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    « July 2008 | Main | September 2008 »

    August 29, 2008

    Five for the Weekend #4 (Labor Day Weekend Edition)

    You might have noticed I haven't been posting as much as I have in the past. Sometimes when that happens it is because non-blogging duties consume my time, even when I find things I'd like to post about. Lately has been a bit different. Non-blogging tasks have consumed my time, but there also hasn't been much that I wish I could post about if I had the time.

    Perhaps that's because nothing is going on (from the bottom-up prospective of a value investor) with the Labor Day holiday coming up. Or because everything got swallowed up by the Democratic Party convention in Denver. Either way, it just feels like we're muddling through and tolerating many stocks being underwater until investors at large see their value. And, with that, I offer up five items to read over the course of the three day weekend.

    • Francis Chou has released his semi-annual report for 2008. His flagship Chou Associates Fund holds a fair amount of newspaper-related stocks, which he says he bought too early. I'm a fellow traveler in one -- Media General (MEG/NYSE) -- though he got in at a much lower price than me. Meryl Witmer's firm dumped their stake, but I'm holding because Media General is way too cheap here. I am confident of unloading it at a higher price, though I'm doubtful of this turning out to be a winner for the portfolio. On other matters Chou reports finding bargains in retail, media, cable and telecommunications and pharmaceuticals. He is staying away from financials.
    • Chou's bullishness on newspapers is countered somewhat by this from Lauren Silva of Breakingviews. Much of her thoughts concern The McClatchy Company, a holding of Chou Associates Fund. Newspapers are either selling at the point of maximum pessimism (see John Templeton), or they're going the way of buggy whips. We're in the fog of war regarding that, meaning we'll be able to look back with 20/20 hindsight and clearly see the bargains of a lifetime or a black hole.
    • Speaking of Francis Chou and Breakingviews, here's a negative consideration of Sears Holdings and Eddie Lampert. Sears remains a holding in Chou's flagship fund, and I note it is still worth more than his cost.
    • Regulars here know I'm also a huge admirer of Mason Hawkins and Staley Cates of Southeastern Asset Management, home to the Longleaf family of funds. This New York Times piece on Longleaf investing in Sun Microsystems is worth a look. I don't own Sun or Dell, which the article mentions (Southeastern owns 7% of Dell, second only to Michael Dell himself).
    • Eliot Wilson writes in The Spectator that the credit crunch has impacted Kazakhstan and its 15 million citizens: The economy is slowing — from over 9 per cent growth in 2006 to an expected 4 or 5 per cent this year. Leading Almaty-based lenders — notably BTA and London-listed Kazkommertsbank — are in all sorts of difficulties. Only the super-conservative Halyk Bank, also London-listed, has avoided the meltdown. Many bank staff haven’t been paid for months.

    That's it for now. Here's wishing everyone in the US and Canada the best over the Labor Day weekend. And for readers everywhere, the hunt for value continues into September and beyond.

    3i Group Eyes Buyouts in India

    It's been a while since I've posted about 3i Group PLC (III/LN) -- the publicly traded (in London) private equity firm run by Phil Yea. When I bought 3i stock in 2005 the firm was doing deals in the UK and on the European Continent.

    The company still does that -- but more and more of its deals and investments are in Asia these days. Including Mainland China and India. So in addition to being a play giving the portfolio exposure to Greater Europe, 3i gives us a smart (and I hope smarter) way to play Mainland China and India.

    I've come across this report of 3i "eying" buyouts in India. Saurabh Shah, heading up the firm's efforts in India, gives three reasons why buyouts will pickup there:

    One, large conglomerates may look at spinning out businesses that are not on top of their priority list. “If a conglomerate wants to keep its best business, it may decide to hive off its No. 9 or No. 10 business,” says Shah.

    Two, where succession planning becomes difficult, the company may be better served by selling out to investors who can bring in the right mix of professional management to achieve the company’s longer term objectives.

    And three, in a service sector-dominated economy such as India, it will be the professional managers that a financial investor (read private equity) brings in, that will lead to greater wealth creation.

    Good article. Check it out in its entirety when the opportunity arises.

    August 25, 2008

    Where to From Here? A (Very Humble) Consideration

    Seems like we're just stumbling along in this down year (so far) for most stock market investors. That could change at any moment -- but let's assume for now things won't change much today at least.

    Where will things go from here in the markets? Four scenarios pop into my head:

    SCENARIO #1 -- We Muddle Along. This is where the Bear market continues well into 2009 and even into 2010. We see the usual Bear rallies and sell-offs, and we can even get lucky with a stock holding here or there popping in price via takeover or something else. But basically we just endure the next couple of years (give or take a few months), then we start a new Bull phase.

    SCENARIO #2 -- We Muddle Along...and Along...and Along. This is where the Bear market goes on much longer than anyone anticipates. Just grinding on and on, well beyond 2010. The Bear keeps going and investors, even many considering themselves "long term" investors lose patience and throw in the towel on holding equities, which helps fuel the Bear even more. The general media runs stories on the death of stock investing, with profiles of families facing ruin because their stocks and stock funds have been down seemingly forever. The heads of the New York Stock Exchange and NASDAQ are hauled in for Congressional hearings, with members of the Senate and House demanding to know what they will do to correct the great wrong being done to the American people. "Big Markets" replace "Big Oil" as the villains politicians cite in seeking votes.

    SCENARIO #3 -- Surprise on the Upside. This is the best of the scenarios -- the new Bull phase takes place much sooner than anyone anticipates. It could be sometime this fall or early next year or, heck, tomorrow for that matter. I doubt this happens, but the more you hear people taking for granted that the market is and will be down for awhile, the more we could see "conventional wisdom" get stood on its head. Not for the first time in history.

    SCENARIO #4 -- Surprise on the Downside. This is the most scary. This is where we're all complacent muddling along in what we think is Scenario #1. But out of nowhere we suffer a market crash, or perhaps an extended and very brutal market sell-off of massive proportions. It could be sparked by some geopolitical event, or series of events. Or it could be the housing slump turns out much worse than we've seen, followed by rot in other areas ranging from auto loans and credit cards to who knows what. Or something totally unforeseen.

    Personally, I believe the first scenario is most likely. But just because the odds are in something's favor doesn't mean it happens. I remember the New York Jets beating my beloved Baltimore Colts in Super Bowl III, after all. The third scenario would be great, because I like seeing my portfolio increase in value (well, duh!) and the sooner the better.

    The other two scenarios? Well, I don't do the top-down stuff. But the really bad Bear markets in our history took place when most American households didn't invest in the markets. Now people have been conditioned to buy through the ups and downs, and I do that myself. Yet what if we saw a very long trashing of the markets -- more than just a couple of years? Would the broader public panic? I don't think so, but I don't really know. No one does.

    For now, the muddling continues.

    August 22, 2008

    Five for the Weekend #3

    With the weekend upon us, here are five items you might wish to check out before Monday brings yet another workweek.

    • King Pharmaceuticals (KG/NYSE) has the distinction of actually being in the black since being added to the portfolio. And this performance has been achieved with the company keeping a low profile -- until now. King made an unsolicited $1.38 billion bid for Alpharma Inc., which the Alpharma board rejected as too low. King's CEO says his company is committed to getting a deal done with Alpharma. Both companies' shares rose on the news (though that could mean something or nothing over the longer term).
    • Foot Locker (FL/NYSE) should join King as a profitable investment at some point, though it took no time at all to achieve double-digit loss status right after I bought it last year. The results of one quarter, or even several, mean next to nothing over the long term. But Foot Locker's better-than-expected results suggest the company's fortunes may be improving. This position is still underwater, but with the stock trading a tad above book value, half of annual sales, and yielding 4%, continued patience seems prudent IMHO.
    • My exposure to Barry Diller's IAC/InterActiveCorp is through John Malone's Liberty Media (which has three tracking stocks that I hold and count as a single position). Malone was pretty unhappy with Diller's plans to split IAC into five companies, which took effect this week. Tim Mullaney of Bloomberg files this story on the prospects of the five newly-traded stocks.
    • I'm all for alternative energy -- wind, solar, you name it -- as long as it pays for itself. If it needs taxpayers to foot the bill then it can never be part of the solution. That's one reason why Tom Donlan of Barron's is such a refreshing voice. He's pointed out in the past that the best energy policy is no energy policy. But I'm afraid this is an issue ripe for charlatans to make big bucks at taxpayer expense. Investigative reporter Tim Carney details Boone Pickens' veiled corporate welfare in two columns in the Washington Examiner, which you can access here.
    • I've just about finished Too Close to the Sun: The Audacious Life and Times of Denys Finch Hatton by Sara Wheeler. This is the guy Robert Redford played in the movie Out of Africa (which was based on the famous memoir by Karen Blixen). Redford's character was an American in the movie but in real life Finch Hatton was from Britain. I recommend the book if this sort of thing sparks your interest. Most of the important stuff takes place in British East Africa, known today as Kenya. It's as much about a time and place and long-gone era as it is about a man's life. For those interested in Kenya in the here-and-now, read this from Africa Confidential on how politicians, administrators and churchmen fostered post-election slaughter of more than 1,000 and displacement of another 350,000.

    That's all for now. Thanks for reading and we'll see you next week if not sooner.

    August 20, 2008

    Charlie Rose GM Fest with Rick Wagoner and Bob Lutz

    Charlie Rose is one of the best interviewers on TV in the US. The other is Brian Lamb of C-SPAN. Both ask questions designed to not only get information but encourage conversations. They aren't part of the self-indulgent "it's all about me" cable TV crowd.

    That was most evident on Charlie Rose's PBS show Monday and Tuesday nights this week. He devoted both shows to General Motors (GM/NYSE). It was great stuff -- and I'd have enjoyed both immensely even if I wasn't a (currently underwater) GM shareholder.

    The first night Rose devoted the entire hour to sitting down with Chairman and CEO Rick Wagoner. From the point of view of GM stockholders, this may have been the most important of the two shows. And that's because this is where the discussion involved cash, cash burn and bankruptcy.

    But the highlight was definitely the second night -- which featured Bob Lutz.

    Much of this hour was about the Chevy Volt (which figured prominently the first night as well). Rose conducted these interviews in Michigan and you can tell he's excited about the Volt for environmental reasons, and because it's GM's chance to "leapfrog" and be a "game-changer." All well and good. And, if the Chevy Volt is a big hit in 2010, Lutz will go down in American business history -- and maybe even American history, period. If that proves to be the case, I hope observers remember to credit Rick Wagoner for hiring him (one of the smartest moves anyone in authority can make is to hire people smarter than they are).

    But I enjoyed the Lutz interviews for more than just the Chevy Volt. For one thing, the man is 76 years old and looks 50, if not younger. He's sharp, funny, and you can tell he's a leader. Listening to him talk, you get the feeling that those working under him respect him totally and would leap over tall buildings to please him. Not because he rules them with whip but because he inspires them. How many supervisors can do that? Not many (and it may take leaping over tall buildings to bring the Volt off successfully).

    When I bought GM stock in 2005, I knew of Lutz very generally -- that he was a "car guy" come out of retirement in a place (Detroit) run by financial types for far too long. I had never seen him interviewed at length. And maybe that's a good thing, at least at the time.

    I like to buy companies with good management, but I try to resist the temptation of falling in love with any one executive. ESPN personalities often poke fun at each other over having a "man crush" on certain athletes. And right now, my knees are getting weak for a certain grey-haired stud in Motor City.

    Would I buy GM stock if I didn't own it already based solely on these Charlie Rose programs? No, anyone still needs to do their due diligence. But I would be rooting for Lutz -- and Wagoner -- even if I didn't own the stock. And I hope Lutz one day writes a book.

    August 18, 2008

    Georgia on My Mind and Flights of Fantasy

    The whole Russia-Georgia thing got my buy-when-there's-blood-in-the-streets tendencies rocking and rolling last week. My first impulse was to see if there were any semi-market crashes in Russia or -- even better -- Georgia. And see if any companies there became incredibly undervalued.

    Then I read several geopolitical types say that if Russia is intent on "reclaiming" its former Soviet republics, it wouldn't stop at Georgia. Looking at the map and you see that Ukraine is the big prize there.

    Ukraine. My mind got to bubbling up memories of reading James Morton, Cundill's emerging markets guy, saying nice things about various Ukrainian firms he'd put money in. I think he even said some traded in London -- I haven't asked my broker about buying stocks in any former Soviet satellites but I know it's easy to buy stuff in London. And, if investors would be dumping stocks in Russia and Georgia, well they'd be doing the same with Ukrainian ones as well. If I could research and find the ones Cundill and the like held, they'd be great candidates to start off with.

    Then, assuming they were selling for a fraction of their true worth, I could buy one or two. And then, assuming things calmed down and the Russian Bear pulled out of Georgia and the bullets stopped flying and the bombs stopped dropping, the markets in that part of the world would recover. And I'd rake in some great profits in relatively short order.

    But that's a lot of assuming, folks.

    And as the week wore on, my juices stopped flowing as my adrenalin calmed down. Reading what Joe Rosenberg, Loew's Chief Investment Officer, said in Barron's reflects my thoughts on coming back down to earth. It's hard enough making money investing in countries with the rule of law, let alone Russia (and I'll add countries impacted by it), where the law is whatever Vladimir Putin decides it is.

    I've got enough on my plate. What with stocks like General Motors (GM/NYSE). And retail holdings American Eagle Outfitters (AEO/NYSE), Foot Locker (FL/NSYE) and Office Depot (ODP/NSYE) underwater with consumers struggling. And don't remind me of my Japanese consumer lenders.

    Okay, I'm back to being sane now.

    August 15, 2008

    Five for the Weekend #2

    Not a whole lot is going on in the markets, from my perspective. That of a stock picker, I should emphasize. There is, of course, plenty of stuff playing out in the credit markets, and on the battlefields of Georgia. No one has a crystal ball, and the best way to navigate our way through the fog of events -- both seen and unseen -- is to read as much as we can and make the most intelligent decisions we can.

    Right now the smartest decision seems to be to sit tight -- as far as the portfolio goes.

    So, with that, here are five items you might wish to check out over the next couple of days.

    • Southeastern Asset Management released its semi-annual shareholders report for its Longleaf family of funds this week. I recommend you download and print it out. If you're a fellow traveler with me in General Motors (GM/NYSE), you'll want to read what Mason Hawkins and Staley Cates have to say in the letter for the flagship Longleaf Partners Fund. And for some interesting points on Japan and China, see the letter for the International fund. Then again, just read the whole report.
    • No shortage of news stories on Warren Buffet's latest moves regarding investments held through Berkshire Hathaway, such as this Bloomberg report. I continue believing that individual investors (I'm one) may better invest their time keeping up with the moves of some other professionals, like Mason Hawkins and Staley Cates (mentioned above). That's because Buffet can't buy many stocks others can, due to his asset-size. I will say one thing striking in recent Buffet stories over the years is how willing he is to invest in non-US companies. When I came across Buffet and Charlie Munger in the 1980s, they rarely ventured outside America (a holding in Guinness comes to mind).
    • How bad things are -- and will ultimately get -- with the big banks is unknowable. They may be screaming bargains but putting any money in them is a gamble, and not a very smart one at that. Then again, I'm a GM investor, right? Anyway, further worries for the banks are exemplified by this Bloomberg interview with Mohamed El-Erian of Pimco, who says it has become harder for financial firms to raise capital because investors such as sovereign wealth funds have gotten "smarter.'' Sobering stuff.
    • Speaking of sobering stuff, there's the matter of Russia and Georgia. Will this turn out to be a very small event in history, or the start of something big? Only time will tell. And a good way to pass the time is to read this analysis by George Friedman of Stratfor. I'm not overly-knowledgeable about Stratfor, yet everything I've ever read by them seems level-headed and even-handed. From the linked analysis: But the geopolitical foundations of the war have been building since 1992. Russia has been an empire for centuries. The last 15 years or so were not the new reality, but simply an aberration that would be rectified. And now it is being rectified.
    • And if you're keeping an eye on Russia's involvement in Georgia, it might be worth keeping up on the level of Russian government involvement with TNK-BP (the Russian joint-venture with BP, the British oil giant). Martin Vander Weyer writes in The Spectator: But what is outrageous is the way in which various arms of the Russian state, including the visa authorities, have been deployed to make life as uncomfortable as possible for BP’s expatriate managers, to the extent that BP is now close to losing any effective control of its massive investment.

    Well, that's it for now. But before ending this post, let me link to another item of interest to any value investor. Fat Pitch Financials celebrated its 4th anniversary this week. So stop by George's blog if you haven't already to express your good wishes and congratulations.

    Have a great weekend.

    August 13, 2008

    Coming Attraction: That Early 90s Show

    I don't know what will happen in the future. With markets or anything. And I believe the fact that I know I don't know is among my few strengths as an investor.

    But there are some things I'm fairly certain of. One is that the current credit crisis will eventually offer up opportunities just like the savings and loan crisis of the early 1990s did. That time is not now. It may be six months from now or a year from now or even longer. Just not now -- that would be a huge risk, in my humble view.

    For me, the risk is missing out. I'm an individual investor doing my own research, which consists of reading as much as I can as often as I can. One of my shortcuts, if there is such a thing, is keeping an eye on what truly great investors are doing.

    One is Michael Price, who runs MFP Investors and is most known for running the Mutual Series group of funds. He left soon after selling the funds to Franklin Resources.

    Price isn't in the press much these days, probably one of the nice things about being out of the mutual fund business (though Mason Hawkins and Staley Cates manage to keep very low profiles). Yet he is the subject of this Bloomberg story. This part well down the report stands out to me:

    Price said he plans to buy stakes in smaller banks that are replenishing their capital. He can't find many worth investing in, he said. "In the next six months lots of banks are going to raise capital and we're going to probably put money into 5 or 10 of probably 50 or 100 we'll look at,'' Price said. "We're going to be very selective.''

    The words of a very smart and patient man, with the longterm record to prove it.

    August 12, 2008

    Evans-Pritchard: Stage Two of Gold Bull Market "Just Beginning"

    Ambrose Evans-Pritchard notes that gold has been falling. And falling despite fighting between Russia and an ally of the US, Euro-zone inflation, the highest CPI in the UK since the Bank of England went independent, and rampant inflation sweeping the developing world.

    He gives four possible reasons for this. And goes on to say why he thinks the gold bull has a long way to go yet. He ends his piece with this:

    Gold bugs, you ain't seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.

    I've noted here before -- confessed? -- that I sold my position in Central Fund of Canada too soon (it's a closed-end fund holding gold and silver bullion). And I am not in gold or gold mining stocks at all. Perhaps I should be tempted, but I like the idea of owning stocks in undervalued companies better.

    I wonder if I'll one day look back at $800 gold and regret not heeding the linked article. Time will tell.

    August 11, 2008

    Franklin Templeton's Don Reed on John Templeton

    With John Templeton's recent passing, it's not surprising to see more and more articles about him or referencing him. I came across another one -- an interview with Don Reed, President and CEO of Franklin Templeton in Toronto:

    "The first time that I ever attended a meeting where he spoke was in New York City. He was addressing a group of shareholders and he said: 'Ask me any question. It doesn't have to be on the investment area. It could be of any nature that you'd like.' I was blown away by the various questions that were asked at the time. One woman (said): 'Five years ago, when I attended this meeting, I asked you what I should do with my son, who was troubled at the time.' You said: "Your son should go out and take an MBA program and go into the business world.? He has been very successful, and thank you for that.'

    There were a lot of those types of things - from every area that you can possibly imagine. One individual said: 'Sir John, why don't you have Quaker Oats in the portfolio.' He said: 'Every morning when I get up, I eat my Quaker Oats oatmeal, and it's good for me and it tastes good. " 'But everybody knows that's the case with that company, so everybody is paying prices that are too high - and that's why I don't own the stock.'

    The interview touches on Reed's life before Templeton recruited him in the late 1980s and what he finds attractive now. He reports being overweight telecom in his fund, with Asia accounting for most of the portfolio in terms of geography. Interesting that he says the credit crunch in the US started five years ago.


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