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Weekend Edition

The Best of The S&A Digest
Saturday, August 4, 2007

Is it time to go short? Not according to Jeff Clark, editor of the S&A Short Report. "There's no low-risk way to enter a short-side bet. Markets that are as oversold as we're seeing right now have a tendency to snap back sharply and all but obliterate short sellers who've gotten too aggressive."
 
The markets may continue to head south. Credit may continue to contract. But... if this sell-off continues... outstanding buying opportunities are sure to arise. Weak hands must soon give way to strong hands. It's the circle of life, Simba...
 
Look for long-lived, "franchise" businesses, with solid barriers to entry, that have historically produced excellent returns on assets over several market cycles. A quick look around brought up these names: Saint Mary's Land and Exploration, T. Rowe Price, Loews, Lexmark, Panera Bread Company, Abercrombie & Fitch, NVR.
 
For the first time in many, many months, we're beginning to see great assets come onto the market at reasonable prices. Mourn your trading losses, if you have them... but celebrate the re-emergence of value.
 
From a reader: If currencies continue to fall in value, will precious metals follow suit?
 
Under a global paper standard of money managed by a spendthrift democracy (the U.S.) this will not occur. So what will happen when the U.S. credit bubble finally collapses or when there's a run on the dollar? Don't you remember the 1970s? People will be less likely to accept the dollar, Bernanke will turn on the printing presses, and precious metals will soar.
 
Borrowing short and lending long is a great business... up until the moment you can't borrow short anymore. American Home Mortgage was cut off, starting three weeks ago. It is now, apparently, insolvent. Likewise with hedge fund Sowood Capital... Sowood's managers must not have studied Keynes, who predicted the sorrows of every highly margined investor: "The market can stay irrational longer than I can stay solvent."
 
Sowood lost half of its $3 billion as the credit spread (the difference in the risk of holding any entity's debt versus holding the risk-free debt of U.S. government bonds) grew a little wider. Yesterday, the fund announced it would sell its open positions to Chicago-based hedge fund Citadel, and return $1.5 billion to investors.
 
Of course, we don't truly mourn for either the hedge fund managers or their investors. Instead, we assume what's said about such limited partnerships is probably true. At the beginning, the limited partners have capital and the general partner has experience. Later, the roles are reversed. We assume that next time the limited partners will try funding their tuition at a more reasonable price.
 
This week, Marathon Oil (MRO) agreed to purchase Canada's Western Oil Sands in a $6.2 billion deal. The purchase will give Marathon a 20% stake in Alberta's oil-sands project, one of the world's largest untapped oil reserves. Marathon will dole out $3.6 billion in cash, $1.9 billion in shares, and take on $650 million in debt to pay for the deal. So far, S&A Oil Report subscribers are up around 20% on the recommendation.
 
Oil closed at an all-time high of $78.21 on Tuesday.
 
Who said Wall Street was crooked? An academic study shows that U.S. executives can secure better ratings for their companies from investment banks if they perform favors for Wall Street analysts. Favors range from recommending analysts for jobs to agreeing to speak with analysts' clients.
 
Kurt Schacht, director of the Center for Financial Market Integrity at the CFA Institute, which represents more than 80,000 analysts and fund managers, noted that these actions were "in clear breach of our code of conducts and standards." Does the obvious unethicality of these actions stop the analysts? According to the study, four out of six analysts admitted to receiving favors from company executives.
 
Tokyo real estate prices have soared 13.1% since last year, according to a Japanese land survey released this week. That's compared with a rise of just 3.5% the previous year. This is the first year of double-digit growth since the survey began in 1992. So Japanese land prices are finally shooting up again, after falling by more than half from their peak in 1991.
 
Our own Steve Sjuggerud has been recommending Japanese real estate since last fall. He calls it "a 15-year, one-way bet." Sjuggerud Confidential subscribers can find Steve's favorite ways to play this trend in his June 2007 special report, My 4 Best Ways to Profit from the 'Honshu Japanese Secret.' If you are not a subscriber, and want more details on this situation, click here.
 
Regards,
 
Porter Stansberry




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