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Felix Zulauf Interviewed by King World News

Eric King of King World News interviews Felix Zulauf, most known for his participation in the Barron's Roundtables. This will be of great interest to anyone who appreciates Zulauf's insights in that forum, and his thoughts on gold in particular and the market scene in general prove no less worthwhile.

Hat off to Eric King, who consistently scores interesting guests.

Buying Unifi Inc.

Earlier this week I established a new portfolio position in Unifi Inc. (UFI), a producer and processor of multi-filament polyester and nylon textured yarns and related materials. UFI is headquartered in Greensboro, North Carolina, and its products are found in home furnishings, apparel, legwear and sewing thread, as well as industrial, automotive, military and medical applications.

My average cost is $3.44 and the stock ended the week at $3.95. The market cap is more than $200 million, with 60 million shares outstanding and about 44 million of float.

I bought the stock at 81% of book value and one-third annual sales. There is no dividend. The Current Ratio is more than 4 and Quick Ratio is over 2. There is some long-term debt the company is working to get rid of.

At the end of April, UFI reported its third straight positive quarterly performance and management expects its first profitable year since 2000. The company has achieved these results despite the lingering effects of the recession and continued high unemployment. Management is focused on generating cash and continuing to deleverage the balance sheet.

Retail sales in UFI’s core markets still remain well below pre-recession levels -- Apparel is off 4%, Automotive is off 29% and Furnishings off 13%. I like the company’s performance in this environment so far, and think it is becoming well-positioned for when a recovery arrives.

The risks with this are most prominently the world sinking back into a deep recession or even global depression. I believe the company would survive, yet the stock price would get hurt. Another risk is with raw material prices. UFI has done well despite increases in raw material prices -- but if they shot up even more it could hamper the performance.

As always, anyone interested needs to do their own due diligence. And UFI is another stock that can trade thinly at  times.

Exiting DirecTV Group

I sold my remaining stake in The DirecTV Group (DTV) today. I got out at $36.70.

I first bought DTV in 2005 at $15.50, and sold half the position when the stock doubled in price. It has been a free ride since and the remaining shares accounted for more than 5% of the portfolio. I like the company, I like it being controlled by John Malone (and before that by the Murdoch people), but think it doesn't have much more to run -- though I'm sure I will be proved wrong and will look back one day and see that I've sold too soon.

I am currently using the proceeds to build a position in another company, in another industry. When the position is completed I'll name the company and give my reasons for buying.

Buying XETA Technologies

Last week I established a new position in XETA Technologies (XETA), which sells, installs and services communication technologies for small, medium and large (Fortune 1000) companies. My average cost is $3.83 and the shares closed Friday at $3.77.

XETA was founded in 1981 and is based in Broken Arrow, Oklahoma. This is a small company, the market cap is around $40 million or less, with 10 million shares outstanding. There's not much float most days, and it took me a long time to fill the position. Of course, the market sold off big the day after I finished building my holding. But that's the way it goes.

There's no dividend, and the stock trades at 1.2 times book value and less than 0.5 times sales.

XETA has greatly improved its balance sheet. The company has grown its cash balance from $63,600 in October 2008 to more than $5.4 million as of January 31, 2010. During that same time frame, total debt has been cut from $3.9 million to zero. Cash flow from operations has funded all of the cash increase. XETA will report its Q2 results later this month. Needless to say, I'll be particularly interested to see what it says, and also listen to their analyst call.

The industry for what is often called "enterprise communications solutions" is large and competitive. There are many regional players. XETA, despite being a micro-cap stock, operates nationally and this gives it a competitive advantage, particularly when bidding against the regional outfits. It has also announced agreements to buy two companies in the past month or so.

The risks with this holding include the fact that there is some customer concentration risk. Marriott accounted for 10% of XETA's sales last year, and the Miami Dade County Public School system accounted for another 5%. Also, XETA uses multiple vendors such as Avaya, Mitel, Nortel, Hitachi and Samsung, and there is some talk of pricing on Avaya products, which could negatively impact the company.

Anyone interested should, of course, do their own due diligence. And remember -- there is VERY LOW liquidity in the shares.

Richard Russell: "Don't Sell Your Gold or Gold Shares"

Peter Brimelow mentions Richard Russell of Dow Theory Letters in his new MarketWatch column. Russell says flatly:

"Do not trade your gold or gold shares. The third phase for gold lies ahead. The central banks do not want to see a new high in the price of gold, and they will do anything they can to keep the price of gold down. But the primary trend of gold is more powerful than all the world's central banks taken together."

"There is nothing more powerful than an idea whose time has come. The idea -- gold is the only money that's safe from the world's clueless governments, and their obsession to escape a recession or a depression."

I certainly think the recent move up in gold has to do with lack of faith in paper money. Specifically, paper money backed by thin air.

I hope you caught Mark Faber on Pimm Fox's Bloomberg TV show earlier this week. He said in the short run he's not betting against central banks -- but that in 10 years or so they'll be toast ("toast" is my word).

Keep in mind, nothing goes straight up. Gold will correct, and I suspect I'll encounter plenty of frustration waiting for my gold miners to overtake the metal itself. But as you've read me put it before, nothing has happened to make me even begin to regret my gold and gold mining holdings.

I think that will be the case for a very long time to come. So get used to it. ;-)

Portfolio Holdings & Strategy: May 2010

My single largest holding continues to be the SPDR Gold Shares ETF (GLD). I’d prefer my gold bullion play to be the Central Fund of Canada closed-end fund, which also holds silver bullion, but it has been selling at a premium. So I settled for GLD.

I also own four gold mining plays: Newmont Mining (NEM), Goldcorp (GG), Agnico-Eagle Mines (AEM) and the Market Vectors Gold Miners ETF (GDX). NEM, GG and AEM have reported good quarterly results, and if the price of gold holds up, I expect all these to do well. GDX is a modified market capitalization-weighted index of publicly traded gold and silver miners. I bought GDX to ensure I’d get proper diversification of major gold miners.

In the tech/media/telecom area, I hold the following stocks: Microsoft (MSFT), Geeknet (LNUX), DirecTV Group (DTV), BCE Inc. (BCE) and a small position in Media General (MEG).

MSFT is up a lot since I bought it for less than $19 a share, but I’ve held on since it looks to have more upside. The company is entering its strongest product upgrade cycle ever. LNUX is a small outfit with a collection of web-related assets. Its e-commerce business is more valuable than the market cap. It will be interesting to see what management does. I have sold enough of DTV to get my original capital out, so the holding is a free ride for me. MEG has been a disastrous investment, and represents permanent loss of capital. BCE pays nice dividend in Canadian dollars, which feels good since I’m living in the US.

In the property & casualty insurance sector, I own Fairfax Financial (FFH/Toronto), EGI Financial (EFH/Toronto), and NKSJ Group (8630/Tokyo).  Fairfax and EGI are based in Canada and NipponKoa in Japan. Fairfax is one of my largest holdings in the portfolio, but I’ve sold enough of it to get my original capita out, so it is a free ride. NKSJ formed out of the NipponKoa merger with Sompo Japan earlier this year.

King Pharmaceuticals (KG) recently got hammered because it looks like its new tamper-resistant pain drug won’t get government approval.

Cheung Kong Holdings ADR (CHEUY) has been up nicely since I bought it during the global financial panic. Li Ka-shing has been buying the stock.

I continue holding Capital Southwest (CSWC) and a small position 3i Group PLC (III/London). CSWC is up recently yet still sells for less than book value. I expect to hold this stock for years to come. And it is the only stock I own where my broker is instructed to reinvest the dividends. 3i is down a lot since I bought it several years ago. It has made some very good payouts in the past, but I must say it may prove to be a lousy investment like MEG.

Lastly, I hold Superior Industries International (SUP). I don’t expect much from this until things pick up in the auto sector. Yet management maintains a strong balance sheet and I’m patient with the dividend near 4%.

My cash position is relatively small -- right around 5% of assets.

Monday, Monday, Gold, Etc.

Yet again, things have been busy in my non-blogging world. And since my non-blogging world puts food on the table, you know which I must pay attention to.

While non-gold-related holdings account for the majority of my portfolio, the fact that I put roughly 20% in gold mining stocks, on top of the 10% position in GLD last summer, has never been regretted by yours truly.

I could regret my commitment to gold and gold mining stocks at some point. But I don't think so. If I lived in Canada or Australia I may not have gone in as heavily, yet I suspect I'd still have some position.

We saw a real run on the banks in the Panic of 2008. Last week we saw some sort of panic, and I think it was more than just a "fat finger" mistake. And at some point -- I don't know when, it could be several years in the future -- we'll see a government debt panic.

So, while I'll acknowledge the possibility that I may one day wish I hadn't had my exposure to gold and gold miners, I also think I may one day wish I'd put more into the sector. No one knows the future. We're all in the fog of history.

Peter Brimelow discusses gold's great week last week in his MarketWatch column. Here's part:

Edel Tully, the gold analyst for UBS, also flagged this demand for bullion in a comment on Friday:

"Our Zurich and Geneva sales desk experienced exceptionally strong demand for small bars and coins...demand yesterday was the greatest that we have experienced since 2008...Coin demand is so intense that supply is struggling to match... German investors have turned to gold."

This is a moment when an accurate strategic view could be invaluable. The remarkable Australian service The Privateer offers one forcefully in its weekly commentary:

"Last week, we titled this report 'A Watershed Week For Gold?' Note the question mark (?) at the end of the title. This week we are removing the question mark. The market 'action' of the last five days has definitely confirmed the hypothesis....what was signaled last week by Gold refusing to go down as the world debt markets seized up again was confirmed this week.

"This time, there are only four global investments left fighting it out for supremacy. They are, in no particular order, the US Dollar, US Treasury debt, German sovereign debt - and GOLD...in the face of this renewed headlong rush into 'safety', Gold is up substantially in terms of EVERY major paper currency in the world - INCLUDING THE US DOLLAR!"

And more:

The idea that something seismic is happening to gold is definitely gaining credence in more conventional, non-gold bug investment circles. James Steel, gold analyst at HSBC, commented on Friday evening:

"Gold seems unlikely to retrace significantly until the reason for its rally -- escalating sovereign risk worries -- abate...we believe that buying interest in gold is unlikely to diminish appreciably, short of a clear resolution to the crisis."

MarketVane's Bullish Consensus at only 78% -- last year's high was 89%. And our Hulbert Gold Newsletter Sentiment Index is at 46.6%. versus 68% last year.

Food for thought. There's no shortage when it comes to gold.

Levy Harkins Moves Into Gold Miners

If you caught the hour-long Jim Grant-fest on Bloomberg TV's Taking Stock program that I've blogged about, you saw Michael Harkins. He's a partner in the New York-based firm Levy Harkins, and has contributed to Grant's Interest Rate Observer and (I'm sure) appeared at Grant's conferences.

Harkins and his partner write this in their partnership letter last month:

In our last letter to you, we said we knew better things to own than gold bricks.  Then we almost instantly began buying gold mining stocks.  We don’t mean to be perverse, things just work out that way sometimes.  We have been buying an exchange traded fund that owns shares in the largest gold mining shares because the shares have severely lagged the rapidly rising price of gold.  You need no reminders from us as to why we think inflation is likely; letter after letter is full of our exhortations on that score. But for the first time in living memory, gold stocks are cheap on an honest to goodness earnings multiple basis, and if gold goes higher, they will really look cheap.  Note, this is not a tracking fund, which can expose long term investors like us with terrible tracking errors.  The trust owns the underlying shares themselves, and gets us instantly diversified, so we don’t accidentally own the mine that has the cave in.

I suspect, though I don't know, they may be talking about the Market Vectors Gold Miner ETF (GDX), which is one of my plays in the gold mining sector.

What they say at the end about diversification is true -- that's why I bought GDX as well as Newmont (NEM), Goldcorp (GG) and Agnico-Eagle (AEM).

If someone wants to not risk buying a few individual gold mining companies, GDX is a way to go. Another would be to invest in the Tocqueville Gold Fund, which is actively managed.

And on a related note, news broke overnight that two Aussie gold miners -- Newcrest and Lihir -- were merging. If the merger goes through, the new entity will be one of the largest gold miners in the world. Interestingly, Lihir has until June 8 to field competing offers, rumored to be from the likes of Newmont and Barrack. We may be on the verge of a new wave of consolidation in the mining industry.

Bearing Asset's Bill Laggner on Greece, Goldman and More

King World News has a new interview with Bill Laggner of Bearing Asset Management. He discussed the debt problems of Greece, other EU countries and, of course, here in the US. He also talks about Goldman Sachs -- you might remember Laggner and his partner Kevin Duffy being interviewed by Barron's some months ago. They revealed being short Goldman and I imagine that move has paid off nicely.

Laggner also talks some about gold. I know Bearing owns gold, but I don't know if they're just in bullion, or have exposure to gold mining stocks.

Three miners I own -- Newmont Mining (NEM), Goldcorp (GG) and Agnico-Eagle Mines (AEM) -- have all reported good results lately. Especially NEM. This group, along with my fourth gold mining play, the Market Vector Gold Miner ETF, is in the black with gold's move up this past week. We could be seeing the start of the gold miners no longer lagging the metal itself.

If that's the case, I'll be a happy camper. I have conviction that will happen at some point -- but I don't know when.