We made our monthly trip to the coin shop yesterday, adding a little more gold to the pile. I remember when the gold price posted on the wall at the coin shop was a three-digit number that started with a "3." Now, it's four digits with a "1" in front of that three – as in $1,345 (yesterday's price).
I used to think each month about which stock I'd buy. Now, I can't wait to put it all into gold. (Must be a sign of the top!) I only want to own two things right now: great, cash-gushing businesses (preferably those that pay a rising stream of dividends)... and gold.
I found a new cash-gushing business for my first issue of The 12% Letter, which comes out today. It's a company that covers its dividend almost four times over and has raised its dividend every year for the last 32 years. The company dominates its industry. Like other dominators, it's very, very hard to compete with.
If this company's dividend grows the next 10 years like it has the last 10, you're going to make 14% a year on your initial investment. But you can only get that yield if you buy the stock now. It's dirt-cheap, around 10 times free cash flow. You can't find many deals like this in the stock market. You should pounce on it while you still can. Click here to find out more about The 12% Letter.
New U.S. rules prohibiting banks from trading on their own accounts, so-called "proprietary trading," are hitting Goldman Sachs, the company that mysteriously winds up on the right side of every trade.
Goldman lost its proprietary trading team to legendary private-equity firm, KKR. Nine traders from Goldman's also legendary Principal Strategies business, including its leader, Bob Howard, will soon set up shop at KKR, starting the firm's first hedge fund. At Goldman, they brought in billions of dollars in revenue.
Goldman decided to become a bank during the financial crisis so it could get government money. Now, it has to play by banking rules.
But of course, Goldman is still Goldman. It's still got the best political connections on Wall Street. And it'll come out on top, again. To make up for the loss in prop trading, Goldman will begin to emphasize another business that gushes cash: asset management. Goldman's expansion into asset management has been reported on in the Wall Street Journal.
Isn't it wonderful that, by not being allowed to use its own money, Goldman will now attempt to grow its presence in the much less risky and super-lucrative business of using other people's money to generate billions in revenue? You just can't keep a good, politically connected financial powerhouse down.
Still, I have to wonder if Goldman will still wind up on the right side of every trade... or if it'll even care. After all, it only mysteriously nailed every major trade with its own money. With other people's money, it sold securities to some clients just so its big clients could sell them short. Sounds like a wonderful group of folks up there.
So... you tell me how the rules and regulations have had any wonderful effect here. You tell me how the rules are reducing risk for anyone but Goldman. You tell me how Goldman isn't still the biggest, slimiest presence on Wall Street. For the life of me, I can't figure how this regulatory gerrymandering ever turns out good for anyone but Goldman.
Last night, Goldsmith did his part to help out some bright school kids who need a few bucks to complete their education. I'll let him tell you what happened...
I received an invitation from Whitney Tilson to play in a charity poker tournament last night in New York. I was already in town, so I extended my visit one day. While I'm debatably the worst poker player in the world, I excel at cocktail parties... and one preceded the game.
I played better than I expected... And I actually took about $4,000 in chips from the best player at our table. (I lured him with an "all in" bet... He had the big stack.) But the result was the same as usual. My aggressive play backfired. I left early, grabbed a slider on the way out, and hopped an Amtrak for Baltimore.
I was playing poker to benefit the Success Charter Network (SCN), a charity started by investing virtuoso Joel Greenblatt. The organization starts charter schools in New York. It currently has four schools in Harlem. SCN's goal is to open 40 charter schools across New York. These schools offer the chance of a great education to underprivileged youth. Students are admitted only by lottery. (The new documentary Waiting for Superman showcases these schools.)
The teachers do an amazing job of keeping students engaged and interested. SCN's academic results are bested only by New York's elite private schools. The only problem... These charter schools receive between $2,500 and $4,000 less in-state funding per student. Donations help bridge the gap. Here is the Success Charter Network's website if you'd like to learn more.
Speaking of Tilson, his hedge fund, T2, recently initiated a new position in Extreme Value World Dominator pick, Automatic Data Processing (ADP). Bill Ackman, founder of Pershing Square, also owns ADP shares.
Tilson's reasoning? ADP is more than four times the size of its nearest competitor. Switching costs are high for its customers. ADP is one of four companies left with a triple-A credit rating (the other three are XOM, MSFT, and JNJ). It has a 3.2% dividend and has retired 17% of its shares in the past five years). The company is suffering now because of high unemployment and low interest rates. (ADP has around $18 billion it invests in safe, short-term securities before cutting checks to clients.)
As Extreme Value readers have known for some time now, ADP is also an excellent play on higher interest rates. ADP takes your paycheck money, distributes the taxes and benefit payments, and then prints you a check. It holds onto the tax and benefit money for days at a time, earning interest. Right now, interest rates are low, so it doesn't earn much. If interest rates rise, ADP's earnings will soar, without it having to do anything different. The higher interest it earns will drop straight to the bottom line.
You can read Tilson's full investor letter, where he further discusses ADP, here.
Two World Dominator stocks, like ADP, are even cheaper and safer right now. One of them has a 90% market share and is triple-A rated. The other has an 80% market share and is more than six and a half times larger than its only real competitor. Both are loaded with cash and very little debt. Both gush billions upon billions of excess cash flow every year. They're screaming buys right now... in a market with fewer and fewer buys all the time. To find out more about Extreme Value and get access to the entire list of World Dominator stocks, click here.
We're in a bull market... Union Pacific (railroads), Caterpillar (industrial equipment), McDonald's, and UPS all announced great earnings. These companies are all U.S. bellwethers. Union Pacific and UPS are great measures of U.S. commerce. Caterpillar measures construction. And McDonald's gives the pulse of the U.S. consumer...
... Or are we in a bull market? It's more like a bull run in a sideways market. It's been ratcheting up and down, going essentially nowhere since early 2000. It'll probably keep doing this for several more years. It'll lure investors in with these big bull moves, then slash and burn them with bearish routs. At the end of it all, price-to-earnings ratios on most stocks will be down around seven to 10 times earnings, many even lower. The S&P 500 and Dow Industrials will yield 6%, maybe more. Sideways markets are the most difficult time to be an investor. More than ever before, you need to stop being a stock picker, and start being a picker of fantastic businesses with big competitive advantages.
A reader recently complained to me about a dividend-reinvestment calculator I sent an Extreme Value reader to illustrate a point. The reader said the calculator was broken. He entered 0% stock price growth and got a higher return than when he entered 5% stock price growth. He got an even higher return when he entered negative stock price growth. How could this be?
But don't you see? The calculator isn't broken. That's exactly how dividend reinvestment works. If the stock price rises rapidly, your dividends buy less stock, and lower your future returns. But if the stock price goes nowhere or rises only modestly while the dividend grows at a rapid clip, your rising dividend buys more and more stock. That creates a much higher return than when the stock price rises.
If you haven't already gotten into Jeff Clark's short-metals trade, now is the time. Yesterday, Jeff recommended a short-term trade betting precious metals will fall. He thinks this trade will make readers a quick 150%. And the trade is cheaper today, as precious metals inched higher. One of his favorite indicators is now screaming, "sell."
One of our most trusted sources for timing the market just confirmed the downturn in metals via e-mail today (you'll hear more about this source soon...).
Jeff went short metals two weeks ago (timing it perfectly) and sold half that position today for a 100% gain. The indicator he's using is deadly accurate. Plus, today is your last chance to sign up for Short Report at a huge discount. To access Short Report and learn how to make triple-digit gains shorting precious metals, click here...
A special note to our lifetime Alliance members and members of our conference call service Off the Record: Make sure to catch this month's call... It's a big one.
On the call, S&A founder Porter Stansberry and legendary speculator Doug Casey will answer the two biggest financial questions in the world: What is the government doing to our money? And how can I protect myself from it?
We put together this call in response to the massive decline in the U.S. dollar since early September... and the concurrent surge in the price of gold and silver. As Porter now says, "We're not seeing just a slight dollar decline. It's a full blown crisis now."
On the call, which will air October 25, Doug and Porter will discuss why the U.S. has entered a dollar crisis... and how every heavy-handed step the government is taking in response is making the crisis worse.
If you're one of the many investors out there who own no gold... or think the government can magically make everything OK, YOU MUST LISTEN to this call. You must take steps to protect your family's finances. If you don't subscribe to the service and to access the call, click here...
New highs: Denison Mines (DNN), Coca-Cola (KO), Prestige Brands (PBH), CARBO Ceramics (CRR), Chimera Investment Corp (CIM), Enterprise Products (EPD), Kinder Morgan Energy Partners (KMP), ConocoPhillips (COP), AmeriGas Partners (APU), Washington REIT (WRE), Altria Group (MO).
A light mailbag today... Please take a moment to write us about your favorite investment ideas or your least favorite investment ideas at feedback@stansberryresearch.com.
"Watched Frank's talk at Columbia tonight. Noticed on the 'viewed x # of times' clock that all week it had been watched fewer than a dozen times, until today, after the Digest, when it has been watched over 600 times. People DO pay attention to S&A Research, don't they? And with good reason, and good results." – Paid-up subscriber Raoul Simon
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
October 21, 2010