Hunt's commodity quiz...

  Our Editor in Chief Brian Hunt called me (Sean Goldsmith) recently and asked if I knew what was the best-performing commodity of the past 12 months. I (blindly) guessed corn.

At the time, the answer was lumber. (Today, it's natural gas, up 56%)... Wood had registered a 46% gain over the preceding 12 months... beating stocks, grains, energy, and just about everything else.

You might not have guessed that lumber would be near the top. But you can probably guess the driver of its rally... As Brian explained in the Market Notes segment of today's DailyWealth:

"It's the huge rebound in the housing market. Like most commodities, lumber was hammered during the credit/housing bust of 2008. But as you can see from the chart below, it's been a heck of a recovery. Prices have surged in the past 18 months... and are sitting near eight-year highs. It's a bull market in wood!"

 Rising timber prices means higher share prices for the biggest timber real estate investment trusts (REITs), like Rayonier and Plum Creek. Both stocks are trading near their 52-week highs and are up around 50% since late 2012.

Timber is a wonderful long-term asset to own. Regardless of what's happening in the economy, trees still grow. You harvest the trees for cash flow (and in today's market, enjoy appreciating land values). If lumber prices are low, you leave the trees in the ground. And both Rayonier and Plum Creek pay 3%-plus dividends.

True Wealth editor Steve Sjuggerud has written about the benefits of investing in timberland for years. He gave an excellent interview on the topic to the Daily Crux – S&A's daily financial news and opinion aggregator website. To read the interview for free, click here.

 In the February 26 Digest Premium, Porter explained how Michael Dell is trying to rip off his shareholders… Dell wants to take the computer manufacturing company he founded (and that bears his name) private. He's planning on borrowing billions of dollars to buy up all its shares at around four times cash flow. This would make shareholders money in the short term… but it's robbing them of the long-term benefits of owning a cash-gushing business. (Dell produces around $5 billion a year in cash.)

Porter wrote:

Dell's board has said Michael's offer for the company gives the best value for shareholders. Mind you, in many cases, boards are comprised of personal friends who don't offer resistance.

 But Dell's largest outside shareholder – Southeastern Asset Management – disagrees. The Memphis, Tennessee-based firm thinks the price is too low.

And other dissenters are coming forward... Hewlett-Packard and Lenovo (the first- and second-largest computer manufacturers in the U.S., respectively) have both expressed an interest in Dell. However, this could simply be a ploy to view Dell's private financials.

Private-equity firm Blackstone is also reviewing the deal.

And billionaire activist investor Carl Icahn announced a "substantial" position in Dell (reportedly 6%). He's urging Dell to immediately pay a special dividend of $9 a share. (That would be funded by Dell's $7.4 billion in cash that the company plans to use for the buyout, $3 billion in receivables, and $5.3 billion in new debt, which Icahn would provide.)

In other words, Icahn is recommending what we did... a recapitalization that will benefit shareholders.

 Dell is down a fraction today to $14.32, though still above Michael Dell's proposed takeover price of $13.65. With the increased scrutiny of the deal and more interested bidders, we doubt Michael Dell will achieve his original deal.

 In his December 2011 issue of True Wealth, Steve Sjuggerud explained the extra gains historically produced by companies that are committed to buying back their own shares. In that issue, he examined a "buyback strategy" of investing in the 10% of publicly traded companies with the largest percentage decreases in shares outstanding each year...

 Steve recommended the PowerShares Buyback Achievers Fund (PKW), an exchange-traded fund that holds companies that have bought back at least 5% of their shares over a trailing 12-month period. The stock is at an all-time high today... True Wealth readers are up 30% on the recommendation.

 Buyback announcements for the S&P 500 topped the $1 trillion mark for the first time since 2009. Remember, buybacks are only effective if the company is buying back its stock at good prices. And you can normally count on management to do the exact wrong thing with corporate cash.

But Steve is confident companies are making the right call today... On the phone, I asked him if he was worried companies were misallocating their capital. "I'm not worried at all," Steve responded. "Right now, the best things companies can do is buy back their own stock. Stocks are trading at 14 times forward earnings... And in a zero-percent world, that's a good deal."

 In an essay at the bottom of Monday's Digest, Steve studied (using his proprietary True Wealth Systems software) whether Warren Buffett's plan to repurchase Berkshire Hathaway shares at 120% of book value (1.2 times book value) was profitable. Turns out, Buffett is correct… The stock outperformed its average over three-, five-, and 10-year periods when trading below that threshold.

As Buffett told CNBC this month, "The surest way to make money is to buy your own dollar bills for $0.80 or $0.90."

 Today, Steve and his analyst Brett Eversole have put another investing concept to the test. This time, they're using the True Wealth Systems computers to investigate what the flow of capital into and out of mutual funds tells us about where the market is headed… We've published their findings at the end of today's Digest. Don't miss it…

 Several more of our portfolio stocks are hitting new highs...

Video-game company Activision Blizzard, which Porter recommended in his October 2011 issue, hit a new high today. Activision is a good example of a business with excellent margins. (Net margins are 24%.) It's best known for its Call of Duty series of combat video games. It also owns World of Warcraft, a subscription-based, online game with 11 million active users.

 World Dominator Cisco also hit a new high yesterday.

Cisco is the World Dominator of "Internet plumbing." Its routers and switches form the backbone of the Internet. I (Dan Ferris) have been covering Cisco since 2010. Since then, the company has impressed me with its financial decisions. It exited bad businesses. It started paying a dividend. It's spending 50% of free cash flow on dividends and share buybacks.

Today, it's focused on generating more revenue from software and services. Those are higher-margin businesses. Cisco's transition will soon get an extra boost, too. It's about to go on a buying spree. Most companies are bad at buying other companies. But Cisco has proved it's an exception...

Over its history, Cisco has bought more than 160 companies. Cisco has made a few mistakes. When you buy 160 companies, you can't get it right 100% of the time. But overall, Cisco has built an incredible business. Much of that building has come from buying other companies.

Now, CEO John Chambers says he's ready to spend some money. He's been lobbying Congress for four years to get a tax break for Cisco's $40 billion cash in foreign banks. The effort failed. Chambers is done lobbying. He's decided to spend the money outside the U.S. Chambers cited the U.K. and Canada as two countries more attractive than the U.S. today.

 It's no wonder Cisco is hitting new highs these days. It's a great cash-gusher of a business that's doing a lot of things right. The stock is still dirt-cheap. Its enterprise value (market cap plus debt minus cash) is less than eight times free cash flow. That's stupid-cheap. The stock is an easy 50%-100% gainer in a year or two.

Even better… Cisco's not alone… In my advisory Extreme Value, I've identified three other World Dominating technology companies undergoing massive, value-creating transitions… all of which are trading at dirt-cheap prices right now. My research partner, Mike Barrett, and I are digging deeper into these businesses. People think they know about these big companies. But they don't. Read the March issue of Extreme Value to see what I mean.

If you want to dig deep into the safest way to double your money in the next year or two, you should read Extreme Value… Of course, if you need a new stock pick every month, don't sign up. We do deep, serious research. We only recommend stocks that are safe and cheap. If we only find three of them in a year (like we did last year), we only recommend three stocks. The only stocks we recommend are our highest-conviction ideas. Click here if you're interested in learning about a subscription to Extreme Value (don't worry... there's no long promo to sit through).

 New 52-week highs (as of 3/6/13): ProShares Ultra Biotech Fund (BIB), Berkshire Hathaway (BRK), WisdomTree Japan Small Cap Dividend Fund (DFJ), WisdomTree Japan Hedged Equity Fund (DXJ), iShares Australia Fund (EWA), Fidelity Medical Equipment & Systems Fund (FSMEX), iShares Insurance Fund (IAK), iShares Biotech Fund (IBB), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), Cisco (CSCO), 3M (MMM), Chicago Bridge & Iron (CBI), American Financial Group (AFG), Kohlberg Kravis Roberts (KKR), Chevron (CVX), Fluidigm (FLDM), and Activision Blizzard (ATVI).

  In today's mailbag, one reader writes in about government goodwill and another calls us "the best out there." Send us your notes to feedback@stansberryresearch.com.

 "In response to your own question, 'And where was the SEC?' you answered, 'Deciding to pass on Buffett's Lubrizol episode was child's play.' It may have been child's play compared to the Madoff case, but I think there was something else at play here.

"Porter has often praised Buffett for investing in companies that have, as Buffett puts it, 'economic goodwill,' or as Porter puts it, 'capital efficiency.' He has been doing this for a very long time, and apparently he is a master at it. I think he is so good at this 'goodwill' stuff that he has mastered the art of 'government goodwill.'

"Let's face it, Buffett has given Obama 'apparently unsolicited' boosts many times at critical points by publicly supporting Obama's policies. Do you believe for one minute Buffett didn't have an ulterior motive for doing so?

"Buffett has benefited financially from the Obama administration already. His investment in government-bailed out Goldman Sachs is pretty safe, WF benefited from Obama. I am sure Buffett and Obama know how to scratch each others' backs. That's what I call government goodwill." – Paid-up subscriber Luis

 "I have given you a hard time in the past in e-mails. I want to say that I am sorry.

"I am becoming quite the fan of you and your company. I am making money, and you and your people seem to really understand what is going on. And you explain it to where it is understandable to me. I learn something new from you folks almost every day. Thanks

"I read your friends at Agora and like them a lot... but, you and yours are better. I read them all, Casey, C. Butler, Mauldin, etc... You're the best out there." – Paid-up subscriber RS

Regards,

Dan Ferris and Sean Goldsmith 
Houston, Texas and Miami Beach, Florida 
March 7, 2013

How Watching Mutual-Fund Flows Can Increase Your Stock Market Returns 
By Steve Sjuggerud and Brett Eversole

Most investors BELIEVE that more money flowing into stock funds leads to higher stock prices... but is it true?

The answer will surprise you…

It seems to make sense that more money chasing the same number of shares should push stock prices higher. But we put our True Wealth Systems computers to work to find out the facts…

Specifically, we looked at nearly 30 years of mutual-fund data from the Investment Company Institute (ICI)… one of the benchmarks for mutual-fund data.

Our goal was simple… to find out if mutual-fund flows can predict major moves in stock prices. Our results will probably surprise you…

First, we looked at how the trend in mutual-fund flows relates to stock performance. Surprisingly, stocks actually do better when fund flows are falling.

During the period we studied, if you had bought a stock index fund during times when people were shoveling money into mutual funds… you actually did worse than if you had simply bought the index at the start of the period and held on throughout…

Conversely, if you bought stocks when money was leaving mutual funds… you did better. The full results are in the table below…

To take this a step further, we combined these simple fund-flow ideas with a simple stock-market trend system. Our True Wealth Systems computers put both ideas together and created a three-part system…

The chart below shows the S&P 500 with our system applied. We've color-coded it so you can easily see our system at work…

The full return details are in the table below…

If you only bought when the system was in "dark green" mode – meaning stocks were in an uptrend while fund flows were in a downtrend – you crushed the buy-and-hold return on stocks (20.1% annualized gains versus 8%).

It may seem crazy… but the facts are clear… The biggest returns happen when money flows into stock funds are going down.

Today, we're in "light green" mode – stocks are in an uptrend and so are fund flows into mutual funds. So we're not in a dangerous mode. It's safe to be in stocks today…

Good investing,

Steve Sjuggerud and Brett Eversole

Editor's Note: As we've explained this week... We've spent several years and nearly $1 million building a set of proprietary software systems that capture the investing strategies Steve Sjuggerud has developed over his career. The result is Steve's high-end trading service, True Wealth Systems.

These systems can now scan a vast array of market data and yield buy/sell signals on assets including commodities, currencies, and stocks... Steve calls True Wealth Systems his "life's work" and "the culmination of everything I've learned in the investing world in the past 19 years." To learn more about it, we encourage you to watch this video.

Editor's note: In yesterday's Digest Premium… we promised to republish "the best essay Porter's ever written" – an excerpt from the July 2009 Stansberry's Investment Advisory. Today, we're running the first half. We'll complete the excerpt tomorrow…

 The Keynesians never counted on Lenny Dykstra...

Dykstra, as you may know, is a former Major League Baseball player whose attempts to cash in on the credit bubble led to bankruptcy and accusations of fraud. Dykstra's celebrity has garnered a lot of attention for his troubles. But our interest in Dykstra is far more personal...

In 2005, Lenny sent us an unusual e-mail. (It is not our practice to comment on the contents of e-mails addressed to us personally. But in Dykstra's case, I don't think we could possibly harm his reputation.) In his e-mail to me, Dykstra introduced himself using his baseball credentials. He bragged about his wealth. And then, somewhat ironically, he complained about the subscription rates we charge for some of our premium products, particularly Extreme Value.

Dykstra told us – as he would later tell investors directly – that he'd been making a fortune in the stock market and was now worth millions, thanks to his car washes and stock-picking prowess. Then, he asked us for a job.

It was probably the strangest letter I've ever received. Here was a man who claimed to be worth millions and who claimed to understand the dynamics of the stock market intimately, but was complaining about the price of Extreme Value?

 In my estimation, anyone with any real money to invest, or anyone who really understands stocks, would think Extreme Value is a bargain. Out of all our newsletters, Extreme Value is the letter that's most widely read among the sophisticated investors I know.

It seemed obvious to me that Dykstra was not what he claimed to be. It's certainly not impossible that a former professional athlete would have a second career in finance. (Consider retired Dallas Cowboys quarterback Roger Staubach, who is today a wildly successful businessman.) But Dykstra simply didn't strike me as someone particularly intellectually curious... or financially savvy.

I replied to his e-mail by wishing Dykstra the best and privately chuckled about his letter. I never dreamed anyone would hire Dykstra to be his stockbroker, never mind hiring him to write an advisory to thousands of investors. Boy, was I wrong...

 About six months later, one of our competitors announced Lenny Dykstra would be its new financial columnist. Almost immediately, we noticed Dykstra was cribbing his stock picks from this newsletter. Soon after we'd recommend a stock, presto, Dykstra would too. Surely Dykstra didn't think he was going to get away with this for long, did he? Sooner or later, someone was going to notice.

Some of the employees of Dykstra's publisher did notice what was happening and called us to say how embarrassed they were of Dykstra's work. And then Fortune picked up on the story. As it turned out, Dykstra wasn't only cribbing this letter. As Fortune discovered, Dykstra had a whole system in place for "borrowing" other investment researchers' ideas and passing them off as his own. Still, his publisher stood by him, even calling Dykstra "one of the great ones" in the financial business.

We laughed so hard, our sides hurt. And in the office, when we wanted to ridicule someone for a particularly bad investment idea, we'd jokingly say, "He's one of the great ones"...

But we couldn't have guessed how badly things would actually turn out.

 In late 2007, at the very top of the global credit bubble, Lenny Dykstra announced he would launch his own financial magazine... We know a little about finance. We know a little about publishing. And we knew Dykstra knew nothing about either. Who, we wondered, would back a magazine aimed at retired ballplayers, published by Lenny Dykstra?

 Magazines, by the way, are one of the many sure ways to lose a ton of money. In fact, judging by the actual losses of people we know well, magazines are the best way to go broke besides divorce or tax evasion. (If there's anything meaner than a woman scorned, it's the IRS.)

Why? Because magazines are extremely expensive to publish but have almost no pricing power. A typical magazine subscription costs less than $20 per year and costs far more than a newspaper to print. That puts the whole endeavor completely at the mercy of advertisers. But who would want to advertise to broken-down old athletes? Think about it this way: If Steve Forbes can't make money publishing Forbes (and the rumor is he can't), what are the chances Lenny Dykstra would be able to pull it off? No chance. Not one in a million.

 Unbelievably, Dykstra found enough willing fools to borrow millions and millions of dollars for the launch of his magazine, The Player's Club. Now, as you probably know, the magazine has gone belly-up. Dykstra has filed for bankruptcy. His wife has filed for divorce. His $18 million home is in foreclosure. And dozens of creditors say Dykstra owes them something around $60 million, which brings us back to where we started, thinking about Keynesians.

 In broad strokes, there are essentially two schools of economic thought – what I call the Keynesians, and what is commonly called the "Austrian" school. Inside each of these broad categories, there are hundreds or even thousands of strands and variations... but I'm painting both camps with a very broad brush to make a simple point about what's happening right now in our economy – a point that Lenny Dykstra illustrates perfectly.

 The Keynesians view the science of economics like any other kind of hard science. They believe in cause and effect across the economy. Therefore, they construct detailed mathematical models, which "prove" how things work. They believe a careful accounting of the inputs and outputs allow governments to steer their economies, just like you and I would steer a ship. A little more sail in a light breeze, a little less sail in a gale.

And of course, you need to put a very smart guy in full control at the helm... and then everything should stay on course. When the system inevitably doesn't work as planned, it's always because some variable wasn't measured properly – an "exogenous" shock they call it.

 Governments love the Keynesian model because it gives them another war to fight. (Nothing is better for the government than a war.) It didn't take long for politicians to latch onto the idea that with Keynesian economics you could fight a war against poverty and the business cycle.

Now, of course, Al Gore says we should use economic principles (cap and trade) to save the environment. After all, if the economy is merely a large and complicated machine, then fine-tuning it with taxes, deficit spending, regulation, and inflation should be no problem...

But the Keynesians forgot about Lenny Dykstra.

– Porter Stansberry with Sean Goldsmith