Bean Counters

Cockeysville, Maryland

* * * Yes… but where are the customers’ yachts? Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns will soon pay their 173,000 employees $36 billion in bonuses. If you do business with these firms, you’re nuts. They’re not making that kind of money by giving you their best picks.

* * * S&A Oil Report Editor Matt Badiali has the hottest stock in our coverage universe. A gold exploration company, it has a big find in Africa… and a lot of major gold companies nosing around it. Word on the Street is that the company will soon be acquired. The stock shot up another 15% on Friday. With the Kinross/Bema deal announced today, there’s more and more reason to think this African gold deal will get done.

Badiali’s pick is already up more than 50%… since August. But, if its reserves were measured conservatively and valued at the same level as in the Kinross/Bema deal, the stock would be worth another 248% from here, according to Badiali. If you measure the reserves a bit more liberally, it’s worth another 553% from here… so this stock might be hot for a while. Check out Badiali’s S&A Gold Report.

* * * It was probably the dumbest thing I’d ever seen published… anywhere. Fortunately, we didn’t write it. Last week, one of the financially illiterate juveniles at the Daily Reckoning (not Bill Bonner) claimed that peak oil would lead to the bankruptcy of ExxonMobil. It was hard to decide which part of the argument was more ludicrous.

After I finished laughing, I spoke to someone who knows all there is to know about ExxonMobil’s prospects and its balance sheet, Dan Ferris, editor of Extreme Value. Says Ferris, "At around six times pretax earnings, Exxon is like a AAA bond yielding 16%, with a coupon that grows whether oil is $70 or $7… It has returned more than 14% a year to investors for more than 50 years. It has $32 billion in unrestricted cash on its balance sheet, and it generated $29 billion of free cash flow the last four quarters."

ExxonMobil made a new all-time high today.

* * * And now… all kinds of vitriol about Dan Ferris’ recent recommendation of Wal-Mart and his discussion of what he calls "the war on the poor" – union organizers who are spreading lies about Wal-Mart to demonize the business.

First, someone at the Daily Reckoning rolled Howard James Kunstler out of the basement to criticize Ferris’ analysis. Kunstler is a hack who’s been claiming the world is going to end tomorrow for the last 20 years. His latest book, The Long Emergency, says we’re all going to die because we’re out of oil.

Apparently, Kunstler doesn’t like Wal-Mart either. Faced with the knowledge that Wal-Mart employs millions of people who probably couldn’t work anywhere else and saves poor families thousands of dollars per year on groceries, Kunstler complains that the company has cost our society billions in so-called "social amenities." I’d guess Wal-Mart’s customers and employees think that’s a fair trade. Not Kunstler. He knows what’s good for us… And he says of Ferris, "Dan Ferris’s bean-counter view of the phenomenon is limited to an extreme."

Watching Kunstler try to match wits with Ferris is like watching dwarf tossing. It’s supposed to be funny. But it’s only sad.

* * * Here’s what Kunstler wrote about Y2K seven years ago, back when it was the best way to scare people into buying a nonsensical book:

"Writing this in April of ’99, I believe that we are in for a serious event. Systems will fail, crash, seize up, cease to function. Not all systems, maybe only a fraction, but enough, and enough interdependent systems to affect many other systems. Y2K is real. Y2K is going to rock our world… I won’t knock myself out trying to empirically demonstrate the ‘truth’ of these assertions. It seems to me that the Y2K problem is so broad, systemic, and unprecedented that imagining its repercussions calls for something beside conventional thinking."

Funny isn’t it? When you’re not worried about actually having to prove what you say with "conventional thinking," you can pretty much write whatever you want. And you can bet that what Kunstler wrote about Y2K isn’t featured on the dust jacket of his new book.

* * * Meanwhile, back on the Wal-Mart warpath: Reader David Rich left us because of the facts we published about Wal-Mart. "I can’t believe the garbage you sent out about Wal-Mart. All those wonderful employees who Wal-Mart is being so good to get substandard wages, little or no health benefits, the women are discriminated against, in some stores people are forced to work off the clock, etc. You fail to mention the conditions under which the people who produce the goods on the shelves labor… This is not a business model to which we should look with approval, but one that needs to be dealt with as the people-destroying model that it is. I am unsubscribing… I can’t in any way support this kind of attitude."

Porter Comment: We’re only bean counters, David. And here are the beans we counted, in regards to your concerns.

Worry No. 1 – Wages. Wal-Mart’s average full-time wage is $10.11 per hour. That’s higher than H&R Block ($8.00), RadioShack ($5.25), 7-Eleven ($7.35), and McDonald’s ($6.25). The national minimum wage is $5.15 per hour. If you hate Wal-Mart because of "sub-standard" wages, it’s time to start picketing hundreds of other great American businesses.

Worry No. 2 – Health Care. Wal-Mart’s full- and part-time employees are eligible for as many as 18 different health plans. Wal-Mart provides health care for more than a million people. The latest Wal-Mart plan costs just $11 per month. Preventive dental coverage with no deductible is available to individuals for as little as $6.52 per month and to families for $20.64 per month.

Worry No. 3 – Cheap Goods from China. We can’t lie. It’s true. Wal-Mart buys tons of stuff from China. But, even so, its Chinese purchases only make up 11% of its merchandise. The other 89% comes from 61,000 American suppliers.

* * * * * * * * * * * * * * * * *

Speaking of bean counting…

Our best investment results occur when we’re able to match together high-quality businesses, extremely low share prices, and contrarian sentiment. Or, put simply, when we get the chance to buy great businesses that no one else wants.

The best opportunity to make solid contrarian investments right now is probably in the homebuilder sector. Sjuggerud recommended one of these stocks recently. I think there’s great opportunity, too, so I asked our top "bean counter" – Ian Davis – to study the situation purely from a "numbers" point of view. Ian is a mathematician by training and inclination. We’ve purchased several huge databases of stock information for him to sort through. And we’re collecting solid indicators and correlation studies like a farmer at harvest.

We’re collecting this information in preparation for a new service that will offer purely quantitative investment advice, based on indicators we can prove mathematically will work. We think this kind of rigorous empirical study is the perfect match for our fundamental investment advice.

Today, I’ll share with you Ian’s latest report. It’s on homebuilders…

Now’s the Time to Speculate in Homebuilders

Shares of leading homebuilders, such as Pulte, NVR, and D.R. Horton, enjoyed a fantastic ride up between August 2005 and July 2006, when stock prices rose 48.7%. Since then, investors have anticipated poor earnings and bailed out on the sector, causing the share prices to drop 17.9% in the past four months.

I’m recommending a six- to 20-month-long position in Toll Brothers (NYSE: TOL), a leading builder of "McMansions." Family-controlled Toll Brothers is the most widely shorted homebuilder, so its shares have an added potential to appreciate as sentiment improves in the sector.

Two factors have the homebuilders poised for a rebound. Last month, the National Association of Home Builders survey on builder confidence registered its lowest level since 1991. Low extremes in this confidence survey signal market bottoms in homebuilders. This is a proven contrarian indictor: Following the last extreme low in this survey, homebuilders gained 270% over the following 24 months.

In addition, the supply of new homes (according to www.census.gov) reached a high of 7.2 months in August. This is another strong contrarian indicator. Homebuilders do very well for one to two years following extreme supply gluts.

*Datastream Homebuilders Index: Consists of an equal weighting of the following seven stocks: Pulte Homes, D.R. Horton, Centex, Lennar, Toll Brothers, KB Home, and NVR.

Toll Brothers has the largest short interest of major homebuilders. As share prices move higher, eventually these shorts must be "bought back." This buying pressure should provide us with better-than-average returns. Toll Brothers also appears to be in the beginning of an uptrend – up 30% since its July 2006 bottom.

While indicators are strong for the sector in general, Toll Brothers is uniquely positioned to benefit from an upturn.

Good investing,

Porter Stansberry

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame