The Barnard Observer
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Home Picks Figures Great Investors Vault Misc Contact c2003-06 Thomas Barnard
Or
All The Best Newsletters Are Positive
For guidance on what position to take on buying and selling, it is often instructive to see what Mark Hulbert’s letter-writers are doing. Hulbert has been monitoring the stock letters for decades now, and he reported June 1, 2006 that all nine letters of the best performing letters for the past 10 years are bullish. Check it out for yourself:
Some are more bullish than others, but none are outright bearish. So, it looks like a buying opportunity.
Richard Russell maintains that the Fed is propping up the housing business with easy money. Russell feels he has to do this because of the $9 trillion in mortgages that have been building up. $2.5 trillion from refinancing alone. And then, if they raise rates, that will put the touch on $2 trillion of adjustable (ARM) mortgages. His take is that the tiny rate increases have been put in place to mislead the public into thinking that they are really dealing with the problems of the economy.
Further, he thinks that the stock prices of the housing companies like Toll Brothers are not breaking down, which tells him the housing bubble is still intact. But the rising price of gold is telling him that intuitively, investors sense that the Fed is creating huge liquidity to keep housing afloat.
Our themes pretty much remain the same. We think networking is sure to continue to grow, it is technology gold. JDS Uniphase (JDSU) is one way to play. Or Cisco (CSCO) is another.
Probably somewhere in here is a good time to pick up gold bullion (GLD) or gold stocks, such as Goldcorp (GG).
One idea we got was from one of Louis Navalier’s frequent emails. That idea is CEMEX (CX), it took a little work to figure it out, but he left enough clues. CEMEX is a cement company headquartered in Mexico but with operations throughout the world. Earnings doubled from 2003 to 2004, and they continue headed up. It’s going to take a lot of concrete to rebuild New Orleans.
Microsoft’s stock has been asleep for years and years, but I think there is reason to believe that may change. Early next year it will come with it first upgrade of its operating system in years code-named Vista. But another more profound reason to vote your money for Microsoft is that it is going after online advertising and online computing, fields that are monopolized by Google now.
Microsoft has proven itself a worthy competitor whenever it has set out to do something. It vanquished Lotus’s fabled spreadsheet 1-2-3 with Excel. It vanquished Netscrape’s Browser with the Internet Explorer. I am not going to claim that Google is therefore vanquished. Far from it. But it has $35 billion in cash and a plan. And competitors like Gates and Balmer. Additionally, they have Ray Ozzie, who was behind the Lotus Notes program, to lead the attack.
To understand what is happening, you need to understand that computing is moving from the desktop and laptop to massive banks of computers (servers), which are doing the heavy lifting at the other end. When you do a search on Google, your computer isn’t doing work, the work is done on Google’s computers. The next thing I suspect will happen is that you will use Microsoft’s computers to do your work online with your Word files, and Excel files, and Powerpoint presentations, and save them all online. Of course you can still off-load them to your computer. But you see the difference, all the work will be done on computers other than your own. All of this gets paid for by advertising, which is a little annoying for some of us who find the search results skewed by companies paying to get our attention.
[Flash: as we go to print it has been announced on WSJ that Google will offer customers the ability to create spreadsheets online.]
The more work that gets down online, the more Microsoft’s operating system becomes (possibly) obsolete. Microsoft clearly understands this. They will attack this problem, and the result will be very much appreciated by the consumer. They will still sell a lot of software before it all goes online, which gives them a little time, but they will be going after ad dollars with a vengeance.
The stock is suffering a little now because they are going to spend money on research and banks of computers, and the investment community thinks this is a sign of weakness. I see it as a sign of a vital predator going after its prey. I think Microsoft (MSFT) is a reasonable bet.
I am a disbeliever in the current bull market, but add the great numbers of us disbelievers up and we spell the wall of worry that the market must climb.
Investment Philosophy
I am in the course of reading Benjamin Graham’s Memoirs. Graham’s idea was that to invest conservatively, one should buy at two-thirds of asset value. This mathematical way of investing probably was more useful in a time when people were generally more honest. I remember describing myself to my father as “mostly honest” because it is impossible to be honest all the time. It is too painful to correct the delusions of a friend’s brilliance, empathy, or other qualities. Assenting, my father said, “That’s about right.”
So, the problem with figures is that we know that nearly all companies rig the figures, holding back expenses, or loading them in to keep earnings down, and the same goes for revenues. Book it this quarter or book it next quarter? The idea is to even out earnings with an upward bias. And if there is to be a bad quarter, then cream it, throw every rotten problem into the soup. Clear out the deadwood. All of the stuff with Enron makes this abundantly clear. If earnings aren’t good enough reasoned Fastow, then his partnership shenanigans would solve the problem. MCI/Worldcom amortized advertising expenses which are usually expensed as incurred. Even “good” companies like GE used insurance loss accounting, which is made up of intelligent guesses, to prop up earnings for the hero of the management world, Jack Welch. His successor is cleaning up the books, but meanwhile making huge bets in the uncertain world of entertainment far away from jet engines and turbines. How do you intelligently invest in a company which is not in just one business?
Parenthetically, I was not at all unhappy that Arthur Anderson disappeared after the Enron fiasco. Their job is to present numbers that mean something. If they strip them of all meaning, then they have failed in their job, and should be dissolved.
For many people, the problem of a company involved in many businesses is solved by betting on the manager, and for those who invest in the myriad businesses of Berkshire Hathaway, they are betting on the acumen of Warren Buffett, who has a keen eye for businesses that he understands.
But circling back to the numbers, you cannot say they are valueless. They are not nothing. They represent something. And I learned another thing about net asset value personally. I bought Maritime Fruit Carriers years ago. A shipping company out of Haifa, Israel. I found it in Value Line. With a net asset value of $10, and a stock price of $3, I thought I was well-protected on the downside. Next thing I knew they were bringing in a former GM president to save the day. I wondered: why do they need to save the day? Earnings were great, net asset value was terrific. But they were building huge oil super-tankers just when the oil market was about to collapse. The Wall Street Journal had many short articles about this ship or that ship being confiscated when it came into a harbor. Trading halted pending (good!!?!) news; it never traded again. .I lost everything. So, I am honestly skeptical about figures. But that’s the scorecard we all use.
Warren Buffett is now concerned that the point values on the scorecard are also a problem. He thinks the dollar is much too high when our balance of trade is in a shambles. Richard Russell in a different way concurs and says that Fed has been pumping too many dollars into the bloodstream of the nation’s economy. And he says the high value of gold is the investors intuition that our dollars are being devalued.
All of this, puts the investor in a bit of a pickle. You can bet on managers, but Skilling and Ebbers and Carly Fiorina were all heroic managers until their downfall. Nevetheless, I pay attention to managers and the numbers.
Warren Buffett and his ilk pay no attention to the business cycle or the investment cycle, and other technical factors. Those that invest basically on price of the investment vehicle or the volume of its shares and so on. I do pay attention to those things, but I do not rely on them any more than I rely on figures or management. Conversely, I rely on all of those things, but it’s a bit like the Racing Forum. Black Velvet comes out in a hurry and clings to the rail, but fades in the stretch. And I know from the inside that racing data are unreliable. An owner can hold back a horse in race after race (like manager holding back earnings), and then when the competitiors look weak, let the horse have his head.
It’s a bit of a minefield, one must nevertheless persevere, and try and use your brains.
June 5, 2006
as amended June 6, 2006