, I appreciate the quality work in the newsletters and the Daily Crux. It's safe to say that only S&A would send its subscribers this type of interview with someone holding such a strong opposing viewpoint." – Paid-up subscriber Dean Northrop
Goldsmith comment: While we don't agree with Prechter's deflationary view, he's made some terrific market calls over his career. And poking holes in his contrary points will only make our thesis stronger. Make sure to read Friday's Digest, where Porter will refute Prechter's argument. And if you still haven't read the interview with the Daily Crux, make sure to sign up here... It's free.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
June 8, 2010