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Bernanke's Coming Reappointment

My hunch is that President Obama's first choice was to appoint Larry Summers as Fed chairman. For one thing, such a move would tie-in with any new president's natural inclination to put his new stamp on things. And Mr. Obama aims to have the most transforming presidency since Ronald Reagan took office in 1981.

For another, Obama trusts Summers on economic and financial matters -- he wouldn't hold the position he does otherwise. And all signs suggest that Fed chairman is a job Summers would like to have.

So, why did President Obama announce he will be reappointing Ben Bernanke?

The timing of his announcement -- while on vacation -- is supposedly because the White House wanted that to be the story of the day. No argument with that.

But the reason for Bernanke's reappointment is something else. It could be that the White House "tested the waters" behind the scenes and got feedback that a Summers appointment would not be well-received by the financial markets.

Or, perhaps the president figured out that Bernanke is committed to giving him everything Summers would -- plus the "stability" the markets crave.

Let's face it -- ALL presidential administrations want low interest rates and easy money policies. Summer would have definitely given Obama that. Yet so will Bernanke.

I believe Bernanke will keep printing money like crazy. Even if the Chinese and others eventually cry foul, the White House and the Fed are more likely to keep the money printing going than defend the US dollar. Why? Because defending the dollar would mean pain at home. Even crushing, Depression-like misery.

We will probably see pain in our future anyway. Yet politicians are, well, politicians. And they'll put off pain for as long as they think they can.

I could be wrong. But nothing I've seen so far has made me regret establishing my position in the SPDR Gold Trust ETF (GLD).

Five for the Weekend #55

After being unable to post anything last weekend, let's get right to newest offering of five items for your review.

• Charles De Vaulx worked with Jean-Marie Eveillard and took over the first time Eveillard retired. Then he left First Eagle abruptly, causing Eveillard to come out of retirement. De Vaulx then set up his own shop, International Value Advisors. Bloomberg reports one of his mutual funds has raised $1.7 billion over the past 10 months, the most of any fund.

• This Canadian story considers focused stock portfolios and their potential for greater rewards and greater risks. Tim McElvaine is quoted: "I might expand to 20 securities," said Mr. McElvaine, who was once chief investment officer at Cundill Investment Research. He also ran what is now Mackenzie Cundill Canadian Security Fund with 20 stocks from 1991 to 1999. "When I started the Trust in 1996, our position sizes tended to be 5 to 10 per cent, but over the last couple of years, my position sizes got to be more than 10 per cent," he said. "I think our performance was better when we had 20 stocks."

• Matthew Lynn profiles the very public spat Paul Krugman and Niall Ferguson have been having over inflation (HT: LewRockwell.com).

• And speaking of economists, Bloomberg runs a column by John Taylor, who explains the Taylor Rule: "There are three reasons people are asking about the Taylor Rule now. First, it helps determine when the Fed will start to move its interest-rate target above zero. Second, it’s a gauge for how many unorthodox actions the Fed should take. Third, a big deviation from the Taylor Rule is viewed by many, including me, as a primary cause of the financial crisis and people want to avoid another one."

• The greatest American reporter of the last half century died last week: Robert Novak. I started reading the Evans and Novak column in the early-to-mid 1970s (Rowland Evans eventually retired and died in 2001). Anyone interested in American politics and how political power interacts with the media (print and increasingly cable) should check out Novak's 2007 autobiography, The Prince of Darkness: 50 Years Reporting in Washington. It's must reading. R.I.P., Mr. Novak.

Have a wonderful weekend. See you next week.

Chou Funds 2009 Semi-Annual Report Available

Francis Chou has posted his semi-annual report on his website. I pay most attention to his shareholder letter for the flagship Chou Associates Fund, because the other fund letters are based on it.

As I repeatedly say, reading the thoughts of value managers like Chou and Tim McElvaine and a few others is more fruitful than Warren Buffett. That is NO slam at Buffett. If you're a regular Controlled Greed reader, you know reading Buffett's "Superinvestors of Graham and Doddsville" in 1986 was a formative event in my (financial) life. But the massive size of Berkshire Hathaway limits his stock-picking universe -- which he freely admits -- so time might be better spent following others.

Back to Chou. Among the points in his latest letter:

• The last two years have been the hardest time he's seen managing money.

• Non-investment grade bonds are fully priced, he sees better buys in investment grade bonds and bank debt.

• Compared to corporate bonds, US Treasuries are in bubble territory: "In our opinion, this is the worst time to hold cash and short-term treasuries unless you believe we are headed into a 1930s style depression." And he adds that anyone believing that should cash out of his funds.

• On inflation. The government-infused liquidity "is countering some of the deleveraging and credit freeze" in the crisis. But that longer term these actions can bring "huge unintended consequences including the return of high inflation and the likely debasement of the US currency."

• Chou then maps out his choice for inflation protection: Constant Maturity Swaps. His funds won't be able to invest in these until November. But he outlines what they are and how they work.

He didn't discuss specific stock holdings in much detail. I haven't compared this report to his previous one, but it looks like not a lot has been going on with his stock holdings. King Pharmaceuticals (KG) is still by far his largest holding in the Associates Fund (which I own as well).

Chou reports that as of 8/14/09 cash accounted for 6.2% of Associates Fund assets. He owns a fair amount of bonds.

Read the entire thing when time permits.

What It Takes To Be A Full-Time Investor

Charles Kirk of The Kirk Report was recently interviewed by Your Trading Edge magazine. It's recommended reading, even if you're not a trader.

The most interesting question, for me, was how to meet the challenges of a lack of regular income when trading full time. Kirk lists four factors:

• Having absolutely no debt

• Living well below your means

• Having alternate means of income

• Having a large savings fund -- not attached to the market -- that covers at least one year of living expenses

My take? These are ALL good ideas for ANY type of investor -- traders or long-term buy-and-hold types or anywhere in between. In fact, they're excellent advice for practically everyone.

Getting specific, on having no debt, I don't know if that includes a home mortgage, but I'm certain Kirk means no credit card bills and likely no car payments.

Living below a person's means is something I bet is catching on big-time these days.

On alternate income, Kirk is married and his wife is a college professor. And he also charges a membership fee for his blog. I don't know if he considers both of those as his alternate income, but it undeniably makes it easier to trade or invest or do anything under the "self-employed" umbrella with a working spouse.

Finally, I've posted before on the advantages of having an emergency fund. The benefits are much more than simply financial. Kirk says a year, and I'm not going to argue with him. I've said in the past six months' worth of expenses is fine. Some financial planner types have said three months. I'd be very leery of relying on 90 days' worth of expenses for any unplanned rainy days.

Barron's Online Has Scott Black's Late-Summer Picks

Scott Black is one of Barron's annual Roundtable participants. Barron's Online has a Q&A with him about the state of things as August is coming to a close. Asked about what's out there:

It's getting increasingly difficult to find cheap stocks. What concerns me is, we're back over 1,000 for the [Standard & Poor's 500 Index], and if you use a bottom-up estimate, of $54 [per share in earnings for S&P companies this year], that's an 18 multiple, possibly a 20 multiple. On a pure multiple basis, this market is full.

More:

The second thing that concerns me is there's been a major disconnect between the stock market and the economy. Look at the Market Laboratory [in Barron's magazine]. Take your pick of the data -- retail, wholesale, industrial. It may be that things aren't cropping the way they were at the beginning of the year, but it's not like industrials are taking off, either, or home sales taking off. The numbers are still disastrous year over year.

President Obama hasn't put anybody to work. When he came in, he quoted Henry Morgenthau [U.S. Treasury Secretary under Franklin Roosevelt] as saying the best economic policy is a job. Until you put people back to work, consumer confidence isn't going to improve. Industrial capacity utilization is at 68.5%, one of the lowest since 1946. The rotary rig count [a measure of drilling for new oil wells] is down from 2,400 to 1,138 in one year. Wholesale sales are down, retail sales are down. These things have just dropped off the cliff.

Bill Buckler of The Privateer has been among those banging the drum about the bad sign of US industrial capacity being in the 60-some percent range.

For me, I'm not going to say there's nothing worth buying here. But just about everything is fairly valued or overvalued. Patience seems warranted.

Dorfman Names Four Bargains

Money manager and Bloomberg columnist John Dorfman names four bargain-priced stocks. Here's how he found them:

I screened U.S. stocks with a market value of $500 million or more to find ones that are cheap by all of my favorite yardsticks. These stocks sell for less than 12 times earnings, less than one times book value (corporate net worth) and less than one times revenue. I also required that corporate debt be less than stockholders’ equity.

More than three dozen stocks passed the test. To find the four he recommends -- and the two he owns personally and for his clients -- read the linked story.

Christopher Wood Interviewed in Barron's

The interview in the current Barron's is Christopher Woods. He's a Hong Kong-based strategist for CLSA Asia-Pacific Markets, and who writes a newsletter called "Greed & Fear." I'm not familiar with his newsletter, and couldn't find a homepage for it through Google. Maybe he's like Fred Hickey, who's High-Tech Strategist doesn't have a web presence.

Woods' global take echoes recent statements by Jean-Marie Eveillard -- that the future belongs to Asia much more so than the West.

That's not to say we won't see bargain stocks and great investments in North America and Europe over time. Yet, I believe the sentiments of Woods and Eveillard ring true. For all I know they may disagree over specific bets, but generally the thrust is the same.

Asked what themes he likes, Woods says:

I like financial services, real estate and domestic infrastructure -- the three broad domestic sectors linked to a domestic demand, asset-reflation theme. If you have got the ability to buy smaller stocks, then you can buy consumer stocks. Search-engine stocks are also domestic demand proxies. I would be less aggressive investing in exporters, but there's nothing I aggressively dislike in Asia, I'd say.

The article includes a model portfolio from Woods for investing in Asia.

Barron's Bearish Cover Story on Sears

I've never owned Sears Holdings, but the company has been widely talked about (and even widely held in some circles) the past few years. This week's Barron's features a story that is down on the company's prospects.

The most prominent investor in Sears is also the man controlling it -- hedge fund manager Eddie Lampert"

Sears and Kmart were poorly run for years before Lampert came on the scene. Perhaps the hedge-fund chief should've heeded the famous adage of his hero, Warren Buffett: "When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it's the reputation of the business that remains intact."But that assumes that Lampert is as brilliant as he thinks he is.

Ouch. Actually, I don't follow Lampert -- and that's no slight against him, either -- so I don't know his long-term record.

Yet I suspect Sears once had merit since Marty Whitman and Francis Chou have owned it. I think Whitman took profits a while back, but don't hold me to that. Chou last I heard still had a position, whether or not he's been holding all the way up and down I don't know.

What I do know is that based on the Barron's cover story, the Sears/Eddie Lampert talk among investors won't be ending any time soon.

Five for the Weekend #54 -- NOT!

No installment of Five for the Weekend this time round folks. Yours truly is (once again) swamped with non-blogging duties and only able to come up for air long enough to post this short bit.

In the meantime, hope everyone is enjoying a great next couple of days. And I'll see you next week.

Buffett NYT Column Yet Another Cautionary US$ Note

Unless you've been away from the internet today, you've most certainly seen Warren Buffett's op-ed column in The New York Times:

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

I'm not predicting disaster and freely confess I have no idea what will happen. But I believe in taking steps to protect against certain potential outcomes that are within the realm of reasonably occurring. Such as purchasing health insurance or auto insurance.

And since I'm living in the US, I need to be aware of the fact that -- as Buffett writes -- "we are in unchartered territory." And it is undeniably true in my view that some unfortunate things could happen with the US dollar over the next few years.

As you know, that was the motivation behind my recent investment in SPDR Gold Shares ETF (GLD). Gold pays nothing, but the cash in my brokerage accounts is paying very nearly nothing. So GLD provides "dollar crisis" protection for nothing. The risk, as I spelled out at the time, is that gold plunges in value.

I doubt that will happen. But my lack of doubting gold and two bucks will buy you a grande coffee at my local Starbucks.