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    June 30, 2008

    Barron's Coming Full Circle on GM (Sort Of)

    Randall Forsyth pens the "Up and Down Wall Street" column in this week's Barron's, and gets around (scroll down) to General Motors (GM/NYSE). He notes that GM stock has fallen about one-third since Barron's recommended the shares in a cover story earlier this month. For those of us holding even longer, the performance is even worse -- GM stock is down about 70% from its peak of $43.20 last fall.

    When I launched this blog in 2005 and recommended GM common, Barron's was cautious on the stock but liked GM bonds. Forsyth writes in the current issue that they are still favorable on the common stock, yet once again offers up the bonds for consideration:

    For instance, the 7.25% senior notes due Feb. 15, 2052 (RGM), closed Friday at $12.30, a nickel more than half their par value of $25. At that price, the notes pay a current yield of 14.74% and a yield to maturity of 14.78%, reflecting their junk rating of single-B by S&P.

    GM's convertibles provide both double-digit current yields and the potential of following in the wake of a recovery of the common. In the meantime, the 6.25% convert due July 15, 2033 (GPM), currently yields 11.78% and has a yield to maturity of 12.39%. In addition, investors have a put option allowing them to redeem them in 2018. Exercising that option would result in a yield to the put date of 15.92%, although GM then can redeem the converts either in cash or stock.

    In either case, these debt securities would seem to provide a lower-risk way to play the revival of the auto maker. Of course, the common would give a bigger bang.

    Exemplifying either patience and bravery, or foolishness and stupidity, I'm holding my entire stake and expecting the bigger bang. But it could end up a complete blow up. So do your due diligence before joining the Barron's editors and me in this investment vehicle.

    Why I Maintain an Emergency Fund

    QUESTION: What’s worse than seeing your stocks take a dive like many of us have seen lately?

    ANSWER: Seeing your stocks take a dive and your car’s transmission suddenly going. Or your house suddenly needing a new roof. Or you suddenly getting let go from your job.

    And those are worse still if you have to also go into debt to cover unexpected major expenses or to tie you over until whenever.

    Having an emergency fund is a topic more suitable to the personal finance blogs. But it’s an especially good feeling having an emergency fund in this stock market, and during these uncertain economic times. That may seem trite to some of those on Wall Street reading Controlled Greed, but it isn’t for the rest of us retail investors.

    Every definition of an emergency fund I’ve read is this: three-to-six months of living expenses in a separate account, such as a money market or bank savings account. This money is totally liquid so you can access it right away without penalty.

    Some points:

    • Three-to-six months of living expenses isn’t the same as three-to-six months of your salary. We should all be living on less than we make, so if you don’t have an emergency fund and want to establish one it shouldn’t be as daunting. Just figure out how much your expenses are for an average month and multiply by 3 or 6. Make it a realistic number. Don’t fool yourself by saying, “I could get by on such-and-such.” Be realistic about your average monthly expenses and work from that.
    • With one exception, I think people should opt for six months’ worth of expenses in the fund as opposed to three. And that’s when a couple are both working full-time jobs and are virtually certain of keeping those jobs for the foreseeable future. Self-employed people and households with one full-time income should go with six months in their fund, in my humble opinion.
    • Don’t worry about low returns, currencies, the falling US Dollar and inflation. Just keep your money in cash for liquidity. Your emergency fund is quasi-insurance giving you as much peace of mind as anything else. It’s not part of your investment portfolio -- that’s what brokerage accounts and retirement plans are for.
    • One possible exception to the above would be to keep your first three months’ worth in cash with the second three months in 90-day CDs. I’ve heard of people doing this, but whether it’s worth it or not probably depends on the CD rate.

    Now, some very smart folks don’t care much for emergency funds. Jonathan Clements, who used to write The Wall Street Journal’s “Getting Going” column is one, if memory serves. He doesn’t like having that much money sitting around earning low returns. And I believe Clements suggests having a home equity line of credit to access in case of emergencies. My problem with that is if something goes from bad to worse, you’ve potentially got your home at risk. And the same could be true if you’re a renter and used other credit.

    I heard about emergency funds many years ago but never went that route. Because I was cash-strapped at that time (I was young) and later I just opted to put money in retirement plans and the like. But after a couple of times of having to use credit cards for unexpected expenses -- and then not having expected income come in from some clients and had to carry over credit card balances -- I finally learned.

    For me, an emergency fund makes sense and establishing one would be item 1-B on my list if I was just starting out today. (1-A would be to never go into consumer debt.) But like I said above, the benefits are more than financial because of the peace of mind your emergency fund gives you.

    And that’s a great thing in any market.

    June 29, 2008

    Going Wide

    Better late than never, I've gone wide and this blog now fills up the entire computer screen. I don't know if doing this makes it easier to read or what. But it seems every quality blog I come across has done this and I'm sure there is a reason (or reasons) why. So I'm joining the "width counts" sentiment that's prevailing across the blog universe.

    As many of you have guessed by now, I can be pretty slow on the uptake when it comes to matters technical. I've even considered hiring someone to re-do my design and make sure I have all the right tags, or whatnot, going for Controlled Greed. (I was thinking about deleting the .com after Controlled Greed in the masthead. But I like it even though it signifies how very un-hip I am.)

    But what the heck. Walter Schloss still writes to companies and requests copies of their annual reports by US mail. And he's one of the very best (if not the best, in fact) investors around. So let's take heart.

    June 27, 2008

    Five for Friday (and the Weekend)

    With various issues preventing publication of last week's edition of Five for Friday, I'm sure you're desperately hoping another week won't go by dishing out the same fate to readers around the globe. Well, relax and check out these items as time allows over the next couple of days.

    • The market has been lousy and, if you're like me, your stocks have taken a beating as well. But, again if you're like me, you buy stocks with a multi-year window not knowing what "the market" will do over the short or even intermediate term. Simply stated, if you and I can't stomach this stuff we shouldn't be in stocks at all. There are bargains out there and now is not the time to dump all your equities. Yeah, we could be facing the end of the world, but I doubt it.
    • That said, plenty of my holdings are underwater. Underwater, but most will be fine over time. Yet I will have mistakes. I stated earlier this week that my Japanese consumer lenders -- Aiful (AIFLY/OTC) and Takefuji (8564/JP or TAKAF/OTC) -- have been mistakes. I haven't dumped them or anything, and will alert readers if they are sold. You might enjoy (?) this Bloomberg report focusing on the latest goings-on with Aiful and Takefuji.
    • Among the portfolio's holdings underwater but not counted as a mistake is CBS (CBS/NYSE). I'm not as delighted with Les Moonves as I was some time back, but CBS is yielding 5% so I'm willing to wait and see what happens down the road. This Globe and Mail article discusses Sumner Redstone, controlling shareholder of both CBS and Viacom, which are both lower since spinning off CBS.
    • Via Sivaram, I came across this MarketWatch interview with Jean-Marie Eveillard. He's very bearish, very much down on Alan Greenspan, and still likes Japan. Eveillard isn't finding much in the US to buy, though he names American Express as a stock he owns. The interview states he has 30% invested in Western Europe, matching the amount he has invested in Japan. I've been wondering lately if slow-growth "old" Europe isn't prime value investor hunting ground. Some companies headquartered there are cheap.
    • If the stock performance of Japanese consumer lenders were magically turned into a nation state, they'd probably look a lot like Zimbabwe. The news there is tragic. Africa Confidential is a venerable publication that's been covering the continent since the Colonial system started ending in earnest in 1960. It has made this article on Zimbabwe and the power players in the military free to the public. You'll find analysis and reporting unavailable in most other press outlets.

    And with that, have a great weekend one and all.

    June 26, 2008

    Gates Shows Himself the Door

    I've never owned Microsoft stock (which could be good or bad, depending on timing) and have never been someone possessing strong feelings about Bill Gates one way or another. I've worked on PCs running Windows since the DOS days, but working at some places using Macs turned me to a Mac-guy at home.

    In fact, I've never met anyone with exposure to both who didn't prefer Macs.

    But reading about Gates stepping down from daily duties at Microsoft to devote more time to his charitable activities leaves me with two thoughts.

    First is that I wish him well in his philanthropic efforts. I'm sure he'll bring enormous talent and fresh thinking to some up-till-now intractable problems. Anyone reading either of Jim Rogers around-the-globe trek books knows that members of NGOs and so-called "humanitarian" organizations spend as much time living lavishly in gated (no pun) communities as they do getting anything accomplished.

    I don't mean to paint with too broad a brush, but anyone can see the normal ways of solving world poverty and hunger and health issues aren't very effective. (And may have even killed millions over the years with DDT getting banned, but that's another story.) And then there's the corruption. So Mr. Gates could be a big help and let's hope so.

    Speaking of corruption, the second thing coming to mind is the absurdity of the Justice Department going after Gates. Anyone working on computers -- at home or work -- could see that Microsoft was NEVER going to conquer the world. Much less be a monopoly. But the federal government spent who-knows-how-many-millions going after Gates, with several state attorneys general getting in the act.

    I know why the states jumped in: they saw a way to pour money in their coffers, without taxing their residents, and then spread it around to buy votes for the next election.

    But the feds? Well, probably some actually thought Microsoft was a monopoly. I don't know how but I'm being charitable.

    Yet mostly, it was the federal government teaching Gates a lesson because he wasn't playing ball with the system. Gates wasn't involved in politics in any big way, didn't hire lobbyists, and was just content to do his business from Washington State.

    Then Big Brother took after him and before you know it, Billy Boy has some folks set up on K Street, starts making PAC contributions and, in general, plays the game. It was a lynching, of sorts, and I use the term advisedly.

    Not that I've lost too much sleep over it. I guess being lynched by Uncle Sam can't be too bad if you're still among the world's richest men at the end of the day. But we should all be concerned when the Political Class shakes down a productive member of this country -- all because they want their cut.

    June 25, 2008

    Buffett Talking "Porn"

    Richard Teitelbaum of Bloomberg writes about Warren Buffett being questioned by 300 executives in Toronto. One asked what makes people want to sell their businesses to him:

    "You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting. "Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''

    This is a very long article. So you might want to print it out before reading. It's really a nice wrap-up of recent Buffett activity. And when somebody's got more than $35 billion to spend, it might be worthwhile keeping an eye on.

    June 24, 2008

    Back to Blogging: And Facing the Good, the Bad and the Very Ugly

    I've survived my non-blogging issues to find things a mixed bag as far as the portfolio is concerned.

    First, the GOOD. By now you know if you care at all that the Supreme Court of Canada ruled in BCE's (BCE/NYSE) favor. Many observers think the deal will go through at the announced price (C$42.75), while others think the price will be lower. I believe we're in good shape either way. Though the deal may now close in September, according to some reports seen this week. Another good sign is speculation the dividend will remain intact.

    Second, the BAD. Generally stocks are performing badly and that includes most of my portfolio selections. With a few exceptions, I'm content. Not happy, mind you, but content because I'm taking for granted that most of 2008, if not the entire year (and even part of next) will be lousy for stocks. Some stocks -- like Foot Locker (FL/NYSE) and CBS (CBS/NYSE) -- are paying us to wait. But most are well positioned. In the meantime, I expect stock performance for my portfolio to be lackluster (what a word!) come the end of the second quarter.

    And now, the truly UGLY. Aiful (AIFLY/OTC) and Takefuji (8564/JP or TAKAF/OTC) have been disappointing holdings almost from day one of buying each. The headwinds against these and all Japanese consumer lenders just seem unrelenting. And the latest is a Lehman analyst saying Aiful is basically insolvent. An Aiful spokesperson replies that the company doesn't have any problem accessing funds and is not insolvent. There are some other things about these stocks I need to mull over. I don't like to telegraph my moves, because I don't want to be accused of ever throwing readers a curve ball. But these two definitely have been mistakes.

    June 23, 2008

    Stuff Happening

    I've had some technical issues and a huge amount of non-blogging duties to deal with since the end of last week. So that's why I haven't been posting since Thursday evening. Hopefully everything will be back to normal Tuesday or thereabouts.

    In the meantime, thanks for being a reader and for your patience.

    June 19, 2008

    BCE Ruling to Come Friday

    Reports from virtually every news source has the Canadian Supreme Court handing down its decision on letting the BCE (BCE/NYSE) buyout move forward. I'm typing this late Thursday evening US east coast time, and almost certainly won't be near a computer when the decision is made public.

    So I'll make a couple of points here:

    • I expect the Court will rule in BCE's favor. The Quebec Court's ruling, if let stand, would tarnish the financial landscape in Canada and I think the Supreme Court agreed to take the case because of that. I'm no expert in Canadian law, or US law for that matter, but every report I've seen says it is highly unusual for the Canadian Supreme Court to hear an appeal this quickly. I've even read that the options market is predicting a BCE win. (For what that's worth, who knows?)
    • But even if that happens, I won't get out the glasses and start popping corks. There's still the matter of closing the deal -- and many smart people think the ultimate price will be lower than the original C$42.75. I doubt it will be much lower, but there are no guarantees. I'm just happy I was brilliant, um, ah, make that LUCKY enough to buy at US$23.01 (and sell 25% of my stake later at $36.31). So I won't be hurt too much, in all likelihood.

    Looks like Friday will be a good day for watching the wires.

    Grant: Walter Bagehot Was Wrong

    Via RealClearMarkets, and courtesy of the New York Sun, comes this article by Jim Grant (from his Grant's Interest Rate Observer).

    Grant finds recent comments by Yves Mersch, Governor of the Central Bank of Luxembourg and member of the European Central Bank, bring to mind Thomson Hankey and Walter Bagehot. Specifically, Hankey's and Bagehot's debate on the role of the Bank of England and central banking.

    Grant sides with Hankey, and notes he answered Bagehot's view -- that a central bank should lend freely in a credit crisis against good collateral at a high rate of interest -- in his book The Principles of Banking (still in print though first published in 1867).

    Bringing it all to today, Grant writes:

    "Investment bankers who work in securitization," the FT went on, "say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover."

    We believe that more analysts ought to be concerned about the risk that these monetary exertions will result in a new cycle of currency debasement. For ourselves, we expect it.

    I urge you to print out the article and read the whole thing. I expect you'll enjoy it.

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