The S&A Digest: The Tisches' $5 Million Test

Loews' new oil and gas company... Gordon Gecko returns... Intel's $200 laptop... What market top?... Eat the bear... Still more about Sarnoff (enough already!)...

It's a deal worth watching... In 2002/2003, Loews Corp. (LTR) purchased a collection of gas pipelines on the cheap, as the entire energy space felt the repercussions of Enron's bankruptcy. A decade earlier, it had picked up offshore drilling rigs for next to nothing, under similar market conditions. Now, Loews is buying 2.5 trillion cubic feet of natural gas from Dominion Resources. See my essay, below, for details...

We have finished reviewing the editorial advisory board applications (please don't send us anymore...). After sifting through thousands of resumes, we narrowed the field down to the finalists. Watch for an e-mail from us this week to schedule a phone interview... you could be one of the finalists. On the other hand... "If the phone doesn't ring, you'll know it's us that's calling." We're looking specifically for people with 20-30 years of experience in fields outside of finance. And we've intentionally favored candidates with entrepreneurial experience. Very, very few of the resumes we received fit these criteria. What Warren Buffett says is true: If you advertise for poodles, you'll get a lot of cocker spaniels.

You're not going to believe this... A sequel to the 1987 film Wall Street titled Money Never Sleeps is in preproduction. Michael Douglas will again star as greedy investment banker Gordon Gecko. You can think of this movie as a personal warning from Hollywood: This bull market is getting very long in the tooth. "Greed is good..." especially when it's tempered by experience and caution.

S&A Dividend Grabber pick Health Management Associates (HMA) will sell two of its Virginia-based acute care hospitals by August 1. The stock has moved up $1 (10%) over the last few days, as rumors of the move spread... finally putting us in the black after grabbing a $10 dividend in January.

PSIA pick Intel (INTL) together with ASUSTeK, the world's largest producer of motherboards, have formed a joint venture to produce laptops that will cost as little as $200 aimed at mass markets in developing countries.

Extreme Value pick ExxonMobil (XOM) and Enbridge (ENB) will jointly build a crude-oil pipeline from Patoka, Illinois, to Beaumont, Texas. The companies say the pipeline will come online by the end of 2010. Patoka sits near old Illinois Basin oil fields, but this pipeline will bring in more crude from Canada.

A Senate panel found that companies overstated tax deductions (shocker) for options granted by $43 billion in 2005. Among the many fraudsters, KB Home (KBH) granted $11.5 million in options for the year and claimed tax deductions of $144 million. S&A Oil Report pick Occidental Petroleum (OXY) issued $29 million and deducted $353 million.

A few new highs: Petro-Canada (PCZ) Occidental Petro (OXY), Marathon Oil (MRO), ConocoPhillips (COP), POSCO (PKX), PowerShares Harvest Currency (DBV), BHP Billiton (BHP), Raytheon (RTN), Nokia (NOK), ExxonMobil (XOM), Pioneer Natural Resources (PXD), NGP Capital Resources (NGPC), Gen-Probe (GPRO), EnCana (ECA), Janus Capital (JNS), Sunoco (SUN), Royal Dutch Shell (RDS-A), Pike Electric (PEC), Petrobras (PBR) Atlas Pipeline (APL), Pogo Producing (PPP).

The mailbag is... bare. Perhaps the novelty has worn thin, but we haven't gotten any insulting letters in days. Or maybe the string of record highs in the stock market has fooled our subscribers into believing we're geniuses (we're not). I bet if we counted the number of truly irate pieces of mail received, we could build a market indicator worthy of Ian Davis's rigorous statistical testing. Well, at least we'll have something to look forward to when stocks finally fall. In the meantime, send us something to read: feedback@stansberryresearch.com.

"I have read in nearly every issue of the Digest 'Signs of a market top.' For any investor, that saying is just that. A warning! How can I invest in recommended stocks at this time with that hanging over my head? Can you clarify yourself on this warning, you are [continually] imposing on me."

– Paid-up subscriber Pat P

Porter comment: Warren Buffett said it best: We try to be fearful when others are greedy and greedy when others are fearful. When we see people acting greedy... and other things that don't sit right with us... we pass it along. There's no such thing as a perfect market-timing signal. You have to go with the preponderance of the evidence... and your gut.

"Why is it that all of the other letters in you group send out an e-mail notification when the current issue becomes available and you do not for PSIA. With the number of publications that you have it is difficult to keep up with the publication dates." – Paid-up subscriber David Hoffman

Porter comment: Uh... we do send out PSIA notifications... Maybe you're not a "paid-up" subscriber anymore?

"OK, so we are off the money topic, but Mike Rollins says not to brine red meat. I disagree on one and only one meat and that is bear meat. It is the only way to make bear palatable. Living in the west, we have the opportunity to grill elk, mule, deer, Barbary sheep, bear, and even oryx from the White Sands Proving Ground in New Mexico. All cook great, except bear. Bear must be brined to get the right texture. As far as the monetary side of the newsletter... I enjoy it and it has made me a bundle of money. Thank you!"

– Paid-up subscriber Fred Fleming

Porter comment: Keep eating those bears, Fred. Keep 'em off Wall Street.

"I haven't received my invitation as of yet to having the pleasure of making your acquaintance for the advisory board. I assume that you are saving the very best for last as hope still springs eternal and where there is no sense there is no feeling." – Paid-up subscriber David Woodworth

Porter comment: The missing invitation to join our board could be related to you repeatedly challenging me to a fistfight... and calling my writing "poison."

"Just a note to let you know that the continuing advertisements for Steve Sarnoff's recommendation and subscription absolutely do NOT reflect his abysmal record of forecasting. While I recognize that trading options is risky, my own records show that I would have been miles ahead doing the exact opposite of what he recommended. At the very least, portray his track record accurately." – Paid-up subscriber Randy Berg

Porter comment: Please, dear subscribers... don't pin Sarnoff on us. We don't advertise for Sarnoff – we've refused all Sarnoff advertising for years (though we've been told, one Sarnoff insert slipped through the cracks and found its way into a recent Oil Report envelope, much to our chagrin and embarrassment).

We don't publish Sarnoff. And we're not responsible for his track record or his marketing packages. Whether he does a good job or a bad job for his readers, we can't say. We don't read his letter. Why not? Because Sarnoff makes absurd claims in his marketing packages that can't possibly be true.

The Tisches' $5 Million Test

"I gave it the famous Tisch family $5 million test..."

So said Jonathan Tisch, scion of New York's Tisch family and current co-chairman of Loews Corp. (LTR), the family's publicly traded holding corporation. Jonathan was describing to the audience of last year's Columbia University Value Investing Congress how he convinced his uncle, Larry Tisch (a famously risk-averse investor), to go along with his plan to buy six oil tankers for $5 million each in the mid-1980s. At the time, oil prices had collapsed and oil shipping firms were selling tankers for scrap rather than paying $1 million per year to maintain them in port.

"I looked up 'broker, tanker' in the Yellow Pages. I called the first number listed. I told the guy who answered the phone, 'I want to buy a tanker.' It took a while to convince him I wasn't a prank caller – always a good sign for a buyer. We flew over to Norway to see one of these boats. I walked up on bridge. I looked in front. I looked back behind. It sure looked like a tanker to me – that's the Tisch $5 million test. If you can't understand the business simply by looking it over, it's not for us. We bought the boats. Eight years later, we sold them for $50 million each..."

I'd never met Tisch... or heard much about him... before I attended Columbia's conference. But as soon as I heard that story, I knew I'd better pay very close attention to whatever Jonathan Tisch was buying. The guy is wise. And a wise investor is worth three or four times more than a smart investor. You can be too smart. You can't be too wise.

Yesterday, Loews announced it was spending $4 billion to acquire a low-risk natural gas asset – 2.5 trillion cubic feet in reserves – from Dominion Resources. Loews is buying what's called "shale gas" properties, which can be expensive to operate but are very low-risk from a drilling perspective because gas tends to be spread evenly throughout the shale. Says Jonathan Tisch about the deal: "This is not wildcatting. This is really factory drilling."

Normally, if a New York investment group was purchasing natural gas assets, I'd be willing to bet the seller got the better end of the deal. But, like I said... Tisch is a wise investor. Paired with Loews drilling assets (Diamond Offshore) and the company's gas pipelines (Broadway Pipeline Partners), Tisch is putting together a new kind of integrated oil and gas company. It's worth watching.

Good investing,

Porter Stansberry

Baltimore, Maryland

June 5, 2007

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