Corn soaring...

Corn soaring... Doug Casey: 'Buy cattle'... Why Doc likes Wells Fargo... Buffett betting on a housing recovery... Doc's new pick... Ackman's Procter & Gamble bet... P&G vs. JCP... Reader feedback on speculating safely...

 In last week's Digest, we explained how the worst U.S. drought in nearly 25 years is sending corn and other feed-grain prices soaring.

Corn is up 33% in the past month near 10-year highs. And the high prices are pushing ranchers to sell cattle... This year's drought follows a 2011 drought in the southern Plains (cattle country). It shrank the U.S. herd to around 91 million head – the smallest in almost 60 years – and pushed beef prices to record highs.

Still, ranchers are increasing the pace of slaughtering cattle... In the week ending June 30, 52,700 cows were slaughtered. That's 3% more than a year ago during the peak of the Plains drought.

 So... the U.S. cattle herd is at its lowest count in 60 years, beef prices are soaring, and ranchers can't slaughter their cattle fast enough... The contrarian should be interested in cattle farming today. I asked my friend Doug Casey – a contrarian who happens to be in the cattle business – for some insight...

 Bullish news for Doc Eifrig's favorite bank, Wells Fargo... At the Allen & Co. media conference in Sun Valley, Idaho – an annual meeting attended by many of the world's most successful businesspeople – legendary investor Warren Buffett discussed Wells Fargo. Buffett's holding company, Berkshire Hathaway, is Wells' largest shareholder with 7% of the company.

Before getting into what Buffett said, a bit on why Doc is bullish on the banking sector... and Wells Fargo in particular. From the May 2012 issue of Retirement Millionaire:

 Wells Fargo is a $180 billion banking giant. It suffered less than other major banks during the 2008-2009 crisis because it had focused on making conservative mortgage loans. That's what Buffett likes about the bank... He told Bloomberg over the weekend, "[Wells Fargo's] got a sensational mortgage operation... The total mortgage market was at the $3 trillion level not that long ago. If it goes back up to $3 trillion, I hope Wells is doing a third of those."

 Wells originated 33.9% of every U.S. mortgage in the first quarter (compare that to 10.6% for JPMorgan). And it's trying to boost its market share to 40%. The company recently announced mortgage application volume hit a record $208 billion in the second quarter. Record-low mortgage rates – a 30-year fixed mortgage now stands at 3.56% – are speeding up applications.

As Doc noted above, as Wells Fargo originates more and more mortgages, the bank makes more money.

Buffett recently added to his Wells Fargo position. It's part of a larger bet on a housing recovery... He also bought a brickmaker, grew Berkshire's real-estate brokerage, and partnered with holding company Leucadia National on a commercial property venture.

 On the topic of super-safe companies paying healthy dividends, we turn to my (Dan Ferris') recommendation of World Dominator Procter & Gamble... The consumer products giant jumped 3.7% last Thursday on news that activist investor William Ackman took a position in the company. Shares were up another 2.2% on Friday. According to Bloomberg, Ackman said his P&G investment is his "largest initial investment ever." And that's coming from a guy who invested $2 billion in Target in 2008...

Ackman, the billionaire founder of hedge fund Pershing Square, is known for taking big positions in companies and agitating for change. He's doing the same thing right now with department-store chain J.C. Penney. While we think the fundamental flaws in J.C. Penney could overpower any manager, P&G is another story... In this case, Ackman is taking a position in a world-class company and trying to improve margins and efficiency.

P&G is the world's largest consumer-products company. It owns 22 brands with annual sales of more than $1 billion (like Gillette and Tide). It owns another 19 brands with sales that exceed $500 million.

 P&G has all the financial clues that tell you it's a great business. It gushes free cash flow... Over the last three years, P&G has generated an average of about $11.5 billion a year of free cash flow. It's consistently profitable... Operating margins have stayed right around 22%-23% over the last decade.

On top of that... management knows how to reward shareholders... The company paid a dividend every year for 122 years in a row and raised its dividend 58 years in a row. It pays out more than half its net profits in dividends. That's why you own a piece of a business, isn't it? So you can get paid every year, by taking the majority of the net profits out of the business.

Right now, P&G's current dividend yield is 3.5%. That doesn't sound like much, but its last dividend increase was 7%... more than enough to beat inflation. It's far, far more important to get an inflation-beating raise every year than to earn a high current yield.

 Now, you might wonder, "If P&G is such a great business, why is Bill Ackman talking about fixing its problems?"

It's a good question. But you have to put it in context. First of all, Mr. Ackman likes to buy stocks in great businesses. We might disagree with him about J.C. Penney... But regardless, its biggest stumbles have been recent: generating net losses, cutting the dividend, and pursuing a bizarre strategy designed to alienate its core customers. But it was a pretty good business for a long time.

But there's no doubt that P&G is a stellar business, even if Mr. Ackman believes it could stand some improvements. That's why he just put billions of dollars into its stock.

Its problems are relative to the quality of the business... For Procter & Gamble, a problem is when the gross margin goes from 52% in 2010 to 51.6% last year. Compare that with J.C. Penney, which saw sales drop to their lowest level in more than a decade. Its sales have fallen in four of the last five years and will likely fall again next year. J.C. Penney generated a net loss of $152 million last year.

P&G doesn't generate losses, period. P&G sales grow slow and steady every year (except in recession years). The company has excellent growth prospects ahead of it. Its net sales hit an all-time high last year and will likely hit another new all-time high this year.

J.C. Penney recently eliminated its dividend. Procter & Gamble recently raised its dividend and will likely do so again next year.

J.C. Penney is in a Sears-like decline (being in the same beleaguered industry as Sears doesn't help)... I doubt even the very capable Mr. Ackman will be able to stop it any more than the equally capable hedge-fund manager Eddie Lampert has stopped Sears' decline. Meanwhile P&G will grow, gush free cash flow, pay higher dividends, and generate consistently thick profit margins with or without Mr. Ackman's presence.

 In the August issue of The 12% Letter, due out Thursday, I will discuss other businesses like P&G. I'll show you why they're your best bet for making money in stocks. And I'll do something you hardly ever see in a newsletter. I'm going to show my readers exactly what it means to own stock in a business, and why it makes little sense to own stocks other than World Dominating Dividend Growers (WDDGs), like Procter & Gamble.

Big blue-chip, dividend-paying companies can sound a little boring... But my job isn't to excite you. It's to show you how to make money safely. That's harder than ever, with everything that's going on in the world today. I'm going to show 12% Letter readers a basic metric that will help them eliminate 90% of all the stocks they look at buying... and help them focus on the few truly excellent businesses out there, which can help them realize fat, steady, and safe returns over the next several years.

I could sell a lot more newsletters by focusing on much sexier stories than Procter & Gamble. But I'd rather sleep soundly at night, knowing I've shown subscribers how to make money safely. The 12% Letter doesn't cost much, just $39 a year. If you don't like it, you can call us any time during the first four months of your subscription and we'll refund your money. If you'd like to subscribe immediately to The 12% Letter – and get access to Thursday's issue as well as several special reports on income investing strategies – click here. (You won't go to a long promotional video.)

 New 52-week highs (as of 7/16/12): Western Asset High Income Opportunity Fund (HIO), ProShares Ultra Health Care Fund (RXL), Vanguard Inflation-Protected Securities Fund (VIPSX), Exact Sciences (EXAS), Eli Lilly (LLY), Monsanto (MON), Integrys Energy Group (TEG), BLADEX (BLX), Enterprise Products (EPD), Two Harbors (TWO), and Philip Morris International (PM).

 In today's mailbag, one reader complains he isn't getting enough of our e-mails. We just can't win... What's your gripe? Let us know at feedback@stansberryresearch.com.

 "I have been a subscriber of your products now for over a year and love them all but just recently in May you stopped sending me all the daily emails! They just stopped and this is the first e-mail from you since then... where did all the e-mails go?" – Paid -up subscriber John Dumas

 "Liked your reply to Bonnie who left her job and pursued a home-based business. My hat is always off to anyone willing to break convention and throw the dice.

"In 1985, I left a secure job with a major oil company to pursue a concept that I knew would eventually blossom and be extremely profitable. Our products were premature for the market. But their time has come, and today I have a very successful and fast growing international petroleum products business. For many years we struggled against huge obstacles and the going was extremely tough against very long odds. Yet we remained firm in our belief, recovered quickly from each blunder, remained aggressive, and made moves in complete contravention to conventional business strategy. It has paid off in spades.

"Over the years, I have also followed some of your recommendations – as well as others from non-traditional investment advisors. These have done well. I also have also sponged into my brain countless books on economics in an effort to get a macro picture of how it all it all works – however dysfunctional. My goal now is to leave a comfortable legacy for my family and for my employees.

"I do not always agree with some of your moves – but Porter, you are spot on in your broader view of things and your advice has made me a lot of money. Sadly, most of the investment world remains encased in 'normality bias.' Immense trials are ahead for most, but with such massive change comes immense opportunity. A pity that so few see it." – Paid-up subscriber Ralph E. Lewis

 "I appreciate your essay on speculating safely... I have been gradually selling positions as I wanted to build up my cash reserve. I can see that it is difficult to keep one's cash as there are so many opportunities every week. The Stansberry team is great a creating stories and making investments sound so very compelling to take action.

"The Extreme Value portfolio also has lots of places where I can use the cash. I was wondering if you have any guidelines for when one should deploy their cash reserves? For example, Porter recommended a great sounding Trophy Asset in his Investment Advisory that has an incredible 72% discount to Tangible Asset. Or a few months ago, the Constellation Brands stock was hammered. Are these the type of things that I should be looking for? Or should I be waiting until fear and panic (VIX gets super high) has hit the market?" – Paid-up subscriber Ron Karney

Ferris comment: I'm glad you enjoyed the current issue of Extreme Value. I was trying to provide readers with a good guide to keeping their capital safe while exposing themselves to huge upside potential. My sincerest hope is that they'll keep it nearby for those times when they're tempted to "take a flyer" with their hard-earned capital.

The answer to your question about what to look for is "both." Needless to say... I'm barred from giving individual advice. But in general, all subscribers should keep their eyes on great businesses and take advantage of opportunities to buy when their prices fall. But also keep in mind that, every few years, Mr. Market gets rather depressed and slides 10%, 20%... sometimes more! If the market surges like it did from early 2009 through early 2011, it's probably time to get cautious. In April 2011, I told Digest readers to hold plenty of cash. The market peaked within a few days, then cratered 20% in five months. Last fall, it was time to get back in, and we found some new ideas.

It's hard to hold onto cash. But if you know what you're waiting for, it gets a lot easier. Waiting for the best businesses and safest speculations to get cheap is one of the successful investor's primary activities.

Regards,

Dan Ferris and Sean Goldsmith

Medford, Oregon and New York New York

July 17, 2012