The S&A Digest: Wall Street's Bloated Profits Are Stabilizing

Happy Tax Day, comrade... While Clark goes long refiners, McCain tries to cut the gasoline tax... Chinese gov't dumb as other gov'ts... Jewelry and handbags for rent... Trailing stops... Corporate America's mean reversion...

 Oil prices hit an intraday record above $113 a barrel today, and Jeff Clark is perfectly positioned to profit from the move. In Advanced Income, Jeff found the one undervalued oil sector: refiners. While every other oil stock is trading at all-time highs, refiners are at 10-year lows.

Jeff created a trade to profit from the turnaround in refiners, and it pays you 8% up front. He noticed a similar trend last month, and that trade is already up 18%. To learn more about Advanced Income and receive Jeff's latest recommendation, click here...

 S&A Oil Report editor Matt Badiali is also long refiners. Click here to read his DailyWealth essay on why now's a great time to buy.

 Energy costs rose 2.9% last month, while food prices rose 1.2%. The Fed cuts interest rates 100 basis points and injects more than $100 billion to prop up the liars and cheats on Wall Street, and I'm paying $5 for a box of cereal and nearly $4 for a gallon of gas. But maybe I'll soon be paying a little less for gasoline...

 My jaw just hit the floor. It says right here in the Wall Street Journal Republican presidential candidate John McCain wants Congress to put a temporary halt on the 18.4-cent federal gas tax and 24.4-cent diesel tax from Memorial Day to Labor Day.

Tax cuts are the only true economic stimulus the government can offer. Everything else it does is merely a redistribution of seized wealth or a manipulation of the money supply.

 China's sovereign wealth fund recently invested $2 billion in oil major BP. A Chinese investment could soon become the ultimate contrary indicator. In the past year, Chinese government-controlled entities invested $5 billion in Morgan Stanley, bought 9.9% of Bear Stearns (at around $150 per share), and invested $3 billion in Blackstone Group at the top in private equity.

 Linens 'n Things delayed a $16.1 million interest payment recently. Leon Black's LBO firm, Apollo Management, bought the company. Apollo paid $1.3 billion for the retailer of textiles and housewares in 2005. Now it's trying to keep its investment out of bankruptcy. As I spell out in the new issue of Extreme Value, due out tomorrow after market close, investors have a decent opportunity to sell short one of the biggest and most overpriced private-equity deals of all time.

 The collapse of the auction-rate debt market created some interesting opportunities in top-rated securities. According to Bloomberg, you can buy "Puerto Rico's tax-free AAA 2024 general obligation bonds paying 12 percent, equivalent to an 18.5 percent yield on taxable issues." Compare that with current 10-year Treasury yields of 3.5% and corporate high-yield, high-risk debt at 10%.

 If you like expensive things, but can't afford them because the bank just cut off your home-equity line and your credit cards are tapped out... try renting. I found a banner ad this morning for a company that rents expensive jewelry and handbags. The bag I clicked on costs $15 per week. If you are in desperate need of jewelry and handbags, but don't have enough cash on hand to buy, check it out here...

 New highs: Sabine Royalty Trust (SBR), Wal-Mart (WMT), Stone Energy (SGY), XTO Energy (XTO).

 Ahhh, tax day, April 15. The day when we are all reminded that this may be the home of the brave, but it's definitely not the land of the free. Tell us about your big capital-gains bill here: feedback@stansberryresearch.com.

 "I always read 'Never enter your stops into the market. Keep such information private.' in your publications. Does this statement indicate that you should keep your stops in your head and continuously monitor your holdings, or am I missing something? I use an online trading service and set my stops using their stops. Am I entering my stops into the market? Thank you for any guidance in this area." – Paid-up subscriber JR Ketelsen

Ferris comment: Yes, you should keep your stops in your head and monitor your holdings. I don't know about the particular online trading service you're using, but it's possible you're entering stops into the market. You could also try XLQ, an Excel program, or TradeStops, which will e-mail you when your stops are hit.

 "You have Martha Stewart in jail – how far back does this go? I thought this was supposed to be a newsletter about today, not last year! Please refund my money. I don't need old news. I was interested in the oil in Colorada etc. Please, the two letters I have read, just ask you to invest more in other letters you have. I don't need this." – Paid-up subscriber Grace Gober

Ferris comment: At the outset of yesterday's Digest, the words "four years ago" indicate the time frame of the conversation about Martha Stewart. It's incredible that you thought we were saying Martha Stewart was still in jail. Your opinion of us is undeserved... But, if you'd still like to cancel, customer service handles those requests.

 "I loved your February 2008 100%-return bond recommendation! This is exactly what I've been looking for in this volatile market. It turned me on to the possibilities of bonds. Bonds don't seem like your stodgy grandfather's investment anymore. Given this, would it be possible to find shorter term bond investments that would have a large payoff? For example, if the aforementioned bond were still selling at $560.00 at the beginning of 2010, one could purchase it then for a near double in eight months. I would think a good researcher could find safe deals like this in today's market with a maturity of 12 months or less. Could you publish recommendations along these lines? I think this would generate huge reader interest. I know it would at least with me. Please keep this publication going, as it is my most favorite right now, especially if you can expand into the type of recos I am suggesting. Thank you." – Paid-up subscriber Landon Nusz

Ferris comment: If Mike Williams ever comes across an opportunity like that, and deems it safe and sound, he'll tell you all about it.

Regards,

Dan Ferris

Medford, Oregon

April 15, 2008

Corporate America's Bloated Profits Are Stabilizing

By Ian Davis

Corporate profits are one of the most "mean reverting" concepts in finance.

When competition is scarce, a company can charge large premiums and still attract plenty of buyers for its products and services. However, these large margins always attract competition and oversupply, which drive down profits.

As profits fall, the less-efficient businesses are forced to close their doors or consolidate. The reduction in supply then causes corporate profits to stabilize. In this way, profits almost always return to a normal level.

Right now, this mean reversion is taking place all over corporate America.

In just the last week, General Electric, aluminum producer Alcoa, and UPS all reported profits or forecasts below analysts' expectations.

Also, in a recent Goldman Sachs report, strategists commented that they "expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower."

So, the fantastic earnings many U.S. companies have enjoyed since 2003 are coming to a close. What does that mean for investors?

Economies Overheat When Corporate Profits Become Too Large

As you can see, whenever corporate profits become too large, a serious correction is just around the corner.

I believe the S&P 500 still has a lot more correcting to do before we reach another buying opportunity like we saw in 1975 and 2003. In the meantime, you should continue to hold commodities (since commodities and equities tend to move in opposite directions) and relatively safe stocks that stand to benefit from a downturn (like Wal-Mart, the ultimate discount retailer).

Good investing,

Ian Davis

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