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Zimbabwe: The Ultimate Turnaround Story?

2009-11-10T12:39:38-05:00

Back before the financial panic, regular readers of Controlled Greed know I was intrigued by the idea of an Africa-wide investment vehicle. The reasons included things like the Dark Continent was growing nicely and could be an emerging market play with global investors focused on Mainland China and India. Not to mention commodities, which have been in bull territory for some time now.

And, while I still keep an eye on Africa to some extent, my focus has diminished since the meltdown.

Why? Because I didn't need to take the risks of Africa when world-class companies like Cheung Kong Holdings (CHEUY) and Microsoft (MSFT) were so cheap.

And then when the US government started creating trillions of dollars out of thin air, gold presented itself as insurance against a looming dollar crisis. Hence my investment in the SPDR Gold ETF (GLD).

But Africa is an important area of interest -- both economically and especially geopolitically.

So thanks to Controlled Greed reader Tim du Toit of EuroShareLab for pointing me to a UK Telegraph piece by the always-interesting Ambrose Evans-Pritchard on Zimbabwe. Check it out by going to Tim's site here.

Dizard: Pointers Suggest Higher Gold Price Long Term

2009-11-09T14:00:00-05:00

In his new Financial Times column, John Dizard writes that the gold bull seemed to be tiring. Until the news of India buying IMF gold gave the gold price a speed-like rush.

Yet Dizard sees higher prices for the metal over the longer term -- and his view is based on factors ASIDE from India:

It is not central bank gold purchases, though, that are the key support; it is the prospect of more extensive controls on the international flow of capital. Specifically, it was Brazil's imposition of a 2 per cent tax on capital inflows in October, not India's gold purchases that month, that was the most significant gold-positive signal. In the past, multilateral officials, such as the managing director of the IMF, would have murmured disapproval, with suggestions that anti-liberal moves such as this should be reversed as quickly as possible. Not now. Brazil's apparent attempt to keep down the real's appreciation, probably to ensure export competitiveness, is accepted and applauded by multilateral-dom as mainstream political economy.

Keep in mind, Dizard is talking the gold metal price over the long term. Anything could happen in the near-to-intermediate term. And check this out:

Andy Smith, a gold strategist with Bache Commodities in London, says it is not the buyers of the odd Krugerrand who are beginning to take over the buy side of the market. "It's the representatives of the Mas and Pas. The bullion bankers are being trained more on the retirement funds in the middle of nowhere and less on the hedge funds."
This means more of the rising base of buyer interest is in the metal, rather than derivatives. Many of them apparently prefer to have their gold in vaults near where they are, Mr Smith's "middle of nowhere", rather than in LME or COMEX warehouse receipts.

And a bit further down:

If one were only interested in getting exposure to gold at a low transaction cost and had no concern about capital controls or taxation, then derivatives, or tradable warehouse receipts, are much more efficient.
This gradual change in investor preference is about an inchoate fear of one government or another getting between the investor and his money.

As I repeatedly point out, because I like to keep my cards on the table for readers of Controlled Greed, my exposure to gold is through the SPDR Gold ETF (GLD). It stood at more than 10% of portfolio assets as of September 30.

Jeff Everett, Templeton and A Hard Truth About Mutual Funds

2009-11-08T23:35:00-05:00

This Financial Post profile of Jeff Everett, formerly with Templeton and now running his own outfit called EverKey Global Partners, is good stuff.

Mutual funds are often victims of their own success. Investment returns can attract more and more money from investors, which can lead to creating more and more funds. And even larger numbers of fund managers and staff to handle everything. Giant fund companies have a hard time putting money to work as well as when they were smaller. But that's not the only problem with bloated operations.

From the linked story:

Everett is frank about why he left Templeton. "There was a tremendous team at Templeton to uncover opportunities. But in the last few years even with the capital I had to tackle new initiatives, there was tremendous inertia to look at new ways to manage risk. I said we can take the Templeton process and improve on it."

And this interesting bit about Sir John:

He has fond memories of working side by side in Nassau with the late Sir John Templeton [pictured below]. In an interview, Everett said the Templeton funds never went short under Sir John or after but that he did put some of his personal money derived from selling his firm into hedge funds run by George Soros and Julian Robertson. However, "I'd argue if he were managing the company in the 1990s especially with the Internet bubble, we'd have found a way to be short in the fund. It's inaccurate to say Templeton never believed in shorting."

About what he's doing now:

One of Everett's long picks currently is China's Inspur International Ltd., trading in Hong Kong, which is 25% owned by Microsoft. It's covered by only one western brokerage firm but Everett came across it through a good contact he met in China.

On the short side, he can't mention current names but cites a past one: Cemex and some China-based shipping stocks. Because the fund has a long bias, it will never be net short. It may be half long and half short or half long and half in cash, or even 100% in cash. In this respect, Everett reverts to the Templeton philosophy: "We're long term investors. There's always something in the world you want to own but there may be a lot of stocks you want to short as well. We're not necessarily the fund to buy in a crash but in a bear market we will do well."

Currently, the fund is fully invested in 90 companies: none of them Canadian. Geographically, it's evenly split around the world: 40% Asia, 35% America and 35% Europe.

Everett has always struck me as a good guy. Read the entire piece when you get time.

Five for the Weekend #65

2009-11-06T16:52:00-05:00

Big business news today is US unemployment crossing the 10% threshold. Yet the true unemployment rate (the way the US Government used to calculate it) has been above the mid-teens for a while now. Now let's dig beneath the usual headlines for five items you might check out over the next couple of days.

Dale Jackson writes in the Globe and Mail about the growing attraction of dividends in the current investing climate: The dividend picture is just as bright on a global level, says David Tiley of Vancouver-based Cundill Investment Research. "In addition to no longer seeing cuts of dividends, we're seeing dividends being reinstated and even increased," he says.

Years ago I read Jim Grant point out the "democratization of credit and the socialization of risk." I'm reminded of that phrase when reading Charlie Gasparino's blockbuster op-ed in The Wall Street Journal on three decades of subsidized risk: All of which brings me back to Mr. Fortsmann's comment about policy makers helping turn a cold into cancer. What if the Fed hadn't eased Wall Street's pain in the late 1980s, and again after the 1994 bond-market collapse? What if policy makers in 1998 had allowed the markets to feel the consequences of risk—allowing LTCM to fail, and letting Lehman Brothers and possibly Merrill Lynch die as well? There would have been pain—lots of it—for Wall Street and even for Main Street, but a lot less than what we're experiencing today. Wall Street would have learned a valuable lesson: There are consequences to risk.

In The Spectator, Martin Vander Weyer has a nice article where he reflects on time spent in Hong Kong in the past. And offers some advice for younger people: "If I was 25 years younger I’d be back out here by Christmas, hunting for a job or a business opportunity or a book or a column to write. If you’re one of those ‘recession generation’ graduates whom Matthew Lynn wrote about recently, or a thirtysomething whose City career has imploded, take my advice: just get on the plane and go, you’ll never regret it."

John Dizard latest column in the Financial Times speculates that shale gas numbers may not add up: The leading shale sceptic analyst is an independent geologist, Art Berman, often described as a “radical”. Rather soft spoken, though, he says: “I hope I’m wrong about shale.” The problem, as he sees it, is that the standard industry analysis about shale well Estimated Ultimate Recovery, or lifetime production, is too optimistic. “They have fantastic initial rates, but the question is whether the (rate of production) persists as they say.” For example, he says, in deep shale formations “the rock collapses as gas is produced, and crushes the proppant. And as the fractures are drained you have to frac and frac and frac.” Expensive.

British historian Lisa Jardine has won the Cundill History Prize for her book, Going Dutch: How England Plundered Holland's Glory,which is about the so-called Glorious Revolution of 1688, when a group of parliamentarians led by Dutch stadtholder William II of Orange-Nassau overthrew King James II. And now I've added yet another book to my lengthy "to read" list.

Have a great weekend.

Cundill Manager Surprised by Chrysler's Cash Flow

2009-11-05T17:45:11-05:00

I haven't followed the Cundill folks as closely since Peter Cundill retired a while back. But this Dow Jones wire report caught my eye today. David Tiley, one of Cundill's more prominent managers these days, is surprised by Chrysler's improved cash flow.

Cundill owns a significant stake in Exor, an Italian company with a controlling stake in Fiat, which as you know now runs Chrysler:

"The focus on cash flow has exceeded our expectations at Chrysler," David Tiley, vice president of investments at Mackenzie Cundill Investment Management Ltd., told Dow Jones Newswires in a phone interview.
Based in Vancouver, Canada, Mackenzie Cundill owns nearly 13% of Exor, which in turn owns 30.45% of Fiat.
At the Detroit area presentation of a five-year plan to revive the U.S. car maker earlier in the day, Chrysler Chief Executive Sergio Marchionne told reporters that Chrysler had broken even in September and had accumulated cash. At the end of September, it had $5.7 billion in cash against $4 billion at the end of June when it came out of bankruptcy, he said.
Marchionne, who is also chief executive of Fiat, is spearheading the restructuring after the Italian car maker took a 20% stake in Chrysler as part of a partnership that could see it increase that stake in coming years.
Should Chrysler become a viable business again, it would bring value to Fiat and, in turn, raise the likelihood of a reduction in the discount at which Exor's stock trades, Tiley said.
After conducting a separate assessment of the value of its assets, he estimated Exor traded at about a 45% discount. "It is substantially undervalued," he said.

Regular readers know I took a beating on GM. My exposure to the auto sector is through Superior Industries International (SUP), an auto parts maker.

Alice Schroeder on Buffett's Burlington Buy

2009-11-04T13:36:18-05:00

Lots of media buzz about Berkshire Hathaway's proposed purchase of Burlington Northern Santa Fe. I don't pay as much attention to Warren Buffett's buys and sells as many do. Because while I admire the man enormously, his assets are so huge that much of the investing universe is unavailable to him.

I caught an interview with Peter Schiff on CNBC yesterday afternoon. He says the railroad buy in more a play on commodities than the bullish view pushed by many in the media. I also saw Niall Ferguson on Charlie Rose on PBS last night. He said it would have been better to buy an Australian rail company because they're doing such great business related to China. I like Ferguson, but I'm tempted to not follow the specific investment ideas of economists or economic historians. And I wonder if Aussie RR companies already have their "China plays" priced in.

Bloomberg is running a good piece by Alice Schroeder on the proposed acquisition:

I admire and respect Sokol, but my comfort with him as chief executive officer is in inverse proportion to Berkshire’s exposure to financial services. Even brilliant CEOs often can’t manage such companies. The Burlington acquisition makes me a lot happier with Buffett’s choice of Sokol.
There are many other motives. Burlington is well-managed. Railroads are a bet against the U.S. dollar and in favor of higher energy costs. Railroads are a play on the trade deficit because this is how we haul all those containers of stuff imported from Asia. In recent years, they have become somewhat like electric utilities that earn a respectable return on capital.

You'll want to read the entire thing. She has some interested things to say about the gigantic stock-split in the B shares with regards to the S&P Index.

India Buys IMF Gold

2009-11-03T12:28:26-05:00

As Jim Grant has pointed out repeatedly over the years, no one can predict the future. But I wonder if one day we'll look back and see the news that India has bought half of the IMF's gold stash is a bigger historical milestone than Warren Buffett buying a railroad company.

Or maybe that's an apples-to-oranges comparison.

Putting my cards on the table, I own the SPDR Gold ETF (GLD). So I guess I'd love to see it skyrocket (not that I'm predicting that), though it was bought more as insurance against some sort of devaluation of the US dollar.

And it could be that India's central bank has bought at too high a price. Maybe. Maybe not. I'll just make a few points, off the top of my head:

I remain convinced a gold bull market started earlier this decade.
This gold bull market remains intact.
Gold bull markets usually have a blow-off, crazy, nutjob, mania phase -- which we have not seen.
India and China look to be buying gold.
China, from reports I've seen, is encouraging its citizens to buy gold and silver.
I suspect many central banks in places like Southeast Asia are slowly adding to their stashes of gold.

What does the above tell me? Well, I'm not quite sure and if Jim Grant can't predict the future, I'm darn well sure I can't.

Except for one thing. I won't be selling my GLD stake in the near term.

Five for the Weekend #64

2009-10-30T18:23:03-04:00

This has been a busy week for me, as far as my non-blogging life goes (which has been the case for about a year now). And I spent all day today (Friday) in a workshop/seminar. So I have no idea what the "big news" is out there, if anything is. But I still have five items for your consideration if you want to do some reading over the next couple of days.

John Makin's article in Commentary (HT: RealClearMarkets.com) called, The Keynes Bubble, is something I confess to having not read. So I don't know if I agree with all the particulars, but I certainly agree we're seeing a Keynes Bubble in the American media. Keynes was a great investor. Yet that means nothing, IMO, about whether he was the great economist or the greatest economist of the 20th century. And let's face it, Keynes is known for his work as an economist, with not enough attention paid to his undeniably impressive track record managing investment portfolios.

Portfolio holding Fairfax Financial has reported third quarter results. From Reuters: "The first option is to always keep our financial conditions strong, so we won't do anything at the expense of our financial condition and that also means keeping capital available for a hard market, whenever it comes," Chief Executive Prem Watsa told analysts during a conference call. "But after that we can buy stock, buy stock back, we can make some acquisitions as and when they come -- we have no plans to make any but we could -- and, of course, we could continue to hold significant amount of cash if we decide to pay some dividends out, continue to build our cash in the holding company," Watsa added. I've sold enough of FFH over time so that all my original investment has been gotten out. Yet it is still a large portfolio position, accounting for more than 7% of assets at the end of September.

John Dizard writes in the Financial Times of the real reasons for the decline in bank lending: The policy people, in the White House, Capitol Hill, or the regulatory agencies can’t have it both ways. Less risky institutions mean tighter lending standards, which means there will be less credit-fuelled growth and more unemployed constituents.

Are you a homeowner who is thinking about refinancing? Bloomberg's John Wasik recommends doing it now: It’s not time to play chicken. Lock in the best deal now. Mortgage rates have climbed over the last two weeks, according to mortgage buyer Freddie Mac of McLean, Virginia. At a 1960s- like national average of 5 percent, the 30-year rate isn’t far from its historic low of 4.78 percent, reached in April. As the economy heats up, it’s far more likely that rates will climb.

With all the talk about the flu, I'm reminded of the 12-hour flu cure by Jeffrey Tucker of the Mises Institute. I'm not a doctor and I can't vouch for this. I will say that I've taken cod liver oil daily for several years. And on those rare occasions when I feel like I might be coming down with something, I'll take three spoonfuls a day. If you decide to explore this, do your due diligence. My only advice is, if you decide to take cod liver oil, make sure you buy the varieties with plenty of vitamin D.

And with that -- have a great weekend.

Guest Post from Saj Karsan

2009-10-28T17:46:42-04:00

The following post is a guest post by Saj Karsan, who regularly writes for Barel Karsan, a blog dedicated to finding and discussing current value investments.

As the market has risen throughout most of this year, many market observers have noted that P/E values are looking rather inflated from a historical standpoint. But of course, earnings are lower than usual this year due to reduced revenue that was caused by financial shocks. So as investors, should we be willing to pay a higher P/E for now, on the assumption that earnings will soon pick up?

When considering the market in the aggregate, this is a very difficult question to answer. Some companies will have cost structures that prove too rigid, and will therefore be unable to adapt to a lower revenue environment. Other companies, on the other hand, will have flexible cost structures or will see revenue continue to grow, despite the downturn. But to determine which of these forces will exert more pull on the market's earnings in the coming quarters is not only extremely difficult, but unnecessary: unless you're trying to value the entire index, you don't have to answer this question for the market in the aggregate. Instead, you can try to answer this question for individual securities, which are much easier to understand.

For example, consider Key Tronic (KTCC), a manufacturer of electronic devices. The company has a P/E of 23, which makes it appear overvalued. But earnings are down because year-over-year quarterly revenue is down 15%. However, the company has little in the way of debt, and has the vast majority of its operating leases coming due in the near-term, giving it further flexibility in reducing its costs. Operating expenses are down 17% this year, and the company sees sales starting to rebound in January of 2010. In fact, based on KTCC's past margins and returns on assets (which it should be able to return to by continuing to cut costs and with a modest recovery in revenues in the years to come), it appears to trade at a normalized P/E much, much lower than the 23 that stock screeners currently display. (KTCC is a stock we've previously discussed here.)

Determining whether the market is over- or under-valued is a difficult exercise indeed. But by focusing only on those companies for which it is easier to compute earnings (circle of competence), and ensuring that companies trade at discounts to those earnings (margin of safety), investors put themselves in positions to profit in the long-term whether the aggregate market offers potential or not.

Disclosure: Author has a long position in shares of KTCC

If you enjoyed this post, consider subscribing to the Barel Karsan feed.

Christopher Wood Op-Ed in The Wall Street Journal

2009-10-27T17:51:58-04:00

Today's Wall Street Journal runs an interesting piece by Christopher Wood of CLSA Ltd. in Hong Kong. This is up on RealClearMarkets.com, so it should be available to non-WSJ.com subscribers.

Wood, you may recall, was recently interviewed in Barron's. And he pens a newsletter called Fear & Greed, which I'm told is only available to clients of CLSA. Now back to the linked op-ed:

Happy days are here again in world stock markets. Yesterday's profit-taking notwithstanding, the Dow Jones Industrial Average is flirting with 10000 and the S&P 500 is up 60% from its March low. Still, if risk-seeking behavior has returned to financial markets, much of it is funded by borrowing increasingly cheap U.S. dollars. There is also very little evidence, if any, that consumption and employment are really recovering in America.
With the U.S. government stepping in to keep markets from clearing, today's U.S. economy in many ways resembles the post-bubble Japanese economy of the 1990s. Ultra-loose monetary policy and low demand for credit, combined with high unemployment and consumer deleveraging, could lead to a prolonged slump.

A bit further down:

Meanwhile, there's an unhealthy reliance on government for growth in America's increasingly command-driven economy. This is clear from the severe slump in car sales post "cash for clunkers." U.S. auto sales declined by 35% month on month in September to an annualized 9.2 million. It's also clear from the enormous role now played by government in the residential mortgage market. Government-guaranteed mortgages accounted for 98% of total mortgage-backed security issuance in the third quarter.

And, finally, this interesting bit:

The next bubble in asset markets will not be in the West but in emerging Asia, led by China. The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.

The next asset bubble in emerging Asia? That's something to keep an eye on. And perhaps benefit from. If I keep some powder dry.

Microsoft Has More to Go

2009-10-26T14:07:08-04:00

In retrospect, buying Microsoft (MSFT) earlier this year for $18.39 was a no-brainer. The company has an undeniably strong cash position and even pays a decent dividend. The stock has been in the upper $20s last I checked due to results announced last Friday.

Most of MSFT's good news stems from aggressive cost-cutting. But there's more good news. Windows 7 has been getting great reviews. And since many PC users never bothered to get Vista, there's plenty of pent-up demand for a new PC operating system. Or there should be. No, check that. There is pent-up demand but with consumers and businesses holding down costs wherever possible, we could still see surprisingly lackluster sales. Hey, anything is possible these days, folks.

Another winner of sorts may turn out to be Bing, Microsoft's search engine. It too has been winning rave reviews -- including from the likes of Fred Hickey. I've tried Bing and think it's fine, but I'll freely admit that I haven't made it my default search engine yet (I still use Google).

For now, I'm not trimming my MSFT position. I think the stock has more to go.

And we'll see more upside -- especially if we can get a recovery in business spending. I don't know how far cost-cutting can take us here.

Five for the Weekend #63

2009-10-23T17:13:06-04:00

Here we are at the end of another week, which means it is time for five items for your consideration. Let's go.

Allan Meltzer writes a compelling op-ed in today's Wall Street Journal: "As long ago as the 1960s, then French President Charles de Gaulle complained that the U.S. had the "exorbitant privilege" of financing its budget deficit by issuing more dollars. Massive purchases of dollar debt by foreigners can of course delay the crisis, but today most countries have their own deficits to finance. It is unwise to expect them, mainly China, to continue financing up to half of ours for the next 10 or more years. Our current and projected deficits are too large relative to current and prospective world saving to rely on that outcome."

I came across this Canadian radio interview with the director of the Institute for Research on Unlimited Love, founded with seed money by John Templeton and the Templeton Foundation. It aired on the death of Sir John in 2008. This blog can't get enough of John Templeton, and I hope you find the interview enlightening and well worth a few minutes of your time.

Scott Payton examines gold in The Spectator: Whatever happens to the gold price during the months and years ahead, John Doody, editor of Gold Stock Analyst, a fortnightly investment newsletter published in Florida, has a method for making a profit: investing in undervalued gold companies. ‘If the gold price goes up, we’ve got two ways to win. But if the gold price does nothing, we can still win on the undervalued aspect of our investments,’ he says. By September, Doody’s top ten gold stock picks were up 96 per cent since the beginning of the year. ‘With gold companies, everybody makes the same stuff and they can sell as much of it as they can produce, at the market price. So when picking gold stocks, you have to work your way back to cash [production] costs. If a company has a cash cost of $800 an ounce, it might not be worth much. But if it has a cash cost of $400 an ounce, it may be worth a lot. The market is not efficient. It does not value every company properly.’

Staying with The Spectator, Edie Lush looks at Islamic finance: "The requirements of Islamic finance — lower proportions of debt to equity, a condition that the lender share profits and losses with the borrower, and a focus on transactions based on tangible assets — mean that Islamic banks have not become entangled in the toxic debt instruments that sideswiped Western banking giants. And while most of the West’s banks were in crisis, Islamic finance continued to grow — by about 15 to 20 per cent in each of the last four years."

The finalists have been announced for the Cundill International Prize, founded by now-retired Peter Cundill, the legendary value investor. The winner gets the world's largest non-fiction historical literature award: "The prize, now in its second year, will be awarded to an author who has published a book determined to have a profound literary, social and academic impact on the subject. The university will grant the equivalent of one full prize of $75,000 U.S. and two “Recognition of Excellence” awards of $10,000 U.S."

Have a great weekend. See you next week.

Notable Notes from the Value Investing Congress

2009-10-21T21:28:14-04:00

Jonathan of the indispensable Cheap Stocks blog posts some notes from the Value Investing Congress. Among the impressive cast is David Einhorn:

Einhorn opened his presentation with his thoughts on the importance of learning from bad decisions. He cited his 2005 IRA Sohn conference presentation on the merits of homebuilder NBC Holdings, which ultimately fell 40% as the homebuilding sector collapsed. Although the rest of the sector fell much further, an average of 70%, Einhorn learned the following:

• It is not reasonable to be agnostic about the big picture, a macro view is vital
• Even given the above statement, you can still be a stock picker

Einhorn went onto give a stirring speech about what he believes to be the current macro risks:

• The government is too focused on the short-term, too focused on getting re-elected.
• Too much focus on special interests (protection of banks, for one)

Einhorn believes that the lesson of the Lehman collapse, a company that he very successfully shorted, is that companies should not be so big that their collapse can jeopardize the entire financial system.
He went onto state that he has changed his view about the validity of owning gold, given its propensity to perform well not just during inflationary times, but when monetary policies are poor in general. In terms of form of ownership, Einhorn owns physical gold, believing that to be even more efficient than the ETF.

As you know, I own a "double" portfolio position in the SPDR Gold ETF (GLD). But I agree owning the physical metal is best, if one goes to the trouble of storing it properly. Next best would be owning something like Central Fund of Canada (CEF), the closed-end fund, as long as it is trading at a discount. (It has been trading at a premium for a good long while now.)

I encourage you to read the entire Cheap Stocks posts linked. And I also think you should read the entire Einhorn speech (you can find it on Tuesday's RealClearMarkets.com). I'm not overly familiar with his long-term record, yet I find his talk compelling nonetheless. I like that he opens by freely talking about an investment mistake. My observation is that good investors are open about admitting mistakes.

Capital Southwest 2009 Investor Presentation

2009-10-20T17:07:15-04:00

A reader and fellow shareholder in Capital Southwest (CSWC) recently commented that he'd like to hear more about the company. My response was (and is) that I would, too.

But CSWC management shuns the press and to my knowledge has never done conference calls. They put out quarterly reports and the very occasional press release. In this media/internet age some may find that disquieting. Not me and I hope not you.

Most important is that for every $1.00 this business development firm puts to work, management is on the hook for 20 cents. They're aligned with us shareholders.

If you're new to CSWC, you can access the 2009 Investor Presentation from last month here. Maybe these guys are becoming something of publicity hounds -- I don't remember them doing many of these back in the days when the late Bill Thomas ran the company. ;-)

The stock is down since I bought it. But never mind. I like this company and its management and I expect to being owning this stake for a long, long time. In fact, as reported here previously, this is the only company where my broker has been instructed to reinvest all my dividends.

And, thankfully, this bull rally has most of my stocks in the black. Yet CSWC ranks as a bargain. And, if I inherited a portfolio 100% in cash, the first thing I'd do is put 4% to 5% in CSWC.

The Invisible Costs of Avoiding Defaults

2009-10-19T15:47:44-04:00

John Dizard's column in today's Financial Times touches on something long troubling many, including me.

Namely, that much of government policy here in the US is geared towards preventing overvalued real estate assets from falling to their true values.

And, as Dizard rightly points out, this is a criticism of the current and former presidential administrations.

Part of the piece:

Essentially, by never taking economically justified writedowns, the US economy will be jellied into low growth, like 1990s Japan but with junkier cars and without the fresh sushi.
As a liquidationist banker puts it: “Without recognising the losses and writing off the bad loans, you will not get price discovery. So prospective new capital will not find out what the property is worth, and, therefore, not be attracted to get the real estate market going again.”
It is not just faceless foreigners and insurance executives who will lose out. The US will not get new construction jobs, mobility for its workforce and companies, or tax revenues from new activity. But those are all invisible opportunity costs. The visible losses would be here and now.

Dizard's columns in the FT are always worth checking out. You'll want to read the whole thing if you subscribe to FT.com.

Will Emerging Markets Outpace Going Forward?

2009-10-18T23:15:00-04:00

Famed UK fund manager Anthony Bolton thinks they very well might (HT: RealClearMarkets.com):

My contention is that a combination of consumers rebuilding their balance sheets, slower credit creation in this upturn than was historically the case, and governments being forced to cut spending or increase taxes will lead to lower growth than before the crisis.
The big question now is whether the relative growth advantage of emerging markets over the developed world has increased.
I think it has – particularly for emerging markets that are driven by domestic demand and investment. I am less keen on those markets where exports or commodities are the main drivers. One reason these are less attractive today is the fact that commodity shares and industrial companies were the leaders of the last bull market.

Further down:

If that is the case, then UK investors’ typical exposure to emerging markets, of about 15-20 per cent of an equity portfolio, could prove too low. Perhaps, for the next few years, they should consider having a majority of their exposure to markets that can provide higher growth.
But if all investors in developed markets make similar changes to their asset allocation, I believe we will have all the ingredients necessary for a new bubble to develop over the next few years in these volatile but rewarding markets.
Fasten your seat belts – we are in for a bumpy, but enjoyable, ride.

If you find Bolton's comments interesting, read the entire thing. This has been posted on RealClearMarkets, so I imagine it can be accessed without subscribing to FT.com.

Five for the Weekend #62

2009-10-16T12:39:29-04:00

Well, the Bank of America results reported today show that the financial crisis is far from over. And with another weekend here, let's get right to five items for your consideration over the next couple of days.

I'm a dedicated Mac user, though I've worked with numerous Macs and PCs over the years. But my personal preference for Apple products didn't prevent me from investing in Microsoft (MSFT) earlier this year. The new Windows 7 has been getting generally great reviews (I've yet to work on a system using it). Here's another on Bloomberg.

John Dizard writes in the Financial Times about gold and goldbugs. "One of the advantages of being a goldbug now, or becoming one soon, is that it is one commodity whose price is not likely to be manipulated below its market-equilibrium level by the US government ("Them", if you prefer). There will be attempts to limit speculation in such essential commodities as oil, grains, or base metals, but a gold price rise would simply represent a successful devaluation. So while the goldbugs' conspiracy theories are chimerical, their investment strategy is at last aligning with that of the real world." I have exposure to gold through the SPDR Gold ETF (GLD).

Famed UK fund manager Anthony Bolton proposes his 7-point banking plan in the Financial Times. "The past 12 months has been a near-death experience for the global financial system. If governments had not acted as quickly and aggressively as they did we might now be in a global depression. Although we can’t stop such financial crises recurring, we may be able to ensure that they occur less frequently and that they have a less universal impact than the crisis we have just lived through."

Long-time Controlled Greed readers know I'm a big fan of Breakingviews.com and The Lex column (appearing in the FT). News broke this week that Thomson Reuters is buying Breakingviews. Here's a profile of Hugo Dixon, Breakingviews' founder (who used to edit Lex), in the Times of London.

John F. Wasik argues in his latest Bloomberg column that -- unless someone will be living in the same neighborhood the rest of their life -- renting may make more sense than buying.

And with that, a great weekend to one and all.

Controlled Greed Portfolio Performance: 9/30/09

2009-10-14T11:42:58-04:00

Through the third quarter of 2009, the portfolio gained +18.2%. The S&P 500 is up +17% over the same time.

Here's how the portfolio positions look at the end of September:

Cash                      20.6%
SPDR Gold ETF         10.3%
DirecTV Group           9.8%
Fairfax Financial       7.7%
King Pharmaceuticals   6.7%
Liberty Media
    (3 tracking stocks)   6.2%
Microsoft                     5.9%
Cheung Kong ADR      5.7%
EGI Financial               5.7%
NipponKoa Insurance    5.2%
Superior Industries       4.7%
BCE                             4.6%
Capital Southwest      4.3%
Media General             1.4%
3i Group                      1.2%

Some notes. These figures are not audited, just me and my calculator. So if I'm off a bit, sorry.

The portfolio stretches over three accounts: my regular brokerage account and two retirement accounts. The VAST majority of my liquid net worth is in the positions above. The "Controlled Greed portfolio" isn't some little portfolio on the side. It is real money. Unless I lose it all, of course.

Cash is by far my largest holding. I'm not totally happy about that since it earns nothing. I'd like to put it to work, and we'll just see how long that is before it is.

The gold ETF was established as a "double" position when bought in the summer. DirecTV is another large holding -- and it's even larger when we consider that DTV is also a major part of one of Liberty Media's tracking stocks. I may well be making a mistake by letting this position remain as is without scaling back and taking some profits. We'll see.

Fairfax Financial is a nice-sized holding. Remember that I've sold enough of this stock a while back to get my original capital out of it. The holding is a free ride.

I'm mostly content with all these stocks, except for Media General and 3i Group. MEG has been a disastrous investment and represents money lost. 3i Group may fall into that category as well. Yet we'll have to see what the private equity firm does when the market comes back to make that call.

We're coming down the homestretch of 2009. Let's see what happens.

Five for the Weekend #61

2009-10-09T12:52:11-04:00

Lots said this week about the US dollar and gold. This is a good time to remember that nations don't have allies, they have interests. It is in the interest of nations holding massive amounts of US dollar assets to NOT see those assets significantly decrease in value. It is in the interest of the US government to see a dollar devaluation, to lighten the massive debt burden.

And the American people? Well, when it comes to this particular subject at least, the US government does not have the best interests of the average American man and woman at heart. This is especially true of lower-income working people, whose dollars are precious. And who may well see those dollars decrease substantially in value over time.

Note the US government doesn't want hyper-inflation. But it DOES want inflation. That is the tightrope being walked. Every US administration professes to want a "strong" dollar. That's bunk -- or at least it was bunk under the previous administration and under the current one as well.

And with that, here are five items for your review over the next couple of days.

Some of my lefty friends can't stand The Wall Street Journal editorial page. And my fellow libertarians dislike its fondness for foreign military entanglements. Nonetheless, the paper's editorial on the US dollar is spot on.

Speaking of the Journal, David Malpass penned an op-ed about about the US dollar and gold well worth our consideration: "A better approach would start with President Barack Obama rejecting the Bush administration's weak-dollar policy. This would invite capital and jobs to come back before interest rates have to rise." No argument here.

Staying with gold, Peter Brimelow of MarketWatch writes of the Aden Sisters, who publish a newsletter based out of Costa Rica. They are very much bullish on the yellow metal.

Neill Ferguson argues convincingly in the Telegraph that "there's no such thing as too big to fail." During the crisis it was often said that officials at the Federal Reserve and Treasury would do "whatever it takes" to avoid a Great Depression. Now they must do whatever it takes to address one of the key causes of the financial crisis: the existence of financial institutions that consider themselves too big to fail – but which are run in such a way that they are bound to do so.

Africa Confidential writes about "mines, dollars and dams" in Congo. Commodities will only grow in importance globally. Making Africa in general and countries like Congo of increasing interest for people across the globe. Stay tuned to this story.

Have a great weekend.

Five for the Weekend #60

2009-10-02T16:00:00-04:00

With the weeks flying by in 2009, let's get right to this installment of five items for your review over the next couple of days.

I'm among those who have pointed out that Charlie Rose conducts some of the very best interviews of business leaders on his nightly PBS show. This has always been the case, such as his hour-long sit-down with John Templeton in the 1990s. And his status has gained in this arena with the financial meltdown. Fortune has an excellent profile of Rose that I highly recommend.

Alice Schroeder has an interesting take on gold in her latest Bloomberg column. She reports not owning the metal, which makes her piece even more worthwhile in some ways: "Enter the gold bugs. They aren’t just betting on inflation, as is the conventional wisdom. Gold has a wicked history of being an unreliable inflation hedge. It has, though, at times been a haven against sudden currency depreciation." As you know, I own the SPDR Gold ETF (GLD).

Marty Whitman of the Third Avenue Value Fund has been big on Hong Kong stocks for a while now. This CNN Money article covers that, plus some other places he's spotting value. I own Cheung Kong Holdings ADR (CHEUY), which has been a large Whitman holding but which isn't mentioned in the linked article.

Meredith Whitney writes an op-ed in The Wall Street Journal, asserting that the credit crunch is continuing: "The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act." This is available on RealClearMarkets.com, so you shouldn't have to be a WSJ.com subscriber to access it.

Back to Bloomberg, John Wasik asks if someone can profit from being an eco-investor: "There are really only two ways of doing it now. You can buy a risky sector fund or stock and hold on to it for dear life over the next few years. Or you can invest in your home. Of the two, I prefer a home investment because the incentives have never been better and there’s no market risk. All the green funds got creamed last year."

Remember, I post articles I find interesting or fun reads. Doesn't mean I endorse or agree with everything various writers express. And with that, have a great weekend.