The S&A Digest: Bernanke scared (again)

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/24/2013

Bernanke scared (again)... Gold appreciating (again)... Ferris high on WMT (again)... Retailers "recessing"... Top mutual funds open up... Activists more active than ever...

 Federal Reserve Chairman Ben Bernanke, who made his bones studying – and being terrified by – the Great Depression, says downside risks to the economy "have become more pronounced." (I don't know about that, but they're certainly easier to pronounce these days... Can you say "recession," Ben?)

The stock market liked it, as usual. The Dow is up 0.9%, and the S&P 500 0.8%. Gold was listening a little better than stocks, though. It's up about 1.9%.

 S&A Prospector editor Matt Badiali reports, "Keep an eye out for news on Alcoa. The giant reported huge growth yesterday. The aluminum industry is hot right now... China will become a net importer of the metal in 2008 for the first time in years. Aluminum gets no interest from small exploration companies. It's a giant company's game... Bauxite ore is readily available all over the world, but it takes a lot of energy to turn it into metal [and the only companies that can afford all that power are huge and well-financed]. Look for the other aluminum producers to have good years too."

 And good news on Sjuggerud and Badiali's pick Seabridge Gold (SA). It just added 4.4 million ounces of gold and 3 billion pounds of copper to its resource estimate. Badiali said the news was "nearly unbelievable... In fact, if I hadn't stood in the valley, looked up at the cliffs, and seen the alteration, I'd be skeptical too." That's geologist talk for, "They're telling the truth." Truth happens in mining, but you have to be a professional to sniff it out.

 Gold futures began trading in Shanghai yesterday, and the Chinese are already paying $1,000 an ounce. Traders said high prices merely reflect the lack of connectivity between Shanghai and the London-based over-the-counter gold market.  Truth is, the Chinese are more scared of their own currency than most. And gold is one of the few things they're legally allowed to invest in. Same with their soaring stock exchange.

 Most of the big clothing retailers posted same-store sales declines in December, including J.C. Penney, Kohl's, Macy's, Gap, Limited Brands, AnnTaylor, Chico's, Extreme Value pick American Eagle, and Men's Wearhouse.

 Shoppers' credit-card balances are starting to get too big. Capital One, the biggest independent U.S. credit-card issuer, says charge-offs will hit $5.9 billion for the year, instead of the $4.9 billion to $5.5 billion it was expecting.

 Not everybody out there is scared, though. The best value-oriented mutual funds are throwing their doors open, looking for new money to put into all the bargains they're finding these days...

Third Avenue reopened its International Fund about a month ago to new investors, and Oakmark reopened two. Longleaf Partners has been hitting up its existing shareholders for new money since mid-November. That's what great investors do when things get ugly. They generally don't cut losses, since they can average down on their cost with new money.

I've had Longleaf Partners Fund and Oakmark Select in Extreme Value for a few years. Longleaf has done okay and Oakmark has struggled, but that's the reality of successful long-term investing. You don't get 15% on your money, year-in, year-out. You have to sweat out the bad and mediocre years. Then one day, your account is bigger, you look back, and it comes out to 15% on average. But average never actually happens in any given year.

That's important to know in years like 2007... and 2008, 2009, and most other years. Consistent returns are highly unusual, so when a company puts in an ultra-consistent performance in every way and the market ignores it, I pounce...

 Extreme Value pick Wal-Mart (WMT) is opening a new store in DeKalb County, Georgia. For a shot at 350-400 jobs, 7,500 people showed up to fill out applications. Wal-Mart consistently draws more than 1,000 people in a single day, nearly three times what it needs to staff a new store.

Wal-Mart is a model of consistency in absolutely every way you could ever want. Consistent profit margins. Consistent profitability, quarter after quarter, for decades. Consistent returns on capital, decade after decade. Consistently attractive employer. Consistently a great place to save money on everyday items. Consistently frugal, super-enthusiastic corporate culture. Consistent retail innovator (i.e., $4 drug prescriptions). And it remains consistently focused on the core business. Even its most obnoxious detractors would have to agree with me that it is a relentless juggernaut.

And yet, here Wal-Mart sits, selling at a price that'd be more appropriate for a junk credit on hard times. If I were a Wall Street analyst, I'd dream about companies like Wal-Mart. Wall Street worships consistency. That's why so many corporate executives are willing to lie to give the illusion of it. So why aren't we reading huge journalistic pieces about what an incredible business Wal-Mart is and what a stupidly cheap price it's selling for?

One last thing on Wal-Mart: It finally beat out Target at Christmas. Target's same-store sales actually fell 5% in December. Wal-Mart's rose 2.4%. The other big retailer reporting a same-store sales increase? Costco, up 7% in December.

 Activist Bill Ackman of Pershing Square says Target should be trading at $120 a share in three years. Ackman says Target's real estate alone is worth the current share price. Target owns 95% of its stores, more than any other major retailer.

 In the "You Get What You Pay For Department," CNBC touted shares of a Brazilian energy company with the symbol PZE. It surged more than 20% in about two weeks, from $13 to about $16. Trouble was, CNBC had the wrong ticker symbol. So the network corrected its "graphics error," and PZE fell 15% yesterday. It's down another 7% today.

What's most amazing to me about this isn't that CNBC made a mistake. It's that so many idiots bought the stock based solely on TV reporting. It's so hard to imagine real adults behaving that way.

 By the way, the company CNBC meant to be bullish on is S&A Oil Report pick Petroleo Brasileiro (PBR), known as Petrobras.

 Activist investors use market weakness to pounce on poor performers, and they're pouncing in record numbers. According to Reuters, activists launched 501 new campaigns in 2007, up from 429 the year before. Activist buying accelerated toward the end of the year, as things got worse, with 135 launches in the fourth quarter. I've been thinking about activism and insider activity lately. In the January issue of Extreme Value, due out tomorrow after market close, I'm including a brief piece on how activists and insiders can do all kinds of things you and I can't do... some good for you, some not so good.

 Closed-end funds – mutual funds that trade on an exchange – are currently trading for an average 6.6% discount to net asset value, when the 10-year average is 4%. Tom Dyson just recommended a closed-end fund carrying the safest debt on Wall Street in his 12% Letter. It trades at a 6% discount to net asset value and yields more than 9%. To learn more about The 12% Letter, click here.

 New highs: XTO Energy (XTO), Baxter International (BAX), Pharmaceutical Product Development (PPDI), Covance (CVD), Coca-Cola (KO).

 You can insult us all you want, but try doing it from the more northern extremes of your anatomy. The southern end is getting played out. Send your comments and criticisms to feedback@stansberryresearch.com.

 "When SA receives statements richly deserving of ridicule, and Porter, or an associate rises to the occasion, I cheer. Indeed, it's a disappointment when charity interferes. Porter in particular has a gift for crafting deliciously sarcastic put downs. Subscriber DS' objection to bruising any feelings would take the spice out of the digest. As for the objection to associates emulating Porter's style, I don't think they do, but even if they did, they could do far worst. It is said imitation is the sincerest form of flattery, so if there is any stylistic resemblance, Porter should be pleased." –Paid-up subscriber SK

 "For what it is worth, this 70 year old finds the comments to Porter and his crew ridiculing him and them for every known insult as mostly inane and without thought. Is he a little pompous at times? Sure, most of us are. Is it in mostly good fun? You Bet. Keep it up and maybe I'll renew if I don't lose my shirt 1st or my wifes. The blurbs for new ideas are too long and wear you out and there are way too many of them. Once in awhile though, they are very worth the bits they take up. The one question I have for the most virulent or strident complainers is. If you don't like the fair, why are you eating at this restaurant? I enjoy them and The S&A Digest immensely. Keep it going." – Paid-up subscriber Peter Stephens

 "Regarding the letter that asserted Dan's writing style was imitative of Porter's, it seems more likely the letter writer was the one trying to sound like Porter. Dan's literary style resembles Porter's only in that he's another acute analyst of economics and human behavior who doesn't suffer fools. Beyond that, their styles differ greatly. For instance, Dan's syntax is more pared down than Porter's, though still engaging and humorous. Perhaps the analogy is this: Dan's a crisp gin-and-tonic; Porter's a Martini capable of knocking you on your ass. Both serve their purposes, both are highly enjoyable, but they're quite different drinks. (And no, I'm not drinking as I write this)." – Paid-up subscriber Sibella Giorello

Ferris comment: Thanks for the words of support... but I can hear glasses clinking in your e-mail. If I'm conceited and unapologetic, as reader "DS" suggested yesterday, I certainly don't want to be. Conceit gets in the way of good judgment... and having just had the worst year of my career as a stock picker, unapologetic is an inappropriate posture for me at this time.

I hate what just happened more than anyone knows, mostly because I allowed it to get as bad as it did. I'm going to work what's left of my butt clean off in 2008 to create a lot more value as an analyst. If I can't do that, well, there's a new Wal-Mart a few miles up the highway from us...

Regards,

Dan Ferris

Medford, Oregon

January 10, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame