Grammys and Barron's...

  The Grammy Awards were on TV the other night. This is the music awards show where the 6,000-member National Academy of Recording Arts and Sciences gives out awards to recognize outstanding achievement in recorded music. Oddly enough, the most outstanding music is always the most popular music. That's a little weird, isn't it? Don't you think there's a girl somewhere who can sing better than Lady Gaga? I bet there is.

Until about four or five years ago, I'd been a performer of one kind or another since age five. I've been an actor, singer, guitarist, keyboardist, one-man orchestra, composer, conductor... you name it. Over about 40 years of performing, mostly as a musician, I noticed the best musicians are rarely the most popular.

Let's face it. The Grammy Awards show is a power play by the wealthiest and most popular recording stars. It's a marketing job designed to sell more records and keep smaller, less well-known artists from competing.

  And so we turn to Barron's and its current issue, which features "The Most Respected Companies."

To compile its list, Barron's surveyed professional money managers about their views of the world's largest 100 companies. It reflects the same bias toward popularity as the Grammy Awards. It's not about great businesses. It's about money managers' opinions of big businesses. If a phenomenally well-run operation just happens to be the 101st largest company in the world, it's out of the running.

As I read the Barron's survey, one fact emerged in sharp relief: Money managers read the headlines and swear by every word. They love Apple. They hate BP. They love IBM. They hate Toyota. They love U.S.-based companies. They hate Russian companies. They're the most sheepish, fad-following bunch of twits you can imagine... just like the people who watch too much TV and buy $250 pairs of jeans because their favorite Grammy-winning pop star wears them.

These money managers charge enormous fees to unsuccessfully track the S&P 500... And Barron's thinks we care what they think about anything. I can only assume Barron's is as desperate to sell magazines as Katy Perry and Lady Gaga are to sell records before their shooting stars burn out.

  Warren Buffett – the biggest big-company investor – is selling more large company investments than buying lately. According to his latest SEC disclosure filing, Berkshire Hathaway has sold all its shares in Bank of America, Nike, Comcast, Nalco, Fiserv, and Loews.

Buffett's sales make sense. Stocks are expensive. Expensive stocks should be sold and certainly shouldn't be bought.

How expensive are stocks today? More expensive than few other times in history, according to John Hussman, president of the Hussman Investment Trust. Hussman says the S&P 500 is selling for around 24 times earnings, based on 10-year average price-to-earnings (P/E) ratios. The S&P 500 accounts for about 80% of the market cap of the U.S. stock market, so it's a meaningful measure for the overall state of things.

This cyclically adjusted P/E (CAPE) has hit 24 only three times: The run-up to the 1929 crash, the Internet bubble of the 1990s, and the mother of all bubbles that crashed in 2008. Says Hussman:

He's right. The stock market is filled with know-nothing gamblers buying what went up yesterday and praying to unload it at the top tomorrow. They'll fail, of course. They always fail...

  Why could stocks fall or even crash? Really, I wouldn't blame anyone for becoming skeptical about predictions of big inflation. One subscriber e-mailed to say inflation was becoming mainstream because he was hearing about it from his mother and the people at work (in a nonfinancial occupation).

But it seems every time I turn around, no matter how much I've heard about inflation, I hear about prices rising. Popular as inflation talk may be, signs of inflation haven't abated. The newest victim is clothing prices. One analyst said he expects an overall rise in clothing prices of 10% in the coming months.

The CEO of VF Corp. – the company that makes North Face, Nautica, Wrangler, and Lee brands – said recently, "All of our brands, every single brand, will take some price increases." J.C. Penney, Nike, and designer-shoe seller Steve Madden are all planning price hikes. Brooks Brothers wrinkle-free dress shirts are $88 now, up from $79.50.

Raw material and labor costs in the clothing industry are rising... The price of cotton hit $1.90 a pound on Friday, more than double the price one year ago. Raw materials account for 25%-50% the cost of most garments, and labor is 20%-40%. Labor costs in China are rising, too. Factories that closed during the crisis now have to pay higher wages due to labor shortages there.

Even Wal-Mart won't go unharmed. Wal-Mart CEO Mike Duke said in a recent interview, "There's no doubt there may be some price increases that come up." He was quick to point out that Wal-Mart won't automatically pass higher cotton costs through to customers.

  Food price increases have hit Danone, the French consumer goods company that gets 60% of its sales from dairy products like Dannon yogurt. Danone expects raw materials and packaging costs to rise 6%-9%. A 10% increase in milk costs hurt sales volumes in 2008, which didn't recover until milk prices fell again in 2009.

  New 52-week Highs (as of 2/14/11): Alexander & Baldwin (ALEX), Automatic Data Processing (ADP), Berkshire Hathaway (BRK), Cenovus Energy (CVE), Sprott Resources (SCP.TO), ExxonMobil (XOM), Denison Mines (DNN), First Trust DJ Select Fund (FDM), Harmonic (HLIT), CARBO Ceramics (CRR), HMS Holdings (HMSY), Molina Health Care (MOH), ConocoPhillips (COP), Sandridge Energy (SD), Walter Investment Management (WAC), Integrated Device (IDTI), O2 Micro International (OIIM), Take-Two Interactive (TTWO).

  If you've seen food, clothing and other essential costs rising, tell us about it. If you work for the government and fear your job will be axed, we'd like to hear about that, too. And finally, if you think Barron's "Most Respected Companies" awards have any value, go ahead and try to convince us... at feedback@stansberryresearch.com.

  "Hey, Sean, congratulations on your first gun. I hope you get many years of fun, enjoyment and comfort from it. There is no shortage of opinions on guns, ownership, sizes, types, etc. (almost as many as questions about Stansberry's Top Ten Open Positions – ha!). I have several gun models; from pistols to shotguns to rifles... even a cane gun (never been shot). My sister says I'm paranoid. I tell her because I have so many guns, I'm not paranoid!

"One thing I would encourage you and all other gun owners to do is maintain a membership in the NRA. I don't see how any gun owner in the U.S. could own a gun and not be a member. They fight for our ownership rights in every state and I believe we owe it to ourselves to contribute to those who would stand up for us.

"One last note. Those guys shooting next to you with the huge guns and wearing the JD T-Shirts... they would probably be the first ones to come running to your aid when the bullets are flying..." – Paid-up subscriber C.R.

  "Your article indicates the inflation trend started in 2010 or before. You should have published this or a similar article then. You should not have waited until now. I paid $4,000 for advice ahead of time, not six months after the fact! " – Paid-up subscriber G.P.

Ferris comment: Porter has been talking about this forever. That's why the article you refer to in the title of your e-mail is called "The Only Trend That STILL Matters."

"Still"... as in it mattered in the past, and it matters now. Porter first coined the term "End of America" in the title of his December 2008 issue... and has written about these ideas consistently since then. Subscribers can also review the January 2009 and 2010 issues, where he reviews the trend in detail. Although the truth is, you could look at just about any issue of Stansberry's Investment Advisory over the past two years and find these themes in play.

  "I've seen several stocks being recommended by different Stansberry analysts. What does this duplication mean? One option could be that you use different methods to come to the same stock selection. Another could be that the analysts are plagerizing off each other. At the least, we pay for your ideas, and then make decisions based on those recommendations. While I don't buy everything, I have several of your recs; same with Porter's. But if you rec the same thing, then why pay for the expensive service? I've noticed the same thing with the 12% Letter and your Extreme Value." – Paid-up subscriber D.S.

Ferris comment: I know several of my Extreme Value World Dominator picks have shown up in many other publications as well as the portfolios of numerous hedge funds and mutual funds. I've been on the World Dominator kick since late 2006. I think only Jeremy Grantham and maybe Tom Gaynor can say the same. That's pretty elite company. If that's not worth $1,000 a year, nothing is.

Whatever overlap exists among the portfolios of Stansberry & Associates newsletters surely represents a small percentage of our picks. Also, with as many services as we publish, it's unreasonable to expect this NOT to happen.

As for any overlap between Extreme Value and The 12% Letter, I've addressed this before, but perhaps it bears repeating. Yes, some Extreme Value World Dominators will appear in The 12% Letter. World Dominators are some of the world's best dividend-paying growth stocks. They're like bonds with coupons that grow. In fact, I believe World Dominating Dividend Grower stocks are absolutely the No. 1 investment income idea available in publicly traded securities. People forget how well they can perform because their stocks have done lousy for 10 years. But all their businesses have grown throughout that time.

On the other hand, several Extreme Value picks I've covered in great depth haven't the slightest chance of ever appearing in The 12% Letter. The stocks are too small and illiquid to recommend to a subscriber base the size of The 12% Letter's. And they don't pay dividends – The 12% Letter's reason for being…

You see, you sign up for The 12% Letter if you're looking to generate big income from your portfolio. You subscribe to Extreme Value if you want to load your portfolio with the best values in the market. These strategies aren't mutually exclusive… but they aren't the same thing.

If you took the advice I gave (and gave and gave) Extreme Value subscribers on a particular pair of small-cap natural resources stocks, a $10,000 investment would have paid for 10 years of Extreme Value by now. Nobody has covered those stocks the way I have – including making research trips to the middle of nowhere through mud, rain, fog, nauseating helicopter rides, etc. But they won't show up in The 12% Letter…

Why? They don't pay a dividend, and I expect they never will. The Extreme Value portfolio has one little stock that says it'll pay a dividend, but hasn't done so yet. That's not safe-and-secure enough for the conservative strategy we use to get double-digit income in The 12% Letter. You either sign up for Extreme Value or you miss out.

Good investing,

Dan Ferris
Medford, Oregon
February 15, 2011Grammys and Barron's... Buffett selling stocks... Clothing prices going up... Danone's rising commodity costs...