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Weekend Edition

The Best of The S&A Digest
Saturday, June 19, 2010

Let's start off today with big kudos to Steve Sjuggerud. While the stock market is down for the year, Steve has nailed trade after trade in True Wealth. Anyone following his recommendations has made a fortune.
Last month, Steve recommended "virtual banks" Annaly and Hatteras (Annaly hit its 52-week low the day his issue came out). Readers are up 13% and 18% in one month. And that's not including the double-digit dividends both stocks pay.
Steve also recommended a super-safe way to play natural gas immediately after the bottom for the year. That stock is up 20%, and readers have earned an extra 2% in dividends. In March (two weeks after gold's low for the year), Steve recommended a basket of gold stocks. Readers made 16%.
And his best trade so far this year was shorting the euro in January. True Wealth readers entered the trade only thee weeks after the euro's all-time low. The euro short returned 30% in just six months.
In his latest issue, out yesterday, Steve recommends a sector he's avoided for nine years. He says readers can safely triple their money in the next three years with these stocks. In some cases, these stocks haven't been this cheap in 25 years. And the last time book value was this low, the stocks soared 150% in two years. Plus, while the share prices have gone nowhere, sales at these companies have been soaring. And the stock is just now entering a massive uptrend. To sign up for True Wealth and access Steve's new pick, click here...
Let's talk about BP... Some of the world's top value investors have begun to buy shares of BP based on their estimates of what the Gulf cleanup will cost compared to the enormous cash flows of the company (roughly $30 billion annually, pre-tax). Our friend Whitney Tilson, one of the most respected value-oriented hedge fund managers in New York, even says that BP won't have to cut its dividend. We doubt Tilson is correct about the dividend, but he makes a few excellent points about the scope of the disaster in contrast to the media hype about the spill:
  • It's a horrible accident, but unlike what Matthew Simmons says, you don't really have to clean up the entire Gulf of Mexico. "The Gulf of Mexico is huge, covering 615,000 square miles and containing 660 quadrillion gallons of water," Tilson wrote in an e-mail to me this morning. "Let's compare this to the amount of oil Deepwater Horizon has been leaking. Most estimates are in the 12,000-20,000 barrels per day range, so let's take the high end and also assume that this continues until mid-August, meaning four months since the accident.
  • "Let's also assume that the cap captures no oil (the latest reports are that it may be capturing most of the oil, but let's be conservative). 20,000 barrels/day x 120 days x 42 gallons/barrel = 100.8 million gallons of oil released. 100.8 million divided by 660 quadrillion is one gallon of oil for every 6.6 billion gallons of water in the Gulf. That's the equivalent of roughly one-millionth of an ounce of oil in a typical bathtub full of water."
  • It has happened before, and it wasn't the end of the world. "PeMex's Ixtoc oil well [1979] was far worse than the Deepwater Horizon well: 140 million gallons of oil poured out of the Mexican well... After four months, an oil slick had covered about half of Texas's 370-mile gulf shoreline, devastating tourism."
  • It's nothing compared to Kuwait. During the first Gulf War, 10 times as much oil spilled into the Persian Gulf, which is one-sixth the size of the Gulf of Mexico. And what were the long-term consequences? Tilson cites a 1993 UNESCO study that reported "little" long-term damage was done to the environment. "Half the oil evaporated, a million barrels were recovered and 2 million to 3 million barrels washed ashore, mainly in Saudi Arabia," he said.
Should you buy BP, down almost 50% from its high? It is now trading at roughly six times earnings. If the dividend isn't cut you'll make 9% a year in yield buying the stock at its current price. Several of the smartest guys we know well in the investment business and in the oil business have said they're buying the stock. So... what do we think you ought to do?
We won't share our opinion on BP. It's not that we don't care... or that we don't feel compelled to give you our best advice. But our best advice in this situation isn't to buy the companies most likely to be caught up in direct liabilities from the accident. BP, Transocean, and Halliburton are very likely to spend the next 20 years wrapped up in litigation from this accident. Anyone who tells you they know how it will turn out is a liar. That can't be known.
One of the aspects of the Enron debacle I'll never forget is that its credit rating wasn't lowered to junk until November 28, 2001... two days before its European subsidiary declared bankruptcy and four days before it declared bankruptcy in the U.S. In other words, when the sun rose on Enron two days before it became the (then) biggest bankruptcy in history, Moody's and the S&P still rated it investment grade.
The weird thing about Enron was, as a former Enron executive put it, the business model "didn't exist" without the investment-grade rating. This raises an interesting question: Should you ever assign an investment-grade credit rating to a business model that can't exist without an investment-grade credit rating? Isn't the model a confidence game from Day One?
Read the credit ratings definitions. The big enchilada, the pair of risks the definitions are built around, are "adverse effects of changes in circumstances and economic conditions." What company has control of "circumstances and economic conditions"?
Heaven knows Moody's can't be accused of timeliness. Enron had been under heavy scrutiny since February 2001, nine months before it went bankrupt. By the time Moody's downgraded it to junk, Enron was one of the biggest scandals of the decade.
Well, let's call Greece "My Big Fat Greek Enron," because Moody's just downgraded the ailing country's credit rating to junk – this week. Moody's nonchalantly declared, "Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default."
Low risk of default?! If you're looking at a $135 billion bailout package from the EU and the IMF, you're pretty much in default, aren't you? I think so, but what's really amazing is Moody's total failure to take timely action. Anyone in the world who can read or watch TV knows Greece has been in a crisis for weeks. But it wasn't until yesterday Moody's said Greek debt was no longer suitable for pensioners, widows, and orphans.
S&A Investment Research

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