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    « August 2008 | Main | October 2008 »

    September 29, 2008

    Monday Night, US East Coast Time

    What a day. I didn't enjoy it when I glanced at my brokerage account to see a sea of red -- with the exception of Fairfax Financial (FFH/NYSE). But I WOULD have voted "no" on the bailout if I was in the House of Representatives.

    It's late and I'm dog-tired. So I'll just make a few random thoughts:

    • Anyone who sold a stock or stock mutual fund today was a fool. This was either a panic or semi-panic and you don't need to be in that crowd if you're patient.
    • The media really needs to start reporting Dow and broad market drops in terms of percentages, and not points. That won't sound as dramatic, but is closer to the objective truth the journalists claim to pursue.
    • The individuals most at-risk here are retail investors on the verge of retirement. Hopefully as they've approached retirement they've limited their equity exposure -- but some have probably not done the prudent thing. (And that is their responsibility, not the taxpayers.)
    • Flipping the channels tonight I caught Ben Stein on Larry King on CNN. He pointed out that long-term investors in stocks who won't be touching the money for 10 years will be fine. I agree, and think it won't take that long. But remember, what Ben Stein and Controlled Greed say plus two bucks will buy you a grande coffee in Starbucks.
    • Always remember that TV anchors don't hold their positions because they're wise or particularly intelligent. Some may be, but most aren't. They have their jobs because they have a certain look, have voices suitable for broadcast audio, and can read prompters without looking like they're reading prompters. That's true when they cover their normal beats of politics or (increasingly) pop culture. And it's especially true when they move over to stock markets. In the UK, the BBC calls these people what they are: news presenters.

    Like clockwork, right after posting about 3i Group PLC it fell more than 12% in London Monday. In times like these there are good bargains out there. But only buy if you have a long-term horizon -- what is cheap now could be much, much cheaper tomorrow.

    September 28, 2008

    3i Group Weathering Credit Crunch

    In this lousy market, we'll take good news wherever we can find it. Apparently one place with good news is portfolio holding 3i Group PLC (which trades in London under symbol III).

    If you're a long-time reader of this blog, you'll recall that one of the things I like about 3i is its focus on medium-sized deals. Most private equity outfits target mega deals. This strategy is paying off for 3i:

    According to Charles Stanley analyst Stephen Peters, the company has also been operating in the mid-cap investment market, where lending by banks has not been hit as severely as for multi-billion dollar takeovers. "As 3i has said in the past, it has always had a good relationship with mid-market banks across Europe. Instead of going to two or three banks, it may have to syndicate out to five or six, but it can still get the deals," he told

    Further down the story:

    Patrick Dunne, 3i's director of communications, told that the company had become "very picky" about its investments and realizations since the credit crunch began last August. "Although the rate of realization is lower, the profit per pound is the same as last year," he told

    He says the company is also optimistic about good opportunities amid the market turmoil. "Clearly the infrastructure sector is very interesting for us, and we think there will be great opportunities in the mid-market buyout market, and a fledgling buyout market in Asia." He added that the company expects to see strong growth within its capital business, which provides equity to companies, such as those expanding internationally.

    3i Group's share price is down since I bought it in 2005. But it's been a winner counting dividends and special payouts (the company had some large payouts in 2006 and 2007). It's currently trading at a discount to net asset value, making it particularly attractive in my view.

    I try to resist falling in love with managements -- but I admire CEO Phil Yea and his team immensely. Of course, now that I say that it could blow up. Or we could see a financial disaster so severe it takes down even the best managed firms. I don't think that will happen for a second. But that's why we diversify our money over several holdings, and not bet the bank on one stock like an Enron dolt.

    September 26, 2008

    Five for the Weekend #8

    With all the bailout frenzy and the presidential debate taking place after all, there's no shortage of media reporting to watch and read and listen to. And here are five more items to fill the weekend.

    • Nouriel Roubini is not someone I've read extensively. The word I hear is that he's been dead-on in anticipating much of the credit crisis. And he seems impressive in the interviews I've seen him take part in on Charlie Rose and other shows. Forbes is running a piece by Roubini on the 10 steps needed for recovery.
    • Matthew Lynn makes the case for UK banks being the big winners in the credit crisis in his Bloomberg column. He names Barclays, HSBC Holdings and Lloyds TSB Group as ultimately benefiting, with Royal Bank of Scotland getting weakened. Buying ABN Amro at the market peak continues to have negative ramifications for RBS.
    • The long-awaited authorized biography of Warren Buffett by Alice Schroeder, The Snowball: Warren Buffett and the Business of Life, will be out in a few days. If you subscribe to the Financial Times you can read an extract.
    • Speaking of the FT, the paper is reporting that Liberty Media's John Malone has been talking with Time Warner about swapping Liberty's stake in the company in exchange for AOL. From the linked story: “There have been limited discussions,” Mr Malone told the Financial Times on the sidelines of an investor presentation in New York. He emphasised, however: “Time Warner still needs to divide the business.”
    • Simon Nixon writes in The Spectator and "challenges the new conventional wisdom that all bankers are greedy, share traders are spivs, governments know best and capitalism is doomed." Even if you don't agree with everything in Nixon's piece, know that the current environment is rich ground for opportunists looking for media lynchings. Right now target number one for politicians and hack journalists is the "free market" -- never mind that Fannie Mae and Freddie Mac would have never existed in a free market system.

    Have a great weekend, guys and gals.

    September 25, 2008

    Jeff Randall on America's "Trickle-Down Communism"

    Really nice, very, very nice column by Jeff Randall in the Daily Telegraph:

    Having failed to deliver victory in the War on Terror, President Bush is hoping for better luck in the War on Error. His goal is to limit damage from the egregious mistakes of sub-prime mortgages; his tactics are to carpet-bomb the banking system with federal funds. The upshot, in Jeffersonian terms, is that US taxpayers are about to be enrolled in an economic chain gang.

    I'll add that in addition to the War on Terror, American taxpayers have been burdened by the War on Drugs and the War on Poverty. And if the wars on terror and now error are anything like the ones on drugs and poverty, you can be sure they will be with us for generations to come.

    Back to Randall:

    In place of rip-roaring markets, according to a Wall Street trader, America has embraced "trickle-down communism". This system involves the state paying "cash for trash" to benefit a few miscreants, and then hoping that some of the taxpayers' largesse will trickle down to the masses.

    Toxic rubbish will not be made to disappear by Mr Paulson's proposals. All that will be different is ownership. It will be like removing nuclear waste from a failing business and parking it in a government building. The risk moves from private to public.

    And another nice bit:

    Those who borrowed to buy assets at the wrong prices will have to suffer, as financial gravity re-asserts its downward pull. There is no policy yet invented that can make fifty cents worth two bucks forever.

    If you like the parts posted here, read the whole thing. Well worth your time.

    Altucher's Back -- and He's Got Stock Ideas

    Regular readers know I'm a fan of Jim Altucher's Financial Times columns. No columns were being run for about a month, and I was worried that the FT had dropped him, or he quit the column on his own.

    But fear not, he took some time off and the column has been back for a couple of weeks now. Here's the latest:

    So in this New Economy, who are the winners? First off, pawn shops are doing great. And when the economy weakens, more people need to borrow money from them. No subprime here. Its sub-sub-subprime - with the main difference being that people leave their collateral at the store when they borrow money, often at a 30 per cent loan to value. Meanwhile, the collateral that they've left at the stores, usually gold, is going up every day in this environment.

    He names a couple of names, and check 'em out if you're a subscriber to FT. And writes this near the end of the column:

    This is a hard time. It's possible to say: "This time things are different." But we've been through 9/11, the 1987 crash, wars, scandals, depressions, stagflation and the markets always come back to make new highs. Always. This time the world financial system is supposedly going to collapse and capitalism is being called into question. But it's not...

    I've posted here several times that Jim Gant is the finest writer in financial journalism. "Just plain words writing," as John O'Hara said of F. Scott Fitzgerald. Altucher at his best approaches Grant. I've never regretted reading a piece by either man, even when I might not agree with everything expressed. And my guess is you won't regret reading them, either.

    Stevenson Says It's Time to Follow Warren

    Writing from the perspective of a UK investor, Tom Stevenson says this may be a great buying opportunity. He talks about Warren Buffett, Ted Williams and the "fat pitch" (which must warm the heart of George over at Fat Pitch Financials) investors desire:

    By waiting for only the "fattest" pitch, Ted Williams secured baseball's highest-ever batting average. We don't need to be so precise – investors are scared and buying from scared investors pays off in the end. The pitch is fat enough.

    You can read the entire Daily Telegraph piece here.

    September 24, 2008

    Bill Thomas, R.I.P.

    Former Capital Southwest Chairman and CEO William Thomas has passed away at age 80. I first heard of Thomas in the early 1990s when reading an interview with Marty Whitman of Third Avenue Value Fund. Whitman called owning Capital Southwest stock "hanging out with Bill Thomas" -- and he said he'd been "hanging out" for 15 years at that time. (Third Avenue remains a shareholder of Capital Southwest.)

    I've been something of a follower of Thomas and Capital Southwest since then. I first posted about Thomas and his unique shareholder letters in 2006. I missed several opportunities to buy the stock, but I corrected that mistake earlier this year.

    Bill Thomas was a principled leader, exemplary businessman, friend of shareholders and a true gentleman. And he was all those things while never seeking the spotlight or the attention of the media.

    Thomas served as a U.S. Army officer for more than five years and was awarded the Bronze Star, Purple Heart and Korean Service medal with five battle stars for heroic actions during the Korean War. During the 45 years that Thomas served at Capital Southwest, the company's split-adjusted net asset value increased over 100-fold. In addition to his natural business acumen, Thomas placed a significant emphasis on fiscal stewardship, patience and integrity of its business managers, which contributed greatly to the financial stability and growth of the company.

    Rest in peace, Mr. Thomas.

    US Dollar: Nothing Left to Believe In?

    Spectacular op-ed by Jim Grant in The New York Times. More than just about the bailout debate, it's about the US Dollar -- the "faith-based currency."

    All was well for a time — indeed, for one of the most prosperous times in modern history. Under the system of fixed exchange rates and a gold-anchored dollar, world trade boomed (albeit from a low, war-ravaged base). Employment was strong and inflation dormant. The early 1960s were a kind of macroeconomic heaven on earth.

    However, by the middle of that decade it had come to the attention of America’s creditors that this country, fighting the war in Vietnam, was emitting a worryingly high volume of dollars into the world’s payment channels. Foreign central banks, nervously eyeing the ratio of dollars outstanding to gold in the Treasury’s vaults, began prudently exchanging greenbacks for bullion at the posted rate of $35 per ounce. In 1965, William McChesney Martin, chairman of the Federal Reserve, sought to reassure the quavering dollar holders. He lectured the House Banking Committee on the importance of maintaining the dollar’s credibility “down to the last bar of gold, if that be necessary.”

    Necessary, it might have been, but expedient, it was not, and the Nixon administration, on Aug. 15, 1971, decreed that the dollar would henceforth be convertible into nothing except small change. The age of the pure paper dollar was fairly launched.

    I know it's popular to dump on Nixon whenever possible. Yet as bad as the 1971 move was (and is), Tricky Dick probably had no choice. Every post World War II administration has spent too much -- Truman, Eisenhower, Kennedy, Johnson and Nixon (who took office in January 1969). LBJ was particularly bad in spending, painting Goldwater as a war-monger in the 1964 election only to put half a million troops in Vietnam while spending on his Great Society that featured Medicare (which is a nightmare still to come). The US simply didn't have enough gold for all the money it printed.

    But lets get back to Grant's piece:

    Just how shall the Treasury secretary spend the $700 billion he’s begging for? Viewed from Wall Street, the administration’s recent actions appear erratic enough. Seen from the perch of a foreign investor, they must look very much like “political risk,” a phrase we Americans usually associate with so-called emerging markets, not with our own very developed one.

    Where all this might end, nobody can say. But it is unlikely that either the dollar, or the post-Bretton Woods system of which it is the beating heart, will emerge whole. It behooves Barack Obama and John McCain to do a little monetary planning. In the absence of faith, what stands behind a faith-based currency?

    And that's the question. Not only do politicians not want to answer that, they don't want you to ask it.

    Comrade Bob Comes Out on Top Again

    What's the difference between cronies of Fannie Mae and Freddie Mac and those of Robert Mugabe?

    Well, to the best of our knowledge, no one connected with Fannie or Freddie has murdered anyone.

    But like ZANU-PF thugs under Comrade Bob, they've got the plunder-and-enrich-yourself thing down pat.

    And Africa Confidential reports on the latest power-sharing agreement that is a disservice to the Zimbabweans who have endured so much since 1980. From an investor's perspective, this sticks out:

    Experts say it will take at least three years before the economy starts to recover, and that hyperinflation could last another two years. That is under the best conditions – good weather and foreign aid that comes fast and generously.  Donors and investors will be watching to see that change is real and the government competent.

    A pure play is LonZim PLC, trading in London under symbol LZM. It is an investment arm of Lonrho PLC, which is an African-wide conglomerate, also trading in London. I think the current market will offer up loads of bargains without taking on the risks of the African Continent -- though the African story is appealing. It's just the these are speculations. And not for the faint of heart.

    Then again, shareholders may fare better than those of Fannie and Freddie.

    Mobius Looking for "Shorter Than Expected" US Slowdown

    Mark Mobius, world famous as Templeton's emerging market guru, and less well known as Controlled Greed's go-to guy for emerging markets affairs, is one person who doesn't think the world is coming to an end. Bloomberg reports:

    "I just don't see a long, protracted recession,'' Mobius, who manages about $40 billion in emerging market stocks, told the Super Return Asia conference in Hong Kong today. "There is an opportunity to buy low right now and sell high in the next cycle.''

    Mobius said private equity investors with a five-year investment horizon should watch out for bargains, even in export- oriented industries, because world trade is still increasing. The economies of emerging countries including China, India and Russia should withstand the financial-market turmoil because they have resources to boost domestic spending, he said.

    Note what he says in the first sentence in the second paragraph: "five-year investment horizon." That's the minimum length of time for investing in equities -- and not just for emerging markets, either.


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