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      May 30, 2008

      Five for Friday (and the Weekend)

      A few things for your consideration between now and Monday:
      • On the heels of Anthony Bolton reporting his view that commodities are losing their luster, comes this Bloomberg story about the John Hancock Global Opportunities Fund paring its commodity-related stock holdings. Note the fund hasn't sold off all such stocks. You know I certainly haven't been big into commodities. But taking profits by scaling back if you have been invested seems prudent to me. I remember reading longtime newsletter writer Doug Casey some years ago. He said that gold stocks were to be traded, not bought and forgotten about. My hunch is the same is true for commodities across the board, though I'm no expert.
      • Speaking of gold, you might be interested in the views of Bill Buckler, who writes The Privateer market letter based in Queensland, Australia. I've subscribed off and on over the years (currently not) and a subscription includes a complimentary subscription to his publication called Gold This Week. He makes these issues freely available to non-subscribers a week later -- and calls it Gold Last Week. I'm no expert on gold, or any of the metals, but Buckler is. You might want to check it out as well as his entire website.
      • The Supreme Court of Canada will apparently decide next week whether or not it will hear BCE's (BCE/NYSE) appeal of a lower court ruling that may derail the company being bought by a group lead by Ontario Teachers' Pension Plan. Reuters reports the Canadian Supreme Court is aware of the June 30 deadline for court approval of what would be the world's largest leveraged buyout, and has earmarked June 17 for an oral hearing if it does decide to hear the appeal. The story continues.
      • Very few people evoke emotions like Rupert Murdoch, at least among those staying attuned to the media. Some find him rather heroic for launching Fox News and having the good sense to hire Roger Ailes, who has made Fox the number one cable news channel in America. Others hate him, largely for the very same reasons, though still others credit him as someone with evil powers who should be stopped at all costs. I'm in neither camp, but I said upon buying The DirecTV Group (DTV/NYSE) that I liked the Murdoch people being in charge at the time. (Now John Malone's crew is now running the ship, which I like equally well.) Anyway, love Murdoch or hate him, no one can deny that he LOVES newspapers. This report profiles Murdoch's appearance at Speaking at the D: All Things Digital conference in California, where he talks about the rather dire future for newspapers in the US.
      • A couple of weeks or so ago, I mentioned that one of this blog's most popular non-investing posts concerned creating a men's wardrobe. Another dealt with the benefits I've seen by consuming cod liver oil, extra virgin olive oil and extra virgin coconut oil. Now I'll link to a Spectator article from December 2006, called Men Behaving Beautifully. Here's part: Male skin is 22 per cent thicker than women’s, has a higher acid pH, more sebum and a tendency to dehydrate more quickly. This means that the formula used to create a male product really does have to be different. Annoyingly for us girls, men’s skin also ages more slowly. For both sexes, however, skincare rules are the same: ‘keep it clean, keep it exfoliated and keep it moisturised’. Well said, and better shaves may be among the benefits you'll gain by caring for your skin -- especially as you get older.
      Have a great weekend, folks.

      May 29, 2008

      Bolton Bolting Commodities

      Anthony Bolton, the UK's most famous money manager with an excellent long term track record, made news over the past day or so with this:

      Bolton said: 'After five years of strong commodity markets, a contrarian such as myself would start to get worried. I would switch out of commodities today and move into financial stocks.' He warned that some financial stocks looked 'opaque' individually but that if the recycled commodities money was spread across the financials sector, investors 'should do well'.

      My humble two cents -- and just putting my comments near those of Bolton is very humbling if not foolish -- is to underline the word SPREAD in his advice on buying financials. Especially if you're considering any of the banks. There's still a lot of toxic financial waste on the balance sheets of some (many?) of these institutions, so caution seems prudent.

      May 28, 2008

      Tender Mercies: Tendering ArmorGroup

      Tender Mercies is the 1983 film staring Robert Duvall, which tells the story of a recovering alcoholic country singer whose life and career gets turned around. I'm no singer or boozer. But my experience with ArmorGroup International PLC included a stock price roller coaster ride equivalent of the wildest binge. And mercifully, it had a happy ending with G4S PLC making a tender offer for my shares.

      Here's how this script played out from the beginning.

      In September 2006 I reported buying ArmorGroup, which traded in London under symbol ARG (with some shares available OTC in the US under symbol AMGPF). The shares were first mentioned here at US$1.03, right around tangible net asset value.

      The stock then proceeded to increase nicely, and very nicely in US Dollar terms. It nearly doubled in price and may well have in intra-day trading. Then towards the end of last year the stock began trading down, and absolutely plunged earlier this year, getting as low as 19 pence in the UK. The primary reason was increasing costs in doing business in Iraq and Afghanistan, plus rumors some contract wins would prove unprofitable (because of under-bidding).

      Underscoring all this was the fact that ArmorGroup stock traded very thinly, so it didn't take much to move the stock up or down.

      Anyway, without any hardcore information, I started feeling I'd be lucky to get my original capital back.

      But then G4S made a tender offer for ArmorGroup at 80 pence per share. I told my broker to sell my shares, and today I cashed out at a tad more than US$1.58 each. Throw in some nice dividends and this position has closed out with a gain of 61.3% (more than 36% on an annualized basis).

      Despite some scary parts in the middle, we get a profitable ending that's music to the portfolio's ears.

      May 27, 2008

      Searching for the Next Buffett

      I wasn't expecting much of this article when I came across it. But Ian McGugan's "The Next Buffetts" in MoneySense magazine is good stuff.

      Put simply, he describes four investors in North America he feels display some of the same characteristics as Buffett, but are younger. They are:
      • Prem Watsa of Fairfax Financial in Toronto
      • Tim McElvaine of McElvaine Investment Trust in Vancouver
      • Dr. Michael Burry of Scion Capital in Cupertino
      • Ian Cumming of Leucadia National in New York
      My take on these choices:
      1. No surprise. I own Fairfax stock and comparing Watsa to Buffett is almost irresistible since they both oversee insurance companies. I've never liked the journalistic hook of dubbing Watsa the "Buffett of the North" or the "Warren Buffett of Canada" because Watsa has been more influenced by John Templeton, in many ways, than anyone else. (I also think hacks who've accused Watsa of promoting himself as the Buffett of Canada are either dishonest or unprofessional, but the guy is notoriously publicity shy and never promoted himself as anything of the sort.) All that said, it does make sense placing Prem Watsa on this list at the ripe young age of 56.
      2. This should be no surprise to regular readers of Controlled Greed. McElvaine used to work for Peter Cundill's firm and left after serving as Chief Investment Officer. McElvaine's fund is only available to Canadian residents so he has a low profile here in the US (and a pretty low one in Canada as well).
      3. I actually know next to nothing about Burry -- not that he should lose any sleep over that. But after reading this article, I'll find out more about him.
      4. This also shouldn't be any big surprise, since Cumming and Leucadia National have been familiar names since the 1990s. I don't follow Leucadia closely, and that's my fault. Like Capital Southwest Corporation, I'm sure there have been times over the years that Leucadia has been a bargain stock and not buying it has been a mistake.
      You'll want to take the time to read the linked article in full. McGugan breaks down each candidate's best and worst calls, why they're like Buffett, and even why they're NOT like Buffett.

      An overall fun piece of reading. My only complaint is not including Francis Chou on the list. But, hey, that's what makes a market, right?

      Mohawk's Got That Value Mojo Working

      This week's Barron's profiles Mohawk Industries, which trades in New York under symbol MHK. Mohawk manufactures carpets, rugs and flooring and its stock price is down because of the housing slump. I don't own it as of now -- which may well say something about me. But I noticed Meryl Witmer's firm lists Mohawk as its largest holding in its latest SEC filing. In fact, Witmer's firm increased their holding significantly from the beginning of the year.

      If you follow the Barron's Roundtables closely, you'll remember Mohawk being one of Witmer's picks. Here's what she says about the company in the linked article:

      [T]he real payoff will come when more normalized earnings return. Witmer estimates Mohawk could generate "about $10 a share in after-tax free cash flow," and report earnings of $8 a share "when housing starts normalize at 1.5 million" versus about 1 million today. Based on her numbers, the stock fetches less than 10 times future profit estimates and less than 8 times free cash.

      Witmer's free-cash-flow projection comes from adding back amortization and depreciation, both non-cash charges. Put a conservative multiple of 12 on her estimates, and the stock could sell for 120.

      Another interesting bit:

      Investors give especially high marks to Lorberbaum, Mohawk's CEO, whose interests appear to be firmly aligned with those of shareholders. He and his family own about 20% of the company. "He has got his money where his mouth is," says Bruce Berkowitz, president of the Fairholme Fund, another big Mohawk holder.

      An industry veteran with more than 30 years of experience, Lorberbaum has been CEO of Mohawk since 2001.

      If you're thinking of buying Mohawk (I am), you might wait a few days. Sometimes stocks get a pop after a positive mention in Barron's.

      May 26, 2008

      Gretchen Morgensen Examins Fairfax Financial

      Portfolio holding Fairfax Financial (FFH/NYSE) gets looked over by Gretchen Morgensen in The New York Times. Morgensen is a well-respected financial journalist, and deservedly so.

      She suggests that whereas Berkshire Hathaway combines careful insurance underwriting with "perspicacious" (her word) investing, Fairfax's underwriting may not be as sound. And that may be painful should Prem Watsa's "hot hand" (her term) turn cold.

      Any of that could prove to be true. But I'll add that Prem Watsa has never struck me as a "hot hand" investor -- his recent masterstroke with credit defaults aside. In fact, Watsa could accurately be described as an overly conservative investor, especially with his insistence on being ready for a 100-year event, as he calls it.

      Still, if you're considering Fairfax for your own portfolio, read Morgensen's piece in its entirety. It is balanced and offers up some food for thought.

      Who knows? It may prove to be a cautionary tale.

      And let me remind regular readers of Controlled Greed, and especially any newer ones, that Fairfax has become a free ride for me. With its share price up nicely since I first mentioned it on this blog in 2005, I've sold enough of my position to have retrieved my original capital. I am a huge admirer of Prem Watsa -- but Fairfax doesn't seem to be the bargain it was. At least to me.

      May 23, 2008

      Five for Friday

      It's the start of a long weekend here in the US, with Memorial Day on Monday. Here are five items you might check out over the course of the next three days.
      • Randall Palmer files a Reuters report from Ottawa about BCE (BCE/NYSE) calling for a quick hearing from the Canadian Supreme Court prior to June 30. BCE points to five previous occasions when the Canadian Supreme Court shortened normal time periods because of the urgency of issues involved in certain cases. I'm no legal expert here in America, much less north of the border. Yet the more I read about this case, the more it appears the Quebec Court overreached by any reasonable precedent. So it may be the Supreme Court will hear the case in fairly short order. But right now, as you've read me say previously, just wait and collect that nice dividend.
      • Bloomberg's Jonathan Weil devotes his column to CBS (CBS/NYSE), saying CBS deserves to trade at a discount to book value because of the amount of goodwill on its balance sheet. He has a point, yet many media stocks have been doing poorly of late and (as you've read me say before) I'm content owning CBS for now. I think the shares will rise in price eventually, though maybe not this year. I'm keeping my eye on Les Moonves keeping his focus on rewarding shareholders. How the recent Cnet acquisition plays out may give us more than a hint of whether or not he's successful.
      • Neil Collins writes in The Spectator of the "mugging" loyal shareholders in Royal Bank of Scotland and others are enduring thanks to these rights issues. There are lots of ways to see an investment lose money. Yet one of the most frustrating has to be when management takes steps -- needed or not -- that dilute shareholder value.
      • Via Maoxian.com, I found this interesting post from a blog called The Simple Dollar. This blogger has apparently reviewed hundreds of books -- and lists the eight making up what he calls "The Essential Bookshelf." The books fall in either the personal finance or personal development category. Some I've heard of, some I've never heard of. But they sound interesting and worth checking out the next time I hit the bookstores.
      • Last week's "Five for Friday" included a salute to Bob Novak on his 45 years of column writing. I should have added that, for those of you interested in American politics, you can get the Evans-Novak Political Report in email format free of charge. If you're like me, you've probably signed up for numerous free email newsletters over the years. Most go unread after a while. But I look forward to ENPR arriving in my email box every Wednesday -- and I actually read it. Yet I caution anyone who thinks political reporting should consist of telling you that those you disagree with are wrong to stay away. As I pointed out last week, Novak is a professed conservative but his reporting is straight down the line. The proof of that is those across the political spectrum who dislike him, some intensely. He should wear their scorn as a badge of honor. But he's cantankerous, so he probably doesn't care enough to do that. ;-)
      Well, that's it for this week. I may post further this weekend if anything interesting pops up. In the meantime, have a great weekend ladies and gentlemen.

      May 22, 2008

      Chou Will Feast Again

      Via Sivaram's Can Turtles Fly? blog, I came across this fine profile of Francis Chou. Based in Toronto, Chou has quickly become one of the best value managers around.

      Yet he's suffering just as other value players are. That's not surprising -- and short term performance is meaningless. Unless you're forced to cash out, but that's really a matter of arranging your financial affairs properly. But one thing that is surprising from the article is that Chou has actually suffered some redemptions in his funds. He doesn't have a high profile, many have never heard of him, and you'd think people putting money into his vehicles would be taking a long term view.

      You can be sure that if Chou ever finds it necessary to close his funds -- in a few years, give or take -- many of those making the withdrawals will be kicking themselves.

      One of the nice things from the article is learning that Chou is a fellow traveler in Office Depot (ODP/NYSE). That by itself doesn't guarantee anything, of course. But since I'm underwater with the pick, which is a fairly recent addition to my portfolio, it is nice sharing a seat on a lifeboat -- or will it prove to be a Titanic? -- with such a good and interesting guy.

      It's All Right, Just Sit Tight

      The latest seen at this writing on BCE (BCE/NYSE)  is that the company is requested "expedited" action from the Supreme Court of Canada. I have no idea what the court will do, except I EVENTUALLY think they'll overturn what is increasingly seen as an unprecedented action by the Quebec court.

      In the meantime, I'm just sitting tight. If no deal happens I can see the share price falling back into the $20s. But I can't see it falling back to my entry price -- $23.01 in US Dollars.

      Right now, I'm somewhat content to collect the dividend that's more than 4%. If any of this changes, you'll read about it here.

      May 21, 2008

      SETBACK: Court Ruling May Kill BCE Deal

      In a surprising decision today, the Quebec Court of Appeal ruled that BCE's bondholders were treated unfairly when the company's board of directors supported the C$42.75 per share offer from Ontario Teachers' Pension Plan and its partners.

      BCE (BCE/NYSE) and its proposed buyout group said on Wednesday night they intend to appeal the ruling to the Supreme Court of Canada. You can read a good overview of this story from Canada's Financial Post.

      My hunch is that the Supreme Court of Canada will overrule the Quebec Court. Because, from what I've read, NOT doing so would rewrite generations of Canadian corporate law. BUT I stress I am not a legal expert and could easily be wrong.

      Right now, I feel especially fortunate -- just downright lucky, in all honesty -- that I got into BCE at US$23.01.

      If you're a regular reader of this blog and got in at the same price, or thereabouts, we just sit and wait. Several published reports suggest the buyers and sellers still want to get the deal closed -- and the meeting today in New York wasn't about price.

      Then the Quebec Court's ruling comes out of the blue. The deal getting closed and reaping a good profit seems so close. Yet June 30 seems so far away. And with a Supreme Court appeal looming, may be even further from us.

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