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    « April 2006 | Main | June 2006 »

    May 31, 2006

    Well, That Didn't Last Long

    No sooner did I mention that portfolio holding General Motors (GM/NYSE) had been trading above the $26.75 per share price at which I first recommended it then it closed lower. The shares closed yesterday at $26.57 each, down more than 5% from Friday.

    Well, at least I could chuckle about it.

    I also chuckled reading the "Observer" column in yesterday's Financial Times. It's entitled "General Disagreement":

    Securities analysts have often been accused of a herd mentality. No such aspersions can be cast when it comes to opinions on General Motors.

    In recent weeks, John Murphy at Merrill Lynch and Prudential's Michael Bruynesteyn have upgraded their ratings on the troubled carmaker to "buy". Himanshu Patel at JPMorgan recommends holding it "overweight". These optimists cite a strong response to GM's offer of severance packages to its North American blue-collar workforce, and the popularity of its big new sports utility vehicles.

    But Ron Tadross, at Banc of America Securities, and UBS's Rob Hinchliffe are among those still advising investors to dump GM. Tadross titled a recent report "Top 10 Reasons to Sell GM".

    Then there are the fence-sitters, such as Robert Barry at Goldman Sachs, who takes a "neutral" view. Sanford Bernstein's Brian Johnson has a "market-perform" rating.

    GM shares fell steeply in 2005 but have bounced back in recent months, with some less volatile periods in between. If that pattern continues, all the analysts will be able to claim victory - and preserve their bonuses.

    May 30, 2006

    Sticking to What You Know

    If you've been managing your own portfolio for a while, you've almost certainly had times when your investment style left a lot to be desired on the brokerage statement.

    Like most every practitioner of the value style, my gains in the late 1990s badly trailed those investors hoarding internet stocks.

    I wasn't alone, of course, as this from Chet Currier's latest Bloomberg piece illustrates:

    At Martin Whitman's Third Avenue Value Fund, for instance, data published by researcher Morningstar Inc. show assets shrank from about $1.7 billion at the end of 1997 to $1.4 billion two years later. At last report here in 2006, they had soared to $8.7 billion. The fund has gained more than 11 percent a year over the past five years, about 10 times the 1.2 percent annual return registered by the S&P 500.

    Another example during the period was Jean-Marie Eveillard, manager of the First Eagle Funds until his retirement last year. His funds' clients withdrew approximately 50% of their money because he refused to put their money in internet and tech stocks.

    Fortunately, Eveillard was proven right by the time he left the business.

    Value has been "in" this decade -- so far. But it won't be forever. Then again, at least I'm just running my own humble amount of money.

    Dorfman: No Bear Market

    I don't make market calls. But that doesn't mean reading those who do isn't interesting reading.

    It is.

    Such as this from John Dorfman in his latest Bloomberg column regarding what he calls the "May meltdown":

    Investors are asking two urgent questions. Was the May unpleasantness the start of a bear market after 3 1/2 years of gains? And given the force with which the Russell 2000 fell, is it time to abandon small stocks? In my opinion, the answer is "no'' to both questions.

    Ned Davis Research Inc. in Nokomis, Florida, keeps excellent statistics on stock-market declines and bear markets, a study design that I created more than 10 years ago. The research firm finds that drops of 5 percent or more in the Dow Jones Industrial Average have occurred 355 times since 1900, or an average of 3.3 times a year. Only 31 times did the decline worsen into a bear market, defined as a drop of 20 percent or more. A bear market occurs about once every three years.

    Then he writes:

    So, more than 90 percent of all 5 percent declines don't turn into bear markets. Ned Davis Research conducted a similar analysis on the Russell 2000, going back to 1979. The small-stock index has experienced 74 dips of 5 percent or more, and nine bear markets. The frequency of declines and bear markets is about the same as for the Dow. If the May meltdown is over, it was nothing other than a standard dip. And that's how I see it.

    How do I see it? I don't see it -- calling bull or bear markets before they get here is outside my circle of competence.

    Any money I might need in the next 5 years isn't in the stock market. The money that is invested in stocks is there with the long term view.

    And I fully expect bad things -- usually unforeseen -- to happen along the way.

    General Motors

    It's too early to pop the champagne corks over General Motors (GM/NYSE). But it's good to see some good news recently concerning the auto giant.

    For longtime readers of this blog, it was good to see the stock price finally get back above $26.75 -- the price at which I first recommended the stock in April 2005. (My personal average cost for GM is just under $33. I first bought shares in the company at $37 before launching Controlled Greed.) The stock closed Friday at $28.08. It's gained nearly 50% since the middle of last month. Meaning don't be surprised if the stock sees some profit-taking. Nothing is a straight line up and that's certainly going to be the case with GM.

    I'm holding the stock. The company is a big position for me and I remain confident that ultimately we'll see significant price appreciation in the shares over time. Until then the company still boasts a dividend yield of almost 4% -- even after halving its dividend.

    And as I've stated numerous times, for GM to work out as an investment does not include substantial improvement in its North American car and truck business.

    May 28, 2006

    Bill Gross and Stamp Collecting

    I picked up a copy of the Washington Post on my way into my favorite eatery yesterday. And I found this article about Bill Gross and his stamp collecting hobby:

    In the 1940s, a woman in Middletown, Ohio, set aside a stack of postage stamps, expecting them to appreciate in value over time and thereby pay for the college education of her young son, Bill Gross. When Gross went to the big city 20 years later to try to sell the stamps, dealers gave him the bad news: They were worth less than his mother had paid.

    Then further down the piece:

    Just as he intensively researches the characteristics of fixed-income securities before he buys them, Gross built a library of records of past auctions at his home in Laguna Beach, Calif. When he is considering buying a stamp, he researches its history at auction. By examining what price it sold for in 1928, for example, and 1953, 1974 and 1992, he can get a sense of whether the stamp is sufficiently rare to appreciate at roughly the same rate as U.S. economic growth. This helps him avoid the trap his mother fell into -- buying stamps too common to rise in value over time.

    I also noticed this:

    It has been a good few years for rare stamps. There are no reliable indexes of the values of rare stamps, but Charles Shreve, of Shreve's Philatelic Galleries, said that in a typical example of recent appreciation, an 1869 15-cent stamp with an inverted center sold at auction in 1993 for $209,000 and in 2004 for $418,000. It just traded hands this week, he said, for $800,000.

    Gross examines that rapid appreciation in the last couple of years through an economic prism as well. It is a function, he said, of excess liquidity sloshing around the globe, a result of easy money policies in Japan and the United States. "The liquidity provided by central banks over the past two, three, four, five years has led to asset appreciation not just of homes, but of stamps, collectibles, gold and commodities."

    May 27, 2006

    Witmer's Rose Bullish on Science

    In this year's Barron's Roundtable, one of Meryl Witmer's picks was Rolls-Royce PLC -- the aerospace and engineering company, not the car company. Rolls trades in London and is unquestionably a fine outfit. But I didn't bite on the stock because it had already appreciated by the time her recommendation appeared in print. It could still turn out to be a fine stock -- and look really good four years from now.

    Still, it would have to drop in price to get me excited. Shares closed in London yesterday at 420.75 pence each. They went for 267 pence in a year ago.

    Yet who knows? With some predicting tough times ahead for the UK market, maybe an opportunity will pop up.

    One thing Witmer mentioned in recommending Rolls-Royce was Sir John Rose, its CEO. He wrote an opinion piece the other day in London's Telegraph that caught my eye. His subject is how science can create value and growth for high wage countries:

    There are only three ways of creating wealth - you dig it up, grow it, or convert it to add value. Anything else is merely moving it about. In a high wage economy you must focus on high converted-value activities. To achieve high converted value you need good education and differentiating skills.

    Keep in mind when reading the linked article that he's writing to a British audience. But the thrust of his thinking applies to those in the US, Canada and other developed countries.

    May 26, 2006

    Speaking of Korea. . .

    Let's keep an eye on this hostile takeover attempt of KT&G:

    Carl Icahn and Warren Lichtenstein are preparing a hostile takeover for KT&G Corp. after South Korea's biggest tobacco company rejected a $10 billion bid by the U.S. investors, according to a local securities company.

    Icahn and Lichtenstein want KT&G to spin off its ginseng and real estate assets to boost the company's share price. The linked Bloomberg report says that if successful this will be the first hostile takeover by a foreign investor in South Korea since at least 2000.

    I don't have a dog in this hunt. Except that I want shareholder rights in Asia (and Continental Europe and the rest of the world) to have the same place as in the Anglo-Saxon countries -- UK, Ireland, US, Canada, Australia and New Zealand.

    That's not to say shareholders don't sometimes get the short end of the stick in the US, for example, but it's objectively true that stock owners in America and the other countries named receive fairer treatment on average from managements and governments.

    So I'll be keeping my eye on this story. And here's how the Bloomberg piece ends:

    Icahn and Lichtenstein have $2 billion committed to their bid and plan to borrow the rest, according to their Feb. 23 letter to KT&G's management. Icahn in February persuaded Time Warner Inc. to buy back more shares. Lichtenstein on April 19 attended his first meeting as a KT&G Corp. director since overcoming management opposition to win one of 12 board seats. He has been increasing his stake in the company since winning the seat and pledging to play an active role in management.

    Lichtenstein's Steel Partners, which set up its Japan fund in April 2002, pioneered hostile takeovers in that country. Yushiro Chemical Industry Co., Japan's largest machine-oil maker, and Sotoh Co., a Japanese textile maker, raised their dividends more than 10-fold to fend off takeover attempts by a fund controlled by Lichtenstein.         

    A KT&G takeover may make it South Korea's biggest, surpassing Kookmin Bank's 6.95 trillion won acquisition of Korea Exchange Bank. Kookmin, the country's biggest lender, on May 19 signed a final agreement to buy as much as a 70.9 percent stake from Dallas-based Lone Star Funds and state-run Export-Import Bank of Korea for 15,200 won per share.

    Templeton Manager: Korean Shares Discounted and Looking to Rebound in Six Months

    This article from The Korea Herald identifies the Templeton investment manager it quotes as "Mike G. Holowesco." But I think the reporter means Mark G. Holowesko. He managed Templeton's flagship Growth Fund when Sir John Templeton stepped down in the early 1990s. Holowesko gave up running the fund several years later, managing private funds through Templeton I believe.

    After giving up managing the Templeton Growth Fund, Holowesko assumed a much lower profile. So it caught my eye when I came across this piece:

    Korean shares are still discounted and they are likely to rebound within six months, Mike G. Holowesco, the senior fund manager at Templeton Capital Advisor Ltd. said. Short-term and momentum investors are bailing out of the emerging Asian markets amid inflation and asset bubble concerns, and the region - including Korea - is likely to see outflow of capital, Holowesco said at the Eighth Korea Exchange Global Investors Conference held in New York yesterday.

    "Nearly 50 percent of capital that has flowed into the region is expected to evacuate, 25 percent of which already has - the region's market will continue go under additional corrections," he said. However Holowesco also said local shares are still undervalued in terms of lead financial indicators, namely by price-earnings ratio, price book-value ratio, and return on equity.

    "Korea's market and economic fundamentals still remain strong; I expect the Korean market to undergo short-term corrections, to resurge by the yearend," he said.

    Holowesko also manages a fund called the Holowesko Global Fund. It's not registered in the US and (to my knowledge) not available to Americans. I don't know much about it except that Sir John Templeton has some money invested in it.

    May 24, 2006

    Watsa up with Fairfax?

    The short answer is nothing. Fairfax Financial (FFH/NYSE) remains a core holding in the portfolio.

    But the longer answer is that Fairfax and Chairman Prem Watsa have been in the press much of this year, and getting mostly bad press at that. It was the worst performing position in the portfolio in the first quarter. It closed Tuesday at $112.50, below the $132.50 price at which I first recommended the stock in May 2005. That’s also below my average cost of $125 (I first bought Fairfax stock several years ago, long before launching Controlled Greed.)

    In March Fairfax announced that due to previously announced restatements related to their finite contracts at Odyssey Re, its 80.1%-owned subsidiary, it was taking the auditors more time to complete their audit than first anticipated. This had Fairfax delaying the release of their audited financial statements for 2005.

    Meanwhile, the SEC continues investigating Fairfax’s use of finite contracts and the timing of transactions in their own securities. And it has also subpoenaed Watsa, who is cooperating (big surprise).

    Because there are very expensive short positions in both Fairfax stock and bonds, any negative announcements have a dramatic impact on its share price. The stock plunged roughly 25% in something like 20 trading sessions and hit a low of $102.50 on March 22.

    I haven’t sold any of my Fairfax stock. I haven't added to my stake because it's already a large position in the portfolio. I don’t believe anything much will come from the SEC investigation. No, I don’t have any inside information. I just note that Fairfax has released its audited financial statements with no new restatements and a clean opinion from Pricewaterhouse Coopers. I could ultimately be proven wrong, of course, but I don’t think so.

    2005 was the worst year in Fairfax’s history. Hurricanes Katrina, Rita and Wilma cost the company about $40 per share. Yet Fairfax entered 2006 with good liquidity. The company had a strong first quarter thanks to improved pricing and some gains in its investment holdings. My reading indicates the company will have a strong second quarter as well.

    Bottom line? If I inherited a portfolio that was 100% cash, I wouldn't hesitate to put 5% of that money into Fairfax stock as current prices.

    May 23, 2006

    Shareholders Continue to be of "Paramount" Concern to Les Moonves and CBS

    The news breaking yesterday that CBS Corp. (CBS/NYSE) agreed to sell its Paramount Parks division to Cedar Fair wasn't a surprise. CBS announced earlier this year it was exploring selling the division and hoped to do a deal sometime in 2006.

    What was a nice surprise was the amount CBS will be receiving: $1.24 billion in cash. Most analysts thought Paramount Parks would fetch $800 to $900. That's not a huge difference. But as a CBS shareholder I'm glad management got more as opposed to less.

    What will CEO Les Moonves and his team do with the money?

    Two analysts in the linked Bloomberg piece think CBS will buy back stock. That's one view. Another is:

    CBS may also use the proceeds of as much as $1.1 billion to finance the company's pension plan, Cathay Financial Inc. analyst Andrew Baker said in a note to investors. By doing that, Baker said CBS may be able to free enough cash to double its dividend payout to shareholders. He rates CBS "outperform.''

    My understanding has always been -- as I've posted previously -- that CBS management feels increasing the dividend takes priority over stock repurchases. So my hunch is that boosting the dividend will be what eventually happens.

    Though, to be sure, I would have no objection to the company taking the proceeds from the Paramount Parks sale and buying back stock.

    We're still in the very, very early innings with this pick. But I like CBS and Les Moonves A LOT.


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