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Weekend Edition

The Best of The S&A Digest
Saturday, August 16, 2008

 As I flew into Miami early this morning, I immediately noticed a major difference in the city's skyline. Now, 40-story (and taller) towers stand where, during my last visit, there were mostly cranes. And as we warned, the real estate market here has been creamed.
 
 In the downtown area, several entire buildings are at risk of failing because of widespread mortgage fraud. In some buildings, squatters have become a problem because most of the units are empty. Prices on most of the new downtown condos have fallen by more than 40% from their peak. Some are now selling for around $200 per square foot. For less than $200,000, you can buy a new condo in downtown Miami.
 
When I was here last, my realtor confidently assured me the downtown condo mania wouldn't spread to South Beach. I knew better. On the beach, 83 current "short sell" condos are now for sale. These units are in default on their mortgages, and the bank is willing to sell for less than the note. The best properties in Miami – including ultra-lux Fisher Island and The Continuum – are now experiencing defaults and short sales. At the Continuum II, more than 25% of the units are for sale.
 
So... why am I here? Miami is one of the world's great playgrounds. These towers will eventually be filled with people, making the city bigger and more valuable. At some point in the future, these properties, especially the waterfront places, will rebound. It might take 10 years... But if you're able to buy anywhere near the bottom, you could end up owning a luxury condo for free for a decade. (The capital gains you'll make will cover all of your ownership costs.)
 
I knew the market wasn't close to a bottom the last time I came. Everyone was still in complete denial of the disaster on the horizon. About six months ago, the real panic began. With it, prices have fallen and transactions have picked up again. Last week, I got a call about a short sell penthouse for sale – down 50% from where the current owner bought it. That smelled like desperation, so I came to see the market again for myself. I'll tell Digest readers what I found...
 
Almost 60% of U.S. and European institutional investors believe another large financial institution will fail in the next six months, according to Greenwich Associates. Another 15% think it will happen in six to 12 months. "Most institutions think we are currently in the most dangerous period for global financial services firms," said Frank Feenstra, a consultant at Greenwich Associates. "Perhaps if the markets can make it through the next six months, the level of pessimism may begin to subside."
 
Perhaps the large financial institution to fail will be Wachovia. The Charlotte, North Carolina-based bank announced an $8.9 billion loss, slashed its dividend, and said it would exit the wholesale mortgage market on July 22. Now the bank says it will cut 600 full-time positions. That's in addition to the 4,400 open positions and contract workers and 6,350 full-time workers Wachovia said it would fire in July. And the SEC is investigating Wachovia for fraud related to its municipal-debt auctions. Its latest 10-Q, which it snuck in minutes before the deadline yesterday, showed a laundry list of lawsuits and investigations. It also showed nonperforming assets more than doubling, from $5.4 billion in December to $12 billion today.
 
Bearish bets on newspapers are accelerating. Shorts against Gannett, publisher of USAToday, reached their highest level in at least 17 years after the company announced ad sales had their biggest monthly drop this year. Short interest in Gannett rose 23% to 52.1 million shares (23% of shares outstanding) from July 15 to July 31. Shares are down 51% this year.
 
So what are these newspaper companies really worth? Nobody knows for sure, but we may get a glimpse of what someone is willing to pay when Cox Enterprises dumps 29 of its publications. The company announced the sale yesterday. The largest newspaper for sale is the Austin American-Statesman. Other newspapers up for grabs include publications in Atlanta, North Carolina, Texas, and Colorado.
 
My recommendation of Wal-Mart went over like a lead balloon at Stansberry and Associates' annual Alliance meeting last November in Mexico. After I made it, I looked out at the audience and saw heads bobbing and nodding off. Everyone voted for their favorite stock pick of the day, and mine was somewhere around dead last.
 
Wal-Mart is up more than 20% since then, a huge return considering what most stocks are doing. Wal-Mart just reported its net income was up 17% last quarter. Sales at U.S. stores rose 11%. International sales and profits both grew 17%.
 
The CEO of Wal-Mart's U.S. division said the company "will do whatever it takes to retain price leadership." That's exactly what I want to hear. In the consumer's mind, Wal-Mart is "the cheapest place to shop." Spending less on everyday items is more attractive than ever to many people. I bet a lot of those folks are people who've never thought about it before.
 
Regards,
 
S&A Research




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