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Weekend Edition

The Best of The S&A Digest
Saturday, March 8, 2008

In a recent DailyWealth, Matt Badiali explained why a little-known genre of gold stocks – prospect generators – is struggling.
 
These small companies find gold deposits, get other companies to develop them, and then collect half the profits. Prospect generators reap all the rewards without the huge mining costs. If they strike gold, their shares can rise thousands of percent.
 
Despite a fantastic business model and soaring gold prices, prospect generators are flat. The reason: newsletter writers. Unfavorable coverage in newsletters has pushed these thinly traded stocks down, creating an amazing opportunity for investors.
 
We often get the question, "What is the best way to invest in gold at today's high prices?" This is it...
 
Once a major company's stock has been pummeled, and then it goes sideways for years, and its sales and earnings continue to build up, eventually, the stock price has to shoot up – like a cork out of a bottle. – Arnold Van Den Berg
 
You've probably never heard of him, but Arnold Van Den Berg is one of the greatest value investors of our time. His Century Management has returned 15.6% annual returns after fees for the past 31 years. And the above quote is one of the great secrets to successful investing.
 
Applying his reasoning to our prospect generators, we see that many of the stocks have floundered, and some have even fallen. Meanwhile, the price of gold (the "sales and earnings" equivalent) has soared. We're setting up for a perfect "cork out of a bottle" situation. 
 
Berkshire Hathaway announced earnings last week. And with the earnings announcement comes Buffett's annual letter to shareholders.
 
There's no better way to learn the basics of business and investing than by reading Buffett's letters. You don't need an MBA, you can read these letters for free – all of them – on the Berkshire Hathaway website here...
 
From a reader: Is there some way that the trailing stop loss technology can be applied to my orders without constant monitoring on my part?
 
There are lots of different software packages that you might use to keep track of your own stop losses. According to our subscribers, www.tradestops.com is one of the best.
 
UBS reported that financial firms will lose at least $600 billion once this crisis plays out. So far, banks have only announced $160 billion in losses. What will cause the extra $440 billion? Variable Interest Entities (VIEs).
 
Bond research firm CreditSights estimates VIEs will cause $88 billion in losses for financial firms. And Goldman Sachs warned it may see $11.1 billion in losses at the hands of VIEs. We've been saying for a long time that Goldman wouldn't escape the credit debacle without taking a large loss. And $11 billion is even bigger than we expected.
 
On the other hand, my No. 1 Extreme Value pick, Wal-Mart (WMT), seems relatively immune to the lethal credit cloud. This week, Wal-Mart reported a 2.6% sales increase at U.S. stores for the month of February and a 2.8% increase at its Sam's Club stores. Sales of groceries, medicine, and electronics were strong. But even Wal-Mart reported slower sales in its home goods business.
 
Wal-Mart also raised its dividend 8%. Extreme Value readers saw this coming. In my second piece about Wal-Mart, in December 2007, I wrote "slower growth means lower capital spending and more free cash flow – which Wal-Mart loves to return to shareholders in the form of dividends..."
 
Bond-fund manager Bill Gross recently bought $1.5 billion worth of cheap municipal bonds. This week, Wilbur Ross, the "bottom feeder," announced a $1 billion purchase. He thinks munis are "an extremely attractive segment of the market."
 
The Wall Street Journal says the muni bond purchases might be based on more than attractive pricing. They may also be a bet that a Democratic candidate will become president and raise taxes, making tax-free munis especially attractive...
 
Steve recently recommended an excellent muni-bond fund in True Wealth. The fund trades at a discount and yields more than 5%, tax-free. You can use munis to build what Steve calls a "virtual Florida retirement." 
 
Regards,
 
Porter Stansberry and Dan Ferris




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