Stocks sure are happy today. The S&P 500 is about 26% off its March 6 bottom as I write and roughly 13% above the previous November bottom... Of course, it's about 47% below its October 2007 high.
Individual stocks are attractive. Microsoft has $20 billion in cash, $2 billion in debt, and trades at an enterprise value (market cap, plus debt, minus cash) of less than 10 times trailing free cash flow.
But the S&P 500 as a whole... who can be sure? Bloomberg's Jonathan Weil has come up with an interesting observation investors should know about. Weil says judged by an accounting measure called comprehensive income, "S&P 500 companies had combined losses in the past four quarters of about $200 billion, according to data compiled by Bloomberg and my own review of the companies' financial reports. In other words, there is no P/E ratio, because there is no E."
Comprehensive income is the change in shareholder equity in a given period, not including dividends and capital injections. Using the better-known net income figure, the S&P is selling for around 25 times earnings. But Weil calls net income, "botox earnings," because the figure is "unnaturally stiff and cosmetically enhanced."
So who knows what the S&P 500 is worth? And with stocks like Microsoft, Berkshire Hathaway, Procter & Gamble, and others selling cheap, who really cares?
I've got a whole list of companies whose earnings – no matter how you measure them – always go in the right direction. I call these stocks "World Dominators" because they're the No. 1, world-dominating companies in their industries. Right now, the list is eight companies long. They're performing so well lately, only half the list is still cheap enough to buy.
Mr. Obama says, "Let 'em eat cake – and have it, too!"
According to a typical, wrong-headed Washington Post op-ed, Mr. Obama will give us, "more regulation, more government intervention, a more generous safety net – without abandoning America's commitment to free markets." As if Dolly Parton could have breast reduction surgery without abandoning her prominent cleavage. You can have one or the other, but not both. In fact, we abandon free markets in direct proportion to the extent that we have more government, regulation, and safety nets.
The Obama administration says it wants to "partner" with private and public investors for its new toxic-asset purchase plan, the "Public-Private Investment Program," dubbed PPIP... But the more details that leak, the more it looks like the government is lying and really only wants to work with a handful of enormous investment firms.
The Treasury rules for participation state applicants must have a minimum of $10 billion in toxic securities under management... Repeat, that's not $10 billion total under management (which would already exclude 99% of the world's investors), that's $10 billion of a specific, toxic asset. And those assets must be "first tier" assets. For example, the applicant must own collateralized debt obligations (CDOs), and not CDOs squared – which are CDOs secured by other CDOs.
(However, we heard the actual application for entrance into this fund is a breeze. The only question is, "Are you Bill Gross?")
Ray Dalio, though he is not Bill Gross, is the manager of the world's largest hedge fund, Bridgewater. It's one of the few eligible to participate in PPIP. Dalio agreed to participate last week, but changed his tune in a recent note to investors, titled "Why We Decided Against Buying in the PPIP and Why We Doubt That It Will Be Broadly Subscribed."
Dalio noted the obvious conflict of interests of having only four of five fund managers running this program. He notes these managers will have "both the government and the investors to please and... they will get their fees regardless of how these investments turn out." Dalio says the limited number of managers "raises possibilities (or at least perceived possibilities) of them colluding because they all know each other."
Dalio views the investment fund as a lose-lose proposition for everyone involved, regardless of the outcome. "There will be reasons for politicians to complain and to focus on the five winners to see how they 'abused' the system," he wrote.
Warren Buffett might be the world's investing hero, but he's no match for the barrel of a gun (the source of all political power, according to Mao Tse-tung)...
Buffett's Berkshire Hathaway is now paying more in the bond market than Fannie Mae and Freddie Mac (which collectively lost $108.8 billion last year), Citigroup, and Bank of America.
Berkshire paid 4% on its $750 million offering of the firm's triple-A-rated debt last week. Fannie, Freddie, Citi, and Bank of America all found buyers for notes paying 2.375% or less.
"Highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels," Buffett wrote in his latest annual letter. "At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one." Makes you wonder how long such a moment can last. I doubt forever. Meantime, I guess it's Cripples 1, Gibraltars 0.
The U.S. government's gun barrel isn't the only one the world likes better than Berkshire Hathaway. As we noted once before, default insurance on Berkshire Hathaway's debt was recently priced higher than the same type of insurance for the sovereign debt of Vietnam.
So here we are, with all the governments getting better deals than the greatest businesses on Earth... Berkshire A shares are selling for $90,000 each, giving you its one-of-a-kind, Buffett-built investment portfolio and assigning an absurdly cheap single-digit earnings multiple to its 67 noninsurance businesses.
Aside from the recent downgrading of Berkshire's credit rating from triple-A, the stock is also cheap because some people, like short seller Doug Kass, think Buffett's investing style has drifted too far outside his area of expertise with his "exotic" bets on derivatives. But Buffett's stock-index options and other derivatives are well within his area of expertise. They're insurance-like, and Buffett is certainly the pre-eminent insurance mogul in the world today.
Back in 1999-2000, when Buffett refused to participate in the Internet mania, everyone said he'd finally lost it. Berksh
ire's share price was cut in half. Then the Nasdaq crashed, and Berkshire doubled in less than three years.
Last year, the market crashed, then Berkshire's share price fell just below half its December 2007 high of $151,000 per share. It could easily double off its panicky March bottom of a bit more than $70,000 per share.
I recently saw a video in which Street.com analyst James Altucher said to buy Berkshire's smaller competitors because they're cheaper on metrics like price to book. Not true at all. Berkshire is around 1.24 times book, while Merkel sells for 1.30 and W.R. Berkley for 1.22. That's all the same valuation ballpark. Berkshire is much more diversified than the other two, and a better, more nimble investor.
The stock is already 29% off its recent panic bottom, outperforming the S&P 500 by about 3%. Not bad for a company with a $140 billion market cap.
Berkshire Hathaway pounds out cash profits like few other companies and has the greatest financial fortress of a balance sheet of perhaps any large company in the world. When it's cheap, you buy it. Period.
If you want to get access to the World Dominator list I mentioned above, plus everything I've ever written in Extreme Value about Berkshire Hathaway, and my favorite way to buy gold today, just click here.
New highs: none.
Lots of folks are pumped up about Porter's latest hot stock tip... Send us your questions and comments to feedback@stansberryresearch.com.
"I trust this wasn't an April Fool's post... I looked all over the web, and at two brokerage accounts, and from a stock price downloading site. Can't find this stock - SUCR - anywhere. you said it's been trading on the Toronto Exchange. Where can I find current and historical data on the price of this stock?" – Paid-up subscriber Randy Watkins
"I am an Aliance member and read your article on Fipke and SUCR. You mentioned it was trading on the Toronto exchange although I cannot find it - Any help would be appreciated." – Paid-up subscriber Tim Blanchard
"I read your April 1 Digest with great interest and didn't hesitate to put in a call to my broker Luke Smith at Global Resource Investments to inquire about SUCR. While I was waiting for Luke to call back I was googling information about Stumpy Fipke... yes, real person rich from diamonds... and SUCR... hmm... can't find it.... sort of looks like sucker... hmmm.. April 1.... OK... you got me! Luke said not to feel bad.. I was one of three who had called so far." – Paid-up subscriber Kathleen H.
Ferris comment: Oy!
Regards,
Dan Ferris
Medford, Oregon
April 2, 2009