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John Dizard on the Greek Problem

2010-02-08T21:55:59-05:00

I never thought the Euro made sense over the very long term, though surely people have made money trading it over the recent years. I have no idea if the Greece debt crisis, or the problems in Portugal, Italy and Spain, spell the absolute end or not. Probably not. As Niall Ferguson said on Kudlow's CNBC show Friday night, I wouldn't want to be a German taxpayer right now.

John Dizard's weekly Financial Times column is about Greece. A couple of good parts:

The history of foreigners providing advice and supervision to the Greeks, or even appearing to do so, is not a happy one. The German military government of Greece during the war repeatedly attempted to stabilise the Greek drachma, in large part because its soldiers were paid in the local currency. Even though large amounts of criminally obtained gold were used for the purpose, by the end of the occupation hyperinflation had destroyed the drachma. Five years of civil war followed.

On the current mess:

I had a word with a friend who led IMF missions to Argentina in the 1980s, and then did sovereign debt analysis on Wall Street. He says: “If I were at the European Commission or the IMF I wouldn’t want to touch the Greek problem. You will be associated with deflation and depression.”
There is no good solution here. The best Brussels can do is limit the economic and political damage by adopting the lowest possible profile.

Read it in its entirety if you can.

Five for the Weekend #78

2010-02-05T17:15:06-05:00

Snowy times here in the Mid-Atlantic region of the US. But as long as the power stays on I'm content to bunker down and wait for the white stuff to melt. Eventually. Anyway, it has been a wild couple of days in the markets. Now let's see what your humble editor is dishing up for weekend reading.

The First Eagle funds have made available their semi-annual market update and commentary. Go here and scroll down to the January 19 item. You can choose to listen to it or download a PDF transcript to read. Jean-Marie Eveillard is among the participants and, as you might expect, there are questions on gold and gold mining stocks.

Portfolio holding BCE Inc. (BCE) has announced a profit forecast beating analyst estimates. BCE has top-notch management, has been trimming fat, and pays a nice fat dividend in Canadian dollars. Not a bad thing in the current environment.

I've noticed that people who deeply admire George W. Bush tend to deeply dislike Barack Obama. And folks who admire Obama deeply dislike Bush. But when it comes to fiscal irresponsibility, Obama is simply Dubya on steroids. A fact that must leave admirers of both men deeply unhappy (if they can bring themselves to acknowledge the truth). Jonathan Weil of Bloomberg has a nice column on the budget fiasco (and dishonesty) in Washington.

Today's editorial in The Wall Street Journal on the US debt and the chance, remote or not, of the US losing its Aaa credit rating is worth reading. Not a fun read, but an important one.

Africa Confidential has a feature on the African Union summit held in Addis Ababa on February 1. Excellent recap on something receiving almost zero coverage in America, and an example why AC is a great publication. That they continue making their feature stories available free online is a treat for those of us enjoying hard news.

Have a great weekend.

Adding More Microsoft

2010-02-04T21:51:35-05:00

You'll recall last month I trimmed my Microsoft (MSFT) position, selling those shares at $30.37. I thought the tech sector was getting frothy and wanted to book some gains. I had bought MSFT for $18 and change when establishing the holding.

Today I added back those shares, and a few more, by purchasing MSFT at $27.998. (That's right -- $27.998.)

Microsoft is in the midst of a powerful product-upgrade cycle, and the very popular Windows 7 hasn't impacted the balance sheet yet. They have some other good things going on and, if you haven't done so already, be sure to check out Fred Hickey's measure of the company in the latest Barron's Roundtable.

MSFT's yield isn't as good as when the stock sold in the teens. But they have $36 billion in cash, and perhaps they'll declare special dividend this year since the tax on dividends may rise after 2010.

Richard Russell Moves into "Apocalyptical Mode"

2010-02-02T05:13:00-05:00

From Peter Brimelow's MarketWatch column covering newsletters:

Nevertheless, the veteran Richard Russell is moving into apocalyptical mode in his Dow Theory Letters.

He wrote after the market closed Friday: "I think this bear-market rally is in the process of breaking up. I'm guessing that the Dow is going to run into some panic action early this year, and I think the Dow will violate first its November low and then its March low."
"I believe we're heading into something that nobody, in their wildest dreams, is thinking about. What will it be? It will be a full correction of the entire rise from the 2002 low of 7,286 to the bull market high of 14,164.53 set on Oct. 9, 2007. Remember, I warned about the 50% Principle which came into play at the halfway level of the Dow 2002 to 2007 advance? That halfway level was 10,725. ... Having risen to 10,725.43 on Jan. 10, the Dow then turned down. I consider this extremely bearish action."
Russell went on: "I see the Dow declining to the low from which the entire rise started. That low was the 2002 low of 7,286. If the Dow does not halt its decline at 7,286, I see it sinking down to its 1980-82 area, which would be around Dow 1,000."

Then Brimelow reports on Russell and gold:

(Incidentally, Russell has some savage words about George Soros, who recently opined that gold may be in a bubble: "Even a billionaire can talk like a fool. Gold hit a high of $850 back in 1980. Gold is now priced at $1,084, just 27% above its price of 27 years ago. How can Soros say gold is in a bubble? My opinion -- in view of the incredible recent production of dollars, the dollar should be substantially lower. Thus, it makes more sense to say that the dollar is in a bubble.")

There are lots of charlatans putting out investment newsletters -- but Richard Russell isn't one of them. He's been writing his newsletter since the late 1950s. Sure, he's had misses as well as hits. And I'm no expert on Dow Theory. But the man is worth listening to.

Barron's Roundtable, Third Installment -- Hickey & Gold

2010-02-01T13:56:07-05:00

The final installment of the 2010 Barron's Roundtable appears this week. I am particularly interested in Fred Hickey's views, because he's been riding the gold bull market for the past decade. And because I've made gold such a large part of my portfolio.

Like Hickey, my single largest precious metals position is the SPDR Gold ETF (GLD), but we're both into the gold mining stocks. He says:

They have lagged the price of gold in the past two years. The price of gold went up 30%, and the stocks fell about 7%, on average. In most gold bull markets, the stocks will outperform by at least 2-to-1.

He then discusses junior miners (an area I'm not in). Then talks about one of the majors we do share, Newmont Mining (NEM):

It has lagged in recent years because its production has been in decline, and that's the case with the whole gold industry. It is difficult to find gold and produce it. There are environmental issues. Declining production is an underlying positive for gold. In 2010, however, Newmont will see a change. The company is bringing on the largest gold mine in Australia. Newmont produces about 5.2 million ounces a year, and this mine will produce a million ounces a year, for 24 years. Also, Newmont will have the benefit of higher gold prices. It also has been cutting costs. The stock sells for a little less than 50. The company is expected to earn more than $3 a share this year, but that is conservative. In the third quarter of 2009, they made 79 cents, versus estimates of 55 cents. The new CEO, Richard O'Brien, is trying to keep expectations low. Newmont is going to blow away expectations in the current quarter, and as long as gold is $1,100 or higher, you'll see some big numbers. Newmont could earn $4 a share in 2010. Put a P/E of 15 to 20 on it, and you have a significantly higher stock price.

Marc Faber chimed in that NEM was a "very cheap stock."

Along with NEM, my other gold mining plays are Goldcorp (GG), Agnico-Eagle Mines (AEM) and the Market Vectors Gold Mining ETF (GDX). They're all down a bit since I bought them in January. But I still like them. GLD is up since I bought it last summer.

Five for the Weekend #77

2010-01-29T16:13:00-05:00

Great GDP number today, and let's hope we hit a nice, long string of such numbers in the quarters to come. But I suspect the growth of almost 6% is due to things like government spending and inventory restocking, so we'll just have to see.

Normally I don't pay much attention to "big picture" things in picking my portfolio positions. Most of the time these news events are "noise." Most of the time, but not all of the time. In President Obama's State of the Union speech, he mentioned wanting to increase exports. I think he'll pursue that with a weak dollar (and to be fair, I'll point out that President Bush had a weak dollar policy as well), which leaves me feeling good about devoting so much of my portfolio to gold. There are other reasons I feel good about that, but let's get to five items you might wish to check out this weekend.

The Senate voted on Thursday to raise the nation’s debt limit to $14.3 trillion, a $1.9 trillion increase that would allow the government to keep borrowing to cover operations beyond the November election. The way the word "trillion" gets thrown around is amazing, and a bit scary. Someday, sometime, somehow, the piper will get paid. I don't know quite how, but this too leaves me feeling good about my gold positions.

Allan Meltzer argues in The Wall Street Journal that the Fed "exit strategy" to prevent future inflation won't work. "When will inflation start? The date is uncertain. But the triggering event will be either a sustained increase in bank lending or a large increase in Fed purchases of government debt. Perhaps both. Either one would trigger a sustained increase in money growth." I don't know if we'll see inflation or what. Yet the long-term trend for the US dollar looks down. And this too leaves me feeling good about my gold positions.

Gillian Tett writes in the Financial Times that calls for a new Bretton Woods aren't all that crazy. "But the key point that investors should note is that Mr Sarkozy has probably smelt the wind: the issue of currency volatility is now hovering around the political agenda." Currency volatility mixing with politics leaves me feeling -- all together now -- good about my gold positions.

Portfolio holding Microsoft (MSFT) announced good results, with profits jumping 60% for the latest quarter. You'll recall I recently lightened my MSFT position. Yet it remains a full holding, pays a decent dividend and should prove to be a good investment this year.

Get Rich Slowly is a great personal finance blog, and recently posted about "Great Lessons from Great Men." "Recently I’ve begun to read a different kind of money book in my spare time. I’ve discovered the joy of classic biographies and success manuals, especially those written by (or about) wealthy and/or thrifty men. When I read about Benjamin Franklin or Warren Buffett or J.C. Penney, I learn a lot — not just about money, but about how to be a better man."

Have a great weekend. See you next week if not sooner.

John Ellis on the Obama Reset

2010-01-27T14:42:15-05:00

With President Obama giving the State of the Union message tonight, you've no doubt seen loads and loads of reports and commentaries on Year One of the Obama administration. What he will or won't say in the speech. And what will happen going forward.

Among the best things I've come across on this topic is a recent post titled, "Reset" by John Ellis on his blog. If you're someone who is reflexively pro-Obama or anti-Obama, it is probably not worth your time. But if you're someone realizing he's our president for the next three years (at least), and that there are real problems -- like the fact that our nation is broke financially -- then I highly recommend it.

Here's just one of many key parts:

The answer, I think, is that whatever pivot is made will be irrelevant. The fact is President Obama doesn't have the luxury of proposing an agenda. Agendas (or at least, agendas as we have come to think of them) are for people who have money. The United States is broke. And the debt is gets worse by the day.
Therefore, President Obama's job is to get us out of debt (or start us down the path toward that end). This job would be difficult in the best of times. President Obama has to do it in the midst of the worst recession since the 1930s. He has to do it in the midst of two wars in regions perpetually hostile to foreign influence.

And this:

That being the case, and I think it is inarguably the case, President Obama will never be successful until he accepts the assignment that history has given him. No one (anywhere) believes for one moment that he can add 30-35 million people to the health insurance rolls and not increase (sharply) the cost of health insurance. President Obama has been peddling this fable for months now and it has only served to make him look either (a) naive, or (b) utterly cynical. No one believes that "cap and trade" legislation is anything like an urgent priority at this time. No one believes that securing the Olympics for Chicago in 2016 is an urgent use of the President's time. No one believes that President Obama deserved or should have accepted the Nobel Peace Prize. The reason that Obama has seen his approval rating fall sharply is that people think he's not doing his job.

Finally:

"Stop spending money you don't have" was the real message of the Massachusetts Senate election that vaulted Senator-elect Brown from the back benches of one of the most useless political institutions in America (the Massachusetts State Senate) onto the front page of The New York Times. "Do your job," was the other, direct message to President Obama. It's a hard job, everyone agrees. But he campaigned for it. He wanted it, or at least he said he did. Either he steps up and starts to do his job or he's a one-term wonder; an interesting, but ultimately unimportant toll booth attendant on the road to the insolvency of the United States of America.

More Volatile Decade to Come?

2010-01-26T12:25:00-05:00

That's what Peter Brimelow wonders in his latest MarketWatch column on newsletters. One section:

Richard Russell summarizes the situation in his Dow Theory Letters:
"Does not look good. But you don't have to take my word for it, look at the daily chart...The Dow has been down four out of the last five sessions and is now trading well below its 50-day moving average...Note the increase in volume on today's negative action, another 'Distribution day.'"
Russell went on:
"I've done my best to warn subscribers of 'the coming weakness.' True, I had to use instinct and my 'market sense' to do it, but the picture is becoming progressively more ugly. By my early computation, down volume today was an ugly 92% of up + down volume... it tells us that this market has the potential to panic on the downside."
But, Russell cautioned, with characteristic cunning:
"Remember, after a 90% down-day, it is normal to see a 4 to 7 'dead cat bounce' on the upside. It's like a man who's shot getting up for a few seconds in shock -- just before he falls down again."

And this from Charles Allmon:

Allmon has long been a brutal bear, tempered by his extraordinary stock picking. But in his most recent letter, he wrote:
"My guess? 2010-2020 may prove to be even more volatile than its predecessor decade...Bottom line? We might see the Dow visit the 3,000-4,500 range, and 21,000, all in one decade."
Hmm. I presume Allmon means the Dow will visit 3,000-4,500 first. Don't you think?
I don't see anything in Allmon's career methodology (micro fundamentalist, number-crunching earning, assets, leverage) to explain his macro market-timing intuition.
But (OK, I've been around a long time!) I'm eerily reminded of long-forgotten Edson Gould, equally venerable editor of Findings and Forecasts, the great perma-bear of the 1970s, who stunned everyone by predicting out of the blue that the Dow could reach the stratosphere -- "3,000, 4,000, or 5,000" -- in the 1980s.

Food for thought.

Monday, Monday

2010-01-25T18:21:24-05:00

I was thinking of posting about the second installment of the Barron's 2010 Roundtable, but decided not to for two reasons.

First, because the most interesting panelist in this installment was Marc Faber. And he's staying with themes and picks he's been with for some time -- and quite profitably, too. If you're an admirer of Faber and follow him, chances are you're catching him on Bloomberg and CNBC (at least in Asia), and reading him on links provided by LewRockwell.com, among others. (Then again, you may be a subscriber to his newsletter.) There's not the urgency to read his thoughts in the annual Roundtble like there is with Meryl Witmer or Felix Zulauf. Though please don't let me discourage you. Read him by all means.

The second reason is that I wasn't struck by anything the other panelist offered up. Scott Black and Oscar Schafer are good stock pickers (Schafer likes Yahoo!). Perhaps their ideas will marinate in my mind and spark my interest later on. Just not now.

Next week we should see picks by Witmer, Fred Hickey and Bill Gross.

Witmer is among the very best value stock pickers anywhere. And Fred Hickey is something of a value player/contrarian. He's been riding the gold bull market for almost a decade now. And, with my exposure to the sector, I'll pay close attention to his view of gold -- both the metal itself and gold mining stocks.

Five for the Weekend #76

2010-01-22T17:55:10-05:00

Well, this was a week that saw a single state-wide election potentially change the direction of the nation. As long as it really means the death the proposed health care reform in Congress, I'll be happy. Now let's get on to five items you can check out this weekend.

Eric King of King World News recently interviewed Bill Laggner of Bearing Asset Management. You might recall Laggner and his partner Kevin Duffy were recently interviewed in Barron's. Lots of interesting stuff on the corruption of America's political and financial systems, and how Bearing Asset is short the "political economy" and long the "real economy."

Martin Wolf wrote an important op-ed in the Financial Times this week, explaining why the financial troubles in Greece deserve a global audience. A bit: "Having falsified its figures for years, violating the trust of its partners, Greece is in the doghouse. Yet, even if it bears much of the blame, the task it is undertaking is huge. In particular, unlike most countries with massive fiscal deficits – the UK, for example – Greece cannot offset the impact of fiscal tightening by loosening monetary policy or depreciating its currency."

Equally important in the world of op-eds is Mort Zuckerman's in Friday's Wall Street Journal, titled "The Great Recession Continues." It starts with this: "The December jobs report has doused the hope that we were at the beginning of a sustained economic recovery. The unemployment rate managed to hold at 10% in December only because of an extraordinary shrinkage in the labor force: Some 661,000 gave up looking for a job."

Africa-Asia Confidential runs a feature on China's investment in Africa. The amount of trade and investment last year was disappointing, due to the financial crisis globally. The Chinese insist their investment in Africa will return to previous levels. A bit: "For now, because of their richness in natural resources and as a nod to South-South solidarity, African countries may at times punch above their weight in China’s strategic considerations. Yet China’s relations with Africa are just a small piece of its foreign policy when seen in a global context, and African countries would do well to remember that."

Writer Robert B. Parker died on Monday at age 77. He is most known, of course, for his widely-popular Spencer novels. Tom Nolan penned an excellent remembrance in The Wall Street Journal this week: "He wrote dialogue that at once informed, amused and gave a sense of character; and he conjured characters a reader wanted to spend more time with—especially Spenser, a fixed point in a footloose world, take him or leave him. A pragmatist whose ethics were situational. A tough and decent type who did what needed to be done in the service of a moral cause, affirming the worth of the individual regardless of race, sexual orientation, social status, age or occupation. He made timeless points that need to be remade every generation, in a society ever able to find ways to betray the public and private trust."

Rest in peace, Mr. Parker. And to everyone else, have a great weekend.

Russia Diversifies into Canadian Dollars

2010-01-20T20:23:10-05:00

This story in the Financial Times may well be part of a larger trend:

Russia’s central bank announced on Wednesday that it had started buying Canadian dollars and securities in a bid to diversify its foreign exchange reserves.
Analysts said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and into investments denominated in other commodity-linked currencies, such as the Australian dollar.

David Rosenberg has recently said that the Canadian dollar is slightly high compared to the US dollar, but that the loonie has better long term prospects. I agree and considered putting money into a Canadian dollar ETF. But I decided to maintain my SPDR Gold ETF and purchase my gold mining stock plays instead.

Plus, I have exposure to the Canadian dollar through Canadian holdings Fairfax Financial, EGI Financial and BCE. I see the stocks trading in Canadian currency as a wind-at-their-back thing. Obviously it won't help much if the companies do poorly.

Back to the linked story. With the FT reporting that Russia and others are buying commodity-linked currencies "at the top" -- and with several Barron's Roundtable participants pointing to near-term strength for the US dollar -- diversifying away from the USD may look less than stellar for the next few months. Or even most of 2010.

But it certainly looks like the US dollar faces turbulence over the long term.

2010 Barron's Roundtable, Part 1

2010-01-19T00:01:00-05:00

The first installment of the Barron's Roundtable came this week. The panelists discuss the general outlook for the year, and then Felix Zulauf and Mario Gabelli gave their investment recommendations. No way could I ever give an adequate overview of everything said. So here are a few key parts standing out to me.

Asked about the economy in 2010, Meryl Witmer said:

There will be some pickup because we are filling the hole created last year when everything stopped. There is some inventory fill, and some growth in health care and electronics. But I see no growth engine in the U.S. Hopefully, there will be a turnover in Washington, but without that, I don't have much positive to say.

On job creation in America she said:

In the past six months, whenever I have talked to a company I asked the chief executive or chief financial officer what it would take to bring jobs here. They said, "You know, the workforce isn't that good, and there is so much regulation. I'm moving jobs out of the U.S." The government needs to cut back on regulation and taxes and open things up for business, or the jobs will continue to leave.

This from Fred Hickey:

The stock market will likely be up this year, unless the dollar collapses. The Fed will continue to print. It doesn't have a choice. Other countries backed off investing in the U.S. Central banks are buying gold. Who will fund our deficits? The Fed will keep printing until the dollar falls apart.

Not to be outdone, Marc Faber added:

That is why we are all doomed. The deficit will be above a trillion dollars a year as far as the eye can see. One day, Mr. Bernanke or whoever is at the Fed will have to increase short-term interest rates. When that happens, America's interest burden will go up dramatically. Interest payments could go to 35% of tax revenue in 10 years' time, but that is an optimistic assumption. I'm inclined to think 50% of tax revenue will go toward interest payments on government debt in 10 years. Then you are bankrupt. There is only one way out -- the Zimbabwe way. You will have to print and print and print.

To which Felix Zuluaf agreed:

It is true. All federal debt, including unfunded liabilities, isn't 100% of GDP, but 600%. In most industrialized countries, federal-government debt is between 350% and 360% of GDP. Eventually the U.S. will arrive at the point where, as Marc says, interest payments on government debt all of a sudden go to 20%, 25%, 30% of tax revenue. And once you go above 30%, you are done. You go into default or your currency breaks down and your system collapses.

Gold is among Zuluaf's recommendations. I think he's been bullish on gold for at least the last several Roundtables. Here's what he says:

Finally, gold could have a correction sometime this year, but investors shouldn't let their gold go. Gold could correct to $1,000 an ounce from a recent $1,130. Use that shakeout to buy. Gold is the only currency with no liabilities. It can't default. It is in a bull market. In the disbelief phase, it fell to $811.70 an ounce. Now it is in the recognition stage, and eventually it will go to the overbelief stage and trade for a few thousand dollars an ounce. It will take a few more years. Gold will perform better than stocks in the next five years.

Zuluaf reported owning physical gold, but says the SPDR Gold ETF (GLD) is fine for most American investors. I own it myself, as you know. He also thinks gold stocks will "fly" at some point but that bullion plays are the safest bet.

MLK Day, 2010

2010-01-18T00:01:00-05:00

Robert F. Kennedy's speech in Indianapolis on Martin Luther King's death on April 4, 1968 (HT: John Ellis):

I have bad news for you, for all of our fellow citizens, and people who love peace all over the world, and that is that Martin Luther King was shot and killed tonight.

Martin Luther King dedicated his life to love and to justice for his fellow human beings, and he died because of that effort.

In this difficult day, in this difficult time for the United States, it is perhaps well to ask what kind of a nation we are and what direction we want to move in. For those of you who are black -- considering the evidence there evidently is that there were white people who were responsible -- you can be filled with bitterness, with hatred, and a desire for revenge. We can move in that direction as a country, in great polarization -- black people amongst black, white people amongst white, filled with hatred toward one another.

Or we can make an effort, as Martin Luther King did, to understand and to comprehend, and to replace that violence, that stain of bloodshed that has spread across our land, with an effort to understand with compassion and love.

For those of you who are black and are tempted to be filled with hatred and distrust at the injustice of such an act, against all white people, I can only say that I feel in my own heart the same kind of feeling. I had a member of my family killed, but he was killed by a white man. But we have to make an effort in the United States, we have to make an effort to understand, to go beyond these rather difficult times.

My favorite poet was Aeschylus. He wrote: "In our sleep, pain which cannot forget falls drop by drop upon the heart until, in our own despair, against our will, comes wisdom through the awful grace of God."

What we need in the United States is not division; what we need in the United States is not hatred; what we need in the United States is not violence or lawlessness; but love and wisdom, and compassion toward one another, and a feeling of justice toward those who still suffer within our country, whether they be white or they be black.

So I shall ask you tonight to return home, to say a prayer for the family of Martin Luther King, that's true, but more importantly to say a prayer for our own country, which all of us love -- a prayer for understanding and that compassion of which I spoke.

We can do well in this country. We will have difficult times; we've had difficult times in the past; we will have difficult times in the future. It is not the end of violence; it is not the end of lawlessness; it is not the end of disorder.

But the vast majority of white people and the vast majority of black people in this country want to live together, want to improve the quality of our life, and want justice for all human beings who abide in our land.

Let us dedicate to ourselves to what the Greeks wrote so many years ago: to tame the savageness of man and make gentle the life of this world. Let us dedicate ourselves to that, and say a prayer for our country and for our people.

Five for the Weekend #75

2010-01-15T16:56:22-05:00

Here we go -- five items for your consideration between now and Monday.

If you've been thinking about donating money to Haitian relief, but aren't sure which organization to give through, consider the Salvation Army. Most of us, when we hear the name "Salvation Army" automatically think of volunteers ringing bells by kettles outside retail stores during the holidays. But from everything I've ever heard, SA is a great organization throughout the entire year. They probably are doing wonderful work transforming lives right in your town as I type this. They also do excellent work with disaster relief. They've been in Haiti since 1950.

Randall Forsyth wonders on Barron's Online if government bonds aren't "the new junk." And he contends this is the reason for you-know-what's relative strength: "Writing in its Market Intellect research note, Michael Thompson, S&P's managing director of Market, Credit and Risk Strategies, and Robert Keiser, senior director of the unit, contend the strength of gold reflects concerns about sovereign debt and inflation. A move above $1200 an ounce, its peak touched last month before its retreat back to the $1100 range, would signal renewed worries on those scores."

The Lex column in the Financial Times has an excellent piece on deleveraging that ends with this: "It may be economically and politically sensible for governments to spend money on making life more palatable at the height of the crisis. But the longer countries go on before paying down their debt, the more painful and drawn-out the process is likely to be. Unless, of course, government bond investors revolt and expedite the whole shebang. Wheatgrass juice and alfalfa sprouts, anyone?"

Staying with the subject of deleveraging and the FT, Gillian Tett has a thoughtful column on how painful the whole process will be: "Either way, the real moral is that the task now facing the western governments is monumental. It is a pity that groups such as McKinsey were not producing these leverage charts three years ago. If so, the politicians might now not be in quite such a pickle, even - or especially - in the UK."

Reading "Volcker Voices His Views in a Vacuum" in The Wall Street Journal leaves me wondering if we'll look back one day and see that Paul Volcker was used by Obama to attract centrist voters in the presidential election. Just like he may have used Rev. Wright to gain street credentials in Chicago.

Have a great weekend.

Controlled Greed Portfolio Performance: 2009

2010-01-14T18:01:42-05:00

For the year 2009, the portfolio gained +27.5%. The S&P 500 index was up +26.5%. Both include dividends.

It’s nice to edge out the S&P 500, since I live in the US and that’s the benchmark used to measure the performance of money managers here. It’s especially good since I’ve held lots of cash (earning nothing) most of this year. In hindsight, I should’ve put that cash to work back in the spring. But, like I said, that’s hindsight.

If I happened to go a long stretch where I didn’t at least match the index, I’d seriously consider switching away from managing my own portfolio. I’d have to. Regular readers know the Controlled Greed portfolio accounts for the vast majority of my liquid net worth, including just about all of my retirement funds. I couldn’t afford to under-perform just for the kicks of picking my own stocks.

Thankfully, that hasn’t been the case. But last year the portfolio lost nearly 40% -- so I’ve got some work to do as my brokerage statements continue reflecting the battering taken in 2008 (and the last half of 2007).

Here's how the portfolio positions looked on December 31, 2009:

Cash                        22.1%
SPDR Gold ETF         10.3%
DirecTV Group           9.4%
Fairfax Financial       7.5%
King Pharmaceutical 7.1%
EGI Financial             6.8%
Microsoft                   6.5%
Cheung Kong ADR      5.4%
BCE                          4.8%
Superior Industries     4.7%
Geeknet                    4.5%
NipponKoa Insurance 4.4%
Capital Southwest    4.2%
Media General           1.2%
3i Group PLC             1.1%

Some notes. These figures are not audited, just my calculator and me. 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. I’m working like the dickens not to lose it all and live out my life in soup kitchens.

Remember that I recently made some changes in the portfolio since the New Year. I scaled back on Microsoft, and put roughly 20% of my assets into four gold mining plays (Newmont Mining, Goldcorp, Agnico-Eagle Mines and the Market Vectors Gold Miners ETF).

I’m holding my SPDR Gold ETF, the double-sized position established in the summer. This means that my gold ETF and gold mining stocks together account for around 30% of my portfolio.

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 also sold enough of my original stake in DirecTV Group to make DTV a free ride as well. Then I inherited more DTV shares when one of my Liberty Media tracking stocks merged with the company. That’s why DTV remains a large portfolio position.

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.

Let’s see what 2010 has in store. I’ve gone on record as saying we’re in a bull rally in a larger bear market. So I think we’ve got more bad news in the future for stocks. And I’d love to be proved wrong.

What 12 "Dr. Dooms" See For 2010

2010-01-12T06:10:00-05:00

Paul Farrell of MarketWatch provides a handy list of what 12 notable folks see in store for this year:

Listen closely to the words of our 12 "Dr. Dooms." For a moment, take off your rose-colored glasses, step out of your denial, see the Great Depression 2 dead ahead, really look at the future our "Dr. Dooms" see in their "Doomsday Scenarios:"

It makes for interesting reading. And thanks to Ellis Blog! for bringing this treat to my attention.

Something's Got To Give

2010-01-10T23:59:00-05:00

This leader from The Economist, titled "Bubble Warning," makes the point that markets have become dependent on unsustainable government stimulus.

I strongly suggest reading the entire thing. But here's a key part that's relevant to stock market investors:

For all the panic last year, asset values never quite reached the lows that marked other bear-market bottoms, and now the rally has made several markets look pricey again.

That is absolutely true -- we HAD a panic. Yet the bear never finished its work. And I saw the other day that the dividend yield for the S&P 500 is back below 2% for the first time in over two years.

I expect at some point the bear will return to finish its work. I don't know if that will be this year or next year. Or even the one after that or the one after that.

As for stocks, I'm not finding anything popping up on my radar screen. My recent purchase of Geeknet (LNUX) is more of a special situation (or perhaps I should say a flat-out speculation), and I'd be happy to have deployed my portfolio cash in more of those.

That lead me to gold mining stocks. With cash earning nothing and the US government printing money like there's no tomorrow, putting 20% on my portfolio in gold mining stocks plus leaving another 10% in gold bullion feels safer to me. Ten years or so ago, if bargains weren't around I'd hide out in short-term US Treasuries earning 6% or thereabouts. That option doesn't exist.

Here's the key with regards to gold. If someone believes we're in a gold bull market (as I do), then gold mining stocks should outperform over time. This is because gold mining stocks have lagged gold bullion to this point, and they ultimately overtake bullion before a gold bull ends.

Of course, if I'm wrong, and this is not a gold bull market, then I'll end up with egg on my face. We'll just have to see how this all plays out.

Five for the Weekend #74

2010-01-08T16:43:00-05:00

Today's jobs report in the US shows we're not out of the woods yet when it comes to the economy. And with that, let's get right to it -- five items you can check out over the next couple of days.

Li Ka-shing has been increasing his stake in Cheung Kong Holdings (I own the ADRs symbol CHEUY). Cheung Kong is a cash-rich company poised to make smart deals in the future. And management is smart enough to not do deals that don't make sense -- wisdom often not possessed by those in boardrooms around the world. Mr. Li offers some cautionary words, “When it comes to investments, it’s better to be careful. The world has just emerged from the financial crisis,” Li said in impromptu comments to reporters at a convention center in Hong Kong yesterday. “You saw how much the stock prices gained in 2009, in the U.S., everywhere. The rises have run ahead of economic fundamentals.”

Marty Whitman, one of the best value fund managers ever, announced this week he's taking a lesser role at Third Avenue. He's age 85 so it makes sense, though we should note he will continue as co-manager of the flagship Third Avenue Value Fund. Time marches on, with Peter Cundill retired, Jean-Marie Eveillard's "advisory" role at First Eagle (who had been fully retired at one point), and the recent death of Chris Browne. I remember seeing the late Phil Caret interviewed on TV back in the 1990s. He was 99 at the time, and said, "I'm a long-term investor." We can bet Marty Whitman feels the same way.

Peter Brimelow writes on MarketWatch that newsletter veteran Mike Murphy had a fantastic 2009 -- and he sees a V-shaped recovery in 2010: "These forecasts are a long way from the consensus outlook. Job growth in the spring? Housing shortage in the fall? Where will the market go when these become the consensus outlook? That is what gives me hope that the S&P will survive its retests, break out to a new recovery high and let us buy stocks back for the run to 1550 and beyond. And maybe, just maybe, post the best return for a year ending in '0' in 120 years. We shall see."

The Chairman over at Maoxian has collected key stories from 2009, which he says is a 120-page document in PDF. Go here to request a free copy via email.

Bloomberg's Jonathan Weil examines the mess known as AIG: "It remains a mystery to me why AIG still trades for about $29, giving it a market cap of more than $20 billion, considering that the company has needed four government bailouts valued at more than $180 billion. It shouldn’t surprise anyone that senior AIG executives harbored similar feelings. For AIG to pay back even part of the government’s money, it probably would have to massively dilute existing shareholders by selling new stock, which itself may not ever be possible."

Have a great weekend.

Portfolio Adjustments: Scaling Back MSFT, Buying Gold Miners

2010-01-07T17:39:13-05:00

Some adjustments were made to the portfolio today. One minor, the others major.

First, I scaled back on my Microsoft (MSFT) position, selling shares at $30.37. The stock is up 65% (not counting dividends) since I bought it earlier this year. I think it will be a fine core holding, with Windows 7 sales incorporated in future results. The stock has grown to an over-size holding, so I cut it back to a normal 4%-5% portfolio weighting.

Second, I have decided to expand my exposure to gold-related investments substantially. You know I established a roughly 10% portfolio position in the SPDR Gold Shares ETF (GLD) last summer. That remains intact.

Today I devoted approximately 20% of the portfolio (which had been sitting in cash) to equal positions in four gold mining plays:

Newmont Mining (NEM) -- bought at $49.45 per share
Goldcorp (GG) -- bought at $41.86 per share
Agnico-Eagle Mines (AEM) -- bought at $57.84 a share
Market Vectors ETF Gold Miners Trust (GDX) -- bought at $49.28

I have conviction we ARE in a gold bull market, but NOT a gold bubble. The recent healthy correction we've experienced in gold cements that view. Gold prices are being driven by factors like central banks buying the metal (especially in Asia), a trend just starting, and individuals distrusting paper currencies being printed out of thin air by the trillions.

That's gold -- but why did I buy gold mining stocks? Because gold miners have underperformed the price of gold bullion badly. And before gold bull markets end, the miners typically go for double or more the price of the metal itself. This also confirms in my mind that we're not seeing a gold bubble here.

I'll post more about this as time permits. But I'll add one last thing: I'm buying major gold producers. I know some say it is the juniors that really go gangbusters before gold bull markets end. Yet I'll just stick with the major gold miners with proven reserves, for now at least.

Roach Sees Double-Dip Risk

2010-01-06T00:01:00-05:00

I think it is safe to assume Stephan Roach's column posted on Bloomberg has been making the rounds. I'm not an economist, and generally not a big picture type of guy. Though I do agree with Jean-Marie Eveillard, who said something along the lines of paying attention to the big picture while doing bottom-up style investing (if that's not exactly right, forgive me, I'm operating from memory here).

You've probably been hearing talk about bubbles lately. Ones we've had, ones to come, ones we're having now. I think we may well be experiencing a complacency bubble. But, hey, only time will tell.

Back to Roach and his Bloomberg piece. He lists four reasons we may see a double-dip in the global economy:

First, the financial crisis itself is far from over. The latest International Monetary Fund estimates put the potential for worldwide writedowns of toxic assets at approximately $3.4 trillion; so far, realized markdowns have been only about half that amount. This points to further earnings impairments for financial institutions and concomitant restraints on their lending capacity.
Second, the breadth of this global recession was staggering. At its low point in March 2009, 75 percent of the world’s economies were contracting. Typically, the figure is closer to 50 percent. This means it will be much harder to turn around this recession-torn world.
Third, the demand side of the global economy is likely to be restrained by a protracted pullback of the over-extended American consumer. In the face of a massive labor market shock to jobs and wage earnings, together with the bursting of property and credit bubbles, the consumption share of the U.S. economy is likely to fall by five full percentage points of gross domestic product -- from its current record of 71.2 percent to the pre-bubble norm of 66 percent.

And last but not least:

Fourth, the supply side of the global economy suffers from massive imbalances, especially China-centric developing Asia. While, on the surface, post-crisis resilience of the Chinese economy has been impressive, it turns out that 95 percent of the 7.7 percent GDP growth realized in the first three quarters of 2009 was concentrated in the fixed investment sector, which already accounts for an unheard of 45 percent of GDP.

We live in interesting times. Let's see what 2010 -- and 2011 -- have in store.