You learn so much about stocks every spring, when all the annual reports come out. It takes awhile to get through the mountain of material, but it's worth it. Something always catches your eye...
For example, take KEPCO, the Korean electric utility. KEPCO generates 93% of the electricity in Korea. And it transmits and distributes 100% of it, a true monopoly. I bet you didn't know Moody's gives KEPCO a higher credit rating than the entire country of Korea. Moody's actually has this one right, in my opinion, because Korea would do a lot better without its government than it would without electricity. So while it seems to fly in the face of reason that electricity revenues regulated by the government are more predictable and safe than tax revenues confiscated by that same government, it's the right way to look at it.
You need to keep up with Mr. Obama and his plan to destroy the U.S. economy, and Messrs. Bernanke and Geithner's plans to destroy the U.S. dollar. But you can't get overwhelmed by this stuff.
The best investors get underwhelmed by it and keep their focus on the bottom-up details of the businesses they own and want to own. Mason Hawkins of Longleaf Partners told investors many analysts and investors have "abandoned security analysis and long-term investing. And many have sworn off equities for fear of short-term macro uncertainties." But he pointed out Longleaf's "opportunity to own severely discounted dominant companies has never been better."
That's true. It's easy to get distracted by the government's actions, especially when those actions have such enormous implications for investors. But once you buy your gold and load up on the kind of gold stocks I'm holding in Extreme Value, you can get back to looking for good, competitive businesses that generate lots of free cash flow and trade at cheap multiples of earnings.
While Ken Lewis hasn't gone to jail... yet... he was ousted as chairman of Bank of America for his bungling of the Merrill Lynch acquisition and BofA's 77% decline in share price. Walter Massey, the president-emeritus of Morehouse College in Atlanta, will take over, while Lewis will remain president and CEO. The bank said Lewis has "unanimous support."
The World Health Organization (WHO) says we're on the brink of a worldwide swine flu pandemic. I'm no doctor, but it looks like maybe the WHO has blown this thing out of proportion. More than 20,000 people die from influenza every year in the United States, and you never hear about it. Less than 200 are dead worldwide from swine flu, all but one of them in Mexico. And that one was visiting the United States... from Mexico. Just 109 cases have been confirmed by the CDC in the United States.
Not a single case of swine flu has been reported in Egypt. But the government has ordered the slaughter of every pig in the country, all 300,000 of them. Since the illness is being passed from human to human and not one case has been reported there, killing pigs seems really dumb. Egypt has also banned kissing, which might make sense if anybody in the whole country actually had the swine flu. Britain wants to buy 32 million surgical masks, even though it has reported only five cases.
People love to overreact. It makes them feel important. Soldiers and cops had a field day during the 1918 flu pandemic (which killed at least 20 million people and afflicted half the world's population). If your dog got out, they just shot it, even though dogs had absolutely nothing whatsoever to do with the disease.
Investors overreacted to news on Procter & Gamble today, with the stock down 3% on a 4% drop in its quarterly profit.
P&G is one of the all-time greatest businesses. It sells its products to more than a billion people. It has 23 brands that do $1 billion or more in annual sales, and another 18 that do at least $500 million. It earns more than 50% gross margins, 19% pretax. The company is well known for its ability to build and maintain branding during tough economic times. Procter & Gamble practically gave birth to the modern radio advertising industry during the Great Depression by inventing the soap opera to boost sales. Its products cost only a few dollars at most, and you're almost guaranteed to have at least one of them in your home.
If you're worried about inflation, owning a great business that sells a simple, inexpensive product is the best way to fight it. Example: Our two teenaged boys inhale Pringles, those perfect oval-shaped potato chips in the red can. Pringles were $1 at Wal-Mart not long ago. A couple of days ago, they were $1.50. I don't know if inflation went up 50% the last few months, but Pringles did. When you're charging $1, a 50% price increase isn't perceived as unfair. If Pringles sold cars, furniture, or big appliances, a 50% price hike would put it out of business overnight.
Incidentally, Pringles is a Procter & Gamble brand.
I've got a whole list of the world's greatest businesses, which I call "World Dominators." Seven out of nine of these stocks are showing a profit since we recommended them. Five of them are still screaming bargains.
Every investor knows instinctively that the time to buy is when things look bad. But few investors know how to buy with the confidence of a pro. Buying World Dominators is how you gain the certainty and deep sense of conviction you're going to be more than just OK... you're going to make money.
This is obviously the most self-serving thing I could say right now, but I think everyone ought to read up on my World Dominator stock picks. They're not only good investments. They're great businesses, so they can teach you what to look for in other investments. To get access to the Extreme Value World Dominator portfolio, click here.
On Tuesday, we told you about IBM raising its dividend and doing a big share repurchase. This morning, we learned of Jim Rogers' short position in IBM. Rogers doesn't like IBM's financial services business. You can read about all of his positions, long and short, here.
Chrysler will file for bankruptcy today after talks broke down between the Treasury and the auto giant's creditors. The Treasury added $250 million to its most recent offer, agreeing to pay creditors $2.25 billion for $6.9 billion of debt, but the secured-debt holders balked... figuring they could recover more in bankruptcy.
Obama says Chrysler's will "be a very quick ty
pe of bankruptcy" and hopes a stronger company will emerge. The president will likely use the restructuring to give Fiat 20% of the company and break contracts with Chrysler's dealerships. While the bankruptcy might be "quick," it could be quite painful for Chrysler's 194,000 employees.
And in a fleeting flash of capitalism – rare in America these days – several creditors refused the Treasury's offer because they owned either larger stakes in General Motors and Ford or credit default swaps (which pay out in the case of bankruptcy) on Chrysler. They simply stood to gain more if Chrysler went under.
It looks like GM's bondholders are standing up against Obama's regime, too. Under the government's initially proposed bailout, GM's bondholders, who own $27 billion in debt, would get 10% of the company's equity. Meanwhile, the government, which loaned $15 billion to GM, would control 50%... As Porter pointed out Monday, the math doesn't quite add up.
Now, GM's bondholders are proposing they get a 51% stake in the reorganized company, the union get a 41% stake, and common shareholders receive 1%. A person familiar with the situation said the new structure would enable the Treasury to be paid back and avoid the nationalization of GM. I'm not sure what that means, since GM has already been effectively nationalized.
MGM Mirage shares soared as much as 50% today after the casino announced it received financing for its CityCenter project. Dubai World, MGM's original partner in the venture, withdrew its lawsuit against MGM and said it will resume paying its share of construction costs... Dubai World will also make good on a $135 million debt payment it missed. The deal guarantees the completion of CityCenter even in the case of an MGM Mirage bankruptcy... which is probably what Dubai World was concerned about in the first place. The group had already invested $4.3 billion in the project.
New highs: none.
Thanks for perspectives on Detroit. Keep 'em coming. And if you have something to say about some other screwed-up municipality or state – like, say, the People's Republic of California – e-mail us here: feedback@stansberryresearch.com.
"I agree wholeheartedly that it is a moral obligation when it comes to paying off your mortgage. Mortgagees enter contracts with the lender. Being from the suburbs of Detroit, I'll give you my point of view on Kwame Kenyatta. The city council of Detroit is broken. Paying relatives and friends who are of the payroll but may or may not do any work seems to be a way of doing business in the big 'D.'
"Martha Reeves formerly of [Martha & the Vandellas] is one of the council members. She is now under investigation for this issue, as of this week. Monica Conyers, wife of Rep. John Conyers who heads several committees is less than honorable, herself, even though she heads the council, now. She states that blacks can't be racist, only white people can.
"Kwame Kenyatta appears to be the most honorable person on the Detroit City Council. He has been a voice of reason while Martha Reeves sings Onward Christian Soldiers when she has a disagreement with the token white person on the council. Kwame has been a cool head in the city, even though, he's underwater with his house. He appears to be a man of integrity, very much unlike the other Kwame (Kilpatrick). Monica Conyers chose not to negotiate with the richest county in the nation on the issue of Cobo Hall. Cobo Hall is where the North American Auto Show is held. Cobo Hall is dilapidated and outdated. Two other counties chose to work with an expansion and renovation issue, she chose to use the race card. The two counties would have provided funds to do the above. She was busy trying to win the war. She won the battle, not the war. Cobo Hall has lost any source of extra funding from the other counties and is left with dwindling revenues, not a smart tactic on Ms. Conyers' end.
"Monica Conyers' in her infinite wisdom with some of the council have decided with the ousting of Kwame Kilpatrick, the bylaws specified Detroit City Council president step up. As he has stepped up, the city of Detroit is broke, there are three elections this year for the same position, One person who is interim and it can be another for the rest of the term. If Dave Bing wins the election in August, he'll be in for less than six months. On a side note, Dave Bing owns 5 automotive supplier companies. He is a successful businessman." – Paid-up subscriber JT
"Marriage in this country is truly insane. Why would any man who has built a good fortune think marriage is a good idea? Probably at least 80% of American women would not know reality if it was standing right in front of them. They have fantasyland in their minds. Who is the idiot that came up with giving 'women' who want out of any marriage over half of everything that the poor fool has. And having to pay her for life? Am I the only one left that can recognize true insanity? When is this insanity going to stop? This is the only 'legal' contract in this country that always TAKES away over half of one of the contractee's life savings just because of gender, despite any of the circumstances that brought up the contract disposal." – Paid-up subscriber Scott
Regards,
Dan Ferris
Medford, Oregon
April 30, 2009