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Weekend Edition

The Best of The S&A Digest
Saturday, October 27, 2007

Buffett on the move... Berkshire Hathaway sold its entire stake of True Wealth pick PetroChina (PTR). Buffett made seven times his investment in PetroChina but told a Fox News interviewer, "We still sold it too soon. I left a lot of money on the table."
 
Steve's readers sold half their position last week to lock in 123% gains in six months – they are letting the other half ride.
 
Are you surprised that during the mortgage boom brokers got bonuses for hosing borrowers in any way possible? We weren't... Fremont Investment & Loan, one of the notorious subprime lenders, paid its brokers bonuses for selling loans at a higher rate than the borrower qualified for. Brokers also got checks for implementing penalties for early payment. Now Fremont is the focus of a Massachusetts-led lawsuit.
 
The most undervalued and unloved stock, according to Steve Leuthold's Undervalued and Unloved (UGLYX) mutual fund, is 12% Letter pick Citigroup (C). The largest financial firm in the U.S. is the fund's top holding at 2.91% of the portfolio. The bank is trading at 52-week lows – 23% off its high.
 
The market continues to punish Citi, despite support from the "smart money" – Eddie Lampert, for one. Citigroup trades for 1.71 times book value, while the higher-regarded Goldman Sachs (GS) trades at 2.51 times book.
 
This week, Tom Dyson told us how to prepare for the Fed's next rate cut in DailyWealth.
 
While China may be expensive, Jim Rogers, co-founder of the Quantum Fund, remains bullish. Rogers is shifting all of his assets out of the U.S. dollar and into the Chinese yuan. Rogers believes the Federal Reserve is destroying the dollar's value and that the dollar will no longer be the world's reserve currency. He expects the yuan to quadruple in the next decade. Maintaining his position as the commodities bull, Rogers is still holding gold, silver, palladium, and platinum.
 
Value-investing legend David Dreman gave a few stock picks during an interview with Bloomberg. The manager of $22 billion Dreman Value Management thinks more subprime problems are coming over the horizon, but still sees value in companies like Freddie Mac and Fannie Mae.
 
Dreman is also bullish on Washington Mutual (WM), the sixth-largest bank in the country and a major mortgage underwriter. WaMu is less levered than most lenders and has the financing to survive this downturn. It also pays a 7.7% dividend right now. Finally, Dreman is bullish on oil... in particular
 
S&A Oil Report pick ConocoPhillips (COP). Dreman, like many others, recognizes Conoco as a world-class company trading for just 12 times earnings.
 
Signs of a market top: PSIA pick Microsoft (MSFT) beat out Google for a 1.6% stake in networking website Facebook. The software giant paid $240 million for its small stake, valuing the business at $15 billion. The company expects to break even this year with revenues of $150 million. MSFT shares gained more than 2% and reached a new 52-week high.
 
Hedge fund SAC Capital, run by superstar trader Steve Cohen, recently disclosed its 6% stake in steel company Wheeling-Pittsburgh (WPSC). Wheeling-Pittsburgh trades at book value and at 0.18 times sales.
 
From Ian Davis, our resident quant: During the height of the dot-com bubble, the median value of the Volatility Index (aka the VIX), which measures investor fear, was 24.03... Last Friday, the VIX reached 22.96, only 4.5% below the dot-com norm. And just last July – when the market underwent a sharp correction – the VIX spiked even higher to 30.8, peaking just as the market bottomed.
 
After four years of relatively low volatility, the VIX is once again on the rise... Now may be the time to put some money in defensive, consumer-staple stocks like Anheuser-Busch (BUD) and Kraft Foods (KFT).
 
Adrian Day, an English money manager, made some interesting points in his speech at the New Orleans Investment Conference this week. For one, Adrian is bearish on the dollar. He said most foreign countries – including Kuwait, Russia, China, and Sweden – have 90% of their nondomestic holdings in the U.S. dollar and now they're dumping. It's simply imprudent to hold such nondiversified reserves. Adrian also believes U.S. markets are overvalued in terms of price to earnings and price to book. And the average dividend yield of the S&P is 1.85%, 47% lower than the historical average.
 
To combat the fall in the U.S., Adrian recommends looking to emerging markets, although many of those are overvalued as well. He likes Japan and Brazil, in particular. One stock he likes is Gafisa, a Brazilian real estate company in which Sam Zell is the largest shareholder. (Read what else the "Grave Dancer" is doing with his money.)
 
Regards,
 
Porter Stansberry




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