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Weekend Edition

The Best of The S&A Digest
Saturday, October 11, 2008

Don't blow it. Fear and panic create low stock prices, which offer patient investors unbelievable returns. Follow your stops, raise cash... but be ready to take advantage of the opportunities the market is beginning to offer investors. All year, I've been telling my subscribers this bear market would create an awesome, once-in-a-lifetime buying opportunity... And it has arrived.
 
We're doing several things to help you take advantage. First, as you'll see in the next few days, we've prepared a series of reports that will show you exactly how you can quickly raise more cash. The first report is about a secret way to "reset" Social Security payments at a much higher rate. If you're retired, there is a simple, easy (and yes, legal) way for you to get a lot more from the government. Look for more info in your inbox.
 
Second, our most senior editors – Steve Sjuggerud, Dan Ferris, Jeff Clark, and I – will be hosting an hour-long conference call. We'll discuss what's happening right now in the markets. We will answer and discuss dozens of reader questions. We will talk about the emotional challenge of dealing with fear and how to identify the safest opportunities. We're putting the details together now.
 
Third, this market is made for traders. Jeff Clark has been killing it over the last several months, making huge profits while other investors have been getting crushed. If you're not yet getting his trading advice, you're literally missing the opportunity of a lifetime.
 
Jeff recently recommended selling puts on certain gold stocks in the S&A Short Report. If you follow his trade, you will collect huge cash premiums up front. If gold stays steady or rises, you simply keep the cash. If it falls, you buy the stock and own a great hedge against inflation. This is one of the best trades in the market today. And right now, we're offering a big discount on Short Report. Click here to learn more.
 
From a reader: You have previously shown us charts indicating that gold was cheap compared to oil. With gold now moving inversely to oil, will you make the comparison again for us?
 
The key to the gold/oil ratio is the number 10. An ounce of gold ought to cost more than 10 barrels of oil. When gold is less than 10 barrels of oil, something is badly wrong. Either oil is too expensive or gold is too cheap... or both.
 
When oil was at $140 and gold was below $800, the ratio was absurdly low – 5.7. Extremes like this are rare and they never last. Today the gold/oil ratio, at $900/$90, is back to around 10. We expect it will continue to trend higher. It typically peaks above 20. Assuming oil remains around $90, that gives you a $1,800 target for gold.
 
If you missed my explanation of what went wrong in September and the role the giant fraud at AIG played in the financial crisis, take a look at last Saturday's DailyWealth.
 
While the rest of the world is scrambling to shore up its financial markets through bailouts, short-selling bans, and deleveraged balance sheets, China announced a trial introduction of margin trading and short selling. In the announcement, the China Securities Regulatory Commission didn't refer to the current global economic crisis, but said it plans to introduce "new vitality" into the stock market. How ridiculous is it that even the "communist" Chinese have a stock market more open and free than our own?
 
Longleaf Partners Fund has endured seven bear markets over 33 years. As managers Mason Hawkins and Staley Cates explained in a recent letter to clients, the fund's best performances come when those bear markets end. "Knowing what our businesses are worth and the potential risks to those appraisals is critical. When the seas are roughest, a conservative appraisal is our anchor against fear."
 
I agree. That's why I've been writing in Extreme Value about the intrinsic value of the world's dominant franchises for months now. It's also why I examined the intrinsic values of two world dominators a couple months ago and decided they weren't quite cheap enough to buy...
 
But this month, all that changed. Yesterday's issue of Extreme Value featured one new world-dominating franchise. It is one of a handful of the most financially sound companies on Earth. (Hint: It's not UPS, Johnson & Johnson, or ExxonMobil.) It makes all its money when people pay their taxes. (But it's not H&R Block.) It's got substantial earnings derived from float. (Yet it's not Berkshire Hathaway or any other insurance company.)
 
Like other world dominators selling on the cheap today, this one is easily worth more than twice its current price of just a little more than 10 times free cash flow. If you'd like to learn more, click here.
 
Regards,
 
S&A Research




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