"Bottoms don't feel this good"

"Bottoms don't feel this good"... The "quicksand" strategy... Target REIT?... Leucadia: smart people, dumb move... No $1 salaries at GM and Ford... Gates is selling Microsoft...

On Tuesday, I pleaded with you not to abandon stocks, as many investors seem to be doing every day. Since then, the S&P 500 has made two new lows (including today's new six-year low). I agree with Porter that many people will exit the market for good this year. But unlike him, I believe many of them have yet to sell out. I still say bottoms don't feel this good.

Our own Jeff Clark claims the best way to survive the current "quicksand market" is to do nothing at all. Says Jeff, "Thrashing around and making quick movements will only get you in deeper trouble. However, if you do nothing, eventually you'll float to the surface and be able paddle yourself safely to firmer ground."

Doing nothing is nearly always the right thing to do with stocks. And Jeff is telling traders to be super-careful in this volatile market.

William Ackman, manager of hedge fund Pershing Square Capital Management, proposed another idea for Target to capitalize on its real estate. Initially, Ackman urged Target to spin off its entire real estate portfolio into a real estate investment trust (REIT). Yesterday, he said taking 20% of a Target REIT public would raise $5.1 billion. Under the new proposal, Target would retain 80% of the REIT and use money from the offering to pay down debt. Ackman said his hedge fund would buy $250 million of the offering.

I wish Ackman well with his Target investment, but I have to wonder, as Porter has wondered in this space before me, why anyone would ever pay fat hedge-fund fees to have someone buy one stock for them.

Worse still is the behavior of Ian Cummings and Joe Steinberg of Leucadia National, who spent $200 million of shareholder money on this loony proposition. Why not just buy $200 million worth of Target and forego the exorbitant fees? The only explanation I can find is that smart people do dumb things.

After taking their private jets to Washington, D.C., the heads of General Motors and Ford said they wouldn't accept a $1 salary in exchange for a government bailout – as the former head of Chrysler, Lee Iacocca, did when the government bailed out his company in the 1980s.

During Wednesday's hearing, a member of the House Financial Services Committee told Rick Wagoner of GM and Alan Mulally of Ford that reducing their salaries to $1 would be an important symbolic act. "I'm willing to do what I've been doing," Wagoner said – he's already taken a pay cut and given up other forms of compensation. Mulally said, "I understand your point about the symbol. But I think, not just for me, but we're trying to fill a skilled and motivated team." When pressed further, he said, "I think I'm OK where I am." Robert Nardelli, CEO of Chrysler, said Tuesday he would accept the $1 salary.

Mulally and Wagoner don't sound like people who want to be bailed out. They sound like people who want to go through the motions of being bailed out so they can blame it on someone else when it all falls apart.

Meanwhile, UAW President Ron Gettelfinger is also trying to scare Congress into lending $25 billion to the Big Three. He says one or two of the big car companies could collapse without immediate assistance, and he's urging Congress not to adjourn before it reaches an agreement. He says it's best for the auto industry and for the whole country.

Surely you remember the old saw, "What's good for GM is good for America." I think that's still true. It's best for GM and America if we let it fail. Long term, the more we bail out and prop up what's not working, the worse it will be for everyone. Failure is an integral part of our system. If we don't let it work, we'll regret it.

At the other end of the investment spectrum from GM, Ford, and Chrysler, bargains in the highest-quality businesses on Earth continue to get ridiculous. Microsoft (MSFT) now sells for a little more than nine times trailing free cash flow. While the rest of the world continues to deleverage as fast as it can, Microsoft is going the other way, contemplating a new debt issue (in addition to its $2 billion commercial paper program).

We've been telling you for some time that Microsoft is cheap enough, has enough balance sheet cash, and is a high-quality enough credit that it could afford to finance enough debt to buy all its outstanding shares. Management has listed share buybacks among the proposed uses for debt proceeds.

We were also telling you Microsoft is a triple-A company before Moody's and Standard & Poor's said so. In this environment, when nobody can borrow money, with commercial paper markets sclerotic, Microsoft starts a $2 billion commercial paper program, paying only 1.42% interest. If anyone can borrow big right now, Microsoft can.

Berkshire Hathaway (BRK), too, has gotten ridiculous. The stock hit $74,000 per share today, roughly 51% below its 52-week high of $151,650.

It reminds me of the Internet bubble, when everyone said Buffett had lost his edge. Within two years, Buffett's view was vindicated. Remember, he was telling us about an impending derivative-fueled credit crisis three years ago. He's also been telling us about a longer, deeper recession for some time. Yet, he's more bullish on stocks than ever, saying recently he could soon wind up with his personal account 100% invested in U.S. stocks, if cheap prices continue.

Berkshire is like a hedge fund that never charges you management or incentive fees. It's loaded with more than 70 private companies, plus a huge portfolio of securities picked by the greatest investor on the planet. It's easily worth $130,000 or more per share. Some say it's worth $160,000 or more. And here it is, trading below $80,000.

Also, take a look at Costco, Wal-Mart, eBay, and Coca-Cola, among others. If you're a lifetime buyer of equities, the only rational response to the current environment is to buy the best stocks when they're selling cheap. If you think you can outsmart the market by timing the bottom, none of your investment decisions are likely to be very rational anyway.

I bet somebody somewhere gets lucky and winds up calling the bottom in stocks. When it happens, he'll write books and give seminars on how he did it, as if one could ever teach coin-flipping. Many desperate souls will fall for it, too. The essence of worship is the total surrender of self-reliance and self-responsibility, and most people are born worshippers, whether it's gods, gurus, rock stars, movie stars, or Dancing with the Stars.

Shares of Goldman Sachs traded below $50 today – $3 below their 1999 initial public offering (IPO) price. Shares are down 80% from their October 2007 peak of $248.

Currently, 101 stocks in the S&P 500 index trade for less than $10 a share. E*Trade is the cheapest stock in the index at $0.98. Allied Waste is selling for $9.90. In between, you've got Starbucks, Motorola, Citigroup... Howard Silverblatt, an analyst at Standard & Poor's, says the S&P has the largest number of under-$10 stocks in at least 28 years.

Yields on speculative-grade corporate bonds are currently above 20% – the highest level in history. Before this year, the record high was 18.3% in October 1990, when 10-year Treasuries were yielding five percentage points higher than today. This is a once-in-a-lifetime opportunity to collect enormous yields on corporate bonds because of overblown market fears. And you're guaranteed to collect your money – all the company has to do is stay in business.

Mike Williams launched his True Income service last year to take advantage of opportunities like this. We’re currently offering True Income at a large discount. To learn how to earn 20% on your money annually, click here...

New high: Short sale of Gannett (GCI).

If Microsoft is so safe, why is Gates selling? Send your e-mails here: feedback@stansberryresearch.com.

"In regard to your calculatiosn about MSFT in teh S&A Digest today: why then is Mr. Bill Gates selling that much now? it doesn't feel very comfortable observing this. I was wondering if you had any explanation about this action." – Paid-up subscriber Rishie M.

Ferris comment: It feels comfortable to me. Gates has been selling mass quantities of Microsoft stock ever since I've been writing newsletters, which I started doing in 1998. Insiders sell for any number of reasons, most of them having nothing to do with their outlook for the business.

"What am I doing? I made about 75 grand (net, starting with about 30) since October 1 buying puts on almost everything I can find, the Dow, NASDAQ, AXP, Citi, GCI, the Euro, the pound, etc., etc. And you are wrong about this being a bottom. The Dow is going to 1500 before the next presidential election. Probably half of all businesses in this country will go broke in that time. The number of bullish advisors (like you) is the highest on record, a sign of a top, not a bottom. I am generating cash to use in 4 years when they will be giving away stocks in killer companies (think $2 share for MSFT). It has nothing to do with value, but the resources people have to invest. Mr. Market is a creature of emotion, not rationality." – Paid-up subscriber Kurt Lothman

Ferris comment: That's a low-probability bet... but I continue to reiterate my position: Bottoms don't feel this good. I wouldn't be at all surprised to see the Dow break below its October 10 low of 7,773.71 between now and December 31.

"I wonder how many subscribers are scrambling to find out whose ticker symbol is 'nyet'." – Paid-up subscriber John Curtin

"Why are 1 oz. Kuggerands selling at 790 bucks and the price of gold is 740 an once? These are not exact figures but close. The cost of shipping is 28 bucks additional. I got these figures the other day from blanchard." – Paid-up subscriber Virginia

Ferris comment: As we've been saying for several weeks now, the physical gold market is very tight. Demand for coins is especially high now. The futures market, however, continues to feel the pressure of a global mad rush to sell everything and get to cash.

Regards,

Dan Ferris

Medford, Oregon

November 20, 2008

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