The S&A Digest: Miami's Not Cheap, Yet

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

As of 07/02/2013

Beachfront condo: "only" $600 per square foot... Mixed metaphor abuse... Would you lend to Hugo Chavez... ? Here come the global warming taxes...

I felt a drop on my shoulder. And then another. The wind picked up. People began to move inside the restaurant. The waiter asked us if we wanted to move. "No, this is Miami... these things never last long. It will blow right over." But it didn't. It rained as though Noah would come floating by at any moment. And it kept raining for hours. We'd parked my rented convertible on the street, a few blocks away.

We'd left the top down. It was a wet ride home.

Thankfully, times remain challenging in the home building sector, according to D.R. Horton. The nation's largest homebuilder by deliveries announced today that fourth-quarter earnings slid 64%. Why is this good news for investors? Because the time to buy good businesses – like DR Horton – is when the company is struggling. When expectations are low, equity prices are cheap.

It's a very, very risky bet. Pimco, ING, and Axa are the three largest holders of Venezuelan dollar-denominated bonds (they hold $1.6 billion worth). Why do they think Chavez will continue to pay interest to American investors? Venezuela earned $57.8 billion in oil revenue in 2006, nearly 16 times the $3.5 billion that Citigroup estimates the country needed to cover the interest on these bonds. The bonds are yielding 7.1%. Doesn't seem worth the risk, does it?

The U.S. auto industry and United Auto Workers (UAW) are making noise about a solution to the looming bankruptcy at GM. The union wants to transfer tens of billions of dollars in health-care liabilities from GM's balance sheet to UAW. A restructuring without filing for bankruptcy would be beneficial for both parties. According to GM's analysis of these obligations, they could total $85 billion. How is GM going to come up with the money, given its junk credit rating? A government-backed loan? It's happened before.

Rumors are circulating that Inside Strategist pick Williams-Sonoma (WSM) has hired Goldman Sachs to advise on strategic options. Although Williams-Sonoma denies the claim and Goldman declines to comment, the company would be a great private-equity target with its prime real estate, popular brand, and solid cash flows.

Earnings for 12% pick McDonald's (MCD) nearly doubled in the fourth quarter 2006, skyrocketing from $608.5 million to $1.2 billion year on year. Even without the spin off of Chipotle, earnings grew 26% to $761.2 million.

The global warming spectacle is moving forward. Public spectacles are manias. What starts as a fraud, becomes a farce, and ends as a tragedy. The whole idea that we can know with any certainty what causes climate change is absurd – a scientific fraud. Al Gore's movie seemed a clear demarcation of the next phase. It was a farce. And the tragedy is now taking shape in Washington. There's talk about putting a cap on fossil fuel emissions in America, a kind of self-inflicted Kyoto Protocol. This is big trouble for electric utilities, for railroads... and for consumers of electricity. Most of the power in America comes from fossil fuels, particularly coal. Moving coal to power plants is the biggest single source of freight for railroads. Whether global warming is caused by man, we can't know. That global warming will cause higher taxes, more regulation, and greater authority for the central government is no longer in doubt.

July 2006 PSIA pick Johnson & Johnson (JNJ) today announced record sales of $13.7 billion for the fourth quarter 2006, up 8.5% year over year. Total sales were $53.3 billion, an increase of 5.6%.

New highs: JP Morgan (JPM), American Capital (ACAS), Macquarie Global (MGU), Ares Capital (ARCC).

As you know, we love to read your mail. Send us whatever comment you'd like to make – good, bad, mean... deranged. Whatever. We'll read it. However, please understand we can't (and won't) respond to you individually. Instead, we answer commonly asked questions below.

"I like your rule of three, but am curious how you could recommend Komag Inc., which does not pay a dividend. I certainly can understand the business and it has continued to fall since the recommendation and is looking rather good owing to the P/E, but still it did not follow the rule of three." – Subscriber Fred Raleigh

Porter Comment: My three rules are for safe investing. I suggest beginning investors limit themselves to buying only stocks that qualify under my three rules. This will greatly reduce the risk of losing money. Komag certainly doesn't qualify as a "no risk stock." We recommended it because it has other qualities – but it's risky. That's why it's not in my "no risk" portfolio.

"Your suggestion of a 'dividend grab' newsletter reminded me of the subject(s) of Joel Greenblatt's book, You Can Be A Stock Market Genius – Uncover The Secret Hiding Places of Stock Market Profits. It covers Spinoffs, Rights Offerings, Merger Securities, Bankruptcy, Restructuring, Recapitalizations, LEAPS, Warrants, and other special situation investment opportunities. The book is from ten years ago. Could any of these areas still be viable topics for a special situations newsletter?" – Subscriber Phil Graham

Porter Comment: Yes... that's right. My friend Chris Mayer writes such a letter. If you're interested in these kinds of special situations, you should check it out. As for our publishing plans... I think we're going to concentrate on the special dividend situations.

"The S&A Digest of yesterday (Jan 22) states: "Let's say you can buy a $1 million condo for $800,000. Is it worth it? I don't know... but I doubt it." A bit sloppy on the language there methinks. If the condo trades at $800,000 then that's what it's "worth" at the time of the trade, not $1 million. Perhaps a more accurate phrasing might have been "Let's say a condo worth $1 million six months ago can now be purchased for $800,000. Is it advisable? I don't know... but I doubt it. PS – The latest reco by Jeff Clark to buy the Feb 44 Put on the Q's has more than paid for my recent Alliance subscription. Thanks, Jeff." – Subscriber Brian Clark

Porter Comment: What people pay for things and what they're worth are almost always widely different. Very few transactions take place at breakeven. That's the key principle to understand as an intelligent investor.

"Your 'dailies' are fascinating, but I'm looking to finance the expansion of our (wife & me) 54 acres of vinifera grape vines on 75 cleared acres of Yadkin River Valley Wine Region NC into a winery/guest house/park for the burgeoning wine tour/agrotourist trade... about $1.5 million for a 30% equity holding... Any ideas?? Now if you would take a glass of good NC red wine daily, in addition to the old Z 'n C, you wouldn't get sick!" – Subscriber Malcolm Hutton

Porter Comment: From what I know of the wine business, it's much better to be a consumer of wine than a producer. However, if you're dedicated to your endeavor, why bother selling a stake in your company? Why not simply sell a few lots in your vineyard?

"What about you guys putting together a compilation of Dr. David Eifrig's articles? He always seems to have good advice and information." – Subscriber Craig Reynolds

Porter Comment: We're going to do something that's hopefully a bit more useful. Right now Eifrig is working on a no-nonsense report about prostate cancer – how to detect it, how to treat it, how to prevent it and most importantly, what we don't know about the disease. Reading it should allow you to be much better – and more accurately – informed about the single-greatest health risk facing most of our subscribers.

"The quote below just drives me up the wall because of the prevalence of the error both in your newsletters and elsewhere in the financial press. 'The 200-DMA often acts like a magnet for stock prices. Stocks typically don't move too far away from the average before a gravitational pull reigns them back in.' – Jeff Clark, S&A Short Report, 9/22/07. This is an obvious reference to what people do when they are riding a horse and want him to stop. They rein the horse in using the reins. Since you're the boss, could you do something about this?" – Subscriber Earl Wycoff

Porter Comment: You want me to put an end to mixed metaphor abuse? When Steve Sjuggerud and I started working together in 1996, we had a cork board where we'd pin copies of our reports with the worst mixed metaphors highlighted. Steve wrote a doozy one month, describing a Fed rate hike as "the last straw that broke the camel's back." When I read it in his letter, I remember laughing so hard I couldn't breathe.

Miami's Not Cheap, Yet

"The Mosaic concept is about intimate spaces," said the Haitian man working the small front desk at the Mosaic beach front condominium in Miami Beach's 'historic' district yesterday afternoon.

When my realtor and I walked into the building, three Haitian employees were standing in the reception area, arguing loudly. Their tiny reception desk stood at the front of what seemed like a small hallway. The sounds of their argument rang harshly against the tile floor and the bare walls. "Where's the lobby?" We asked. "We're here to look at unit No. 601."

"This is the lobby."

Later we learned that the gym, the small pool, the tiny elevator that takes you to the beach, the miniature TV club room, the nonexistent grounds surrounding the property, etc. were all designed to be small... very small... because, as the door man told us, the Mosaic concept is about "intimate spaces."

You can imagine why a developer would want to promote such an idea. But who would buy it? And who would pay $1.3 million to live in such a building? The unit we looked at was 1,824 square feet. Except for the kitchen appliances and the bathroom vanities, the condo looked like a construction site. There was no flooring. There was no paint. New condos on the beach are sold "decorator-ready." After paying millions for a condo, you're expected to spend another $50,000 or so yourself to make it ready to live in.

"You can take $100,000 off the price and you get a $25,000 credit towards decorating... the current owner is very motivated to sell."

'Motivated' is a euphemism here. It means 'desperate.' The current owner is being squeezed. He can't afford the payment that's now due to the developer. He put down a deposit as the unit was being built. He had hoped to flip the unit before it was finished to a new buyer.

It might be a good deal. Assuming you could get the place for $1 million (my realtor said she expects the unit to sell for $1.1 million), you'd be paying $603 per square foot. Similar units down the beach sell for twice that amount.

The building's location is just north of South Beach, in an area known as the historic district. There are three other luxury condos being built right next door. The exclusive Setai condo/hotel is only a few blocks south. South Beach is leaking north and higher prices are moving up the beach. Because of height restrictions in this part of the beach, the buildings here are smaller. And, in theory, as South Beach's prices migrate north with these new luxury buildings, the prices here will go up even more because there are less units available.

Taxes on this unit will be approximately $26,000 per year. And the condo fees come to $12,000 per year. Assuming you put 20% down, your monthly payments – with taxes and fees – would come to about $12,000 per month – $144,000 per year. Assuming you paid $450 per night at the Ritz Carlton Hotel in South Beach, you could stay there for $13,500 per month. Most hotels, of course, don't cost that much.

Why pay for such a condo when it's cheaper to stay at most hotels in town?

Because real estate appreciates, don't you know? And, if in a year or two this place is worth what the developers say it will be worth ($1,000 per square foot), you could sell it for $500,000 more than you paid for it. You could make a profit and have a place at the beach.

That's what's happened for the last 10 years. When I lived here (2000), you could buy a three-bedroom place like the one I saw yesterday, at the most desirable building on the beach, for about $250 per square foot. Prices have gone up four-fold in seven years for the best locations on the beach.

Will they go up another four-fold in the next 10 years? It could happen. Do you want to spend $1.4 million in taxes, fees, and mortgage interest to find out?

Good investing,

Porter Stansberry

Miami Beach, Florida

January 24, 2007

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