Wal-Mart's spending down, dividends up

Wal-Mart's spending down, dividends up... Ackman's mysterious Target proposal... Sunbelt housing crushed... Consumers out of confidence... or money?... Paulson buying Cheniere... Gross buying bank debt...

Extreme Value pick Wal-Mart (WMT) says it'll cut capital spending by 36%. Spending will drop from $9.1 billion a year ago to a range of $5.8 billion to $6.4 billion. The world's largest retailer bowed to pressure from investors wanting greater returns. The company plans to open 166 U.S. "supercenters" – which sell a combination of general merchandise and groceries – over the next 12 months, and then 125 to 140 the year after. (Last year, it opened 191 new stores.)

That's OK with me. Part of my original thesis on Wal-Mart was that reduced growth and capital spending going forward meant higher dividends for shareholders. Since I first covered the stock in October 2006, Wal-Mart has bumped up its quarterly payout twice, from 16.8 cents per share to 22 cents and then to today's level, 23.8 cents per share.

We may see a major change at Wal-Mart's competition, too. Target's largest shareholder, Pershing Square Capital Management, will present details tomorrow about a potential transaction it says "will build long term value for Target and all its stakeholders." Bill Ackman currently owns 10% of Target through Pershing.

Ackman recently suggested Target use equity swaps to buy back more of its shares. That's where Target pays a bank the interest cost of buying the shares, and then settles up periodically, either paying the bank when the share price falls or getting paid when it rises. Target's CFO said Target doesn't like the idea because it would require the company to report the gains and losses in its earnings. Target would prefer to use call options to buy shares, a technique it has used in the past.

The latest Case-Shiller housing index numbers say that Phoenix, Las Vegas, Miami, and San Francisco saw the largest drops in year-over-year housing prices in August...

If you've ever wanted to look for a house in some of the most expensive cities in America, I bet the bargains are really starting to come out of the woodwork.

Plummeting housing values nationwide have shut off the home-equity ATM. The Conference Board, a private research group, reported today that its consumer confidence index fell from 61.4 in September to 38 this month. That's the third-largest monthly drop since the index's inception over 40 years ago. I wonder, do consumers lack confidence... or money?

Analysts who try to call tops and bottoms are a pet peeve of mine. No law of the universe, for example, prevents the Dow Jones Industrial Average from going to 5,000. It's around 9,000 now. It's been as low as 7,773 recently, after peaking at 14,279.96 last fall. Who knows where it'll be next week or next year?

Our own trader extraordinaire, Jeff Clark, is cautious on the overall market. Jeff says, "Don't let the market fool you" and warns his readers that, "no trader in his right mind would carry a position overnight. There's just too much risk of an opening gap the next morning."

Skeptical as I am that bottoms feel anywhere near this good, I soldier on, reveling in the myriad bargains available today, many in the greatest franchises in the world.

I recommended eight stocks in the current issue of Extreme Value, several of which are cheap and liquid enough to buy all their own outstanding shares. I'll have several more to recommend in the next issue. I don't know when bottoms happen until after they happen. By then, stocks that were dirt-cheap could be less dirt-cheap. You literally can't afford to wait.

With all the cheap stocks around today, anyone who says he's waiting for the market to bottom is a speculator, because the odds of knowing when that moment arrives are remote. If you want to know which world-dominating franchises are the ones to buy right now, click here to learn more about Extreme Value.

John Paulson of hedge fund Paulson & Co (one of this year's few winners) bought 7.4 million, 14.6%, of liquefied natural gas company Cheniere Energy (LNG). PSIA readers may remember Cheniere as Porter's favorite short. He called Cheniere's business model "one of the craziest ideas I've ever seen." You can read his full write-up here.

Since Porter's short-sell recommendation, shares of Cheniere have fallen from $38 to under $1. Every stock is overvalued at one price and undervalued at another. If you pay little enough, even "one of the craziest ideas" can be a good buy.

Bill Gross, manager of the world's biggest bond fund at PIMCO, said he likes the debt of KeyCorp and Regions Financial because the banks are applying for the Treasury's equity-purchase program. "We like the ones that are submitting applications: Key Bank and Regions and a host of others that are large enough and well capitalized enough to be admitted to the club," Gross said. "The government is investing 10 to 15 percent of the banks' total capital themselves into the company and so why not be a partner with the government at a higher yield than the government is giving? It's a slam dunk in my opinion."

PIMCO is also buying swaps and mortgages, focusing on short maturities that will gain as the Fed keeps the target rate steady at 1% or less. Gross is avoiding Treasuries, although he admits, "To the extent that the Fed goes down this week to one percent and stays there for the next year or two, it's easy to see that a two-year Treasury at 1.7 percent has some value."

Porsche has amassed a 74.1% stake in fellow German automaker Volkswagen. Shares rose as much as 93% on the news. Volkswagen soared so much due to heavy short covering. No one expected Porsche to have increased its stake from 35% to 74%. Hedge-fund managers were literally in tears, according to the Financial Times.

The rise makes Volkswagen the world's largest publicly traded company. Volkswagen had a peak market cap of $370 billion, more than ExxonMobil's $343 billion as of Monday.

And ExxonMobil earned over $40 billion last year, making its trailing price-to-earnings (P/E) ratio less than nine. Volkswagen earned about $2.4 billion, making its P/E more than 150.

Kirk Kerkorian is still dumping Ford shares. Tracinda, Kerkorian's investment vehicle, pared its position to 4.89% from 6.09% on October 20. At its peak, Tracinda owned 6.43% of the company.

The National Automobile Dealers Association estimates 700 new-car dealerships will close this year, and 37,100 jobs will go with them. The country's 20,700 dealerships accounted for $693 billion in sales last year, 18% of all retail sales. Dealership salaries make up 13% of the country's retail payroll.

Despite the obvious effects these closures will have on the economy, they could also make things worse for the Big Three. As their biggest dealerships shutter, GM, Ford, and Chrysler will have fewer avenues to push their vehicles.

New highs: Just our short position in Gannett (GCI).

In the mailbag today... the craziest thing I've heard about gold coins all week. Can you confirm it? Send us an e-mail at feedback@stansberryresearch.com.

"I'm interested in finding out more about the S&A Alliance membership. How much does it cost to join and how much is the annual maintenance fee? I have made some money from PSIA and The 12% Letter, and a few tips in The Digest, and so I am thinking about spending some of the profits to join your Alliance."

– Paid-up subscriber Joe E.

Ferris comment: The Alliance is a great deal. You get everything we publish, except for our most exclusive biotech service, free... for life. Right now, we're putting together an information packet for folks like you. Check your inbox next week for the details.

"Dear Porter! Several month ago – to be accurate it was the day BEFORE Gold began to seriously tank I sold all $ 780,000 worth of the gold coins that you recommended buying a few years ago, WHEW! Last week, thinking about when to maybe get back into some with gold getting beat up-I called my 'broker' only to hear the weirdest story ever. He deals with a few big Gold houses including Heritage in Dallas. He claims that the ONLY coins that are now salable to ANYONE are ones that are at a par with actual gold itself such as St. Gaudens MS-60's or 61's and that Big Dealers are actual re-plastic sealing better grades like 64's 5's etc. in lower grade envelopes as the only way to sell them and that the traditional investing plan that sees collectibles increase in value faster than gold itself has become a thing of the past. Remember – I'm no longer a gold coin holder – just the messenger!!!" –Anonymous

Ferris comment: This sounds crazy, and I haven't yet been able to get in touch with anyone to confirm it. I'll let you know what I find in Thursday's Digest.

Regards,

Dan Ferris

Medford, Oregon

October 28, 2008

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