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Cheung Kong Reports Excellent Results

Portfolio holding Cheung Kong Holdings (CHUEY) says 2009 profit rose 53% as economic growth in China and Hong Kong lifted home sales and raised the value of its investment properties:

Net income climbed to HK$19.9 billion ($2.56 billion), or HK$8.59 a share, from a restated HK$13 billion, or HK$5.63, in 2008, the world’s second-biggest builder by market value said in a statement today. That beat the average HK$17.6 billion estimate of 10 analysts compiled by Bloomberg. Excluding earnings from its 49.97 percent stake in Hutchison Whampoa Ltd., profit jumped 91 percent to HK$12.8 billion, from HK$6.69 billion in 2008, the company said in the stock exchange filing.

Cheung Kong's ADRs have skyrocketed since I bought them -- but the company still trades for right around book value last I checked. I bought it at 70% of book during the time when the global financial crisis was in full swing.

My concern now is the reported bubble in China. The linked Bloomberg story quotes a Hong Kong analyst:

Cheung Kong is unlikely to be affected by measures to cool the property markets in Hong Kong and China because “the governments don’t want the markets to collapse, they just want prices to cool down a bit,” said Ngan, who has an “outperform” rating on the stock.

Well, that's all well and good. But I don't have that much faith in top-down central planning. With all due respect to Bob Woodward, we now know that Alan Greenspan was never really "The Maestro," and we'll likely see that there aren't any on the Mainland, either.

So I'll be keeping an eye out. If things heat up in China maybe I'll take some profits.

Normally I'd be worried about Li Ka-shing's age -- he's 81 now -- but I believe Cheung Kong has ample management talent onboard. Including Li's son, who serves as Deputy Chairman.

Gold Under Pressure Recently, Rebound Coming?

I promise you, I am NOT a gold bug. But I think the answer is "Yes" and, as you know if you're a regular reader of Controlled Greed, I put my money where my mouth is.

This from Peter Brimelow's latest MarketWatch column:

From a completely different angle, those who view gold through the prism of U.S. monetary conditions have something equally exciting to contemplate: a possible massive breakdown of the 30-year bond chart after a poor auction this week.

Dow Theory Letters' Richard Russell said of this on Wednesday: "I believe it would mark the end of the 25-year bull market in bonds. That bull market (a trend of lower interest rates) has been a major force for the great bull market in stocks and the economy that began in the early 1980s. ... The current yield on the 30-year Treasury bond is 4.62%. Technically, this chart implies that the yield on the long bond could rise to near 7%."

A gold-friendly interpretation of this: rising inflation expectations.

By week's end, gold had rebounded fiercely. Noting that gold futures volumes have increased sharply, a LeMetropoleCafe commentary Sunday concluded: "With sentiment as measured by MarketVane and the HGNSI quite washed out and strong signs of life in the physical market, the stage is set for a meaningful rally."

We're in the seasonal weak period for gold. But I believe the demand from places like China and India is among the reasons the price has held up well. Let's see what happens later this year -- and next.

McElvaine Investment Trust 2009 Annual Report

Tim McElvaine has posted his annual report recently, and it is a great read for any value investor. (You can get it here.) McElvaine isn't as well known in the US because he's based in Canada and you have to be a Canadian resident to invest with him. That's not his choice, it's the law.

I'm not going to recap the letter here. But it's worth pointing out he reports finding interesting ideas in large-cap non-Canadian stocks.

He also finds the environment differing significantly from this time in 2009. Credit continues to be tight, but failing another banking crisis it is highly unlikely we'll revisit last year's lows.

McElvaine thinks inflation may be an issue, "but I am not sure gold is the answer." He says that when an investment is advertised on TV, he doubts there's an opportunity there. I totally agree about seeing gold ads on TV (and hearing them on radio) as being cautionary.

Yet, as I've explained on Controlled Greed previously, I think it is beyond doubt we've been in a gold bull market. And that gold bulls don't end without gold mining stocks overtaking the metal. We've yet to see that, and that results in my overexposure in gold mining plays. What's more, Tim is in British Columbia, which makes gold not nearly as attractive with the long-term prospects for the Canadian dollar much better than those of the American currency. (David Rosenberg has been saying the Loonie is a bit overvalued right now compared to the USD, but we're talking long term here.)

That said, McElvaine is way smarter than me. And you can bet he never lost his shirt on GM, unlike yours truly.

Read the entire thing when you get the chance.

Insurance Stocks and Hurricane Season

Jim McTague writes in Barron's that hurricane season will be starting soon, and to avoid all but a few insurance stocks in the meantime. The ones he names are good. They're not the three property and casualty insurers in my portfolio -- Fairfax Financial and EGI Financial (trading in Toronto) and NipponKoa (trading in Japan) -- but I get his point.

Natural disasters, along with major terrorist attacks, are the chief obstacles to profiting with P&C insurance companies. So my take is to ENDURE the weather, and ride for the longer term.

That said, McTague makes a compelling case:

The start of the June 1-Nov. 30 hurricane season is just about two months away, and it's likely to spawn at least five storms, two or three of the category three variety, packing winds of 111 mph to 130 mph. At least that's what AccuWeather's chief long-range meteorologist, Joe Bastardi, predicts. If he's correct -- and, yes, that's a big if, although Bastardi was dead-on last summer in forecasting that this winter would be unusually snowy in the East -- the insurers could get a walloping similar to what they experienced in 2008. That year saw five major hurricanes, including Ike, the insurance industry's third costliest ever, at $12.5 billion.

I'm keeping my insurance stocks for now. And, as I constantly remind readers, Fairfax is a big holding of mine, but I've sold enough of my stake to get my capital out and make it a free ride.

Are US Treasuries a Good Bet Over the Long Term?

I don't think so -- though as an American citizen I'd love to be proved wrong.

John Dizard doesn't think they're a store of value in the long run either. But he confesses, in has latest Financial Times column, that David Rosenberg successfully argued the contrary while debating Jim Grant at the Grant's Spring Conference last week:

I was supposed to keep time and make sure the debate was fair, but my rhetorical thumb was on Mr Grant's side of the scale. I agree with many of his detailed points, including the fecklessness of the political class, the enormity of the US government's off balance sheet exposures, as well as the grim examples set, for example, by those who believed in the purchasing power of UK gilts at the beginning of the past century. If you believe in the predictive power of price charting, the "technicals" for the Treasury bond are signalling a rise in rates.

Against this impressive thesis, Mr Rosenberg had nothing to offer but facts and history. Incredibly, given that the audience was prepared to believe the worst of any government promises, he won a significant number of votes over to his side by the end.

Good stuff, like everything Dizard produces, so check out the entire thing if you subscribe to FT.com. Dizard closes with more about his ongoing consideration of shale gas.

Berkowitz in Barron's on the Aftermath of the Panic

This week's feature interview in Barron's is with Bruce Berkowitz, the value investor running the Fairholme Funds. He's asked about some of the attractive plays he's been finding -- AIG, Bank of America and Citi.

But it is this section that stands out to me:

In 2008, the Fairholme Fund lost nearly 30%. What did you learn from that experience?

Hopefully, at my point in the game, after doing this for about 30 years, there are no new lessons. But an experience like that reinforces some important lessons -- one of which is that you can't predict the future or the extreme nature of events.

In running the fund, we were talking about bad times, and headwinds coming for years -- and we made the move toward health care and defense, correctly believing that even in a severe recessionary time, those two industries are recession-proof, and that's proven to be the case.

But when times are very tough, almost all assets are highly correlated, except for cash.

So it was a mistake to think there were places to hide in the equity world. There were not any places to hide, because when liquidity dries up, people sell what they can sell, no matter what the price is of what they are selling.

I lost 38% in my portfolio in 2008 and while I've recovered somewhat (I had a good 2009), the fact is that when we get hit in a financial panic it takes a long time to really get back on track.

I basically matched the S&P 500 those years -- but hitting that benchmark loses its meaning when you see a year like 2008.

The lesson for me -- more of a reminder than a lesson -- is that stock investing is truly long term money. I'd say a minimum of 10 years. There are exceptions, such as dividend plays for retirees, but when EVERYTHING plunges in price like they do in these full-fledged panics, you need to be able to ride it all out while your stomach gets all knotted up.

Charles Allmon, Superbear

Peter Brimelow wrote this week about Charles Allmon, editor of the Growth Stock Outlook newsletter. A couple of interesting bits:

Over the past 10 years, the letter is an up annualized 4.22%, versus negative 0.08% annualized for the total return Wilshire 5000.

Remember, all this has been done while Allmon has been substantially in cash. Right now, he's only 20% invested.

Allmon doesn't explicitly time the market, but in his most recent letter he says repeatedly that he sees "no earth-shaking bargains," according to his very fundamentalist stock selection techniques.

His stock portfolio, which doesn't change much, is about two-fifths gold miner Newmont Mining Corp. (NYSE:NEM) ; about a fifth each of high-yielding cigarette makers Altria Group Inc. (NYSE:MO) and Philip Morris International Inc. (NYSE:PM) ; and the balance in high-yielding drug manufacturer Bristol-Myers Squibb Co. (NYSE:BMY)

Allmon writes: "My best guess is a down market in 2010. This may surprise, if not shock investors by the downside ferocity later."

As you know, I own NEM. More about gold:

He writes: "Contrarian that I am, I'm not risking more than 15% of our [overall] portfolio to gold exposure. Could gold, for some reason, take a big dive? I don't know, but anything is possible."

Allmon has said before that he would hold gold through a major drop because he values it as insurance. Looks like he still thinks that way.

My gold exposure -- bullion and mining stocks added together -- is double Allmon's. Yet I would also hold through any major correction.

Russell Reluctant Bull

Peter Brimelow, who covers newsletters for MarketWatch, writes today about two letters that foresaw the 2008 panic -- and are not bullish now. Interesting stuff, but later in the piece he moves on to Richard Russell, who has been penning Dow Theory Letters since the late 1950s:

"OK, today I got three important bull signals, the great tide of the stock market has turned to bullish on the three counts I've been waiting for. The Dow closed at 10733.70 -- at last above the critical 10725 level. This is a new high for the Dow, and it means that the Dow has finally confirmed the new high for the move on the part of the Transports. A Dow Theory bull signal -- the primary trend of the market is bullish. At the same time, the great arm of the Dow has swung back above the 50% level. The Dow is now back in the bull zone above 10725. At the same time there were 627 new 52-week highs on the NYSE, a new high-total and well above the 523 new highs of January 11....An all-round historic day."

But Russell adds: "What am I personally going to do about it? Honestly, nothing. Stocks are generally overvalued in this area."

His reasoning: "Actually, the market is priced to produce losses over the years, particularly if you factor in inflation, commissions, dangerously low dividends and rising taxes."

I find Dow Theory intriguing, but don't employ it in my investing decisions. But I have enormous respect for Richard Russell and always find his comments time well spent.

I, too, think the market overall is overvalued. That's one reason I haven't been doing much lately. Since the New Year I bought a special situation -- Geeknet (LNUX). And I took the plunge and established four gold mining stock plays -- Newmont Mining (NEW), Goldcorp (GG), Agnico-Eagle Mines (AEM) and the Market Vectors Gold Mining ETF (GDX). In a way, they are special situations as well, since I view gold miners as the next beneficiaries of the gold bull market.

Of course, if I'm wrong about the gold bull I'll end up with egg on my face. Lots of it. Yet as I type this I feel really good about my gold stake (remember I also hold the SPDR Gold ETF -- symbol GLD -- that is the single largest position in my portfolio).

For now, I'm not selling my other stocks. One reason is because the portfolio is long-term money -- truly long term -- that I won't be touching anytime soon.

Bill Laggner of Bearing Asset Management on King World News

Eric King interviewed Bill Laggner of Bearing Asset Management this weekend (he has also been interviewed by King several times before, most recently in January). Laggner and his partner are value investors, but they apply the value approach through their belief in the Austrian School of economics.

This interview, like all the ones King has conducted with Laggner, is well worth listening to. It focuses on the continuing saga of the world dealing with the global financial crisis, with heavy emphasis on the corruption of the Political Class. No stock picking, yet plenty of good stuff.

Good Stuff from Seth Klarman and Fred Hickey

Alan Abelson's column in Barron's has this on Baupost's Seth Klarman:

Although just about everybody calls himself a value investor, Seth is that rare bird who really is a value investor. And like Seth himself his investment approach is unostentatious, smart, serious and painstaking. His year-end letters to his limited partners are always a joy to read and, unlike so much of the genre, enlivened by insightfulness, wit and that most uncommon ingredient -- common sense.

In his latest commentary on 2009, he reflects with more than a dollop of wryness on the effects of that mother of all rallies (which, we would be derelict and ill-mannered were we to fail to mention, last week celebrated its one-year anniversary). Seth writes that the monster move has been taken as "an all-clear signal." It even, he says a tad wondrously, has rescued from the purgatory where moldy old Street sayings end up the notion that we're in a Goldilocks world for investors, one that's not too hot and not too cold.

Gentleman and scholar that he is, he submits a delicate demur to this vision of "financial utopia," pointing out that its components are inarguably a tad repulsive, encompassing as they do unyielding reduction by Uncle Sam of short-term interest rates to just this side of zero, the printing presses running all-out, all the time, and the dead hand of government cropping up everywhere -- in the financial markets, in accounting standards, in the economy.

And this on Fred Hickey, who edits The High-Tech Strategist newsletter:

In his latest missive, Fred opines that "my hunch is that this market might roll over and suffer at least a 10% correction," something he points out we haven't had since stocks took off a year ago.

He hazards that if the Fed really decides to ring down the curtain on quantitative easing that could trigger fears of rising rates, or, even worse, a chain reaction of rising rates that might unnerve investors, force Mr. Bernanke to speed up the printing presses again and cream the dollar.

In some ways, Fred's talking his book, since he's loaded with gold, to which such a sequence would add fresh glister. As for tech, although he has enjoyed some profitable trades, he now believes that, with a few exceptions, like Microsoft, Verizon, Cadence Design, and Sybase, the stocks are over-owned and no longer very attractively priced.

I obviously agree with Hickey for the most part. I own MSFT and own gold and gold mining stocks.