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Weekend Edition

The Best of The S&A Digest
Saturday, May 2, 2009

You need to keep up with Obama and his plan to destroy the U.S. economy, and Bernanke and Geithner's plans to destroy the U.S. dollar. But you can't get overwhelmed by this stuff.
 
The best investors get underwhelmed by it and keep their focus on the bottom-up details of the businesses they own and want to own. Mason Hawkins of Longleaf Partners told investors many analysts and investors have "abandoned security analysis and long-term investing. And many have sworn off equities for fear of short-term macro uncertainties." But he pointed out the "opportunity to own severely discounted dominant companies has never been better."
 
That's true. It's easy to get distracted by the government's actions, especially when those actions have such enormous implications for investors. But once you buy your gold and load up on a particular set of gold stocks, you can get back to looking for good, competitive businesses that generate lots of free cash flow and trade at cheap multiples of earnings.
 
Take IBM, for example. IBM increased its quarterly dividend by 10% to 55 cents a share, the 14th year in a row it has raised its dividend. It also announced a $3 billion share repurchase. The company has nearly $13 billion in cash. Its shares have held up much better than the market, down a mere 22% from the peak. (Did I just say a 22% drop was good? Wow... I'm really slipping.)
 
Big technology companies are sitting on loads of cash... Apple has more than $23 billion in cash and short-term securities. Dell has $9 billion. Hewlett-Packard has $11.3 billion. Microsoft has $20 billion. Intel has $11.8 billion...
 
World Dominators can use this cash for dividends, share repurchases, or acquisitions. That's part of the attraction of great businesses with pristine balance sheets. There's far less risk of being painted into a corner by creditors, which is what you get with debt-heavy, commodity-oriented companies.
 
From a reader: Porter is always advising buying gold bullion, but never seems to mention silver coins. Since gold coins are so expensive, what ratio of silver to gold would be appropriate?
 
As you probably know, that's a loaded question. Historically during periods of metallic money, a 15-to-1 silver-to-gold ratio was about average. If gold is at $900, that means the price of silver ought to be much, much higher – like $60 an ounce.
 
But that's if you assume we're headed back to a worldwide gold standard (and I think we are... but it's going to take a while). In fact, the silver-to-gold ratio is a good measure of confidence (or the lack of) in the U.S. dollar. When the dollar falls, the silver ratio falls. My friend and colleague Chris Weber has written more about this than anyone else I know.
 
The Daily Crux recently reported corporate insiders are selling stock at the fastest pace since October 2007 – the month the stock market peaked. Insiders took advantage of the S&P's 28% gain from its 12-year low on March 9 to dump $353 million in stock, or 8.3 times more than they bought. Of course, insiders know more about a company than anyone else, and their buying and selling can be a great indicator of a stock's direction.
 
This movement is clear... Insiders are saying we're in the midst of a bear-market rally. However, insiders have been purchasing hand over fist at one small beverage company... This company is more than 100 years old, has zero debt, and throws off tons of cash... And we think it's getting ready to pay out a large, special dividend. To access the full details of this company, a recent Inside Strategist pick, click here...
 
Let me explain investment banking to you. It's real simple. You take a tiny bit of capital from suckers... er, I mean investors. Then you borrow against that capital by around 50 to 1. Then you gamble like crazy and try to earn 1% or 2% a year on the borrowed money. When you win, you pay 50% of the revenues to the employees and the managers. After all, they "made" the money. But when you lose, it's the shareholders' problem. And if you lose enough money, it's the taxpayers' problem. Sounds like a great business, doesn't it?
 
It boggles my mind that investors would actually choose, willingly, to invest in these companies under these terms. But like Barnum said, there's a sucker born every minute. Goldman recently raised $5 billion from suckers. Guess what it's doing with the money? Bloomberg reports the bank is ramping up its risk taking faster than any other bank on Wall Street...
 
Goldman Sachs's so-called value-at-risk, the amount the New York-based bank estimates it could lose from trading in a day, jumped 22 percent to $240 million in the first quarter, twice what Morgan Stanley stands to lose, company reports show. VaR climbed 2.8 percent in the same period at JPMorgan Chase & Co. and dropped 14 percent at Credit Suisse Group AG.
 
Guess what else Goldman is doing with the money? The bank set aside $4.7 billion for employee compensation in the first quarter. That's not a misprint. If compensation continues at that rate, Goldman employees would make an average $569,220 each this year – just beneath the bank's record pay in 2007. What could the firm be doing that's so valuable to the economy it justifies this incredibly high rate of average compensation? Separating fools from their money is hard work.
 
Regards,
 
Porter Stansberry




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