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Levy Harkins Latest Quarterly Letter

Among the very best things about Pimm Fox's "Taking Stock" show on Bloomberg TV (and radio) are the fairly frequent appearances of investor Michael Harkins.

Fox repeatedly reminds the audience that none other than Jim Grant says that Harkins is the smartest person on Wall Street (or words to that effect). I'll add that listening to him has the added pleasures of someone with true wit and wisdom.

You can get an idea of what I'm talking about reading the Levy Harkins Q3 letter, recently posted on the firm's website:

European banking woes dominated every asset class in the third quarter, sending everything associated with “risk” sharply lower, and cash, German bunds, and American bonds sharply higher.  We wrote in our last letter that the expression “Greek bailout” was the misnomer of the decade.  The Greek people face austerity and privation for a very long time.  The bailout cash is going to French and Belgian bankers, circuitously to be sure, but the Greeks will touch the money for mere seconds.  How to pull off this shell game, where the French guarantee debts without the markets noticing France is already overstretched, is the conundrum.  Every 10 days or so we have another meeting, where Frau Merkel and M. Sarkozy resemble nothing so much as two inebriates trying to hold up a lamppost.  Confidence has been badly dented, and we should have seen this more clearly 3 months ago.  Meanwhile, the continent continues casting about for a French Jimmy Stewart to restore calm.  Good luck with that.

In the mood for more? Read the entire thing.

Buying SmartPros Ltd.

By the end of the day last Friday, I finished building a new position in the portfolio -- SmartPros Ltd. (SPRO). SPRO provides accredited professional education and corporate training, with the accounting segment providing roughly 70% to 75% of revenues.

SPRO is a tiny company. The market cap is less than $10 million with approximately 4.89 million shares outstanding. My average cost is $1.93 a share.

The largest shareholder owns more than 12% of the stock, recently added to his position, and the chairman and CEO owning more than 6%. Add in some additional holdings by other insiders and you've got a stock that's VERY THINLY TRADED.

SPRO has reported net losses for the last quarter and the first nine months of 2011, the loss for the nine-month period has narrowed from the year before.

I like that the company has a strong cash position. It has about $6.5 million in cash and cash equivalents, $1.6 million in accounts receivable (net of doubtful accounts), $5.3 million in deferred revenue and no debt.

The dividend yield is roughly 2.6% and the company has been buying back stock. The company is also on the lookout for acquisitions -- which is its primary goal for growth over and above the dividend and stock buybacks. There some risk in that (in that an acquisition could always prove ulitmately unwise), but I think the amount of stock owned by insiders means their interests are aligned with mine.

Happy New Year

Well, it's been ages and ages since I've posted anything.

Why? Because I've been positively swamped with non-blogging duties. And I mean that in a good way.

With one small exception, I haven't made any portfolio moves since my last post. That one exception is adding a few bucks to my Agnico-Eagle (AEM) position a couple of months ago after the company got clobbered when announcing it was closing a mine. Of course, it fell even more along with other miners as the year neared its close. Yet I remain long-term bullish on gold and the gold miners.

I'll be posting the portfolio's 2011 results shortly. But here's how it broke down a couple of weeks or so ago:

Cash (US Treasury MMF)            35%
Equities (non-Mining related)    33%
Gold Mining Stocks                    19%
Gold & Silver Bullion                 13%
                                              100%

I have no idea how many readers Controlled Greed still has -- but here's wishing anyone reading this a happy, healthy and prosperous 2012.

Selling My VXX Position

On Thursday morning I dumped my VXX stake -- the iPath S&P 500 Short-Term Futures ETN.

I bought a small position in it on April 15 for $27.57. My exit price was $38.30, for a gain of more than 38.9%. Not bad for four months.

This was the only time I've ever toyed with anything like the VXX. Normally I just invest in what I believe to be good companies at good prices, or just sit on the sidelines in cash. But there were a lot of volatile things going on in the world and the economy, yet the market was acting as though volatility was nothing to worry about.

Hence, I went "long" volatility (or a hunch we'd be getting some) and decided to buy a small holding in the VXX.

Lastly, apologies for not posting this Thursday evening. I try to let any readers know my moves in a timely fashion, but I've been swamped recently with non-blogging projects and haven't even logged in to this blog for a while. I know several people have left comments and I haven't responded yet. I'm not happy with that and will try to do better in the future.

Are Gold Mining Stocks Undervalued?

I think so -- compared to the bullion.

But note that my view only remains valid if my assumption that the gold bull market is real, and has not reached "blow off" bubble stage yet.

We've seen some wild times over the past week. I haven't been posting because I'm swamped with non-blogging stuff in life. But I'm keeping my eye on things, and my gold/equities/cash positions have let me sleep well in these markets. My overall portfolio is down a bit. But, aside from gold, the good thing is that my VXX position in back in the black.

Anyway, back to the subject of this post.

If you haven't seen it yet, and you have access to FT.com, read John Dizard's piece on gold mining stocks from the end of July. He quotes a familiar name in these parts -- John Hathaway:

“More than half of them [junior stock promoters] are liars and crooks,” Mr Hathaway says, “and you will only know which ones if you spend your life around the mining business.

The financial statements for those companies are meaningless, because they don’t produce anything.” Only extensive contacts, checks, and site visits will sort them all out.

Like many gold market professionals, Mr Hathaway thinks it’s about time for a gold price correction.

After that, he sees a resumption of the secular bull market in gold. However, the gold mining stocks could rise even in a stagnant or falling gold market. That’s what happened for a couple of years following gold’s last peak in early 1980.

And after that? Mr Hathaway says: “We talk among ourselves about what would be the right moment to shut down the fund, or at least steer investors to other funds.”

That’s apostasy to a real goldbug, but this should be about money, not religion.

Hathaway started his fund in 1998, when everyone was ga-ga over tech stocks. That's one reason I pay attention to him. He's not some promoter.

You read Dizard's column here (again, if you subscribe to FT.com).

Levy Harkins on Inflation

I haven't been blogging as much lately, mostly because I've been swamped with other duties. And doing anything with my portfolio has been non-existent as well. And I feel good about that for now.

You see, with all that's going on in the world (read: Major Uncertainty), my equities/gold/gold miners/cash position continues to give me comfort. Whether that holds or not, we'll see.

But I continue to read, read, and read some more. Value investors love to read and I'm certainly no exception. One of the best reads lately has been the Levy Harkins Q2 letter to investors.

Part of it reads:

Our greatest vexation is that a long held past prediction of ours is coming true, and it gives us not one whit of joy.  We mean that inflation is now here, and visible to any and all who want to see it.  The American Consumer Price Index is up 3.6% year over year, and this is even with the government’s blatant attempt to manipulate the oil market.  The UK is much worse, as is China and sundry third world markets.  The common refrain from the authorities that, “3.6 percent isn’t all that bad,” misses the point entirely.  There never was a stable inflation rate, certainly not one of that size.  Inflation is a process, often thought to be disease like, where you are either getting better or worse.  With the Federal Funds Rate at 0, there is near certainty that worse is likely, since negative real interest rates stoke the fever.  Only when real rates get positive, that is the Funds rate gets meanfully above the inflation rate, can improvement be hoped for.

They go on to mention the book, When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. Some of what Levy Harkins says about it is this:

What is startling about Ferguson’s book was that he wrote it in 1975.  He couldn’t have known anything about Lehman Brothers, Quantitative Easing II, the Euro, or any of it.  He was almost closer to Weimar than he is to our own time.  Yet the pressure on R.A. Havenstein as President of the Reichsbank to print money in the early 1920’s is eerily similar to what we read today regarding Bernanke and Trichet.

Food for thought.

Will The Day Come When the Government Forces People to Hold Treasuries in Their Retirement Accounts?

Stephanie Pomboy thinks so, according to Alan Abelson's Barron's column this week (scroll down). With the US debt burden a huge problem, and getting worse, policymakers may soon find themselves needing to widen the pool of buyers for US Treasury debt.

Writes Abelson:

For example, one proposal Stephanie envisions is to require 401(k)s to hold a certain percentage of their assets in Treasuries at the risk of losing tax-free status. Another is encouraging public pension funds to fatten up the share of their portfolios given over to Treasuries. Still another is enticing companies to put a chunk of the nearly $1.9 trillion in cash "burning a hole in their pockets" into Uncle Sam's obligations, possibly as part of a deal for a tax holiday to bring home the huge cache of foreign profits sequestered abroad.

The impact of such actions, she feels, is bound to be ponderable. Were public pensions to boost their allocation to Treasuries from the current 6% to 16% (pre-Alan Greenspan, 24% was the norm), Stephanie reckons it would mean something like $300 billion of government bond purchases. And that, she points out, would be "chump change" compared with the potential additions by individuals and corporations.

As things stand today, nonfinancial corporations have $1.4 trillion in cash and a mere $48 billion in Treasuries. As for individuals and their 401(k)s, only $300 billion of total mutual-fund assets of $8.3 trillion are invested in Treasuries. All of which strongly suggests there's a mega-abundance of room for greater exposure to government debt.

Creating demand for Uncle Sam's obligations—"whether by carrot or stick," Stephanie says—has the not-inconsiderable advantage of "allowing fiscal stimulus to continue without all the inflationary consequences of dollar debasement" that accompanied QE1 and 2. And then she quickly adds, in patented Pomboy fashion, "until, of course, this, too, goes bad."

Sounds about right. The Political Class drives nation's finances off a cliff, and destroys the US dollar in the process. Then these hucksters and thieves force people to stash their Monopoly money in their retirement accounts -- or lose the tax advantages of such accounts.

And you can bet they'll do all this with their usual self-righteous and blame-someone-else manner.

I hope Americans would never let this happen. But I'm often amazed that Americans let FDR confiscate their gold in the 1930s. If things get bad enough -- and people get desperate enough -- they'll sometimes blindly follow public servants offering scapegoats and fake hope.

WSJ's Weekend Interview with Jim Grant

Blockbuster piece by Holman Jenkins on James Grant in this weekend's Wall Street Journal. Simply a must-read even if you -- like me -- eagerly consume anything you come across in the media by or about the premier financial journalist of our time.

You'll see plenty of interesting stuff about Grant's background and, of course, the sorry state of Central Banking, the US dollar and fiat currencies in general.

But you'll also find perhaps useful information on Grant the investor, including past victories and what he sees now:

When Treasury bonds were yielding 13% in the early 1980s, Grant's called them a screaming buy. If inflation, then coming down, suddenly ran amok again, an investor could give up 13% a year in principle and still break even on the coupon.

Likewise, before the housing crash, he took a hard look at subprime mortgage securities and urged investors to short them. "They were then selling at 100 cents on the dollar," he now says. "If we were wrong, they might go to 101 or 102. If we were right, they'd go down a lot."

And today?

"We are looking at a bunch of these big cap, astoundingly cheap American enterprises that are hiding in plain sight. Wal-Mart is one, J&J is another," he says. Wal-Mart he describes as a mature business whose per-share earnings are those of a growth company, thanks to its massive share buy-backs.

"We can observe that the dividend yield [on many blue-chip U.S. companies] is a match for most points on the Treasury yield curve. But their managements are adaptive, unlike the inert Treasury bond that you buy for so-called safety."

I don't own Wal-Mart or J&J, but I do hold some Microsoft (MSFT). I like to think MSFT has a bit in common with the big caps Grant's thinking of. Maybe I should do more "hiding out" in those kinds of stocks.

Read the entire interview here if you subscribe to WSJ.com.

Klarman Gunning for Spuds

The Globe and Mail has a story posted on its website that'll be in Tuesday's paper. It's about Seth Klarman's Baupost Group investing in Highland Companies -- Ontario's largest potato grower.

Highland is also proposing developing a mega-quarry on its land:

Baupost was part of a group funding Highland’s purchase of about $50-million worth of potato lands in Dufferin County in Southwestern Ontario, under which, at a relatively shallow depth of about six metres, lie an estimated one billion tonnes of limestone suitable for construction aggregate. The rock could be worth up to $25-billion, depending on its quality.

To be sure, there is a big element of dice-rolling. To hit pay dirt, the quarry needs to be licensed, which means overcoming the fear and loathing among many in the local area toward the proposed development. It’s a huge, hard-to-quantify risk.

Further down:

Mr. Klarman, who declined through a spokesperson to be interviewed, manages about $23-billion (U.S.) through his Boston-based Baupost.

But in a written statement to The Globe and Mail, Baupost said the investment “is consistent with our long-term, value-oriented strategy. We take our role as a responsible investor seriously, and made this investment because we were confident that Highland would pursue this project in a thoughtful way that respected the local application process, as well as important community and environmental concerns.”

Full story here.

Going After Short-Sellers Again

I've never shorted a stock in my life. I've got nothing against short-sellers. It's just not my game.

But I've always been disgusted by politicians making villains of short-sellers. Usually the short-sellers are taking advantage of conditions the politicians and their cronies were instrumental in creating in the first place.

I don't know how much that is the case in Italy. And I don't know if Italy is the next Greece or not.

Yet when I see headlines like "Italy Moves to Rein in Short-Selling Amid Market Jitters," it's not encouraging. And does anyone think curbing short-selling makes a difference in the longer run?

Longleaf's Hawkins and Cates in The New York Times

The NYT examines several mutual funds that did well in the 2nd quarter.

Among them is Longleaf Partners Small-Cap Fund, managed by Mason Hawkins and Staley Cates.

Their fund, which carries an expense ratio of 0.92 percent, returned 3.71 percent in the second quarter.

Mr. Hawkins and Mr. Cates like to buy the sort of dirt-cheap stocks that Warren E. Buffett has famously called “cigar butts.” These days, Mr. Buffett typically skips over castoffs, opting to buy pricier fare as long as he’s confident that a company has a competitive advantage. But Mr. Hawkins and Mr. Cates still seek those half-smoked stogies. “We’ll never compromise the principle about buying really cheaply,” Mr. Cates said.

Their refusal to consider anything but bargains means that their fund, which is closed to new investors, can build up a hefty hoard of cash. On May 31, in fact, cash accounted for about 15 percent of its $3.4 billion in assets. “We demand high quality but want a great price, and there typically aren’t a lot of those stocks around,” Mr. Cates said.

The managers aim for shares that trade for no more than 60 percent of their estimate of value.

Often, that means betting on companies with overlooked assets. Consider Dillard’s, the department store chain. When Longleaf bought in several years ago, the stock was trading in the teens, but its real estate alone — Dillard’s owns most of its stores’ buildings — was worth $60 to $70 a share, Mr. Hawkins says. The company was struggling but had laid plans for a turnaround, and the Longleaf managers believed that it could deliver. Their faith has begun to pay off: Dillard’s ended the quarter at more than $50 a share.

Longleaf typically owns just a handful of stocks, and Mr. Hawkins and Mr. Cates stick with favorites for years. Thus, at the end of March, the fund had only 22 holdings and an average annual turnover of 17 percent, according to Morningstar.

Read about the other funds in the article here.

Richard Russell's Latest Outlook

The King World News blog has a timely excerpt from Richard Russell, who's been writing his newsletter since the 1950s.

I'm linking to it because it strikes a chord in me. We're certainly in the "fog of history" as far as the stock market is concerned. Of course, we're always in the moment, living in real time, but the "fog" seems thicker than usual to me.

Yeah, one day I'll look back and see it all so clearly.

That's why, to beat a dead horse, I like my gold exposure, I like my cash exposure, and I like still being in stocks. My portfolio isn't quite one-third in each of those categories, but pretty close.

From the KWN blog post quoting Russell:

Today QE2 ends, and supposedly the Fed steps back. The Treasuries are now on their own, and the Fed has stopped buying. The smart boys are sticking to this scenario. With the Fed no longer buying Treasuries, the Treasuries start falling while interest rates rise. This tends to throw the economy into the dumps. The Fed will watch for a while as the edge is taken off inflation. But as the economy worsens, the Fed will be forced to stimulate again. Once stimulation is back, the precious metals will boom. That's the line and scenario that I hear.

The Russell reaction -- It bothers me that it's all so pat and so widely accepted. So far, the Treasuries are acting according to script and so is gold. The stock market is acting as if something better is riding on the winds of the future. Could something be amiss with the accepted scenario? Could Bennie Bernanke have it right? And why is Treasury Secretary Geithner ready to say "bye" to the administration? What can he see ahead that he doesn't like? Geithner's been Obama's leading economic confidant. Certainly, an unusual time to exit.

Read the entire post here.

It will be interesting to see what the second half of 2011 has instore for us.

John Dizard: Mega-Bailout to Come?

John Dizard's Financial Times column has this insightful observation:

One gets the sense that what the world’s political and speculative communities want is an excuse for one last, titanic, round of “stimulus” amphetamine. The collectors and dealers I saw last week at the contemporary art sales in London were astonished by the money in the room suddenly looking for something to do. I think they may be seeing the premonition of the mega bail-out to come.

That's the column's last paragraph. It pops out to me because it aligns with my belief that -- while we my not see an outright QE3 -- we will at least see easy money policies for a very long time.

The bulk of Dizard's piece deals with Europeans not applying the lessons learned from previous emerging market restructurings, or applying them too late.

He recommends a new book, Banker to the World: Leadership Lessons From the Front Lines of Global Finance by William Rhodes, a former Citibank president. Dizard reports first meeting Rhodes while writing about Nicaragua's debt restructuring in 1980. And says Rhodes' career is best described at "the international banks' chief sovereign workout person."

Among Rhodes' key insights is this: a government needs to present its debt restructuring program as being "national" in origin -- and avoid looking like it was imposed, rather than supported, by outside forces (like the IMF, other countries or outside financial institutions).

That's not the case with Greece.

And with eventual default taken for granted, Dizard says the failure will taint the big European and multlateral institutions as well as Greece.

Andrew Massie of Cundill Profiled by Morningstar

Morningstar profiles Andrew Massie, co-manager of the Mackenzie Cundill Value Fund (the fund that for many years was managed by the legendary value investor Peter Cundill).

He talks about the fund's investments in Dell and Microsoft:

The investment case for either stock isn't readily apparent, Massie acknowledges. "If you look at Dell and Microsoft on a hard price-to-book basis," he says, "you would never own either one of them."

What Massie finds appealing about Dell is that it is "morphing" into a higher-margin service company, and is more than just a low-margin hardware provider. "That is something we think the markets aren't truly appreciating," he adds. "We were really happy to buy Dell averaged down at $8 a share."

As for Microsoft, Massie notes that the company generates an awful lot of free cash flow and has had positive earnings for the last 40 quarters. "It is a company that is not appreciated," he says, "but definitely in terms of net asset value they do hit the sweet spot."

There's more worth reading -- so check it out.

On another subject, this is yet another Friday where I don't have time to do a "Five for the Weekend" segment. But let me wish all Canadian readers a happy Canada Day. And a happy July 4th to my fellow Americans.

Jim Grant: Gold the "Legacy Currency," Liking Blue Chips

Another day, another Jim Grant appearance on Bloomberg. This time Tom Keene conducts the interview during his "Surveillance Midday" program.

They discuss Central Banking and QE2. Grant says that the gold price reflects the investing public's faith -- or lack thereof -- in what he terms "the PhD standard." He calls gold a "legacy currency" and says what's needed is something that can't be created by (and I'm paraphrasing) adding digits on a computer.

Keene asked him about the gold standard. Grant''s for it, noting that it wasn't without problems, but remains the least imperfect of any currency standard in human history.

A few more things are discussed. Then at the end, Keene asks what he's finding attractive these days. Grant says he's increasingly liking the big blue chips that have "gone nowhere" for a decade.

The interview is less than 10 minutes. You can watch it here.

Some Things Bear Repeating: Jim Grant on the Fed

To state the obvious for anyone who reads Controlled Greed anywhere close to regularly, I'm a huge admirer of Jim Grant.

So for me to link -- yet again -- to an interview conducted with him may seem like preaching to the choir of this blog's handful of readers.

But Grant's appearance on Bloomberg's "In Business" program last week to discuss Fed policies and actions strikes me as compelling. The central bank's war on savers -- especially those who are retired, but everyone else as well -- should be a scandal. Score another one for the American media.

You can watch it here. The entire thing is around 13 minutes.

Frightening Stat for US Stock Market Investors

The latest Barron's has a letter from a reader pointing out something Marc Faber stated in the Mid-Year Roundtable earlier this month.

Here's what Faber said:

The U.S. stock market measured in Swiss francs, Australian dollars, Japanese yen or gold or silver is already down by 50% to 80% from a 2007 peak.

That's a devastating fact. And an even more devastating indictment of the American Political Class -- which includes members of the media and crony capitalists as well as politicians.

BTW, I linked to the Barron's Mid-Year Roundtable through RealClearMarkets.com, so a Barron's subscription shouldn't be needed to read it. It really is something worth printing out and reading. And re-reading over time.

David Winters: Go Long and Go Global

David Winters of the Wintergreen Fund was on Bloomberg TV today. He thinks the way to go in this market is for long-term investors (with time horizons up to five years) to invest globally.

He doesn't name names, but in saying he's not heavily in financials does say he like Berkshire Hathaway -- because of all the cash it has along with being unlevered.

Winters used to be with the Mutual Series of Funds (now part of Franklin Templeton). Jim Grant wrote in Forbes a few years ago that he was invested in the Wintergreen Fund. Whether that's still the case or not I have no idea.

The interview is less than seven minutes. See it here.

Anthony Bolton's Disappointment

One of the best value managers ever in the UK was Anthony Bolton of Fidelity. He came out of retirement when he saw the potential for investing in China.

He relocated to Hong Kong and started a new fund last April -- the Special Situations China Fund.

The fund's performance has been "disapointing" over the past year. Emma Wall of the Telegraph interviewed Bolton and asked about the fund's results. He replies:

The last year has been very much a year of two halves. I was feeling things were going well after the first six months and then the latter six were disappointing – even more so the period since year end. The market background has been poor and I think that has hurt me two ways. I have a lot of medium and smaller size stocks which tend to be more volatile than the market, and also the fund has gearing that increases the volatility too.

There have been some specific areas that have not done well. My put options on the Korean market and some of the US listed Chinese shares have also been disappointing – there have been some problems identified at some of those companies and that has lead investors to be wary of the whole area. I have 15pc of the fund exposed to that group.

Having a low exposure to oil has also hurt me – as the Middle East problems obviously caused the oil price to rise.

Bolton's still a great manager. This has to do with more with timing than anything else.

You can read the entire interview here.

Grant on Taking Stock

Yesterday, Jim Grant made another apperance on Pimm Fox's "Taking Stock" program on Bloomberg TV.

It's hard for any program on five days a week to be consistently worth our time. But Pimm Fox's show is the best thing on financial television.

Grant was held over for more than one segment. They discussed banking regulations, the risks with money market funds, the current financial scene and, at the very end, Grant voiced his opinion that gold should head higher (though he added that the metal has no intrinsic value).

Watch it here.