ExxonMobil's moving experience

ExxonMobil's moving experience... Corporate America maxing out its credit card... Cummins Diesel lends to a bank... Heebner calls a bottom... Why you should buy gold and silver...

I remember a few years ago hearing some fund managers would hold ExxonMobil shares for short periods of time as a proxy for cash.

They're not doing that now. ExxonMobil's share price, along with many other share prices, fell 14% yesterday. It's down a bit more as I write.

When you get a margin call and can't sell your illiquid mortgage-backed securities, you sell whatever moves, as fast as you can. Mortgage-backed securities and their derivatives are tattooed in place these days, but ExxonMobil shares move like highly lubricated excrement through migratory waterfowl.

Given that it's one of the most widely held stocks in the world, the decline in ExxonMobil's share price is likely a sign of mass redemptions at mutual-fund companies, as their shareholders panic. Why anyone who's solvent would sell out of an unleveraged fund that's holding great stocks like ExxonMobil is beyond me.

If you don't own ExxonMobil, now's your chance to buy a piece of the most profitable company in the world (more than $40 billion in income) for about seven times free cash flow. This is one of those times all the great value mavens talk about: Investors of every size and shape are selling stocks for reasons that have nothing to do with safety or value.

You get a chance to buy companies this good at prices this cheap maybe twice in a lifetime. I was born in 1961 and didn't buy in 1982, so this might never happen again in my lifetime. ExxonMobil isn't even the cheapest of the big, safe, world-dominating companies. In the Extreme Value portfolio, I've got more than half a dozen blue chips, a couple of which are so cheap and generate so much cash flow, they can buy back all their outstanding shares. Click here to learn more about these stocks and what I consider the world's greatest business.

Hedge-fund losses and liquidations are in high gear... along with every other kind of loss and liquidation. TrimTabs Investment Research says hedge funds had their worst month ever in September, with average losses of 6.2%. Investors withdrew $43 billion from hedge funds – nearly seven times the previous monthly record.

Highland Capital, a $32 billion fund company, said it's closing its $1.5 billion Crusader fund. And Citadel, a super-secretive, Chicago-based fund giant, said it's down 30% for the year.

Corporate America is tapping its credit cards to pay the bills.

It's a growing trend that started in mid-September, when GM drew down the last $3.5 billion of a $4.5 billion credit line. Since then, at least 17 companies have tapped credit lines. Six companies – American Airlines, Goodyear, Host Hotels, craft store Michael's, and auto-parts makers Lear Corporation and Dana Holdings – have drawn down a total of $1.775 billion on revolving lines of credit over the past few weeks.

Shell-shocked banks are in denial. JPMorgan Chase CEO Jamie Dimon says he hasn't seen clients rushing to draw down credit lines. Citigroup is running around telling its clients not to tap credit lines because it makes them appear desperate. I'm pretty sure their clients aren't faking it. They really are desperate.

You have to expect at least one of these companies is drawing down credit lines in anticipation of declaring bankruptcy. I bet legendary investor Carl Icahn winds up making some big investments in bankrupt companies as the credit crisis plays out. Meanwhile, as I wrote in the current issue of Extreme Value, Icahn's stock, Icahn Enterprises (IEP), is dirt-cheap, selling for less than book value.

Who needs credit revolvers when you have friends? Cummins, the diesel engine company, has agreed to provide $25 million of $50 million in new capital sought by Irwin Financial of Columbus, Indiana. Cummins, also based in Columbus, started up in 1919 with funding from Irwin.

Switzerland joined the global bailout, giving UBS $59.2 billion. The Swiss government also urged Credit Suisse to raise funds. Switzerland held out as long as it could, but has now become the last great financial center to prop up domestic financials.

In America, Citigroup announced its fourth straight quarterly loss, writing down another $4.4 billion, adding to $40 billion in writedowns and losses. Citi also cut 11,000 jobs this quarter, bringing this year's total to 23,000. I didn't even know the company had 23,000 employees. What have they all been doing all these years?

Merrill Lynch announced its fifth-straight quarterly loss. The bank wrote down another $9.5 billion, again on top of $40 billion, and reported a net loss of $5.15 billion. Merrill laid off 5% of its employees.

Economists predict New York City will lose 165,000 jobs before this crisis ends... 35,000 of those will be from the financial services industry. This is bad news for the city. Finance jobs are 13.6% of New York's economy and 9% of taxes.

Mutual-fund manager Ken Heebner thinks we're close to a bottom. Heebner appeared on CNBC and said he thinks the recent decline in the market is just a massive selloff. In addition to liquidation to meet margin calls, people are taking gains now instead of waiting for OBAMA! to raise the capital gains tax. You can watch the video here. (Heebner's interview is toward the end.)

Maybe Heebner's right, and we're close to a bottom. But I don't think the bottom will feel nearly this good.

New highs: Gannett (GCI)... Porter's short position.

Remember, we're airing our conference call with Porter, Steve, Jeff, and myself tomorrow at 4 p.m. Eastern time. If you haven't done so already, register for the call here. And if you have a question for any of us, please send it to feedback@stansberryresearch.com.

"I took your advice and purchased physical silver. Being a novice at this I was under the impression that gold and silver were safe hedges against a deteriorating market. Instead of gold and silver rising or even flat lining they are both fluctuating with the market volatility in the same cycle. What gives?" – Paid-up subscriber Jerry

Ferris comment: Gold and silver aren't hedges against a market decline. You should own physical gold and silver not because the market is falling, but because of the cause of the market's decline: a massive credit crisis, which has already resulted in an expansion of the Federal Reserve's balance sheet. Physical gold and silver will protect the purchasing power of your money and not much else.

"I'd appreciate a discussion of investing in natural gas pipeline companies. The thesis, as I see it, is that you are investing in monopoly businesses with very high barriers to entry that are paying fat (10-14%) tax advantaged dividends that typically grow 4-10% per year based on a fixed toll independent of the spot price for the fundamental economic staple being transported. This is all in a context of ever more natural gas usage because of the need to reduce oil consumption and extensive new domestic natural gas discoveries. It seems like a once a generation opportunity, but share prices are getting hammered. Why, and is this an opportunity or a trap?" – Paid-up subscriber Mike Heneghan

Ferris comment: It's not a trap. It's an opportunity, and a huge one. According to 12% Letter editor Tom Dyson, pipelines present "probably the most compelling income opportunity I've ever seen. The situation is so extreme, pipeline companies that normally pay 6% yields are paying 10% today. And pipelines that normally pay 10% yields are paying 18% today." Tom's latest issue, out today, features his two favorite pipeline opportunities. Click here to learn more.

Good investing,

Dan Ferris

Medford, Oregon

October 16, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame