The S&A Digest: Kuwait Abandons the Dollar - Sign of a Bottom?

Secondhand Buffett wisdom... The Digest returns... Another sign of a market top... Berkshire buys gold... Porter's trailer park... Still on global warming...

Although I wasn't at Berkshire Hathaway's annual meeting, I've read several excellent reviews. The best, by far, is on Jeff Matthews' blog.

Buffett says, regarding your investments: "If you can't write an essay describing 'why I'm going to buy the entire company at the current valuation,' you have no business buying 100 shares of stock."

Sounds familiar... I've recommended that you keep a note card of the key reasons you're buying a stock (business case, margin of safety, objectives). And I tell our subscribers, if you can't explain, in detail, the businesses you own without notes, then you own too many stocks or you don't understand them well enough.

Regarding the problem of excessive executive compensation, Buffett advised: It's nuts to give an executive team more money just because oil has gone from $30 a barrel to $60. But if they can find oil for less money than the industry does, "I'd pay 'em like crazy."

In addition to offering good advice about setting compensation, Buffett is also pointing out how to invest in oil and gas stocks: Find the ones that are great at discovering new reserves.

Finally, from Whitney Tilson's notes... Buffett on the fate of the U.S. dollar: "Look at oil going from $30 to $60 and the euro from 83 cents [per dollar] to $1.35... The price of oil for Europeans has gone up very little – 25% vs. 100% for us. It's easy to anchor on your own currency. [But] you'll have to think more about currency than you have. Around the world, others think about currencies, but the average American hasn't had to."

Regarding our declining currency, it seems to me that most Americans, led by the corporate media and their siren-song politicians, believe we can run a huge federal deficit each year, finance an army with bases in 130 countries, make economically absurd promises to every citizen (Medicare, Social Security), and continue to spend at record levels (without saving a penny). When asked to explain how we can successfully violate the laws of economics, Homer Simpson exclaims "We're Americans" and looks at you as though you're a traitor for not understanding what he means...

The consequence of financial profligacy, of course, is inflation. But the naifs don't understand inflation. They've never considered the logical outcome of a popular democratic system paired with paper money. Democracy is governed by the law of politics: Promise everything to everyone. Unfortunately, real life is governed by the laws of economics and, most importantly, by the law of scarcity: There can never be enough of anything to satisfy everyone. The conflict between democracy and economics means there can never be enough paper money. History is replete with examples.

But Homer Simpson knows nothing about the history of paper money. In fact, he knows no real history at all, thanks to a state-dominated education system that colors all political leaders as courageous and honest... ha! Thus, Homer will blame the oil companies for higher gas prices. He'll blame "speculators" for houses he can no longer afford. And he'll blame immigrants for the declining standard of living.

Berkshire Hathaway is planning to buy two gold jewelry manufacturers, Bel-Oro International and Aurafin. Terms of the deal were not announced, but Berkshire plans to combine the two companies into a new business called Richline Group. The new company will account for about 6% of the market for gold jewelry.

Signs of a market top... China is investing $3 billion with U.S. private-equity group Blackstone.

Parts of my back yard look vaguely like a Kentucky trailer park: black metal equipment randomly strewn about, grates, bags of charcoal, rusty tools, old gloves, etc. Barbecue season has begun in earnest at my house. I've already done a dozen racks of ribs, a whole brisket, hundreds of chicken wings, and three or four tenderloins. I'm sure my neighbors here in the Greenspring Valley of Maryland's horse country are thrilled...

The favorites this season, so far, are the grilled (never fried) chicken wings, the 12-hour whole brisket (cooked at 206 degrees), and my Asian baby back ribs. I've experimented a lot with the ribs and the brisket. What I've found, despite claims to the contrary from "pit masters," is that everyone prefers slightly chewy baby back ribs (cooked at medium temperature – around 325 degrees) to low- and slow-cooked spare ribs.

Regarding the brisket, the trick is to use a pellet smoker (I own a Traeger Executive) that can maintain a steady temperature for hours and hours. Brisket starts out as a fatty and tough cut of meat. But after 12 hours in my smoker, the fat has melted, and it's so tender you can literally eat it with a spoon. To make sure it doesn't dry out, I recommend basting it heartily for the first six hours and then wrapping it in foil until it reaches an internal temp of 190 degrees.

What's next on my barbecue journey? Kobe brisket.

I'm sure you've heard of Kobe beef, the best-marbled and most tender beef you can buy. It's made from Wagyu cattle, which originated in Japan. ("Wagyu" means "Japanese cow.") Besides being incredibly tender and tasty, Wagyu beef is better for you because it has a high percentage of unsaturated fat. Several American ranches now raise the four Wagyu breeds, making it easier and more affordable to buy, though it still costs about $40 per pound for choice cuts.

How can you eat Kobe beef and not break the bank? Simple – order Wagyu brisket, which is one of the cheapest cuts of meat you can buy. Morgan Ranch (whose Wagyu got a good review from The Wall Street Journal last week) sells Wagyu whole brisket for $5 per pound.

New highs: American Express (AXP), ConocoPhillips (COP), Royal Dutch Shell (RDS-A), Petrobras (PBR), Macquarie Global Infrastructure (MGU), Chevron (CVX), Eni (E), EnCana (ECA), Intel (INTC), McDonald's (MCD), McKesson (MCK), Marathon Oil (MRO), Nokia (NOK), Petro-Canada (PCZ), ExxonMobil (XOM).

It's such a blow to the ego to realize that no one is actually reading any of these Digests... We must have gotten 50 e-mails asking where I was last week. Dear subscribers, as I explained before I left, I simply needed to take a breather during my spring vacation. But I'm back now... despite the chorus of boos. Send your own gripes here: feedback@stansberryresearch.com.

"Cell phones? In Scott County? TN? They are still using smoke signals. Works better. Cheaper too. Smart! Just kidding. Have a great time!" – Paid-up subscriber Hank Cowell

"Yeah, sure, Porter – you go on vacation just when everything goes to crap. Flimsy excuse for evading telling us what to do. Being on vacation – no reason not to publish. Please extend my subscription to make up for the missing week..." – Paid-up subscriber George Bottinor

"After reading your publication for some time now, I can clearly see that you are, in fact, a bigot. Just come out and admit it. You openly despise thieves, liars, and fools. You are constantly exposing them in you newsletter. Whether it is that nice Mr. Jobs or those Ponzi fellows from Utah, you just can't seem to find anything positive to write about... I believe the 'hidden agenda' in your writing is to keep your readers from becoming the victims of thieves, liars, and fools; or worse, becoming thieves, liars, and fools themselves. Next thing you'll be telling me to stop sending money to that nice Nigerian bank executive, who has been sending me unsolicited entreaties, just because he's from another country (whose markets you won't cover because you're a bigot). But you probably won't print this e-mail because you don't have the guts. BTW, thanks for the dating tips next time I'm in Charm City, hon." –Paid-up subscriber Matt Winkler

"You have made your stance on global warming pretty clear in the Digest. Thought you might be interested in this link: Believers to Skeptics. It's a small list of some of the more respected scientists who have reversed their position on the human impact of global warming and some of their reasons." – Paid-up subscriber Justin Seli

Porter comment: No... I'm not really interested. Global warming isn't a scientific issue. There's nothing scientific about it, from either side. There's far too much we don't know and can't know about the Earth's climate.

Global warming is a political issue being driven by the media. It serves to empower those groups that want to tell the rest of us what to do with our property – mostly because they don't have any. It empowers con artists like Al Gore, who want to steal from us. And it empowers media giants, because it gives them something new to scare us with. Every bad idea of the last 300 years had exactly the same traits... and all of them dressed themselves up under the guise of "science," from Marxism to Y2K.

"Why do you quote Munger's comments on global warming? Why should they receive any credence? When last I looked, he was an investor of note – his scientific credentials on the other hand are non-existent!" – Paid-up subscriber Paul

Porter comment: Munger knows more about the world and about history than anyone I personally know. Doesn't mean he's right about everything. But it does mean he's worth listening to. And it also means he doesn't have to hide behind the "wizard" of science to make a point.

"Here's what I don't get. Availability to all this fabulous researched data... surrounded by so many great minds, so many seminars, invaluable insights, advice from world-class experts, yet you are still sitting in Baltimore fighting with disgruntled subscribers and stressing over promotions and deadlines.

"Seems to me, you should have made your millions long ago and can now enjoy your family compound in Tennessee or the Islands or wherever instead of having any constraints at all. Sure, there's the line about doing what you enjoy, giving back in return for the good fortune you have received etc. But really that's just a bunch of baloney. I know you enjoy expounding your ideas and need a forum... but then you could just publish a blog or something.

"If I was Dan Ferris... I would only leave Oregon when I felt like it and certainly wouldn't be bound by any publishing schedules. Likewise, if I was you I would just hunt turkeys or whatever else you enjoy. You gotta admit something just doesn't make sense..." – "On and off confused subscriber" John W. Scionti

Porter comment: Maybe I can't explain it to your satisfaction... but I truly love what I do – writing, thinking, competing with my other analysts for the best ideas and track records. Arm wrestling with my subscribers is truly just for fun... I only communicate with a tiny fraction of my total audience, and I know the letters I get aren't representative: Most people don't care that much about our letters or my opinions.

Here it is... Saturday morning, I've got 20 people (family) coming over for dinner tonight, and I'm typing a reply to your question. Why? I truly enjoy it. All of this – the research, the travel, the writing, the e-mail communication – it engages my mind and lights up the world for me. The people I meet... the things I learn... How could I not do this?

Oh, by the way, I've tried on multiple occasions to quit writing. Once I went about three months. I got so depressed. It was the pits. This is what I do. Even if they didn't pay me... this is what I would do. (Don't tell them.)

"It took me a while to get to Stansberry, but I'm glad I did. Your advice is completely understandable, honest, straight from the heart, and totally reasonable.

"It is refreshing to read someone who tells it like it is, requests critical dissent, and handles it with straightforward, intelligent responses. I grew up in west Texas, where a man's word was his bond. It didn't take long to figger out who was 'bull____ing' versus those telling the truth. I hope to meet you someday and perhaps we can go on a good quail shoot or turkey hunt." – Paid-up subscriber Ron Smith.

Regards,

Porter Stansberry

Cockeysville, Maryland

Kuwait Abandons the Dollar: Sign of a Bottom?

By Ian Davis

Kuwait's decision to peg its currency to the U.S. dollar couldn't have come at a worse time.

Back in January 2003, the countries in the Gulf Cooperation Council– an organization made up of the six Persian Gulf monarchies – were attempting to "harmonize" their economies in preparation for a single, unified Gulf currency (which was, and still is, planned for 2010).

As part of these preparations, all six of the Gulf monarchies pegged their currencies to the dollar.

Their timing was terrible. In 2002, the U.S. dollar, as measured by the trade-weighted dollar index, began a slide that has lasted more than five years and has trimmed 20% off its value in relation to its trading partners.

Over that same time, the price of oil has risen by about 225%. But while the currencies of oil-exporting countries should have been appreciating, they were instead declining.

Foreign Investors Are Poor Market Timers

However, Kuwait isn't alone in mistiming U.S. markets – overseas investors in general have been terrible market timers. Just look at the net monthly purchase of U.S. stocks by foreign investors. This figure reached its all-time high just as the Nasdaq peaked.

Kuwait Abandons Market Peg

In what may turn out to be another contrarian signal, this Sunday, Kuwait un-pegged its currency from the U.S. dollar.

The following chart shows the trade-weighted U.S. dollar index. As you can see, the index is approaching historic lows, and Kuwait has jumped ship.

Conclusion

Foreign investors succumb to panic and greed just like domestic investors. Currently, Kuwait is concerned about the future of the U.S. dollar. But given Kuwait's historic success with its currency bets, this may be a bullish sign for the dollar.

Good investing,

Ian Davis

May 21, 2007

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