Four days unlike any other...

Four days unlike any other... What's wrong with financial media... S&P downgrade hypocrisy... The Day The Dollar Dies... Ratings agencies don't need to exist... Einhorn/Klarman buy World Dominators... WMT and MSFT: No-brainers... Jon Stewart on Ron Paul...

 I hope I've heard the last of "four days in a row where the S&P 500 moved more than 4%." The statistic has been repeated perhaps 100 times since last Thursday's closing bell.

But I haven't heard one person give the correct analysis. The correct analysis of last week's four-day 4% "streak" is this: It means nothing. You could take any four days in a row, measure the S&P 500's movement over that time, and come up with a new statistic that says, "Four days like this have happened X times in the past 50 years." That, too, would be meaningless. (Maybe I shouldn't have said that. I probably just gave some airhead at CNBC an idea...)

But that's the financial media's purpose, isn't it? They're there to look good and assign phony meaning to random events. It's a brilliant strategy. It guarantees they'll never, ever run out of things to talk about.

 The financial news sources everyone loves – from the Fox-ified Wall Street Journal to CBNC to Bloomberg Radio – all have a common theme... one that will help you become the worst possible investor.

The theme is simple: "Whatever just happened is important." Whatever stock just went up or down... whatever commodity everyone wants to buy today... whatever big political development the government wants you to focus on... whatever is being squawked about elsewhere is super-duper important. (There's even a financial TV show called "Squawk Box." They know exactly what they're doing, and they're doing a lousy job on purpose.)

Let's face it. If there were a financial news network – or even a single financial TV news program – devoted to learning about businesses, their competitive advantages, and (most important to investors) what businesses are worth... nobody would watch. It would put so-called investors (who are really just casino customers) to sleep.

So... we get "four days in a row of 4% movement on the S&P 500" repeated to death for a week.

 "The market is saying S&P's rating decision is wrong," Edward Marrinan, the head of macro credit strategy at RBS Securities in Stamford, Connecticut told Bloomberg. "The Treasury bond is still seen as the ultimate risk-free security."

The hypocrisy surrounding the S&P's downgrade of the United States' credit rating is absurd. As we already noted, the SEC is investigating S&P for insider trading around the downgrade. Michael Moore is calling for Obama to arrest the CEO of S&P. Meanwhile, we see praise and back-patting all around for Moody's and Fitch, the other two credit-ratings agencies, which maintained the U.S. at triple-A.

 In the same Bloomberg article we quoted above, Thomas Mann, a congressional scholar at the Washington-based Brookings Institution, said "It was really kind of bizarre that [Standard & Poor's] become political analysts." This is another argument you often hear... S&P didn't base its downgrade on financials. It based the downgrade on political instability. While our politicians did make a mockery of the system during the debt ceiling "crisis," the U.S. debt problem is glaringly obvious. From the May 2011 issue of Stansberry's Investment Advisory, titled "The Day the Dollar Dies"…

It's true the U.S. Treasury is "still seen as the ultimate risk-free security." But things change. Remember when "home prices always went up"? The rating agencies maintained their triple-A ratings of prime mortgage debt (and even worse, collateralized debt obligations – pools of crappy mortgages). And folks levered up to buy homes they couldn't afford, hoping increasing prices would allow them to extract more cash. It ended badly. Then, the markets turned on the rating agencies for not downgrading mortgages sooner.

 We've never placed much faith in the ratings agencies. While a change in credit rating may temporarily dislocate a market, market forces will prevail. That's why these tirades against the S&P are crazy. The mortgage crisis came without any downgrades form the rating agencies. And so will the U.S. debt crisis. Eventually our counterparties will tire of having their repayments inflated away. And they'll stop buying Treasurys.

 It's hedge-fund filing season (every quarter funds must disclose their positions via SEC filings). Today, we'll cover what some of the better-known managers are doing. David Einhorn, who runs Greenlight Capital, bought 5.75 million shares of Microsoft, bringing his position to 14.8 million shares. It's an interesting move, as Einhorn recently called for Microsoft CEO Steve Ballmer to step down.

Einhorn also increased his Apple position by 246,000 shares, bringing his total position to more than 1 million shares.

Microsoft is the world's most dominant software company. It's trading for around nine times earnings, and it yields 2.5%. It has more than $50 billion in cash and short-term investments. Apple has more than $76 billion in cash and securities. It's trading around 11 times earnings.

 Seth Klarman's Baupost Group made two new purchases during the quarter. His fund added 12 million shares of Microsoft and 5.5 million shares of BP.

 It seems Einhorn and Klarman have arrived at the same conclusion I arrived at almost five years ago. When you can buy big, safe blue-chip companies at dirt-cheap valuations, you "back up the truck" and fill it with shares.

For once, I can say without even a touch of absurdity that Einhorn and Klarman have nothing to tell me about this particular investment idea. I've been singing this song since I first recommended Wal-Mart in October 2006...

 You hear a lot about how Wal-Mart is having trouble competing with Amazon (even though e-commerce is less than 1% of Wal-Mart's sales). You also hear a lot about how it's mistreating its workers (even though it provides low-cost health insurance to more than 1 million people, pays full-timers more than H&R Block, McDonald's, and RadioShack, and attracts thousands of job applicants at new store openings).

You hear fewer mentions that Wal-Mart is doing record sales and now has more than 7,000 stores, over half of which are outside the United States. During a time of high unemployment and ill-conceived economic stimuli and jobs programs, Wal-Mart employs more than 1.4 million people in the U.S. and more than 2 million worldwide.

 Today, Wal-Mart reported a 12% increase in net income in the second quarter. Overall sales for the quarter grew 5.5%, with international sales growing more than 16%. The company raised its dividend 20.7% earlier this year. It spent almost $3 billion in dividends and share repurchases last quarter. Wal-Mart trades today for the absurdly low valuation of less than 11 times next year's estimated earnings.

If Wal-Mart is so bad, why does it keep growing relentlessly, raising its dividends, and buying back more shares year after year? When will all this bad news show up in the financials? Ever? Don't hold your breath.

And this is just one example. I listed five other stocks of World Dominating businesses, all of them as safe, cheap, and relentlessly growing as Wal-Mart, in my last Extreme Value weekly update.

 To be fair, Einhorn did discover Microsoft a couple months before me, back in the summer of 2006. I sent an internal memo around Stansberry, showing how Microsoft was cheap enough and generated enough free cash flow to take on enough debt to buy back all its outstanding shares and still pay out billions in dividends.

Porter recommended it to his subscribers a month later, and I put it in Extreme Value the month after that. I've never seen anyone anywhere else do the "buy itself" analysis of Microsoft. Extreme Value readers have known about it for almost five years now.

The stock market in general has been too expensive over the past several years, with one brief interlude of cheapness from March 2009 to April 2009. But during the entire period, I've been recommending one "World Dominator" after another. These companies are by far the best, safest, cheapest deals in the world today.

Which would you rather own? U.S. Treasurys rated double-A-plus and probably deserving a triple-C rating? (I downgraded U.S. Treasurys to triple-C more than a year ago in Extreme Value.)

Or would you rather own Microsoft, with its zero-net-debt balance sheet, gushing free cash flow, and growing dividends at double-digit rates? Microsoft yields 2.5%. The 10-year Treasury note yields about 2.3% today. The note's yield will be eaten alive by inflation. Microsoft's payout will grow at double digits.

This is a no-brainer decision. That's why two of the greatest investors of our generation, Einhorn and Klarman, aren't just buying... They're loading up. Klarman has 13% of his equity portfolio in Microsoft. Einhorn's Greenlight has 8% of it reported equity holdings in Microsoft, a stake worth about $380 million. They'd much rather own Microsoft than U.S. dollars. I don't blame them.

 I recently discovered a new World Dominator. Like the other ones, it's the No. 1 company in its market. But unlike most of them, it's small enough that its sales could conceivably grow at double-digit rates over the next several years. It sells a product people buy in good times and bad. Management is paying down debt, growing the core franchise.

Mr. Market stupidly made the stock cheaper last week, even though it's generating record free cash flows and will likely top $600 million in free cash flow this year... putting the company at less than seven times free cash flow. It could easily double over the next year, and it'll be much safer than just about any other stock you're going to learn about during that time. To find out about this company and the other World Dominators, click here to get access to Extreme Value.

 New 52-week highs (as of 8/15/11): None.

 Don't miss Porter's venom in today's mailbag. Have a question? Send it to feedback@stansberryresearch.com.

 "Porter question, if Germany leaves the euro, won't that leave them with a high-valued (sought after) currency that is destructive to their huge export economy? It seems like things would have to get really, really awful for Germany to leave the euro." – Paid-up subscriber Nick Peck

Porter comment: Your question makes me chuckle because it shows how corrupt both the U.S. media and the education system have become. Saying a currency that holds its value is bad for your economy is tantamount to saying that not accessing your retirement accounts (until you retire) is bad for your net worth.

It's so stupid it's hard to believe that anyone has to explain it.

And yet...

 "I really enjoy your newsletter, but I must admit to be totally confused by the attack on Prechter.

"First, both you and Bob agree that there will be a crash in stocks. Where you differ is if that will be followed by inflation or deflation. I note that Harry Dent also projects a stock crash followed by deflation.

"At any rate, until we get farther down the road, no one knows who will be correct. Certainly, in the short term, you have been more accurate, but it is the long term that will prove who is correct. Gloating early could prove to be embarrassing.

"As an aside, I interviewed Bob in 1986, when he was a raging bull. Since I don't know what your position was then, I can't compare. In 1988, I had arranged Lou Rukeyser to be a lunch speaker and had dinner with him the night before. I asked Lou his feeling on the Elliott Wave. He said that he did not like a system 'where if it was wrong it was because you miscounted.'

"Porter, I really enjoy your letter and I like the educational aspect of your Friday newsletter. I am glad I am a subscriber. I like your analysis. Your positions are well thought out and well explained and I commend you.

"But I am disappointed in the 8/12 newsletter." – Paid-up subscriber Greg Carney

Porter comment: I've never understood why someone would be disappointed in me because I pointed out the fallacies in another man's argument. Either my points are valid, or they are not.

We interviewed Prechter. We asked him tough questions about his view. Many of his answers were simply false. Others don't make any sense. Wouldn't it be more logical to question Prechter about his reasoning instead of questioning me about my criticism?

 "Despite your misgivings, dislike, disagreement or whatever it is wth Precther both of your core investment recommendations are pretty similar. You recommend 50% in gold and 50% in cash thru SHY. He recommends 80-90% treasuries and 10-20% gold. He also thinks speculators can make some good money on the downside as we are in a secular bear market. The last paragraph of Friday's digest criticizes him for recommending treasuries, the same thing you recommend for 50 % of your wealth.

"You act like he's some kind of nut or something. He's trying to safeguard his clients just like you. His recommendations on stocks have been pretty good the last 10 years. If you don't think so, you should check the facts. He made me 800 S&P points in the 2007 to 2009 crash and he covered close to the bottom... far more than I ever made following any of your recos (and probably haven't paid him as much). He's not perfect but either are you. You should treat professionals like him with respect. I'm an Alliance member and generally think you guys are smart and I like your work. But sometime you really come across like an arrogant SOB. Who do you think you are anyway?" – Paid-up subscriber Mark Butler

Porter comment: I think there's an important and meaningful difference between our approaches. Namely, Prechter has been saying for years that gold will collapse. He reasoning is, in my opinion, absurd – that in a global economic collapse the U.S. dollar will be a reliable safe haven and better than gold or silver. His advice – to own Treasury bonds – is, in my opinion, the worst possible thing you can do with your savings.

On the other hand, I've been begging people since at least 2006 to keep a large segment of their wealth (up to 50%) in gold and silver bullion. My reasoning is that the world's reserve currency (the U.S. dollar) was heading for a collapse. The downgrade of the U.S. last week and the soaring price of gold and silver would seem to validate my approach. As I've explained dozens (or hundreds of times)… my allocation to U.S. Treasury bills (which is a different instrument than a bond) is simply to hedge the volatility of gold.

As for who I think I am... what difference does it make? Either my ideas are right, or they are wrong.

Regards,

Dan Ferris and Sean Goldsmith

Medford, Oregon and Baltimore, Maryland

August 16, 2011