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Paul Harvey, R.I.P.

Paul Harvey, one of the greatest broadcasters in American history and certainly the greatest radio broadcaster, died today in Phoenix at age 90. His delivery, along the way he blended news with commentary, was unlike anything else on the radio dial. And Harvey would personally endorse advertisers on his show, which he reportedly wouldn't do unless he liked the product or service himself. (I still remember his glowing praise of Curtis Mathes TVs years ago.)

A true pioneer is gone. Rest in peace, Mr. Harvey.

Five for the Weekend #30

Well, the Bear market rumbles on and on, clawing and shredding brokerage statements left and right. While we're tending to our scratches and mauled psyches, we can spend some quality time reading over the weekend. Here a five suggestions.

• Good overview article on value investing entitled, The Graham & Dodders. Besides Graham and Dodd, the piece discusses Warren Buffett, Mohnish Pabrai, Leon Cooperman, the guys at Tweedy Browne, and the Sequoia Fund (co-founded by the legendary, and late, Bill Ruane). Even if you're familiar with value investing, as Controlled Greed readers are, you'll find this worth your time.

• If you're a regular here, you know I can't get too much of the late John Templeton. And here we go again. This Forbes piece provides a nice overview of Sir John's career, and even tries to pinpoint some stocks he might find attractive today. I'm suspicious of that sort of thing, but confess it gets my interest.

• With Warren Buffett's annual letter to shareholders due Saturday, Bloomberg speculates Berkshire Hathaway's 2008 performance may have been its worst in history -- as measured by the company's book value.

• It's been popular since September 11, 2001 -- especially among many of my conservative friends -- to dump on the Saudi Royal Family. Yes, I know the majority of highjackers that day were Saudis. Yet I've always believed that was by design by forces wanting to destroy US-Saudi relations. Karen Elliott House wrote a thoughtful op-ed in The Wall Street Journal this week on reforms King Abdullah is implementing. And I wish him and The Kingdom well in what must be among the world's most difficult balancing acts.

• Africa-Asia Confidential runs yet another in-depth report on China's growing investment in the Dark Continent. This story focuses on China creating a mining portfolio in Liberia, Guinea and Sierra Leone.

That's it for now. The big thing this weekend will be Warren Buffett's letter. Remember when Buffett wasn't part of American pop culture? Anyway, see you next week.

Jim Grant Review Teaches the True Gold Standard

Jim Grant recently reviewed a new book titled, Lords of Finance: The Bankers Who Broke the World in The Wall Street Journal. Grant writes that the book is a "modernist's" account of the errors helping produce the Great Depression, adding:

It is also, necessarily, a provocation to debate about this, our Great Recession. Liaquat Ahamed is the modernist in question, and he writes with all the world-wise assurance of the professional investor, World Bank alumnus and Brookings Institution trustee that he is.

Apparently, Ahamed believes the main villain was the gold standard. Grant corrects him in the review by pointing out his quarrel is with the "gold exchange standard" -- a "road-show version of the genuine article." More:

The gold standard -- i.e., the gold standard -- was the monetary system more or less continuously in place between Waterloo and World War I. It was simplicity itself. Bank notes were exchangeable into gold, and gold into bank notes, at a fixed, inviolable rate. A central bank's everyday job was to facilitate this exchange. Of what we know today as "monetary policy" -- i.e., manipulating interest rates or the money supply to promote full employment or to pull the economy out of the ditch -- the conscientious central banker would have no part. This gold standard perished in World War I.

Another great part:

But gold backing is not, in fact, the essential feature of a properly functioning gold standard. What made that self-regulating system tick was the simple rule that a dollar or a franc or a pound could not be in two places at the same time. Gold movements between debtors and creditors ensured as much.

You might suppose that so basic a feature of the physical world would naturally rule the financial one. But the post-World War I wrecking crew discovered that a certain privileged kind of money could be made to do double duty. This was the "reserve currency." The pound sterling was the original reserve currency, the top monetary brand of the day. The U.S. dollar is its successor. It was given to Britain, later to the U.S., to have it both ways, to consume much more than it produced but never to have to pay its foreign creditors in anything except the paper that it alone could lawfully print. And as if that were not good enough, the creditors dutifully reinvested the pounds or dollars in the securities of the debtor government. It was heaven on earth, while it lasted.

Of course, it didn't last; it never does. Inflation -- of prices or of credit -- brings down the hammer. The disservice that Mr. Ahamed does to history is to fail to distinguish between the flaws of the classical gold standard, on the one hand, and the far deeper imperfections of the gold-exchange standard (so similar to the evils of today's dollar standard), on the other.

Like anything of Grant's, read the entire thing.

Lonrho-LonZim Controversy Brewing

Regular readers of Controlled Greed know that yours truly has been intrigued by the idea of an African-wide play. The reason is because Africa has been growing nicely over the recent years, and might be a smart play on emerging market growth with Mainland China and India getting all the press. (This was before the global financial crisis.)

Lonrho is a company I've been keeping an eye on -- and money out of.

While Lonrho is a "conglomerate" investing across several countries and industries on the "African Continent," it also qualifies as a micro-cap outfit. As a result, there's very little coverage of the company, both in the press and among analysts.

Then, with the current market meltdown, you don't have to endure the risks of putting your money in Africa when plenty of outstanding companies are available at cheap prices. (At least that's what I hope the case with Microsoft and Cheung Kong Holdings.)

Thursday the news broke in London that Lonrho's investment arm LonZim (which invests in Zimbabwe) had bought Lonrho's stock without telling anyone:

LonZim spent almost £3 million buying nearly 60 million shares in Lonrho, with which it shares most of its directors, over a three-month period, including participating in a private placing in November, but failed to disclose the purchases as a related-party transaction. The company also failed to inform Collins Stewart, its nominated adviser, which is understood to have now moved to sever all ties with both LonZim and Lonrho, after what is believed to have been a rocky relationship.

David Lenigas, who chairs both companies, last night denied any wrongdoing by the AIM-listed groups and said that he was already in discussions with a number of parties interested in becoming LonZim’s new adviser, with a view to relisting as soon as possible. LonZim suspended its shares at 31p while it reviews the transaction.

Lonrho trades in London under symbol LONR. LonZim had been trading under symbol LZM.

Sobering Column by Tom Stevenson

Tom Stevenson isn't a technical analyst. And I'm not, either (as a value guy, that's no surprise). Yet his Daily Telegraph column makes interesting reading. Even if you, like me, don't quite know what to make of it.

A bit:

It is not inconceivable that another big down-leg is what the markets have in store for us. This is the scale of what happened to investors during the Great Depression. But to believe this outcome you have to also accept some pretty ghoulish forecasts for the global economy. You have to believe, for example, that the entire financial world order which has held for decades has come to an end and that much of the wealth creation of the post-war period has been an illusion.

Same Old, Same Old Left-Right Debates on TV Getting Old

President Obama's State of the Union speech was excellent, in terms of delivery and charisma. And the First Lady was simply stunning, even radiant. I don't know if Mr. Obama will ever top his victory speech the night of the Iowa caucus, which was a transcendent moment in American history.

But the analysis on TV here in the US has been uniformly bad or at best very mediocre. Everything is positioned in the false Left-Right light, leaving those of us in the libertarian segment (admittedly feeling very small these days) out in the cold.

Even Charlie Rose was disappointing, having a 5-person roundtable consisting of 4 leftwingers and one supposedly conservative pundit (who, BTW, writes it seems to increasingly impress the Beltway cocktail party set). It's obvious most of these folks on all these shows grew up believing the New Deal hype and accept it as religion.

And it would be so -- well, refreshing -- to have seen Thomas Donlan or even better Jim Grant frequent these roundtables. Perhaps Mr. Donlan will address the State of the Union address in the upcoming Barron's this weekend.

In the meantime, Holman Jenkins writes something in The Wall Street Journal popping out:

His will be a fascinating presidency to watch, not least because of his inexperience, his intellectual agility, and the crisis in which he finds himself. But his presidency will get really interesting in a year or two, or six months -- whenever he finally realizes that everything he thought he wanted to do is irrelevant. He'll then have to adapt an agenda for the world as it is, in which many childish things no longer have a place.

And, by the way, he kids himself if he believes he will be allowed, like FDR, to preside over a depression without being politically blamed for it. The public is different now -- the world is different -- and he will own the "Obama depression" sooner than he thinks.

Wonder column. Read the entire thing. But I wonder if Jenkins is wrong in that last paragraph.

Barron's Bary on Buffett's Berkshire

Say that three times really, really fast. :-)

Berkshire Hathaway is the subject of this article by Andrew Bary in Barron's Online:

While Chief Executive Warren Buffett has made a slew of savvy preferred stock and corporate-bond investments, the company's famed portfolio of stocks has been slammed in the ongoing bear market.

So far this year, Berkshire's class A shares have slumped 20% to $77,500, near the lowest level in five years and just over half the stock's peak reached in late 2007.

The investment company's woes come in spite of recent investments outside the common stock market. For example, the company has bought $2.6 billion of convertible securities from Swiss Re that pay a 12% interest rate. Berkshire also has bought a series of bond issues from the likes of Vulcan Materials, Harley Davidson, Tiffany and Sealed Air that pay 10% or more.

Berkshire's problems these days clearly stem from its equity portfolio, which could be down more than 25% in 2009, based on our calculation of the performance through yesterday of Berkshire's 17 largest investments, which historically have accounted for over 85% of the portfolio.

Bary estimates that the stock trades at 1.2 times book, below the 1.5 times book its traded for over the past decade. He concludes:

Berkshire has taken some lumps this year, but it remains a financial powerhouse at a time when credit is dear and investment opportunities are plentiful. This plays to Buffett's strength, although he probably wishes he had invested less in 2008 and had more cash to invest now.

The annual report, including the most-anticipated and most-read letter to shareholders in the world of business will be out this weekend.

"Dollar is Best Looker in Ugly-Currency Parade"

So says the always-interesting Michael Sesit in his latest Bloomberg column. He notes that to end the US dollar's reserve-currency role, you need a replacement. And there isn't one. Some may whisper, "gold bullion," but you get the idea.

A snippet:

Americans are now saving more while spending and importing less. As they do, the current-account deficit will narrow and the U.S. will become less dependent on foreigners to finance the gap. The deficit amounted to 4.8 percent of gross domestic product in the third quarter, having been as large as 6.6 percent of GDP in the last quarter of 2005.

I think the long-term prospects for all the paper currencies is lousy. But two thoughts occur as I type that. How long is long term? And what else is there (as insurance) other than gold bullion (but I'd wait for the correction in the price of gold)?

Jean-Marie Eveillard on Bloomberg

Bloomberg interviewed Jean-Marie Eveillard on First Eagle today. He gave his thoughts on prospects for nationalization of US banks and some stock ideas. It's good stuff and, like any interview with Eveillard, well worth your time if you're a fan of those great value investors who've proven themselves over the course of time.

On a related note, earlier this month Sivaram of the Can Turtles Fly? blog posted about the recent First Eagle conference call. He includes links to listen to the call or read the transcript.

BTW, it's nice to see these guys at First Eagle are fellow travelers with me in Microsoft (MSFT/NASDAQ). That doesn't guarantee anything, of course. But I'd rather be alongside folks like these than not.

Hope and Waterfalls

John Dorfman offers hope for a stock market recovery in his new Bloomberg column. A few bits:

Market action during and after “waterfall declines” -- sudden drops of 20 percent or more in a few days or weeks -- tend to follow a pattern, featuring three phases. First there is the dramatic decline itself, often recession-related. Next there is a basing period of one to three months when the stock market moves sideways. Then there is generally a rally lasting six to 12 months, carrying stocks up 24 percent on average.

If that happened this year, the Dow Jones Industrial Average would recover to 9,133 and the S&P 500 would bounce back to 955.

Dorfman uses Ned Davis Research to find that we've seen 11 "waterfall" declines since 1929. He believes we're now in the next phase -- finding a base. And he believes this provides a guide for 2009:

Traders say that the stock market likes to go up with as few people onboard as possible. Today, many people have retreated to cash, or to a mixture of cash and bonds. Many of these investors will miss the next rally.

Using data from Ned Davis and Bloomberg, I examined what happened in the market three months, six months and 12 months after the market low in the 10 descents cited earlier.

In seven cases out of 10, it took several days or weeks for the market to hit a final low after the waterfall decline. That bottoming process took 2 1/2 months after the crash of 1987, for example. The same interval applied with the post-Internet bubble bear market of 2000 to 2002. So far, the current basing period -- assuming that I’m right, and we’re in one -- has lasted three months.

More:

Three months after the post-waterfall low, the market was higher in all 10 cases. The average gain was 15 percent.

Six months after the low, the market was higher in nine of the 10 cases (flat in 1937). The average gain was 17 percent.

Twelve months after the low, the market was higher in nine cases out of 10 (flat in 1929-1930). The average gain in 12 months was 24 percent.

You'll want to read the entire piece. While I don't know if Dorfman's hunch will prove true, I do believe this is not to time to dump stocks and move to cash or bonds. It is a good time to make strategic lateral moves, such as my recent move into Microsoft and, before that, Cheung Kong Holdings. (Whether those two specific plays work out only time will tell.)

I'm trying to position the portfolio for the eventual recovery. Whether it comes later this year or the one after that. Or the one after that. Or the one...well, you get the idea.