Weekend Edition
Inflation-Proof Stocks
January 26, 2008
Buffett on the move... This week Berkshire Hathaway bought a 3% stake in Swiss Reinsurance, the world's biggest reinsurer. Buffett has been hot on insurance in the past month. He recently received a license to start a bond insurance company in New York and bought a reinsurance unit from ING for $440 million.
Insurance companies are the backbone of holding companies like Berkshire Hathaway. They take in tons of cash in the form of premiums, which sit on the balance sheet as "float," until they are paid out as claims. In the interim, managers like Buffett can reinvest the cash to produce excellent returns for shareholders.
Buffett is buying insurance companies now because they are the perfect hedge against inflation. They collect premiums in today's dollars and pay claims over time in inflated dollars.
Porter recently recommended several other companies poised to flourish in today's inflationary environment. These elite groups are known as Secret Investment Societies. To learn more, click here...
GM CEO Rick Wagoner is a pitiful businessman. But it takes a special person to con investors so artfully. He should have been a stockbroker!
He told The Wall Street Journal GM would see "significant" profits in "two or three years." We wonder if the reporter laughed out loud when Wagoner spoke. That's the same thing Wagoner promised back in 2005 when his turnaround program began. Back then, GM's debt hadn't been downgraded to junk status, its finance company (GMAC) was minting money by dealing in subprime mortgages, and gas was still less than $2 per gallon. So far, Wagoner's turnaround plan has cost the company nearly $50 billion in losses.
Also not mentioned in the Journal article: The company's own accountants don't believe GM will ever regain profitability, which is why they wrote off most of GM's tax losses last quarter. If the U.S. slips into a recession this year, GM will go bankrupt within 18 months.
How much more of America will the Arab nations buy? We can't know for sure, but the Institute of International Finance estimates the Gulf Arab states will own more than $2 trillion in net foreign assets by year's end. Forget about teaching your children Chinese...
How bad could this recession become? The Baltic Dry Index is the best way to track shipping costs for dry goods, including coal, grain, and iron ore. Economists use the index to track global trade and growth. The index has been in freefall, down 30% since the start of the year.
Gamblers take note: The Patriots and the Giants are going to the Super Bowl. Vegas already set odds. Currently, the Pats are 13 to 14 point favorites. But the bookmakers admit this is a bigger spread than it should be. "We obviously make that line to get equal action on both sides. To do that, because of the perception of the Patriots, we have to increase their number more than usual," said Jay Komegay, sports book director at the Las Vegas Hilton.
As 12% Letter editor Tom Dyson wrote in DailyWealth, betting against the Patriots has been a lock for most of the season. Last weekend was no exception. With another touchdown in sight at the end of the game (a score which would have covered the point spread), the Pats decided to simply kneel and let the clock expire.
Signs of a bottom in the U.S. dollar... McDonald's is now a currency expert. The new McDonald's commercial shows three people in an office talking about the dollar tanking, until they realize you can get a McDonald's cheeseburger for a buck... to which they proclaim, "The dollar is looking strong."
In a world filled with way too many securities, another bizarre offering has been created. You can now buy a share of a minor-league pitcher's future big-league salary. Cleveland Indians farm team pitcher Randy Newsom is selling 4% of his future major league earnings for $50,000. You don't have to buy all 4%. You can buy shares in Randy for $20 from his broker, Real Sports Investments.
Last week, Jeff Clark noticed a good setup in the market, writing about Merrill Lynch, "Any time a company can announce a $15 billion loss and still see its stock run up 5%, that's a pretty good sign that a bottom is in place. It may not be the bottom. But it is a bottom for the time being."
He used the same reasoning to take a long position in a homebuilder. Clark's readers closed the position for a 147% gain while the rest of the market was getting slaughtered. Jeff also went long Citigroup at the perfect time. His readers held Citi calls for two days, and they booked a 144% gain.
His next issue of S&A Short Report comes out on Monday. Click here to learn more about how Jeff finds his trades.
Regards,
Porter Stansberry & Dan Ferris
