Smart homebuilder
Sean Goldsmith tells me he's "enfermo" (sick) and catching a cab to the hospital. Sean is in Nicaragua and hopes he didn't "catch some nasty @#$%" down there. Get well soon, Sean. I'm sure you'll be back on the Digest in no time.
Just when you thought I was done talking about the new house... Ever since we moved in, I've heard about the guy who built it. He built another one across the park from us... then this one... then another down the street, where he lives today. His homes are gorgeous, and the workmanship is top quality. He chooses only prime locations. He uses the best materials, quartersawn oak, Brazilian teak hardwood floors, etc... I've always felt like I should meet this guy, but I just never got around to it...
Or so I thought. Turns out the builder is a friend, who I see a few times a year. We were out at lunch a couple days ago, and I started talking about the new house, the location, the view... when he interrupts and says, "I'm your neighbor. And I built your house."
In addition to building homes, he's also a stock trader who uses a technical system. The system gave him a big, fat, hairy sell signal on Ryland Homes (RYL) right at the top of the housing bubble. So he finished my house, built the one he's living in now, and exited the homebuilding business for good. If that trading system is something that interests you, be patient. I promise you're going to be hearing a lot more about it.
He built my house for about 11% more than I paid for it, which was about 40% less than what it sold for at the peak of the bubble. Today, he manages money. Smart guy. His partner wrote a book predicting the crash of 2008. You'll be hearing more about both of them soon...
The bidding is on for 3PAR (PAR), a data storage firm. Dell offered $18 a share last week. Hewlett-Packard countered recently with $24 a share. Dell has now countered back with $24.30 a share, about $1.6 billion in cash. 3PAR's board says Dell's latest offer is "superior," and HP management is crafting a response, according to the Wall Street Journal.
Dell can and likely will play this game until HP overpays or gives up. Dell's original deal with 3PAR gives Dell perpetual matching rights. 3PAR has to give Dell three days to match any competing offer. So HP offers $24, and Dell offers $24.30. If HP offers $25, Dell will offer $25.10 or some other slightly higher amount.
Dell seems to think it's important to own 3PAR. I hope it's worth what it's paying... Dell's latest offer is 8 times 3PAR's trailing 12-month revenue, about 90 times earnings, 12 times book value. 3PAR closed below $10 a couple days before Dell first bid on it. Now, it's around $26 in anticipation of a higher bid from HP or someone else.
Dell is scrambling to rejuvenate its business. Last week, it introduced the Streak, its combination smart phone and table computer. It introduced a miniature smart phone called the Aero this week. Last month, Dell settled with the SEC for $100 million on charges of unethical accounting and financial reporting. Dell is cheap, at an enterprise value of 4.5 times last year's free cash flow. It is in a highly competitive industry, and its brand isn't as strong as it used to be. I don't know Dell's future, and I'm doubtful its mobile devices will compete well with Apple's ultra-popular "i" gadgets.
But $15.8 billion of enterprise value seems cheap for a consistently profitable business that generates nearly $4 billion in operating cash flow and spends less than $400 million. If you subtract the cash for the latest 3PAR offer, Dell is still cheap at about five times free cash flow – a 20% cash yield. There has to be some upside here... doesn't there?
Maybe the downside in the overall economy is a greater worry to you than the upside in little old Dell. If so, I've got just the stock for you. It's Fairfax Financial (FFH), founded and run by Prem Watsa, the Canadian Warren Buffett. Watsa is now betting on Great Depression... or at least the Great Deflation.
You may recall Watsa made a few hundred million dollars worth of bearish derivative bets against lenders like Countrywide Financial back in 2003. When the housing crisis happened, Fairfax made billions.
Watsa is at it again. This time, he's purchased $174 million in derivative contracts to protect Fairfax's $22 billion investment portfolio from deflation for the next 10 years. If deflation averages 2% annually over the next 10 years, as measured by the Consumer Price Index, Fairfax's bet will return about $9 billion on a $174 million investment – just shy of 52 times its money.
Fairfax isn't talking about potential returns from the derivative bets, or giving details of how the bets are structured. Fairfax trades for a hair over book value today. At least one source I've seen says the stock is worth nearly $600 per share. I don't know exactly what Fairfax is worth. It's a complicated company. I'm willing to bet few of its shareholders have actually read its annual report and perhaps a handful truly understand every word of it.
Watsa seems to be good at making big bets, so maybe he's got another winner here... but that's how everyone thinks, isn't it? The guy who made a big pile of money yesterday making a big call stays just famous enough to have his head handed to him in a public way by Mr. Market. George Soros comes to mind. I remember when Soros took the Quantum Fund to 90% cash because he said he just didn't understand the market anymore... after losing $2 billion in Russia when Long-Term Capital failed, and then going long Internet stocks in early 2000. Ouch!
No matter what happens to the economy, I have to believe the U.S. dollar will grow weaker. It's certainly about to become less popular – and less useful – in China. The nation wants its renminbi to become a global currency like the euro or the dollar, and it's getting the help of all kinds of big banks around the world. Big banks like HSBC, Standard Chartered, JPMorgan Chase, and Citigroup are all doing road shows to encourage the use of the renminbi in trade with China. BBVA, the big Spanish bank, is planning a global marketing push to promote Latin American companies that trade with China.
The BBVA campaign is great news to Extreme Value readers. I've covered what is easily the No. 1 way to take advantage of bigger trade flows between China and Latin America. It's a Latin American bank that's safer than any bank in the U.S., with several times the capital of a typical U.S. bank. Its shareholders include 23 central banks. It's one of the all-time great income investments too, having paid back Extreme Value readers more than 50% of their initial investment in dividends.
Today, it's yielding 5% and selling dirt cheap, at less than 70% of book value. It never participated in any subprime or other bubble-related investments. It's in a safe, stable business. Recently, I updated Extreme Value readers on a secret development happening right next door to this Latin American bank, which could double the size of the business within five years. To learn more about Extreme Value and discover the name of this bank, click here.
One of the Social Security "loopholes" we've been urging people to take advantage of may soon close. The "repayment" benefit allows you to collect Social Security at age 62... then pay back your benefits down the road and restart your Social Security payments at a higher rate. Best of all, you get to pay back the money interest free... and can even deduct taxes you paid. Any interest you've earned on that money is yours to keep. It's a great deal, which many of our subscribers have taken advantage of.
One of our readers from Albany, NY, for example, recently wrote to tell us: "We increased our monthly benefits about $300 per month... Not too bad..." A reader from Vermont said: "Based on Steve's research I did a 'redo' on my Social Security last year... [I got] an increase of slightly more than $600 per month."
The point is, if you want to take advantage of this "loophole," do it soon. The Social Security Administration has proposed a new rule to severely limit your ability to restart your benefits. The agency has proposed limiting a recipient to one repayment in his lifetime and only if the request is made within 12 months of initially filing for benefits. The federal Office of Management and Budget has the final say on the rule. It could shut this down in the next few months. To learn more about this loophole, watch our free video...
New highs: ATAC Resources (ATC.V), Eldorado Gold (EGO), Keyera Facilities Income Trust (KEY-UN.TO), Silver Wheaton (SLW), AuEx Ventures (XAU-TO).
In today's mailbag... What's the most important tool a trader has? A Short Report readers asks, and Jeff tells us. Send your questions to feedback@stansberryresearch.com.
"I've been a paid in full Alliance member for many years. I want to thank you for what you do in the S&A Short Report. Your results are truly amazing and I've been successful because of your service! I've been trading off and on for 10 years, but have become more active this year. My goal is to retire from my day job in 5 years and live off of my trading profits. More so than your recommendations, I value the insights and wisdom you share from your own trading.
"I've read your Ultimate Home Business report and follow the 4 indicator you provided for day trades. I use bullish percent indexes and use the MA's you've written about (e.g. 20 day TRAN, 13 day TRAN). I watch the $NYSI and $SPXA50R, I follow the VIX and SPX closely looking for divergence. Bearish rising and bullish falling wedge patterns are the most amazing patterns I've ever used. In short, you have my attention and I want to learn more!
"I know your disclaimer on the feedback page indicates you can't give individual advice. I am hoping you would share more about your trade plans and what you do each day. What is your daily and weekend routine (specifically what you do and what you review)? What patterns (beside rising and falling wedge) do you have the greatest success trading? Are there charting tools that help identify rising and falling wedge patterns? What are the moving averages you use for all of the BPI's? What software tools you use (charting, selection, etc.)? What helps you be a successful trader? I want to focus on what should be done each day to be successful, knowing that the results will follow. I appreciate any details you would share. Thanks again for everything!" – Paid-up subscriber John Tschida
Jeff Clark comment: Thank you for the compliment. If you're going to trade for a living, it's important to remember that markets are dynamic. So your trading strategy has to be dynamic too. What works today may not work tomorrow, and you constantly have to adjust your parameters in order to account for the change. Much of my daily routine involves looking at multiple trade setups and trying to figure out why some work while others don't.
For example, the wedge patterns you point out have been terrific for us this year. We've scored lots of triple-digit gains by trading those setups. But not every trade has been a winner. So I like to compare the patterns and see what adjustments can be made. Was there another technical indicator that showed divergence? Would using a chart pattern over a different timeframe make a difference? In short, I'm constantly tweaking my strategies and trying to gain every edge possible.
The best advice I can give you for trading is to take note of your emotions before you make every trade. Are you trading off of logic and reason or off of fear and greed? Are you feeling like you're missing out on a big move in the market and therefore chasing a position? Did somebody on CNBC just say something that got you spooked? Are you bored and trying to force a trade just to be doing something?
I pause for a few seconds before I hit the "send" key on every trade just to be sure my decision is rational and not rooted in the emotion of the markets. That keeps me from making a lot of mistakes.
Trading stocks and options is a fun and exciting business. It can be tremendously profitable too – as long as you keep the emotion out of your trades, and constantly adjust your strategy to keep up with the changing conditions of the market. If you can do that, you'll have an edge over the vast majority of traders.
"Mr. Market... I hope this isn't the character from New Jersey who goes by that name. If it is, run the other way! He would always tout various stocks, then claim that he sold stocks and never lost a dime. The last stock he touted before he disappeared was KB Homes just before the bottom fell out of the housing market. Please tell me he is another person using the same moniker." – Paid-up subscriber Robert
Goldsmith comment: "Mr. Market" is just a personification of the stock market as made famous by Benjamin Graham. He likens the market to a person to show how the market's "mood" can irrationally change from day to day.
Regards,
Dan Ferris
Medford, Oregon
August 26, 2010