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    « September 2008 | Main | November 2008 »

    October 31, 2008

    Five for the Weekend #13

    This is the last weekend before the American presidential election. So there will be plenty of reporting throughout the weekend as news organizations remain in full-court-press mode down to the finish line on Tuesday. If you need a diversion, check out the following between now and Monday.

    • Via value blogger Sivaram, I came across presentations from Jim Grant's latest investor conference. Sivaram points to presentations by Grant and Jim Chanos, and I'll add the one by Leon Cooperman is interesting as well. Most of my readers would be most interested in Seth Klarman's presentation, but that's not available to non-subscribers to Grant's Interest Rate Observer.
    • Portfolio holding CBS (CBS/NYSE) released results this week, and ad spending is of course down. Les Moonves says the dividend is safe. At current prices, CBS stock yields more than 10%. So let's hope Moonves is right.
    • Speaking of the portfolio, the lowest-risk holding is probably Capital Southwest (CSWC/NASDAQ), which is down since I bought it last summer. As is everything. The company announced its net asset value of 9/30 is $142.74 a share, and the stock ended Friday at $102.00. That's a discount of more than 28%. Buyers get conservative management (that's been buying back stock) and some interesting assets while waiting for the market to recover and the discount to narrow.
    • Retired finance professor Michael Rozeff argues that gold at $735 is overvalued. And suggests $550 seems a more reasonable price. I think his article is thought-provoking, but since I own no gold bullion I don't have a stake in it or the author's view. I simply link to it as food for thought.
    • Regular readers know I'm attracted to the concept of an African-wide investment play. The Dark Continent has been growing by 5% or more over recent years, and the right investment could be a neat play contrasting China/India. Lonrho PLC (symbol in London is LONR) has come down in price significantly and would normally be an appealing speculation. But the markets have sold-off completely and there's no need to look outside the developed world for bargains now. Just keep an eye on Africa, which includes reading the lead articles Africa Confidential continues offering free online.

    Have a great weekend and don't overdose on political reporting.

    October 30, 2008

    Ted Forstmann on Charlie Rose Show

    Charlie Rose had Ted Forstmann on for a segment Wednesday night. Forstmann is a private equity pioneer who forecast the junk bond scandal some years back, and who anticipated the current credit crisis.

    As expected, most of the interview deals with the financial mess. Forstmann also touches on his work with education -- he's done great work over the years trying to give poor kids access to quality schooling -- and his admiration for Nelson Mandela.

    He also said a couple more things of note. First, that the top earners in America are already getting soaked by the government, and that if Uncle Sam keeps going to them for more and more, they'll just stop producing. I don't want to get political, but the commonsense of that view just strikes me as obvious. Of course, someone a lot smarter than me said that the problem with democracy is that once the general populace figures out it can vote itself entitlements, well, you get the idea.

    The second thing is when Forstmann said we should work to create equality of opportunity, not equality of result. Equality of result is not possible, with all the differences between individuals.

    Yet we can be sure that no shortage of politicians will ignore that truth. Especially in election years.

    "Probably the Biggest Financial Crisis of All Time"

    Martin Vander Weyer leads his article in The Spectator with this doozy:

    At this juncture, my best credit-crunch advice is to keep beside your armchair at all times an atlas of the world, a modern American dictionary and a bottle of whisky. If your constitution is strong, you might also want a copy of the Financial Times but do keep the television zapper handy, so you can hit the ‘mute’ button when the news comes on.

    Further down:

    What began as the American subprime mortgage crisis is now the biggest global financial crisis of our lifetimes and probably of all time. Six weeks ago, we were being invited to feel sorry for sacked Lehman Brothers staff carrying their belongings out of that shiny Canary Wharf tower in cardboard boxes. Now we see just how far afield the damage is spreading; how many hard-working people, most of them much poorer than ourselves, are going to get hurt. And we begin to sense how chaos theory actually works, how the flapping of all those flamboyant butterfly wings in the financial industry has finally caused a tornado to rage across the world.

    Asian and East European economies that looked immune to trouble because they were driven by low-wage manufacturing and not yet as decadent as the West, turn out to be just as vulnerable to the downturn as the buy-to-let plagued cities of provincial England. Any ‘emerging market’ that was hot last year is suddenly stone-cold, because foreign investors are fleeing as fast as they can, causing mayhem for local stock markets and currencies. And it turns out that many of these eager new players of the globalised game had all too swiftly learned our bad habits: their banks are dangerously undercapitalised and overexposed to real estate, while their profligate governments lack sufficient firepower for the necessary bail-outs.

    I don't know if this piece will leave you chuckling. Or crying. Or tempted to do a bit of both.

    Five Characteristics for the Unforgiving New World

    Tom Stevenson writes yet another thoughtful column in the Daily Telegraph. He says we're in the "Great Deleverage" and lists five traits the best investments will share in this world:

    They will have rock-solid finances. They will not be dependent on external funding because they will be well-capitalised and throwing off cash. Because their weaker rivals will be going to the wall, they will see plenty of opportunities to reinvest this spare cash in the business because their return on capital will be high.

    They will be market leaders, with strong brands and near impregnable barriers to entry. In an uncertain world, customers will return to the names they trust. People will look back with incredulity on the idea of scraping an extra percentage point of interest by depositing their savings in an Icelandic bank they'd never heard of.

    They will be run by people with years of relevant experience. Don't expect investors to accept banks run by retailers or retailers run by bankers for many years to come.

    They will start to behave a little more like private companies, investing for the long-term and not just the next quarterly earnings figure, because short-term gains are only achievable with high levels of leverage that won't be available or acceptable.

    Read the whole thing. Always good to read the thinking of a sound fundamental investor in times like these.

    October 26, 2008

    John Maynard Keynes: The Money Manager

    Chances are you've been hearing more lately about the late economist John Maynard Keynes. But I'd like to dwell on his success, much less well known, in managing money. I first heard of Keynes being a successful investor from Warren Buffett some years ago.

    Keynes managed portfolios for King’s College, Cambridge and the National Mutual and the Provincial Insurance companies. His performance for King's College was especially impressive. He took over running money for the college in the 1920s:

    Keynes spent half an hour each day on stock market research - in the morning, still in bed - studying company reports, reading the financial sections of the newspapers and speaking to his various brokers by telephone.

    The Chest’s initial capital was £30,000. By the time Keynes died in 1946 the fund had grown to £380,000 - an annual compounding rate of just over 12 percent.

    As the linked piece states, that might not sound all that great, but it is remarkable considering this time period includes the 1929 crash and the run up to WWII -- both disastrous for the British stock markets. The market fell 15% over the same period. What's more, Keynes' performance is due to capital appreciation only (dividends were not reinvested).

    Before anyone thinks Keynes track record as an investor should be considered an endorsement of his economic theories, it's worth noting Keynes apparently didn't himself:

    His investing philosophy changed over time - Keynes began to doubt his initial belief that he could profit from his broad understanding of economic cycles. He grew to favour making large investments in individual businesses. Keynes was a logical man and individual businesses had balance sheets he could study and they sold products or services whose value he believed he could objectively assess.

    I'm not saying anyone should or shouldn't admire Keynes the economist. I am simply saying his success at managing money is apart from that. Some more from the linked site:

    Like Buffett, Keynes was sometimes criticised for investing in stocks he believed would prosper in the longer term and then sticking doggedly with his selections despite shorter-term problems. Increasingly, Keynes grew to favour a contrarian style of investing, writing in 1937:

    “It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is the right moment for selling it.”

    If you like all this, check out Keynes' thoughts on managing concentrated portfolios. And here's a 1991 Berkshire Hathaway shareholder letter where Buffett praises Keynes.

    October 24, 2008

    Five for the Weekend #12

    Another lousy day. But that's no news flash. Jean-Marie Eveillard said in the CNBC interview linked to in my previous post that the next six months are baked in. And things will be bad. With that, here are five things you might wish to check out over the next couple of days.

    • Mason Hawkins, Staley Cates and the folks at Southeastern Asset Management have boosted their stake in Sun Microsystems -- and appear to be taking a more active role with Sun management. I don't own Sun, but it's always worth noting when normally passive investors get active. Especially those with the long-term records of Hawkins and Cates.
    • Tom Stevenson writes in the Daily Telegraph about the five things investors believed six months ago, but now don't. "Investors have changed their minds about so many things over the past six months that they will take certainty wherever they can find it. If the certainty on offer is the long hard slog of a good old-fashioned recession and a return to financial basics then bring it on. We've read that story before and we know the ending, if not when it will come."
    • This Globe and Mail piece screens for bargains by focusing on low price-to-sales ratios. Among those making the grade is Fairfax Financial Holdings (FFH/NYSE), which regular readers know I own in the portfolio.
    • Count Barton Biggs among those seeing US and European stocks as cheap. He says, "One of these days, even if the world is going to hell, we will have a tremendous run-up,'' said Biggs, 75 "There is an extreme level of pessimism and almost despair. As long as I have been in the business, those have always been good signs.''
    • In his new Bloomberg column, Michael Sesit argues that returning to a Bretton Woods-type agreement wouldn't cure the ills in the global financial system. I agree with him on Bretton Woods, but I don't confuse that agreement with a gold standard. But I'm no currency expert.

    And with that, have a great weekend.

    October 23, 2008

    CNBC Interviews "The Value Kings"

    Just when I'm thinking you'll never see anything worthwhile on CBNC in America, they talk with not one, but three great value investors. And all at the same time.

    I came across this via Sivaram's Can Turtles Fly? blog -- Charles Royce, Marty Whitman and Jean-Marie Eveillard being interviewed by Erin Burnett. All three gentlemen say historic bargains are around, pretty much everywhere since the market sell-off has been truly global. Whitman and Eveillard are particularly bullish on Japan.

    Always a Bull Market Somewhere

    Scott Payton writes in The Spectator about scripophily. "Scrip" is a term for a currency substitute, while "-ophily" is a derivative of the Greek for "love."

    ‘Whenever there’s a catastrophe on Wall Street, our business just gets better — because our products become more collectable.’ So says Bob Kerstein, founder of Virginia-based, the world’s largest buyer and seller of historic bonds and share certificates.

    The recent blizzard of insurance and investment banking failures has brought Kerstein particularly brisk business. ‘Our Merrill Lynch certificates are selling very well, and we’re almost completely out of Bear Sterns certificates,’ he says. ‘A few months ago you could buy a Merrill Lynch certificate for about $20 or $30. Now they’re worth upwards of $100.’

    This part also sticks out:

    Old Chinese government bonds, some of which were never fully redeemed, have long been in high demand. The Chinese 1913 Reorganisation Gold Loan is particularly sought after. ‘People are buying them and taking the Chinese government to court, arguing that they should be paid in gold,’ Veissid explains.

    However, share and bond certificate dealers are keen to distance themselves from such speculative buying, arguing that it is nothing more than wishful thinking. ‘Since the 1930s, the so-called gold clause has been chucked out of court more times than I’ve had hot dinners,’ Veissid says.

    Interesting article. Interesting subject.

    October 21, 2008

    Altucher: Seven Reasons to be Bullish

    There are seven reasons for investors to be bullish, according to James Altucher in his Financial Times column. The first three are:

    * Oil prices have halved. People will now be able to pay back their subprime loans. Banks will have to start writing up the subprime debt that caused this whole mess.

    * Stock prices have dropped to 2002 levels. The big difference between now and 2002: China, one of our biggest customers, is three times the size.

    * People are comparing this time to the Great Depression. This could not be further from the truth. In the Great Depression, the government, in its infinite wisdom, raised taxes and increased interest rates. In other words, it continued to deflate the economy during the downturn. It took money out of the economy. Without money, people could not start businesses, banks failed, people lost jobs, people went hungry. Why did the government do this? It was afraid of putting too much stimulus in the system as people would then get into a speculative frenzy like 1929. This time the government is doing the opposite. Rather than deflating it is reflating and we'll all have to worry about any speculative excesses that occur only after the economy is back on track.

    Check out the remaining four reasons by clicking on the linked article, if you subscribe to

    I see that Jim's FT column is now appearing every other week. Bummer. But understandable (it's probably a bear writing a weekly column).

    October 20, 2008

    Jim Grant Observes Some Opportunities

    James Grant of Grant's Interest Rate Observer penned a compelling essay in The Wall Street Journal this weekend, The Confidence Game. (I tried posting about it on Saturday but had some technical issues, and that's another story.)

    A couple of sections of note. First this:

    We seek out bargains in Wal-Mart, but run away from them on the New York Stock Exchange. The proliferation of investment bargains brings us no joy. Share-price volatility is testing all-time highs. The debt markets are inconsolable. The triple-A rated mortgage bonds that once yielded only a small increment over the basic wholesale money-market interest rate today fetch 12% and up. And those are the securities that, as Grant's Interest Rate Observer does the numbers, appear to be money-good -- barring another 20% or 25% decline in house prices. Yet if the risk of true apocalypse in real estate is great enough to warrant these towering mortgage yields, there can be no easy explanation of the relatively low yields still attached to the unsecured debentures of some big American retailers. Lowe's Cos., the giant home-improvement chain, would surely feel it if house prices dropped -- again -- through the floor. But an issue of unsecured Lowe's debentures, the 5s of October 2015, are quoted at a price to yield just 5.8%.

    And this:

    For the first time in a long time, stocks, tradable bank loans and mortgages are becoming cheap. The bear market is truly a value restoration project. Wall Street will be going on sale -- if the government will let it. For the entrepreneur, the silver lining in the federalization of finance is obvious. Start a bank or broker-dealer to compete with the institutions that will soon be smothered in Mr. Paulson's quarter-trillion dollar embrace. There's oxygen, still, in the free market.

    Fairly long piece, you might want to print it out first before reading it in its entirety.


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