Weekend Edition

You have to be careful about taking advice from anyone who faces career risk for giving unconventional advice. Trouble is... if unconventional advice were popular, it wouldn't be unconventional and it wouldn't work. By definition, most people are going to fall for the bad advice that leads them astray.

 

They don't recognize good advice because it can look like bad advice for years at a time. And bad advice can masquerade as genius for longer than you'd believe. It's hard to tell the difference. Jeremy Grantham of Grantham, Mayo, Van Otterloo has some ideas about the kind of advice investors take versus the kind they ought to take but don't.

 

Grantham says investors tend to fall for "a logical, clear-cut, and simple process," and if they're not very careful, they'll wind up hiring "eloquent and plausible amateurs rather than sometimes incomprehensible experts."

 

I'd go even further. Clients like to hear sexy, outrageous stories and big promises of fast, large profits. They like to look straight into the rear view mirror of recent history and see an outstanding performance. Clients want to be sold, not educated.

 

While Wall Street was doling out bad advice in December of last year, our own Steve Sjuggerud told his True Wealth readers to short the euro in December 2009. He followed that with a recommendation to buy gold. Readers closed out of the euro trade for more than 30% gains. And gold is up double digits. Porter went long natural gas and short hard-drive manufacturers. Those trades are up 50% and 25%, respectively. Tom Dyson recommended a utility company, also up double digits, and a "virtual bank" that made his readers nearly 40% gains.

 

What was yours truly up to in December 2009, when Steve, Porter, and Tom were making winning recommendations?

 

Back then, I told Extreme Value readers to hang on to an energy company that had recently spun off from a previous Extreme Value oil and gas recommendation. The spinoff is up 22%. It's poised to explode to the upside, too... Consulting firm IHS Cambridge Energy Research Associates says Canadian oil sands will become the United States' No. 1 source of imported oil this year. The firm also says oil sands imports will roughly equal combined imports from Saudi Arabia and Kuwait.

 

The company I reported on has over 130 billion barrels of oil sands on its lands. It expects to increase production 400% over the next several years. It pays a regular dividend, which I expect to rise sharply as production increases. Canadian oil sands will likely be funding many investors' retirement, providing potential for 400% in capital gains and rapidly rising income as the years go by. My report on the company is in the December 2009 Extreme Value. For more info on Extreme Value, click here.

 

Whether it's Porter, Steve, Tom, me, or any S&A editor, Stansberry Research remains totally independent. It is beholden to no one but its readers. It exists solely to give advice that makes profits for you – the individual investor. Wall Street earns most of its money by serving giant corporations and institutional investors who can generate huge volumes of trading and banking business. It doesn't care about the "small fry" customers.

 

Things look bad... The stock market is down... Everybody hates Komrade Obama... Everybody hates BP... Is it time to buy stocks again?

 

If sentiment is your guide, possibly... According to the AAII Sentiment Survey, 32% of individual investors are bearish, still more than the 30% long-term average, while 34.5% of investors are bullish, down 8% from last week and below the long-term average of 39%.

 

Mr. Market is still feeling down in the dumps. You never want to buy when he's happy because that's when stocks tend to be overpriced and ripe for a disappointing performance.

 

But sentiment doesn't rule. Valuation rules. That's the defining characteristic of the market's big trends. Stocks are down lately, and investors are still quite bearish because they look in the rearview mirror... But the overall market is still trading around 18 times earnings or so, with dividend yields averaging around 2%. Stocks don't get really undervalued until they're in the low teens or even single digits, and yielding 5%-6%.

 

With sentiment bearish and stocks expensive, I have to conclude Mr. Market is in one of his rare rational moods. Sometimes, it's right to be bearish.

 

One of the areas I'm becoming more bearish on is municipal bonds.

 

The tragedy is investors have come to think of bonds in general, especially municipal bonds, as a safe haven. They don't pay much in yield, but – and this might sound familiar – they're viewed as safe because most of them are rated triple-A by the ratings agencies. We learned from the subprime debacle that garbage is garbage, triple-A rating or not.

 

Hopefully, many investors also learned something about the fancy math and sophisticated modeling ratings agencies used to "manage" and "assess" risk in securities. A contrary view of the notion of risk management via modeling, written by an engineer, appeared in the Digest's reader feedback. The readers conclusion is sound: Complex statistical models are no substitute for sound judgment based on experience and know-how.

 

For example, suppose a friend came to you and said he invented a pair of shoes that will tone your butt and help you lose weight while you walk. Suppose he says folks are lining up around the block to pay $100 a pair for them, and he's looking for some new investors. Would you bite? Many already have...

 

A $100 pair of shoes that tones your butt and helps you lose weight?! It sounds ridiculous, but it's true. No one ever went broke underestimating the intelligence of the American people, nor their desire for a no-exercise/no-diet weight-loss plan. So Skechers and Adidas-owned Reebok have turned so-called "toning shoes" into a nearly $1-billion-a-year business. Skechers' toning shoes, known as Shape Ups, helped the company triple its market share in U.S. women's athletic shoes this year to 17%, or $225.7 million.

 

The shoes, according to Skechers, "are designed to simulate the feeling of walking on sand and make wearers stabilize their steps, leading to stronger leg, buttock, back, and abdominal muscles." Walking with regular shoes also strengthens the legs, buttocks, back, and abs. In fact, I'm pretty sure walking with no shoes does a good job of this, too.

 

Regardless, toning shoe sales in the U.S. was just $17 million in 2008. Sales increased eightfold last year when Reebok and Skechers introduced their models. In the first four months of this year, toning shoes sales hit $252 million – 75% more than the total for all of 2009. It's dangerous to fight against the trend, which is undoubtedly "up," with these two companies, but at some point, the "tight-butt shoe bubble" will make a fantastic short sale.

 

Regards,

 

S&A Investment Research

• How China Will Drive Natural Gas Prices Higher and Higher...
  By Matt Badiali Friday, June 25, 2010
  
• Use This as a Guide to Oil Stocks Right Now
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• Own These Companies for the Next Leg Up in Gold
  By Matt Badiali Wednesday, June 23, 2010
  
• Why I'd Be Happy with a 40% Tax Rate
  By Jeff Clark Tuesday, June 22, 2010
  
• The Two Numbers to Watch Before You Get Bullish
  By Frank Curzio Monday, June 21, 2010