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Weekend Edition

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

It's called a "repo tour."
 
A repo tour is when you fill a bus with prospective home buyers and take them on a tour of homes in or near foreclosure that sell for "below market" prices. Last week, the first repo tour ever made its way through Jackson County, Oregon, my neck of the woods. They called it "The Tour of Hot Deals."
 
The tour included breakfast and lunch, courtesy of two local brokers.
 
Nearby Medford, Oregon, was in the Wall Street Journal a couple years back as one of the top 10 cities most likely to experience a dramatic drop in home prices. The median home price in Jackson County fell 9.1% in the quarter ended January 31. Over the last five years, median home prices in the area have increased by 50% on average.
 
I still haven't found out if anybody actually made any offers after the tour. They're planning another one for later this month. With the way things are around here these days, I have no desire to get into real estate, but the tour-bus business is certainly looking attractive.
 
 Check out this hilarious Wall St. Meltdown music video to the tune of Billy Joel's We Didn't Start the Fire.
 
 From a reader: What is the difference between a stop loss and a trailing stop?
 
You set a stop loss on the purchase price of a stock. For example, if you set a 25% stop loss on a $10 stock, you sell when the price drops below $7.50. You adjust a trailing stop with upward movement. If you buy a $10 stock and set a 25% trailing stop loss, and the stock moves to $12, you sell if it drops below $9 ($12 times 0.75).
 
 After reading this, you'll know why ratings agencies change their credit estimates every month. They're using high-school math to analyze the most complex businesses in the world. In his blog, www.bankstocks.com, financial whiz Tom Brown criticized the analysis of Sean Egan of independent ratings agency Egan Jones...
 
When it comes to Egan Jones' assessment of the bond guarantors, here's what passes for number crunching: Egan told me that he looked at each guarantor's subprime mortgage and second lien exposure, and simply assumed 30% loss across the board. He then added up his estimates for all the guarantors, and arrived at $80 billion. Then he multiplied that by three, on the assumption that the rating agencies require three times anticipated losses to maintain a AAA rating. Then he took the result, $240 billion, and rounded it down to "over $200 billion" because it was such a big number.
 
I kid you not. Sean Egan has done the impossible. He's managed to make S&P and Moody's look like models of analytical rigor by comparison.
 
To read the rest of Tom Brown's criticism, click here.
 
 Extreme Value pick EnCana (ECA) doubled its dividend and made $11 per share in cash flow in 2007. EnCana owns 25 million acres (give or take a few) in western Canada... oil sands country. Extreme Value readers are up about 260% on the stock since we recommended it in May 2004. Click here to read about my top pick for 2008.
 
 New York has filed an antitrust suit against the big title insurers alleging they paid kickbacks to brokers that recommend their policies. Four companies have about 90% of the U.S. title insurance market. And title insurance is required on every real estate transaction, even if you're refinancing a home you already own.
 
I wouldn't expect the title insurance market to sustain too much damage, though. Most people won't want to be bothered about an expense of a few hundred dollars when purchasing a home for hundreds of thousands of dollars.
 
 Government regulators are going out of their way to police something much more important... baseball! This week, baseball star Roger Clemens testified before a congressional committee with nothing better to do than ask him if he used steroids. Speaking of consensual crimes that are none of the government's damn business...
 
 Freakonomics author and economist Stephen Levitt says Chicago-area "prostitutes are more likely to have sex with a police officer than to be arrested by one." Prostitutes also said they made more money and worked fewer hours when they had a pimp. Several prostitutes asked Levitt's researchers for a pimp reference.
 
 PSIA pick Microsoft (MSFT) shares are as cheap as they've been since the company went public on March 13, 1986. After falling 12% on news of the Yahoo takeover, Microsoft is now trading for 15.6 times earnings. Porter's portfolio has some other technology stocks that have been overly battered in this year's global selloff. These blue-chip companies are laughably cheap. To learn more about PSIA, click here.
 
Regards,
 
S&A Research




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