The S&A Digest: Dow Winning Streaks

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

As of 06/28/2013

Dyson's ice breaker... Another dividend to grab... What's the best thing that can happen?... Pioneer's huge buyback... Ian's latest "quant" study...

Tom Dyson, our lone British analyst, was at it again last week at our Spring Editors' Conference in Naples, Florida.

"Poor-tah... I worry that you may not like my presentation," he began. "You see, it's about global warming... Whether global warming is caused by man or not, something is having real effects on the Arctic Ocean. Shipping lanes that are normally closed by solid sea ice have become passable during most of the summer and thus, commercially viable. If the trend continues, the famed Northwest Passage may finally open – shaving thousands of miles off the trade routes between Russia and London, which is rapidly becoming the most important financial center in the world. This will have big implications for the world's shipping companies and could mean huge increases in demand for ice breakers."

Tom's recommendation? A Russian ice breaker firm called Murmansk Shipping Co. (Russian Stock Exchange: MUSH). MUSH owns the world's only fleet of nuclear-powered ice breakers (eight of them) and leases them to companies wanting to explore the Arctic for oil.

Tom is famed in our group for his ultracontrarian, totally off-the-map ideas. At our editor's conference, I charge my staff with presenting two investment ideas. I ask for one idea that fits into the parameters of the newsletters they write and one idea that can be about anything. Tom's "anything" ideas are always entertaining. One year, he made the investment case for buying Mexican pesos. But Russian ice breakers? This is probably the most obscure idea of all time. While Tom might end up with the last laugh, he won't have laughed the loudest. That prize belongs to us. We laughed so hard we think we broke something. But, for you global-warming advocates, it's time to put your money where your mouths are.

To grab or not to grab... Span-America Medical Systems (SPAN) is paying a $5 dividend on June 6 to shareholders of record on May 23. S&A Dividend Grabber subscribers will receive an update shortly.

Lots of very big deals:

When I was a child and my friends wanted to throw oranges at passing cars, break into the school, or steal sodas at the gas station, my father's words would echo in my ears: "What's the best thing that can happen if you do this?" The answer was always the same: Nothing. Nothing good can come from the actions I'm considering. Dad's logic kept me away from the worst excesses of my peers.

I am reminded of the question, watching the record number and size of Wall Street's latest deals. I don't know how all of these deals will turn out... but I do know the best thing that will happen – nothing – doesn't have much upside.

A ranking of global corporate brands by the Financial Times and Millward Brown Optimore placed Google in the No. 1 spot. The top 10, in order, are General Electric, Microsoft, Coca-Cola, China Mobile, Marlboro, Wal-Mart, Citi, IBM, and Toyota. I use Google every day and am amazed at the quality of its software and the reliability of its services. But I can't believe the brand is more valuable than these others. Not yet.

Extreme Value pick American Real Estate Partners (ACP), which is run by Carl Icahn, will sell its four Nevada gaming operations to Whitehall Street Real Estate Funds for $1.3 billion. American Real Estate expects to realize $1 billion from the sale. Interestingly, when we first recommended ACP back in 2004, the entire business was worth less. Hint: If you find yourself buying what Carl Icahn wants to sell you, you're probably paying too much.

S&A Oil Report pick Pioneer Natural Resources (PXD) increased its budget for share buybacks $450 million to $750 million – a sizeable increase for a $6 billion market capitalization business. Since 2004, the company bought back 31 million shares. It currently has 123 million outstanding shares. The stock rose 7.5% today on the news.

New highs... it's a bull market: Allegheny Technologies (ATI), Chevron (CVX), Macquarie Global (MGU), Janus (JNS), Southern Copper (PCU), Oakley (OO), Raytheon (RTN), Oneok (OKS), AutoZone (AZO), FLIR Systems (FLIR), Alexander & Baldwin (ALEX), JP Morgan Chase (JPM), Nokia (NOK), Enterprise Products (EPD), Banco Latinoamericano de Exportaciones (BLX)

In the mailbag today, a good mix of disgruntled, confused, irate, plus... a new category... subscribers are now taking shots at our parent company, Agora! Send us your concerns here: feedback@stansberryresearch.com.

"I want to bring one thing to your attention regarding Agora IT system. It sucks! I tried to cancel Dr. Rachebacher's newsletter... It turns out that the IT system had instead cancelled my TrueWealth subscription, which I love very much. I have to reinstate my TrueWealth. You guys need to hire competent IT people to write and run the system." – Paid-up subscriber Robert Liu

Porter comment: You're preaching to the choir... For those of you who are new subscribers or those simply not familiar with our operating structure, we, like several newsletter publishers, have Agora Inc. as a large shareholder. To streamline our database operations and IT functions, we share resources with several other Agora affiliates. These services have operated with relatively high efficiency until about six weeks ago... when something went horribly wrong. It is as if the world's largest wrench was thrown into our entire technical machine. Now, when we fix one part of the system, something else breaks. We're interviewing new IT service providers. We're rebuilding our website on a totally new platform. We're working very hard (and spending a fortune) to make sure everything works and is reliable. Please... bear with us. We should have everything back up to snuff by the end of June.

"Porter – I know you are a pretty smart guy. You do remind us every day in the Q&A. However, did it ever occur to you that there is somebody in the business that is smarter than thou." – Paid-up subscriber Ludy Langer

Porter comment: Ludy, the list of people in this business that are smarter than me is endless. I depend on them. And I hire them whenever possible.

"I've been in OMI for quite awhile... Recommending it at $27, when the buyout is $29.78 or so, is a worthless effort... Arbitrators hustling for a fast 10% do that... If you didn't already own it 30% lower, it's worth neither the time or effort now." – Paid-up subscriber R. Dudley

Porter comment: As we've seen recently, often companies "in play" end up being purchased for large (ridiculously large) premiums. It was my hope that would be the case with OMM – but it didn't happen. As I told my subscribers, the downside risk in the OMM recommendation was that we'd only make a small profit. This was acceptable to me because a deal was sure to happen quickly. There's nothing bad or useless about making 8% in two weeks – especially when you had a reasonable chance at making 25%-50% in the same time frame. I like situations where the only downside is making 8%... I suspect many of our subscribers do, too.

"A general question for you about the OMM situation. Should one immediately SELL at the jumped-up price, or HOLD for a period, looking for higher competitive bids, or for another dividend before closing? Note that OMM reports earnings next week." – Paid-up subscriber Jim Kornfield

Porter comment: There's no right answer. I expect the deal to be done at $29.25 within the next six months. Look at the price that's being paid now. Can you find a better place for your money?

"First, you said: 'We don't normally publish annualized returns, because, as you can see, doing so greatly exaggerates the average return figure. Or, as I like to say, "you can't eat annualized returns."' Later on your e-mail/ad [says]: 'would have produced an average compounded annual return of 33.8% over the last 37 years, which is as far back as it's possible to get reliable data.' And, you also said, 'He calls his strategy "Max Yield." It's worked to produce double-digit compound annual returns.'" – Paid-up subscriber Timo Yla

Porter comment: As Emerson said: "Foolish consistency is the hobgoblin of little minds." When you're speaking about total portfolio performance over a long period of time (several years) annualized returns are very useful for making comparisons. It is appropriate, accurate, and meaningful to annualize long-term trading strategies, like the one from Ian you cite above that requires buying a few stocks and rolling them over every two years for 30-plus years.

However, many newsletter publishers annualize small gains that were made quickly (in a few days, weeks, or months), which makes a few gains seem much bigger than they really were. I am opposed to publishing these kinds of phoney numbers. I want to reward my editors for making big gains. It doesn't matter to me (and I don't think it matters to 99% of my audience) if a 300% gains takes two years or even four years to achieve. What matters to us is that the editor got the pick right and enabled his readers to make a large profit. Such profits enhance the portfolios of our readers – and it's their entire portfolios that are deserving of "annualized" returns.

"I have been researching investment newsletters and recommendations for a few years. I am not a high roller, a financial guru, or even the brightest bulb in the box, but I have been able to do fairly well over the last 35 years in building my portfolio. Wasted a lot of money on many of those pie-in-the-sky investment newsletters bearing the Hidden Secrets & other marketing strategies. Reading your articles is a breath of fresh air. You shoot from the hip, tell it like it is, while maintaining high standards and ethical values. These qualities are missing in today's society and today's business world. Kudos to you and staff for maintaining quality, consistency and service. My flag is in your camp and the reason is as I have stated: high standards and ethical values." – Paid-up subscriber Rick

"If I am not mistaken you are involved with a project in Argentina with Bill Bonner and Doug Casey, in [Cafayate], Argentina. I am most interested in Argentina, especially rural-type areas... in particular your area. Could you let me know details of this project and perhaps a realtor in that town/area?" – David McMillen

Porter comment: Yes, you're right, though my "involvement" is only as an unpaid-consultant. I've written about Cafayate and the project in DailyWealth and in my newsletter. To read what I wrote, click here.

In addition to the value and the outstanding beauty of Cafayate, I really like several aspects of the deal. I've seen a lot of land deals go bad because the people running the deal were essentially hobbyists. They didn't really know what they were doing; they were simply rich and wanted to have a town named after themselves somewhere.

In this case though, David Galland has been running the deal on behalf of a bunch of seriously rich guys. And that makes all the difference in the world. Galland is the most dynamic entrepreneur I've ever met. For those of you who don't know him, he built Jim Blanchard's Investment Conference business into the huge success it was during the 1970s and 1980s. Galland then founded Everbank. Today, he's running Doug Casey's investment research shop and putting together really good private investment deals like Cafayate.

Answering your question a bit more directly, Galland tells me the group will be ready to bring some of the best lots to market later this year. And, as a friend of the project, I should be able to get anyone who is interested involved in the earliest stage. I'll keep you posted.

Regards,

Porter Stansberry

Baltimore, Maryland

Dow Winning Streaks

By Ian Davis

June 24 1941, Joe DiMaggio is sitting in the clubhouse sipping coffee and smoking a cigarette. The Yankees are playing a double header today versus the Washington Senators, and while DiMaggio sits and relaxes, an event is occurring that nearly ruins one of the greatest feats in baseball history.

Someone has snuck into the Yankee dugout and stolen Joe DiMaggio's favorite bat. Not only that, but DiMaggio is in the middle of an unprecedented hitting streak, currently at 41 games, one game short of beating the record George Sisler set in 1922.

It's only a "piece of wood," DiMaggio nonchalantly says of the bat. But he doesn't get a hit in his first three times up to the plate in the second game of the double header. Finally, on DiMaggio's last time up to bat, Tommy Henrich offers him his bat, and Joe accepts.

Red Anderson's first pitch nearly hits DiMaggio, almost ending his hitting streak. Then, on the second pitch, DiMaggio connects, slapping a changeup pitch into left field. Sisler's record is beaten, and DiMaggio goes on to rack up the longest hitting streak to this day, 56 games.

The Dow equivalent of DiMaggio's record hitting streak was its January 1987 run when it traded higher for 13 consecutive sessions. This is the largest streak of up-days in the history of the Dow (since 1928).

Recently the Dow achieved a rare eight-day streak (between March 29 and April 10, 2007). Let's take a look at how the Dow performs after these market rarities and if there is any way to profit from investing following these events.

HOW RARE IS AN EIGHT UP-DAY EVENT?

Since 1928, the Dow has rallied for five or more days only 48 times. This is few enough to make it a rare event, but sufficient to draw some meaningful conclusions from the data. The following chart shows the number of occurrences of Dow "hitting streaks" lasting more than four days.

ARE THESE STREAKS SIGNS OF A MARKET TOP?

After the 13-day streak back in 1987, the stock market continued to perform exceptionally well for nine months after the streak ended. However, if you look a year forward, you see the Black Monday stock market crash, which would have erased your returns in one fell swoop.

The following chart shows the average performance one week, two weeks, one month, three months, six months, nine months, and one year after each of these hitting streaks of various lengths. For most of these hitting streaks, the market continues to perform better than or on par with the market's long-term average. The only exceptions are the 10, 11, 12, and 13 day streaks. These exceptionally long streaks tend to lead to a period of market underperformance in the following 6-12 months.

Market Returns After Long Stretches of Up Days

THE DOW LOOKING FORWARD

Since the Dow just underwent an eight-day hitting streak, let's take a look at how the Dow may perform going forward by looking at past occurrences of these hitting streaks.

The following table gives you a list of probabilities – based on previous occurrences – of the market posting a positive return and/or beating the market after a set period of time. I also tried to give you a sense of risk/reward by showing the ratio of the largest fall compared to the largest rally following these events.

CONCLUSION

Based on this study, I would conclude that long stretches of up-days are not a sign of a market peak. Even if these stretches suggest the market is overheated, a fall is not necessarily imminent. You were more likely than not to achieve better-than-average market returns by investing following these long streaks of up days, whether you invest for a week or up to a year.

Notably if you bought following eight-day up streaks, and held for three months, you would have achieved above-market-average returns more than 70% of the time. However you also would have experienced the most risk (the largest loss following this strategy was 1.74 times the size of the largest gain).

Good investing,

Ian Davis

April 23, 2007

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