You'll hate this, too...

You'll hate this, too... Timing vs. valuation... The Playboy Dolt... Trichet: Head counterfeiter... Greece: Default inevitable... Banks fantasizing about Greek debt... Sjug's great euro call... Jeff Clark's new gold trade... Wall Street sheds jobs...

 This past April, I said it was time to sell risky stocks and own dollars. Everyone thought I was crazy. Nobody thought the dollar was the place to be. We got loads of mail opposing that opinion. It was virtually impossible to find anyone who agreed with me. But since then, stocks have plummeted and the dollar has strengthened.

Today, the dollar's strength looks overdone. I don't think Treasurys are a good place to be. I still don't see most stocks as being truly cheap.

But I can find pockets of value here and there. Today, I'm going to ruffle some more feathers by doing the same thing I did in April. I'm going to point out another generally attractive proposition based primarily on my assessment of what's safe and cheap... one that I'm fairly certain you will hate…

Bank stocks are cheap.

 I can hardly think of anything folks want to own less right now than banks. It is absolutely impossible to read any of the big financial news sources (Wall Street Journal, Financial Times, Bloomberg, etc.) without seeing evidence of a total revulsion toward bank stocks. Today, you can read about bailouts at Chinese banks, new standards that would make it harder for banks to turn a profit, the failure of a major European bank, and investors scared about U.S. banks' exposure to the euro crisis.

And just look at the valuations of the most well-known banks: Goldman Sachs sells for 70% of book value, JPMorgan Chase sells for just 72% of book value, Citigroup trades for just 44% of book value, and Bank of America (BOA) sells for just 31% of book value. They're all priced for wealth destruction. And BOA is priced to disappear from the face of the Earth. Investors hate banks.

 For a ballpark assessment of the bank stock situation, I asked my trusty Bloomberg terminal to come up with a list of publicly traded U.S. banks that have market caps of $250 million or more and trade at 99% of book value or less. Bloomberg says 148 banks boast market caps of $250 million or more. Of those, 67 (almost half) currently trade at a discount to book value.

At a discount to book value, you're getting every $1 of the bank's net assets for less than $1. And you're getting all its future earnings for free. So 45% of all the banks worth $250 million or more are offering investors the chance to buy their future earnings for free. Clearly, they're not all great buys. Some are toxic waste. But I find it hard to believe there aren't a handful of well-run institutions that would make excellent investments at these prices.

I've got two incredibly high-quality small bank stocks in Extreme Value. They're safer than most banks because they carry more than twice as much capital as they need. They have an advantage over the competition because the FDIC has handpicked them to buy failed banks in their regions. Yet, one trades at 69% of book value, and the other trades at 76% of book value. The FDIC guarantees large amounts of their assets, due to their participation in failed-bank transactions. And they're both small, at $160 million and $140 million in market cap.

With the FDIC helping them grow… their assets at fire-sale prices… and management teams that maintain much more capital than the regulators require… these businesses represent excellent opportunities at current prices. To learn more about Extreme Value – and find the names of these high-quality, valuable, hated, and dirt-cheap assets – just click here.

 I smiled last week when Porter said I pooh-pooh the idea that anyone can time the market, then offered his own timing indicator – the spread between safe and risky bonds. He's right. I think market timing is essentially undoable, though anybody can get lucky once in a while. Nobody can do it with any consistency.

The reason I smile is that Porter proved my point… The credit spread he mentioned is not a timing indicator. It's not about time. It's about value. It's about what assets are worth, how much they pay investors to own them, and how cheap they are in relation to those payments. It's the same type of thinking that goes into the purchase of an apartment building, a burger franchise, or any other income-producing investment. It's a business decision, not a bet on timing.

I know Porter is plenty smart and experienced enough to know cheap assets can (and often do) get cheaper and that expensive assets can (and often do) get more expensive. In other words, a credit spread that's wide enough to be attractive can always get wider. That doesn't mean it isn't trading at an attractive valuation.

So instead of asking which direction securities prices will go, I believe Porter is really asking the kinds of questions most successful, wealthy investors learn to ask... "What's it valued at today? How much is it worth? How much am I willing to pay?" That's what credit spreads tell you.

Timing simply asks, "Buy/sell/hold/hedge now? Or not now?" Timers are trying to find the moment in time beyond which a stock or bond's price will rise or fall. But a wide enough spread doesn't mean prices will go up from a certain point in time. A wide enough spread says it's sufficiently cheap to buy with a margin of safety – the defining principle of value investing. Timing and valuation look similar to a lot of folks. But they're not the same.

 I do the same thing, but I don't do it with credit spreads. In the current issue of Extreme Value, I run through seven methods of determining whether most U.S. stocks are cheap. (Only one of them indicated cheapness, so we're still playing it relatively safe.)

When valuing an asset, the primary question you try to answer is, "What is this asset/business/security's intrinsic value?" The question that follows for the best investors is, "How much am I willing to pay for it?" That's what the spread between risky and safe corporate bonds tells you.

Timing indicators don't ask those questions. They don't tell you when stocks and bonds are cheap. They don't tell you when risky corporate debt yields offer adequate compensation. Timing indicators claim only to know when prices will rise or fall from a given point in time... Folks who run timing indicators ask, "Is the price of this security/asset/business going up or down from this point?" That's timing, not valuation. Timing indicators don't address valuation. They address one thing only – the direction of the movements of securities prices.

I'm sure many traders will say it's not that cut and dried. But what they really mean is they use both valuations and timing indicators. They'll also say there's a lot of important information embedded in prices. Well, yes, there's certainly more than one way to skin a cat. I just think it's important to understand the difference between timing and valuation, so you can make a clear decision about the role each plays in your own investing activity.

 Normally, when government dolts want to assign blame to market volatility, they blame short sellers. These conniving market manipulators spread false rumors and put downward pressure on markets – or so the finger-pointers would want you to believe.

But when that dolt is Italian Prime Minister Silvio Berlusconi – the playboy of Europe – you can expect more flare. If you've read anything we've written for the past several months, you understand the problems plaguing Europe. (If you don't, we'll go into those later.) Berlusconi is ignoring Europe's shrinking economies and growing debts as the culprit in favor of cocaine. Yes, the huge swings in European markets are due to coked-up traders. From Bloomberg…

 While Berlusconi is searching for the cause of Europe's woes, European Central Bank President Jean-Claude Trichet is trying to stem them... By doing the only thing a central banker knows how to do... printing money. Today, Trichet warned that the euro crisis has "reached a systemic dimension" and said governments must unite to recapitalize the banks. He said, "We are at the epicenter of a global crisis," as the risks have spread to the banking sector and "some of the larger EU countries."

 Today, the "Troika" – a consortium made of the European Commission, European Central Bank, and International Monetary Fund (IMF) – said Greece will receive its sixth bailout tranche of $11 billion upon European Union and IMF approval, likely in early November. The Troika also said the 2011 recession was deeper than expected (no surprise) and we probably won't see a recovery until 2013.

 We would add to those predictions that Greece will not repay one penny of any bailout funds it receives. The country will default. On the bond market, Greek paper trades for $0.40 per dollar of debt (a low figure). But most European banks have only written the debt down to $0.79 per dollar (a laughably high figure). They don't need to mark to market until Greece formally defaults. And it's not illegal to do that, either. Once again, the rules don't protect investors. According to The Telegraph, even "officials in Berlin" have said the 21% haircut is "more likely than not" too little. Meanwhile, two-year Greek paper is now yielding a record 159%.

 The default of Greece (and Italy, for that matter) is a foregone conclusion. The looming question is the future of the euro. We've been euro bears for years... sometimes to the detriment of our portfolio. In the words of our friend Doug Casey, the dollar is an "I owe you nothing," while the euro is a "who owes you nothing." It's a currency made up of a group of bankrupt nations who can't agree on how to save themselves. Given the way these nations have warred with one another over millennia, I have to wonder who thought they'd ever come to a permanent agreement on – of all subjects – the issuance and management of currency.

With the latest round of European bailouts on the horizon, the euro is at a crossroads. It's a similar situation to January 2010, when the world first recognized the severity of the European debt crisis. At the time, True Wealth editor Steve Sjuggerud wrote…

 While it's difficult to predict currency movements with any degree of certainty in the short term, we do know the euro is toast in the long term.

It's also difficult to predict how gold will act in the short term. But one of our editors called its recent movements with incredible results. In his S&A Short Report, Jeff Clark made 80% in one day trading Gold Fields, 80% in one week off the gold-stock fund GDX, and 55% in one week off Kinross Gold. Then, Jeff sold puts on the gold bullion fund GLD for a 140% gain in two weeks. Nobody has played the volatile gold market like Jeff Clark. His readers have made a fortune on his gold trades.

And today, Jeff sent an update saying, "Let's buy some more gold." One of Jeff's favorite indicators for the gold market just reversed from "extreme oversold" conditions, creating a buy signal. This is just the third gold-sector buy signal in the past two years…

The last two times this buy signal flashed, The Gold Bugs Index (HUI) rallied 15% in one month. Take a look at the chart:

Now, Jeff's indicator is more oversold than it was on either of the previous occasions. And he expects an even bigger rally this time around.

In particular, Jeff is recommending buying options on one of the cheapest gold stocks in existence. This stock is trading at its lowest point in two years... It fell 25% in the past month. And Jeff believes it will quickly recoup those losses. Jeff thinks readers will make 150% on this trade. To learn more about the S&A Short Report and access Jeff's latest trade, click here...

 New 52-week highs (as of 10/10/11): V.F. Corp. (VFC).

 In today's mailbag… Readers take us to task for our waffling and "obscene panderings." How have we offended you lately, dear reader? Send your e-mail to feedback@stansberryresearch.com.

 "For the love of God I wish you would make up your mind as to your position! For the last year, I've seen you through out recommendations like shorting TLT at 83 and buy BP at 45 and above – even up to 50, and several more in fact that have all lost at least the 25% stop which you suggest, but in truth those so-called long term positions have lost much more and I never see you talk about having to get out of your bad picks.

"So which is it – is the world as we know it going to come crashing down or have you finally decided to follow Warren like everyone else. I bet that your current stocks that you told us about on Friday, like Coke – go down 25% before they go up 25% just like most everything else you've picked. A monkey with a dart could do what you guys have done for the last year. Sure you can pull out some tid-bit from one of your letters that shows where you mentioned to do this or that, but you are yelling from the roof tops that the world is about to end and then turning around and saying buy Coke. Why should we be in any stock if what you say about the state of the world is coming true before our very eyes?" – Anonymous

Porter comment: I don't know what newsletter you've been reading, but my position regarding the market and stocks couldn't have been clearer…

In March 2010, I gave specific reasons why I thought the market was overvalued. I recommended holding 50% cash (SHY) and 50% gold (GLD) – unless you were an experienced investor and could hedge your long exposure with at least as many short sells. So far this year, I've recommended something like eight short sells and three long positions. As you note, the "longs" haven't done very well. No surprise there.

But don't pretend like I haven't been excruciatingly specific about asset allocation and the risks in this market. And don't pretend that I have ever written anything about changing my outlook or allocation.

As for my most recent essay... I wrote in numerous places that I wasn't changing my position on the market at all – only acknowledging that, at some point, it will be time to do so and that time is drawing closer.

 "I'm a brand new subscriber and enjoy (so far) what I've read in your e-mailings. I don't mind mentally challenging or complex investment ideas as present in your Friday essays. What I do mind however is your touting of ridiculously expensive ($1000 per year subscriptions) newsletters created by your various associates by your placing links in your essays to their lengthy advertisements. If I ever cancel my subscription to your newsletter it will probably be because of these obscene panderings that you include in your writings." – Paid-up subscriber Joseph Paysse

Porter comment: Did you ever hear the phrase, "Never look a gift horse in the mouth"?

The S&A Digest is free. The time, energy, and effort to write and publish it are not. The author of Friday's Digest has been studying finance for 20 years. He manages millions of dollars of his own assets and runs a large, international research company with clients in more than 120 countries. He has a wife and family (two boys). He spends roughly six to eight hours per week writing the Digest personally, for no other reason than that he remains personally dedicated to the quality of his company's products.

If you know of another place to get insights like this... from someone like this... for free... please let us know. We would like to sign up.

While the monetary cost of enjoying the Digest is (and will) remain zero, we earn our keep via the small amount of advertising (for our fee-based products) that we include with our editorial. You mentioned you find this offensive and that its inclusion, in your eyes, was a reason to cancel. Please keep this in mind: If you don't wish to purchase any further products from us, you're under no obligation to do so. Likewise, if you find our advertising – a small paragraph in the Digest or an e-mail sent you every now and then – to be so obtrusive that the inconvenience outweighs the benefits of our editorial, you're free to call our customer service staff during business hours. You'll receive a refund. And we can part as friends.

I don't think there's a business in America – and certainly not in the financial sector – that offers its customers more value for less money than mine. But if you disagree... I'm always willing to part as friends.

In the meantime, please understand that without our "obscene panderings" there would be no Stansberry & Associates Investment Research, no Digest, and no newsletters for sale at $49 per year. People like me would all work for hedge funds... where we'd sell our advice for a lot more than $49 (or even $1,000) exclusively to people whose net worth can accommodate those kind of fees.

Regards,

Dan Ferris and Sean Goldsmith

Medford, Oregon and New York, New York

October 11, 2011