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Capital Southwest Sells Long-Time Holding

Portfolio holding Capital Southwest (CSWC) doesn't make news often. Today it announced it is selling its wholly-owned Lifemark Group for $84.75 million in cash:

"Lifemark has been part of the Capital Southwest portfolio since July 1969, when we made our initial investment. As our longest investment holding, Lifemark is an example of how our capital enables management teams to consistently think and act long-term," stated Gary L. Martin, chairman and president of Capital Southwest. "It is in the best interest of our shareholders to pursue this transaction now. The market is ideal for us to use the capital from this sale to invest while the opportunity is high and the availability of alternate funding is low. This allows us to add companies to our portfolio that provide a great long-term benefit and return on investment to our shareholders."

Capital Southwest estimates that $46.2 million of the proceeds will be retained for future investment and $24.4 million will be paid in long-term capital gains tax on behalf of its shareholders. Based on an individual tax rate of 15%, it is estimated individual shareholders will receive a net tax credit of $3.73 per share effective 12/31/2010 from this transaction. The transaction is subject to the approval of the State of California.

CSWC has seen its stock price move up nicely recently. Yet the shares still trade at a discount to book value. While it is by no means a big dividend payer -- yielding less than 1% last I checked -- it is the only holding where my broker is instructed to reinvest the payouts.

No one can predict the future, but I expect this is a holding that will remain in the portfolio for many years to come.

Jim Grant on Bloomberg's "Taking Stock" Program

I mentioned the other day that Jim Grant was on Pimm Fox's Taking Stock program for the full hour. I didn't know of a link to it, but David of Finance Trends Matter was kind enough to provide the link in the comments section.

David posts the link on his blog, which you can find here. Check it out.

Marty Whitman used to say that most of the news we hear and read regarding markets is "noise." That has never been more true than now. And that's why Grant's appearance on Bloomberg and his op-ed in the Washington Post that I posted about a few days ago are so welcome -- not to mention valuable.

Fred Hickey Q&A with Barron's Online

Barron's Online is running a short interview with Fred Hickey, editor of The High-Tech Strategist newsletter and one of the most interesting members of the Barron's Roundtables.

Hickey talks about a lot of tech companies that I don't own. But one that I do is Microsoft (MSFT), which is a large holding in my portfolio. Hickey has been bullish on MSFT recently, and hasn't changed:

Going forward, all the new product upgrades will be a boon. I had taken some shares off, in Q4, when the stock was very strong, cutting the position in half. This was the only quarter you could see any disappointment. I've been saying it can go up 50%, 45%. They had blow-out numbers in Q4, they were outstanding. I think you'll see those numbers return when we see July and September and January numbers. I think we could see Microsoft regain some cache. People were very negative a couple years ago. People called it the next Smith Corona, which was insane. People thought they had lost their way. It takes time to turn around that kind of sentiment. There's the threat of Google with its "Chrome" operating system software, and the threat of Apple's Mac gaining share. The Internet search business, with Bing, would be upside if it works. If Bing continues to gain share, and they add Yahoo's piece to it, then it's all upside. You're buying Windows, and Office, and Sharepoint [collaboration software], which is fantastic, and MS Exchange [email server software], and they all work together, and it's the dominant business platform. There's some concern about their position in phone [with Windows Phone 7 software], from Apple and Google, but I don't know why. It's not a big part of their business.

And here's his view of the big picture:

It's more cloudy than it's ever been because there's more intervention in the market than there's ever been. The market is not an effective pricing mechanism right now. The economy wouldn't be rebounding as it is without this economic stimulus that is really unprecedented in this country's modern times. And I think that's what's driving this market higher. It is a liquidity-driven market. I worry about that. I would prefer to see a crisis occur. I don't think the path we're on is the right one. I don't think we should be printing money. Coming out of that bubble in 2002, we saw tremendous asset inflation that didn't help our competitiveness, and we were kicking the can down the road. We're going to get a short-term labor market rebound, I'm afraid, but it's not going to be a real one.

I'll only add that nothing has happened to make me re-think my gold and gold mining stock positions.

Jim Grant: Let Bankers Fail

With financial legislation pending in Congress, Jim Grant's op-ed in today's Washington Post (HT: RealClearMarkets.com) makes for timely reading (and re-reading). A few parts:

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits.

Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail. Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors.

And this further down:

"The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's. Gradually and by degree, starting in the 1930s -- and then, in a great rush, in 2008 -- the government has nationalized it.

Finally, this:

Until 1999, Goldman Sachs was a partnership, with the general partners bearing general and unlimited liability for the firm's debts. Today, Goldman -- like the vast majority of American financial institutions -- is a corporation. Its stockholders are liable only for what they invested, no more. And while there are plenty of sleepless nights, the constructive fear of financial oblivion is, for the senior executives, an all-too-distant nightmare.

The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism. By all means, let the bankers savor the sweets of their success. But let them, and their stockholders, pay dearly for their failures. Fair's fair.

Obviously, I think you'll want to read the ENTIRE thing. It'll prove well worth your time.

Also, Grant appeared on Pimm Fox's "Taking Stock" program on Bloomberg TV for an entire hour earlier this week. Hope you caught it. It may be archived on the Bloomberg site. I haven't had time to search it. But anyone who didn't see the program should check around this weekend.

Another Example Why Thomas Donlan is THE Best Editorial Writer in America

From his latest in Barron's:

Bernanke is the man who has done more to put off the day of reckoning than anyone else in the world, and he is providing liquidity by the supertanker load.

He assured the world that he intends to carry on:

"Today, the economy continues to operate well below its potential, which implies that a sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable."

Instead, Bernanke thinks the U.S. should charm the world into extending more credit, by offering what he called "a credible plan for meeting our long-run fiscal challenges."

A plan -- not action. As Robert M. Bleiberg, who thundered from this page from 1955 to 1991, said many times, "One needn't be a flim-flam man to be a central banker, but it helps."

As if to demonstrate, Bernanke added: "Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term."

A free translation: If we can con the world into thinking we are serious about curbing our deficits and reducing our debts in the future, the world's investors and savers will lend us even more money at lower prices right now. Then we will have more economic growth and we will curb our deficits without pain.

It's humbug. Economic growth comes from savings and investment, not credit-card consumption.

More on Microsoft from Fred Hickey in Barron's

Microsoft (MSFT) is a major holding in my portfolio. So Alan Abelson's column in Barron's (scroll down) caught my eye when he wrote about Fred Hickey (of The High-Tech Strategist newsletter) and Hickey's continuing bullish view of the company:

Not only has the company's Widows 7 proved a big winner (in contrast to its predecessor, Vista, which was a disappointment for sure and even a borderline bust), but Fred has high hopes for the new operating system that he confidently expects to enjoy a wave of demand from business buyers. He also believes the upgrade of what he calls Microsoft's other cash cow, Office, shipments of which are slated to start in June, will meet a warm reception.

Moreover, he is quite enthusiastic about relatively recent and promising new additions to the product line, like the SharePoint server, Bing search engine and Microsoft's "Project Natal" for the Xbox 360 game console, scheduled for unveiling June 13.

He contends that the stock (ticker: MSFT) is still something of a steal at 16 times depressed trailing earnings. Fiscal third-quarter profits, you might take note, are due to be released Thursday.

As Fred points out, Microsoft's software is firmly entrenched in most large business enterprises and its sundry software offerings are "complex and interoperable," while Google's comparable products just aren't in the same league.

"In this overpriced, dangerous stock market," he says, "I regard Microsoft as a great gift." Despite his usual aversion to hyperbole, he calls it "the most valuable tech stock in the universe." And, he waxes on, "Microsoft generates huge cash flows, pays a nearly 2% dividend, has a stock price upside of, say, 50% if the bull market continues to run, and limited downside if it does not."

I agree this is an overpriced and dangerous market. But an upside for MSFT of 50%? I don't know about that, yet would love to see it come about.

Dizard Disses Treasuries

Yes, I've been away from the blog longer than ever before. I've simply been swamped with non-blogging duties. But I have made no moves regarding the portfolio, so you haven't missed anything. You know the old saying, "no news is good news." With Controlled Greed, the saying is "no news means no moves."

In other areas of interest, John Dizard penned a column in the Financial Times earlier this week urging readers to sell the T bond. Here's a part:

Yes, that is a maniacal chuckle you hear from the goldbugs, as they contemplate the problems of government bond investors. While I have had my differences with people whose commitment to precious metals is more religious than opportunistic, at this moment they’re probably right.

More:

I’ve tried to be balanced in considering the merits of government bonds. The best argument in favour of US government fixed income securities, as distinct from fishing for value in bonds with credit risk, is that one can buy much longer, and more certain, duration (weighted average terms to maturity of cash flows) in the Treasury market. That would work, if the world were to stay in an indefinite economic stasis, with little growth, inflation, or restriction on international capital flows. Oh, and if the US were to actually balance the Federal budget ex-interest payments.

The other great attraction of the Treasury market is the presumed efficiency of its pricing mechanism. If you believed that, the week just past is when you discovered there is no Santa Claus. One of the most heavily pre-announced policy changes in the history of the Federal Reserve came on March 31, with the end of its programme of purchasing mortgage-backed securities. You would think that this would have been fully discounted by all those basis-point paring bond arbitrageurs and bankers. But no. The Fed stopped buying, and mortgage backed securities prices dropped like a bribed boxer.

And another section:

A deflationist, or unworried Treasury holder, would point to the low capacity utilisation numbers and high unemployment. Both types of measurement are, however, particularly inaccurate at turning points in the economy. “Capacity is always wrong in retrospect,” as Ms Sterne points out. Unemployment numbers are also a lagging indicator, and do not account for shortages of specific skills. This is a problem when central bankers make forward-looking decisions with weakly based data.

A cynic would say the Fed is reacting like a child abused by its cruel political parents, who blame it for their mistakes, and who want free money to be available forever. I don’t agree. It just looks that way. So sell the T bond.

Of course, you really should read the entire piece if you haven't already.

Jim Grant Interviewed on Bloomberg TV

I only get basic cable. My cable company recently sent me a digital receiver because I'll need it to get even those channels. I connected to my TV last week and lo and behold I now get Bloomberg Television. I don't get Fox Business or CNBC Word -- but with Bloomberg, who cares?

One day this week at 5:00 p.m. I caught Pimm Fox's "Taking Stock" show. Fox was off, but the substitute host had a short (6 minute) talk with Jim Grant, editor of Grant's Interest Rate Observer and Controlled Greed's declared Best Financial Writer Of Our Time. Grant explains his take on the sorry state of US Government finances.

Check it out.