The S&A Digest: Cheap gas, cheap eats

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/17/2013

Cheap gas, cheap eats... Wal-Mart's up: zzzzzzzzz... Longleaf eats its cooking... Three new Ben Graham stocks... Junk-bond default rates soar... Newspapers and GM: falling knives...

Gas prices might have declined, but they're still high. I drove down to San Francisco last Thursday and back on Saturday. It took about $130 worth of gasoline. If I'd bought it all at Safeway, where they give me a 50-cent-per-gallon discount, I would have spent $14 less.

In San Francisco, I ate on the cheap. I'm tired of paying $40 for a hamburger and two Samuel Adams Boston Lagers. These days, I like to stay within walking distance of a grocery store, which is not always easy, especially in the city. I spend well under $10 on yogurt and orange juice for a few days. Breakfast at most hotels can easily start at $20. It's ridiculous. I'm just not paying it anymore.

My wife and I have been eating out less, too. We're suddenly asking ourselves if we really need to spend more than $100 on a steak and a couple of drinks when we can spend well less than half that eating the exact same thing at home. (We can drink more, too!) We're financially way ahead of most folks, mostly because we owe nothing on our house. We just want to make doubly sure we're not spending more than necessary to have a good life.

We're going up to Seattle for the weekend. We got the airfare for a nominal charge by using my reward miles, and we got the hotel on the cheap through Priceline. When we're there, we'll have one expensive meal and go cheap, cheap, cheap on all the rest, which is not as hard as you might think. Since we're in our late 40s, we've started paying attention to how much we really need to eat... not as much as we used to.

Of course, if you really want to spend less on groceries, the best thing to do is shop at the store with the lowest prices...

My recommendation of Wal-Mart went over like a lead balloon at the annual Alliance meeting last November in Mexico. After I made it, I looked out at the audience and saw heads bobbing and nodding off. Everyone voted for their favorite stock pick of the day, and mine was somewhere around dead last.

Wal-Mart is up more than 20% since then, a huge return considering what most stocks are doing. Wal-Mart just reported its net income was up 17% last quarter. Sales at U.S. stores rose 11%. International sales and profits both grew 17%.

The CEO of Wal-Mart's U.S. division said the company "will do whatever it takes to retain price leadership." That's exactly what I want to hear. In the consumer's mind, Wal-Mart is "the cheapest place to shop." Spending less on everyday items is more attractive than ever to many people. I bet a lot of those folks are people who've never thought about it before.

I think one of the big mistakes investors make is they constantly look for some new vehicle to move their money into. The exchange-traded fund (ETF) industry in particular has fed this need like no other. With stocks falling (though not anything like cheap yet), the ETF sellers have suddenly discovered the father of value investing...

It was only a matter of time before the ETF industry discovered Ben Graham, father of value investing and an early mentor to Warren Buffett. Graham and Buffett always get more popular during bear markets.

Last week, Deutsche Bank launched the ELEMENTS exchange-traded notes (ETNs) linked to what they call, "Benjamin Graham Intelligent Value Indices." The Deutsche Bank ETNs are the first to offer investors exposure to indexes based on the value-oriented investment philosophy of Benjamin Graham.

ETNs are debt securities that pay a return linked to the performance of a single security or index, the debt version of ETFs. They have a lot in common with ETFs. ETNs can be used to track commodity, currency, or equity market indexes. They're bought and sold in regular brokerage accounts. They also have an arbitrage feature. Investors who accumulate large blocks of notes (usually 50,000 or more) can redeem them back to the issuing financial institution weekly, to take advantage of pricing discrepancies. That'll keep the notes from trading at big discounts or premiums to their underlying value.

The new Benjamin Graham ETNs will be listed on the NYSE Arca, as follows:

Benjamin Graham Large Cap Value ELEMENTS (BVL)

Benjamin Graham Small Cap Value ELEMENTS (BSC)

Benjamin Graham Total Market Value ELEMENTS (BVT)

Value-oriented fund manager Longleaf Partners sent me its semi-annual shareholder letter today. Longleaf writes, "Bear markets do not die of old age." Longleaf is down 12% year to date. What is it doing about it? It's "aggressively adding personal capital to the Funds and encourag[ing] our partners to do the same." Longleaf's Partners, an Extreme Value pick, is up just shy of 10% per annum since inception in April 1987.

Shockingly, the junk-bond market seems to be out of touch with reality. That's the conclusion of Martin Fridson, CEO of Fridson Investment Advisors. Says Fridson, "The bottom line is we expect many investors are in for a rude shock over the next year as high-yield bonds default in higher numbers than they expect." Investors aren't paying enough attention to the growth of the junkiest junk bonds, those rated triple-C. The only rating lower is D, for default.

Triple-C-rated securities account for 23.5% of Merrill Lynch's U.S. High Yield Master II Index, up from 10.4% a decade ago. Fridson thinks, "The high-yield market is entering the up-leg of the default rate cycle with a far worse quality mix than the last time around."

Almost one-fourth of all junk bonds are on the cusp of default, and yet optimism prevails. Fridson says, "It is hard to give much credence to optimists who forecast a substantially lower peak default rate in this cycle than the 10.89 percent rate reported by Moody's Investors Service for January 2002."

Giving credence to optimists has been a bad bet in a lot of industries lately...

Bearish bets on newspapers are accelerating. Shorts against Gannett, publisher of USAToday, reached their highest level in at least 17 years after the company announced ad sales had their biggest monthly drop this year. Short interest in Gannett rose 23% to 52.1 million shares (23% of shares outstanding) from July 15 to July 31. Shares are down 51% this year.

So what are these newspaper companies really worth? Nobody knows for sure, but we may get a glimpse of what someone is willing to pay when Cox Enterprises dumps 29 of its publications. The company announced the sale yesterday. The largest newspaper for sale is the Austin American-Statesman. Other newspapers up for grabs include publications in Atlanta, North Carolina, Texas, and Colorado.

In every declining industry, you'll find someone trying to catch a falling knife. For newspapers, that investor is value-oriented asset manager Third River Capital Management. The fund bought nearly 3 million shares, 7.4%, of Journal Register Co., which publishes newspapers in six metropolitan areas including Detroit, Philadelphia, and Cleveland. Journal Register shares currently trade on the pink sheets at $0.028 a share. It's down from $6.71 at the beginning of 2007 – a 99.6% drop. At current prices, Third River's stake would cost you about $83,000.

Speaking of industries in dire straits, General Motors' shares fell almost 8% yesterday after Moody's downgraded the company, citing concerns over whether GM could make and sell smaller cars fast enough to compensate for the falloff in large auto sales. The ratings agency lowered GM's "corporate family" and "probability of default" ratings to Caa1 from B3 (from junk to junkier), now seven notches below investment grade.

GM also announced it may sell its Hummer brand (the greatest gas guzzler in all automobiles) to Russian oligarch Oleg Deripaska – Russia's richest man. The company hired Citibank to consider all options for its Hummer brand. Hummer's U.S. sales fell 40% in the first half of the year.

New highs: none.

World records are falling every day in Beijing... and the mailbag. Send us your notes, we promise to read them all: feedback@stansberryresearch.com.

"'There's another looming real estate disaster worth mentioning: Dubai.'

"So, how do we short it...?" – Paid-up subscriber D. Kiessling

Ferris comment: I haven't the slightest idea...

But I do have an idea about short sellers: They better be careful. Everybody wants to sell short these days. Suddenly, everyone thinks it's easy. It is rapidly becoming the crowded trade, and that's never good for those in the trade. Be very careful shorting. It's very difficult. The only guy I know who's very good at it is Jeff Clark, and he treads (and trades) cautiously in choppy markets. You should probably take it from him and do the same. To learn more about Jeff's trading service, the S&A Short Report, click here.

"I see where your subscriber DSC reported watching his 'growth drop 300%' in a particular investment before he got out. I once thought I was the worst investor in the world because I lost 100% on an investment early in my career, before I understood the value of trailing stops. I felt ashamed that I had tied the world record for the worst investment result ever (without using margin) and would have to bear that cross for a lifetime.

"Now DSC comes along and has instantly removed that mark of shame from my record by achieving a 300% drop and still having something to sell! Please pass along my personal thanks to DSC for the boost to my self-esteem as well has my hearty congratulations on his new world record." – Paid-up subscriber Ken McGaha

Regards,

Dan Ferris

Medford, Oregon

August 14, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame