The Daily Crux is up and running. Today, visitors to the site (and subscribers to our handy "Home Delivery" service) learned about an unusual group of stocks the world's best value investors are buying... a brewing financial crisis even bigger than subprime... a potential mania in gold... and how to make 85% on a small stock market decline.
If you'd like to keep up on the world's best investment ideas and news, make sure to visit the Crux today. You can also sign up for our free Home Delivery e-mail here. It's a huge timesaver for busy investors.
Sign of a bottom in Citigroup?
Citi might back out of a $400 million marketing deal that would rename Mets Stadium after the bank. If you've read Victor Niederhoffer's entertaining book Practical Speculations, you've seen the "Stadium Indicator" chart, which shows how bad it is for a company's stock price when it does a stadium deal.
If Citi gets out of a stadium deal to cut spending, who knows? I wouldn't touch any big U.S. bank stock with a thirty-nine-and-a-half-foot pole, because it's impossible to read the financials. But it makes you wonder.
Extreme Value pick Loews Corporation's CEO, Jonathan Tisch, was on CNBC today discussing the troubled hotel industry. The Tisch family has been in the hotel business for 65 years. He says right now is a "difficult moment" and that "nobody's traveling." Consumers aren't traveling because they don't know what their homes are worth and their 401(k)s have been "shredded." Groups are canceling trips.
Tisch says there's an "AIG effect," resulting in trip cancellations, especially by public companies that are operating on government bailout money. Even those that aren't canceling meetings are spending a lot less on food and wine.
Tisch isn't predicting a rout in the industry, though. He says hotels are trimming expenses, so their profit and loss statements shouldn't look too bad. And Tisch says the pain hasn't been bad enough to create fire-sale prices on hotels. (I can't help reminding you of my mantra of the last few months, "Bottoms don't feel this good.") Tisch says there are no real bargains just yet.
When the Tisches start buying hotels again, that could be a great signal it's time to buy the best hotel stocks. My favorite is Choice Hotels International (CHH). The stock is essentially a royalty on a popular hotel/motel franchise, which includes the Comfort Inn, Sleep Inn, Quality Inn, Econo Lodge, and Clarion brand names.
Fewer people are traveling, and fewer goods are traveling, too... Extreme Value pick UPS says it is freezing executive salaries and suspending its 401(k) matching, as it gears up for a difficult 2009. Its average daily package volume fell 2.3% last quarter. UPS serves every address in the United States and delivers more packages around the world than anyone else.
Though FedEx does a good job, UPS' returns on capital over the last 10 years have trounced FedEx's. UPS has increased its revenues every year of operation since the company was born in 1907, when the country was in the grip of financial panic.
The forces of deflation are good for more than keeping you and your stuff from traveling. They can make you rich, too, by creating great investment bargains. SocGen equity strategist James Montier says dividend swaps in Europe, the U.K., and Japan are forecasting dividends to collapse as much as 66%, and to stay collapsed "pretty much forever!" Somehow, I think forever is overdoing it a little.
I don't know how to buy dividend swaps (small investors probably can't), but Porter, Tom Dyson, and I have recommended a slew of stocks that have paid dividends consistently for decades. This is a great time to buy the best dividend payers. My personal favorites are Procter & Gamble and ExxonMobil. If you're an investor in search of steady, growing streams of income, you should definitely own these two.
The Washington Post says banks that have received government money have reduced lending more sharply than those that didn't. The Post also reports the best and worst banks have seen deposits rise, which most banks view as a necessary prerequisite to increasing their lending. The best banks benefited from a flight to safety, while the worst banks benefited from aggressive competition by offering higher interest rates.
The government is gearing up for more bank failures... A new bill by comrade Barney Frank of the People's Revolutionary Financial Services Committee triples the FDIC's borrowing power from the Treasury and gives it three years to get back to the statutory minimum reserve of 1.15%. It was at 0.76% at the end of the third quarter.
The FDIC's chief operating officer, John Bovenzi, told the committee the FDIC would need more borrowing authority to compensate for higher-than-expected losses from bank failures. On Friday, regulators shut down three more banks – in Utah, Maryland, and Florida. That makes six bank failures in less than five weeks so far in 2009. At this rate, 60 banks will fail this year. The deposits of two of the Maryland and Florida failures were sold to competing banks.
Everybody wants to call the market... which is really strange to me, because if there's one thing we can all be certain of, it's that nobody can call the market.
Goldman Sachs analysts sent out a recommendation this morning to buy put option spreads on the S&P 500 on the chance they're right about when and where the index goes. For investors using a "put spread" strategy, Goldman says the highest payoff would be generated through buying March 825 puts and selling March 745 puts, producing $1.85 in profit for every $1 invested if the S&P 500 drops to its November low. I wonder if the trade is any harder to do now that the report is out.
British bank Barclays, eager to get in on the act, says it believes the
S&P 500 will fall to 750, about half its October 2007 peak and just above the November 21 bottom of 741.02.
Last December, I posited two scenarios based on the valuation of the S&P 500: one where the bottom had been reached last November, and one where the bottom was much lower, under 500. Don't forget that the 1929-32 peak-to-trough move was -89%. A similar performance today would take the S&P 500 to around 173 some time in 2011.
Will it happen? I don't know. But I bet you everyone freaks out and sells the world's best businesses for dirt-cheap prices if it does. I think most folks handle sharp price reductions in stocks by running for the exits. Few stop and think about what they're doing. Though thinking about value and waiting remain perennially out of fashion in securities markets, they're always hot items at my house. I think the correct response to a sharp price reduction in stocks is to keep thinking about the relationship between price and value. The farther apart those two numbers get, the better the opportunity for future profits.
New highs: none.
In the mailbag... At least one of you thinks we've made you a better investor. Anyone else? Let us know here: feedback@stansberryresearch.com.
"In the issuance of your report card you ask us readers to ask our selves a questions: 'Am I a better investor after reading S&A research?'. A little background, the truth, and then hope for my future – first the background; I started subscribing to the 12% Letter in the spring and upgraded to the Private Wealth Alliance over the summer (as a side note I wanted in on the Private Wealth Alliance for International Strategist as I studied International Relations in college and was intrigued by international investing but you have since shut that publication but I understand why) because I thought then and still believe now that for the money that package is untouchable. Among your investment opportunities over the last 8 months that caught my eye were shorting Freddie/Fannie/the financials, Wal-Mart, McDonalds, & BUD as blue chips, Iowa Telecom from the 12% Letter – other things interested me but not enough to contemplate investing – the truth is that I made zero investments in 2008 but if I had; the ideas listed above have two things in common: all of them are Stansberry picks and all of them were winners. So when the time comes will I be a better investor after reading S&A research; how could I not when I am making decisions while properly informed and all I have to do is skim the cream off of the top of the crop. Belated happy new year and best of luck to all in 2009." – Paid-up Alan
Ferris comment: Thanks for the kudos. I would encourage anyone who thinks he has a really great investment idea, one he knows all about, to do it. As long as you don't risk money that would ruin your standard of living, you'll be better off by learning and/or profiting. Investing is a lifelong project.
Two of the greatest investors, Ben Graham and John Maynard Keynes, were down 70% and 50%, respectively, during the Great Depression. They went on to rack up excellent lifetime track records. Nobody goes through a lifetime without a few big drawdowns. Successful investors recognize them for opportunities.
Good investing,
Dan Ferris
Medford, Oregon
February 3, 2009