The S&A Digest: The religion of Porter

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As of 06/20/2013

The religion of Porter... Accepting "The Offer"... The unsung hero of the oil boom... DCR going to zero... Is Whitman right?...

 With oil hitting $132 a barrel today, oil companies of all ilk are trading at all-time highs. But here's one company that's stayed out of the spotlight: National Oilwell Varco (NOV).

NOV is America's largest drill-rig manufacturer. The company calls itself the "Wal-Mart of the oil patch" because it produces everything you need to drill. It increased net income 42% since last year and currently has a $9.9 billion backlog... NOV's only a $35 billion company.

It's likely the good times aren't over. Day rates for drill rigs are above $300,000, and with oil above $130, oil companies are happy to pay it. In fact, there's a shortage of offshore drilling gear. Brazilian oil company Petrobras will spend $30 billion on new rigs through 2017. Things are rosy for NOV, and the stock is definitely in an uptrend...

 We've been following the performance of the MACROshares Oil Down Tradeable (DCR) the past couple months in The Digest. The ETF has a special clause saying the fund will cease to exist if West Texas Intermediate Crude, the market's benchmark oil price, stays above $111 for three consecutive days – which it has. And despite the fund's homepage stating DCR's net asset value is zero, shares continue to trade above $1. Shares are down 58% since our May 8 update in The Digest, but the downside is always 100% from here.

 "We are not bidding to buy Yahoo," Microsoft CEO Steve Ballmer told a crowd in Israel today. But Ballmer said his company is interested in buying Yahoo's search business. I'm sure this isn't what Carl Icahn wants to hear...

Icahn bought 50 million Yahoo shares this month hoping to push management into a quick sale. John Paulson, Dan Loeb, and T. Boone Pickens all bought large positions in Yahoo supporting Icahn's strategy. And they were all hoping to turn a quick profit. These guys are great at investing in businesses and hammering management until it bends. But they're not so good at running businesses. A long proxy fight isn't in anyone's best interest.

 Having trouble finding dedicated employees? Zappos, the online shoe giant, responded to the problem with "The Offer."

The company now tells new customer-service employees (after a four-week training program), "If you quit today, we will pay you for the amount of time you've worked, plus we will offer you a $1,000 bonus." The payment has risen from $100 at the company's inception. About 10% of new employees accept the offer. Zappos believes if a new employee takes the offer, he wasn't fit for the company in the first place.

 Despite much ridicule from fellow value investors, Marty Whitman may end up on the right side of the bond insurer bet...

Whitman owns bond insurers MBIA, Ambac, and Radian in his Third Avenue Value Fund. More than 2% of his portfolio is in MBIA. Bill Ackman took the other side of the bet. His hedge fund, Pershing Square, made huge money (probably billions) shorting MBIA and Ambac.

But yesterday Ackman announced he sold out his Ambac position and reduced his MBIA position to only $74 million. And without Ackman, the biggest public advocate for shorting bond insurers, sentiment should change.

 New highs: ConocoPhillips (COP), Comstock Resources (CRK), Chevron (CVX), EnCana (ECA), Exelon (EXC), Occidental Petroleum (OXY), Petrobras (PBR), Plains Exploration (PXP), StatoilHydro (STO), Stone Energy (SGY), Sabine Royalty Trust (SBR), Pioneer Natural Resources (PXD), XTO Energy (XTO).

 In today's mailbag: politics, religion, and pointing out imagined flaws... the usual. What are we doing, good or bad? Let us know at feedback@stansberryresearch.com.

 "What WAS Obama's greatest moral challenge of our generation? Please respond. I'm on pins and needles!" – Paid-up subscriber Joe Cisar

Goldsmith comment: It's climate change. And to those mailing in asking for $100: Dan only extended the bet to SC, who didn't respond.

 "Moses gave us 10 commandments; Wilson gave us fourteen points; how many amendments to the Constitution? And there is always in the background the Golden Rule – 'Do unto others as you would have them do unto you.' Or, paraphrased, 'He who has the gold makes the rules.' If Porter came up with these Two Commandments, I'd join his campaign in a moment.

1. Make no aggression upon any person or upon their property.

2. Do what you say you will do.

"Not a religion, but a good grounding. A way to live with other people that allows you to live with yourself." – Paid-up subscriber Ed

Goldsmith comment: Don't expect Porter to go into politics anytime soon. Though he has expressed great interest in starting a religion...

 "I think you mean per square meter vs. foot when talking about the housing issue in France." – Paid-up subscriber Fred Raleigh

Goldsmith comment: No, I mean square foot.

 "I've seen very few suggestions regarding fixed income investments, specifically bonds. Is this outside the realm of possibility?" – Paid-up subscriber Larry B.

Goldsmith comment: Not at all, Larry. We launched our high-yield bond service, True Income, in February. Mike Williams writes it, and his recommendations are doing great. Last month's pick yields more than 10%, and the price of the bond has already risen 11%. Currently, we only offer True Income to Alliance members. But we'll extend our offer to the public soon.

Regards,

Sean Goldsmith

Baltimore, Maryland

May 21, 2008

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