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Weekend Edition

The Best of The S&A Digest
Saturday, December 22, 2007

The move hasn't been widely reported yet, but last week, the SEC began a process that will likely result in the first major changes to the rules for reporting oil and gas reserves since 1978.
 
We expect the biggest impact from the rules to come in companies with a large, marginal resource base – like oil-sands producers and coal-bed methane producers – which should be allowed to greatly increase the size of their "proven" reserve base. This sets up a great test of the efficient market hypothesis. If you believe markets are efficient, changing the rules about reporting reserves shouldn't change stock prices: Nothing has changed about what the company owns.
 
Our bet though is that the size of the increases in many companies will be enormous and that it will result in much higher valuations for some companies. Keep an eye on Matt Badiali's reporting in our S&A Oil Report.
 
The Taj Mahal sees almost 2.5 million visitors a year – as long as they don't try to buy tickets with U.S. dollars. The tourist attraction announced in November that it would stop accepting the dollar and take only rupees.
 
Investment bank Morgan Stanley announced a $9.4 billion mortgage hit. To raise capital, the bank sold part of itself to China Investment Corp. for $5 billion. China Investment will receive equity units that convert into as much as 9.9% of the bank's common stock. The shares carry a fixed payment of 9% before converting to common August 17, 2010.
 
Morgan Stanley joins the ranks of Bear Stearns, Citigroup, and Blackstone as companies that have sold out to foreign funds.
 
German airline Lufthansa will pay about $305 million for an up-to 19% stake in JetBlue. Lufthansa will buy 42 million newly issued shares and appoint a director to JetBlue's board.
 
When the dollar collapses, as it is doing now, buying U.S.-dollar assets is cheap for foreign companies. Want to keep your job? Better learn a foreign language...
 
Signs of a slowing global economy: Dry bulk shipping stocks are "breaking down." Dry Ships fell this week (down to $72) and is now almost 50% down from its recent high. Dry bulk shipping companies move commodities – like coal, iron ore, and bauxite – to manufacturing sites around the world (e.g. China).
 
Signs of a bottom in retail... Insiders are loading up. Limited Brands CEO Leslie Wexner bought $19.2 million in stock since November. Ten other insiders bought millions more. Dillard's director Warren Stephens bought $1.75 million in stock, the biggest purchase in the history of the company, as the department store's stock fell the most since 1980. In total, retail insiders bought $346.4 million in stock since the start of November.
 
Such large purchases caught the eye of Inside Strategist editor Graham Summers. He covered the retail industry in his latest issue.
 
What's the best way to scare analysts away from your stock? End a conference call with "Let's get the f**k out of here." That's exactly what Al Lord, CEO of student lender Sallie Mae, did this week. Already nervous analysts sent the stock plummeting 21%.
 
We've long held out our fall 2002 PSIA recommendation of America's leading nuclear power generator, Exelon (EXC), as a case study of compound returns. We've "owned" Exelon five years now, for a total return of 332%. This is a great result... but future gains are likely to be even larger, simply because Exelon has the ability to raise prices – which have more than kept pace with inflation – and because it steadily increases its dividend.
 
This week, Exelon announced a 14% increase to its quarterly dividend, to $0.50 per share, and a buyback program of $500 million. Based on our split-adjusted buy price of $21.50, we should earn 9.3% next year on cash dividend payments alone, not including any impact from the company's share repurchase.
 
We're only at year five... imagine what our annual dividend-only returns are likely to become in another five years. I'd bet by year 10, we'll be earning close to 20% a year on our original capital in dividends alone. That's why holding high-quality businesses for the long term is so hard to beat.
 
Regards,
 
Porter Stansberry




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Date Range:12/13/2007 to 12/20/2007
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Date Range:12/13/2007 to 12/20/2007