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Weekend Edition

The Best of The S&A Digest
Saturday, March 1, 2008

As you well know... inflation is here. Oil is at an all-time high, hitting $102 a barrel this week, and food prices are soaring. The new low in the dollar – the euro is now worth more than $1.50 – means the market is pricing in yet another interest-rate cut.
 
Our recommendation, once again, is to buy gold... like we've been saying since 2003. No, we don't think it's too late. Gold is only now becoming an object of interest for institutional investors. And you won't hear any discussion of it yet at cocktail parties... unless you're at my house.
 
As we've noted before, insurance is a great business to buy during inflationary periods. Insurance companies collect premiums in today's dollars, then pay out claims over time in devalued dollars.
 
In a recent Barron's interview, David Winters, CEO of value mutual fund Wintergreen Advisers, said he likes buying companies that can easily raise prices during inflation. In particular, he likes cigarette companies. No matter the cost, smokers must have their nicotine fix. Winters is loading his portfolio with Japan Tobacco, the third-largest tobacco company in the world.
 
Last month, Dan Ferris showed Extreme Value readers a backdoor way to buy one of the country's best cigarette companies for a 25% discount. This play has virtually no analyst coverage and could mean big profits in the near future.
 
Signs of a top in steel prices? Last week, the world's largest iron ore producer, Vale, struck a deal to increase the price of its product – a key ingredient in steel – by 71%. Rising iron ore costs are leading steel makers to raise their prices around 30%. Today, the London Metals Exchange launched its first steel-futures contract.
 
"Wherever you look, things look bleak," says Robert Shiller, co-creator of the S&P/Case-Shiller home-price indexes. Home prices fell 8.9% in the fourth quarter of 2007, compared with the fourth quarter of 2006.
 
Miami was the hardest-hit major city, with an 18% annual decline in 2007. Las Vegas, Phoenix, and San Diego house prices all fell 15%. Charlotte, Portland, and Seattle are the only three metro areas measured by the Case-Shiller index that still haven't experienced year-over-year price drops.
 
Like all real investors, we applaud panic. We enjoy nothing more than a real solid bear market. Why? Because we're buyers, not sellers. We wait for good opportunities to put our money to work, and we have no desire to cash out. It's never hard to find something interesting when other investors are scared. Look at the financial sector right now...
 
Anything related to finance has been crushed, regardless of any facts. Take business development companies (BDCs), for example. Much like private-equity firms, BDCs raise capital to invest in various companies, then pass the profits to investors. Most of the companies have nothing to do with mortgages and most of them never touched any of the hugely expensive deals Wall Street is struggling to close. Some of them, in fact, only finance commodity-based businesses, like oil exploration firms. So... while these stocks are technically financial firms, their earnings are driven by oil prices, not interest rates.
 
Tom Dyson covers one such energy BDC whose share price has floundered since last year, thanks to the mortgage mess. Meanwhile, oil and coal have soared. As a result, this BDC is now yielding more than 12% and continues to raise its dividends. 
 
From a reader: I've seen frequent mention of buying U.S. gold coins. How do you sell them and who can you recommend to certify the grade?
 
I'm no expert when it comes to coins. So far, I've only bought them. I haven't sold any yet... and I doubt I ever will. I buy bullion coins and I keep them as my preferred form of savings (it seems a lot smarter to save gold instead of paper currency). But I've been told that selling on eBay is relatively easy. And my coin dealer regularly quotes buy prices, so I could sell back to him if I wanted.
 
As for coin grading, that's a topic I know even less about. But from what I can tell, you only want to trade in PCGS-graded coins. So if you want to get a coin graded, you should contact PCGS.
 
You can also read the full story on gold coins and why they're a great way to build and grow wealth.
 
Regards,
 
Porter Stansberry and Dan Ferris




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