I (Porter) have been struggling to find a good, new book to read. (If you have any suggestions, please let me know.) So I've returned to one of the most important things I've ever read...
It's not a book... but I have been reading all of the letters Warren Buffett has written to shareholders of his firm Berkshire Hathaway, going back to 1965. I previously mentioned The Essays of Warren Buffett: Lessons for Corporate America by Lawrence Cunningham. In that work, Cunningham compiled the letters and organized them by topic.
Buffett first moved into the insurance business... then into common stocks... and then newspapers. So he immediately got involved in the businesses that offered him the highest average, long-term returns on invested capital. That still seems to be his focus today.
The S&P 500 crossed 1,700 for the first time in history today on good economic news and more talk from the Federal Reserve. First the news, as that's the only thing that's changed...
The Institute for Supply Management, a trade group, said its July manufacturing index jumped to 55.4, up from 50.9 in June. Economists were only expecting it to read 52. American manufacturing is picking up faster than many self-appointed experts predicted. The index hit its highest level in two years.
Meanwhile, applications for unemployment insurance declined by 19,000 from 345,000 to 326,000 in the week ended July 27 – the lowest weekly number since January 2008. Economists were expecting it to hold at around 345,000.
And things are also picking up abroad...
China's official Purchasing Manager's Index (PMI) rose to 50.3 in July. And the Eurozone Manufacturing PMI, maintained by the research firm Markit, also rose to 50.3 in July, up from 48.8 in June. That's its first reading above 50 – the threshold signifying growth – since July 2011.
Now on to the Federal Reserve... Chairman Ben Bernanke yesterday said the Fed would continue its $85 billion in monthly bond purchases until the economy has sufficiently recovered. It's nothing he hasn't said before... but the market always likes it when he coos a little reassurance in its ear.
In addition to rising stocks, we also saw rates on the 10-year Treasury jump from 2.59% to 2.68%. Gold rose a dollar... And oil jumped more than 2% to $107.50 a barrel.
If you're looking for bullish signs for gold stocks... keep an eye on Barrick Gold.
The world's largest gold miner announced horrid earnings today. The company took an $8.7 billion write-down, mostly tied to its Pascua-Lama project in the Andes.
Barrick lost $8.6 billion in the quarter, down from a profit of $787 million a year earlier. The gold miner also cut its quarterly dividend from $0.20 a share to $0.05.
Earnings announcements don't get much worse than this one... Still, the stock hardly budged from Wednesday's close price. If a company can lose nearly $9 billion, slash its dividend, and still have its stock price hold up... you can bet most of the bad news is priced into the gold sector.
The company also said it would cut costs by $2 billion this year to offset lower gold prices... And it will review operations at all mines where the total cost of production is more than $1,000 an ounce.
"For those operations that are not generating positive cash flow, we will change mine plans, suspend, close, or divest them," Barrick CEO Jamie Sokalsky said.
Amid all the Bill Ackman-related news yesterday, one tidbit fell through the cracks...
Yesterday, shares of retailer J.C. Penney (JCP) fell more than 10% after the New York Post published a story saying CIT Group, the largest lender in the apparel industry, stopped supporting shipments from smaller manufacturers to JCP. The implication... CIT didn't believe JCP could pay its suppliers.
We've written extensively about the investment in the Digest (here and here, for example) and Digest Premium. In short, Ackman initiated a large position in JCP in 2010 at around $25 a share. He bought 17% of the company, eventually growing his position to around 20%.
And so far, it's been a disaster... despite his various efforts to revive the well-known retail name. Sales have plummeted, customers went elsewhere, JCP cut its dividend, and the stock tanked...
JCP denied the Post report today, and shares are up more than 2%. Still, yesterday was unpleasant for Mr. Ackman.
New 52-week highs (as of 7/31/13): ProShares Ultra Nasdaq Biotechnology Fund (BIB), Chesapeake Energy (CHK), Emerson Electric (EMR), iShares Nasdaq Biotechnology Fund (IBB), Johnson & Johnson (JNJ), 3M (MMM), Marvell Technology Group (MRVL), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), and Cambria Shareholder Yield (SYLD).
Do you want more commentary on Detroit? Sorry, we've said our piece... Send your feedback to feedback@stansberryresearch.com.
"I wholeheartedly agree with your assessment of Ackman. How crazy it is that he just keeps on going. So many other people in power positions are doing the same thing in their profession and it is the backbone of our demise." – Paid-up subscriber TW
"I'm wondering if you plan to do another feature article on Detroit, now that the expected bankruptcy has occurred. Thanks." – Paid-up subscriber Edward Price
Goldsmith comment: You mean in addition to the one we published in last Friday's Digest and the two Digest Premiums we devoted to the topic? No...
Regards,
Sean Goldsmith
Miami Beach, Florida
August 1, 2013