Olympic mountain in foreclosure

If you think you can pour yourself a drink, sit down, relax, watch the Olympics, and escape the commercial real estate crisis – think again.

The Whistler Blackcomb ski resort, where U.S. Olympian Lindsey Vonn won a gold medal yesterday, should by rights be sold off in a foreclosure auction tomorrow. Fortress Investment Group owns the resort operator, Intrawest ULC. Intrawest has been selling properties to pay down debt. Lenders, including Lehman Brothers (of course), have been circling since Intrawest missed a December payment on a $1.4 billion loan. But creditors agreed to extend the foreclosure auction date until February 26, to avoid a sale during the Olympics.

The buyers could be getting quite a good deal once the sale goes through. Fortress Investors saw their $1.7 billion equity investment in Intrawest sink to just 4 cents on the dollar as of October 31, 2009.

Wal-Mart's sales last quarter rose 4.2%... but sales at stores open more than a year (called comp sales, a key retail metric) fell 2%. Naturally, the Wall Street Journal headline said, "Wal-Mart's Profit Rises 22%," while the Financial Times noted correctly, "Walmart suffers first US sales decline."

Those who fear inflation can't ignore what's going on at a monster like Wal-Mart, the world's largest retailer. The world's largest grocer said the drop was caused by deflation in the price of groceries – which make up 40% of its U.S. sales – and in the price of electronics. Wal-Mart is known to eschew temporary, promotional pricing in favor of its trademark "everyday low prices." Seems like every day last quarter they got lower and lower.

Wal-Mart also said its ongoing remodeling of U.S. stores hurt foot traffic more than anticipated. That's Wall Street speak for fewer people shopped at Wal-Mart last quarter.

Perhaps Wal-Mart isn't the best bellwether for inflation... For the 12-month period ended January 2010, the unadjusted producer price index of wholesale goods in the U.S. rose 4.6%. That's the largest 12-month increase since October 2008. Of course, the news stories all say that, when you strip out increases in food and energy, it's really not that bad. These folks should try stripping food and energy out of their lives. I bet that would be pretty bad.

Another way to look at inflation is by examining the Treasury yield curve, the difference in yield between various maturities of government bonds.

This morning, for example, the curve hit a new record. The 10-year Treasury fell, and the two-year Treasury rose to a record 2.92%. Generally speaking, longer maturities are considered riskier than shorter ones. Selling long and buying short is how some investors try to take on less risk.

Most companies are reporting higher earnings lately. Bloomberg says more than 350 S&P 500 companies have reported fourth-quarter earnings since January 11. About 75% of them have beaten analysts' earnings-per-share estimates.

Remember though... the "analysts' expectation" bit is just another Wall Street game, giving analysts something to do and the Wall Street Journal and Bloomberg something to publish.

The fourth quarter of 2009 is measured against the fourth quarter of 2008, the worst fourth quarter in history. So Wall Street analysts, who always look in the rearview mirror, based their estimates for 2009 on the awful period of the prior year. That's why so many companies are beating expectations. It's really meaningless.

Wal-Mart's lower comp sales are measured against a relatively good performance that resulted in the prior year when the financial crisis scared everyone out of more expensive stores. So it's in the opposite position.

Ignore earnings expectation noise. It doesn't tell you what to do. To know what to do, you must focus on valuation, how cheap or dear stocks are at any given moment. At this moment, stocks are expensive, with the Wilshire 5000 index of all U.S. stocks selling around 29 times earnings and yielding less than 1.9%.

I was reading Sham Gad's value investing blog this morning when I came across this idea:

[T]he balance sheet is the FIRST MOAT. Of course, the balance sheet alone is not enough. The income statement is the SECOND MOAT. A debt-free, cash-rich company is great, but not so great if that business can't produce profits.

It made me think immediately of my new pick in Extreme Value, the first stock I've found since August that is both safe and cheap enough for my readers. The new pick has both of the moats Gad mentions. It's got nearly half its current market cap in cash and securities. That's the first moat. As for the second moat, the income statement, this is one of the most profitable and difficult-to-enter businesses on Earth. Gross profit margins are routinely north of 75%, and pretax margins are usually in excess of 20%.

The company benefits from many laws and regulations that limit competition. One law allows it to sell certain products for at least five years with zero competition. Competitors simply aren't allowed in the market until the five years are up... and it can charge as much as it wants. This business is known for its ability to sail through recessions and benefit greatly from inflation.

Sham Gad's two moats address financial risk and business risk. For investors, there's also the risk of paying too much. A business like I've described above is easily worth 15-18 times free cash flow. This one is selling for less than six times trailing free cash flow. It's the cheapest, highest-quality bet I've found since I recommended IMS Health at $13 last August... and watched it hit $21 less than three months later. To get details on how to access the new Extreme Value pick, click here.

Gee whiz... now what do I do? I recently bragged Warren Buffett bought ExxonMobil after I had already recommended it... But now Buffett is selling. Last quarter, Buffett cut his position in ExxonMobil to just a third of its former size, according to his SEC filings. He also reduced positions in ConocoPhilips, Procter & Gamble, Johnson & Johnson, Carmax, Gannett, Ingersoll-Rand, SunTrust Banks, and United Health Group.

This doesn't worry me. My guess is the sales he reported in his latest SEC filing were done to raise cash for the acquisition of BNSF railway. I heard once several years ago that mutual-fund managers who are required to be fully invested sometimes park cash in ExxonMobil for short periods of time because it's a large, liquid stock. I doubt Buffett was merely parking cash. I think he just found something he wanted to do more than hold those stocks (i.e., own 100% of BNSF).

Buffett increased his stakes in Becton Dickinson, Wells Fargo... and Wal-Mart. He more than doubled his positions in Iron Mountain and Republic Services.

New highs: Powershares Dynamic Biotech Fund (PBE), Keyera Facilities (KEY-UN.TO), Markel Corp 7.5% Senior Debentures (MKV), TimberWest Forest Corp (TWF-UN.TO), Portfolio Recovery Associates (PRAA), IMS Health (RX), Steak 'n Shake (SNS), Shaw Group (SHAW), Jinshan (JIN.TO).

In the last two Digests, we asked if you'd surrender your gold, should Komrade Obama try to confiscate it the way FDR did in 1933. We received dozens of replies, too many to print. All of them were in the negative, and many indicated the government might encounter armed resistance to a gold-confiscation effort. To comment about gold, guns, groceries, or anything at all, e-mail us here: feedback@stansberryresearch.com.

"I guess they would get my gold pretty soon after I had expended my last round. At 77 I probably couldn't hold too many of them off with my old survival knife." – Paid-up subscriber HM

"I'd surrender my gold the same day I'd surrender my guns! The corrupt and incompetent 'leaders' we foolishly employ would simply flush my good savings after their bad spending. Ain't gonna happen! At least not while I have a breath in my body, and ammo in my home. Does that make me a Patriot or unpatriotic? I don't care what label they stick on me – I'm pursuing LIFE, LIBERTY, & HAPPINESS – and it doesn't include them! Read the Constitution any of you lambs who say you WOULD surrender your gold... and grow a spine!" – Paid-up subscriber PDN

"I will be happy to give my guns, ammo, and gold to the Feds when they come to confiscate them. And I'll be sure to give them the bullets first." – Paid-up subscriber MV

"When in grade school back in the fifties, I did a pretty good job of learning the 3 r's... readin, ritin, and rithmetic... after many more years of formal education and having small business ventures, I came to learn even more important things, I have come to appreciate the 3 g's even more. they are gold , guns , and groceries.. I keep a modest supply of each and try to grow them 'quietly.' I advise anyone willing enough to listen to do the same... what good is a stash of gold and groceries if you can't protect them..." – Paid up subsciber DH

Ferris comment: "Gold? What gold? I'm sorry, officer. You have the wrong house."

"Is the article in the Onion about Ben Bernanke a spoof or is it real? From yesterday's Daily Crux." – Paid-up subscriber John Mahler

Ferris comment: The Onion is all satire, zero reality. But don't forget Bernanke talks openly about the ability to print money. Nor should we forget his threat to drop dollars from helicopters if necessary.

"Don't get me wrong, long term I'm fearful for the value of the dollar. But, in trying to be a contrarian, I have to wonder if China and Japan's dumping of Treasuries is the same type of move as the state of Alaska buying gold in 1980, or the Bank of England selling a bunch of it in 1999. In other words, bonehead moves made by government officials at the worst possible time. Perhaps there is a (very) short-term opportunity here in the dollar/Treasuries..." – Paid-up subscriber Mike P

Ferris comment: There's a difference between a buyer who's in the market and one who is the market. For practical intents and purposes, China is the market. If that buyer goes away... look out below.

Good investing,

Dan Ferris
Medford, Oregon
February 18, 2010