The Horses are at the Gate

The Broad Picture

CNBC reported on October 19th that mortgage defaults are becoming noticeable at a little over 2%. Big surprise. All manner of monkey business has been going on to get these loans through. Loans that are catalogued as gifts. Loans on top of loans. A mortgage broker told me a year ago that he had just put through loans equal to 115% of a home property. The home builders are not following through on land they've optioned. This part of the economy will lag for a while. Autos, too. That was also reported on CNBC today. A gent who follows new car sales at dealers says (if memory serves) that whenever total new car says fall 2%, that a recession follows. He claims we are at that point.

But let's not fail to mention that there are some good things going on also. Google just announced third quarter earnings up 92%. That's either going to bring down the PE ratio, or will justify a stiff share price increase.

Last newsletter, we said we were on the cusp. Since that time the Dow Jones broke above its all time high, and is now above 12,000. We need some other confirmations. An S&P at an all time high will help. The Transports which earlier broke through to an all time high, should probably do so again. Then, it's off to the races. Even if the economy doesn't look like it at the moment.

Tech

I have for now given up on JDS Uniphase. Sometimes reverse splits have the desired effect of making the stock appear more substantial and attracting more buying, and although they appear well-placed to me since I believe in the growth of networks, this may not be the way to play it. So, I sold my shares at a small profit. I still like Cisco, and recommend holding it. They are even better placed, and the purchase of Scientific Atlanta to get control of the set-top TV boxes looks very astute.

Oil and Energy

My crystal ball on oil and energy is not clear at all. It looks like supplies are piling up a little, so you wonder what all the to-do is about new refineries. But all the threats are still out there. If Iran goes off line because of a military action, then it's $100 oil. A cold winter, and oil goes up. Hurricane season has been light, and that might help oil to drop some more, but I wouldn't bet a lot on that. Since no recession appears at hand, demand will be unrelenting. I am still keeping my energy plays, but I'm also considering selling and buying back later on. Partly this is because I think I have identified a better opportunity (see the bottom of this letter).

Rockefeller

Speaking of oil, I was curious how Rockefeller, who I have often considered the richest American of all time would stack up today:

John D. Rockefeller owned 23% of the Standard Oil Trust. That meant that after the 1911 landmark anti-trust suit split up the Standard Oil Trust, John D. owned 23% of thirty-four companies. Probably the easiest part of any calculation would be Exxon Mobil, which is composed of two of the largest parts of the Standard Oil Trust, Standard Oil of New York (SOCONY - Mobil), and Standard Oil of New Jersey (Exxon). The market value of Exxon Mobil stands at $414 billion, 23% of which would be $95.22 billion for Rockefeller. Also, he would have owned 23% of Chevron (Standard Oil of California), which adds another $23 billion. So, that's $118 billion.

Then it gets harder to calculate. Four companies of the Trust - Atlantic Refining, Richfield Oil (merged together became Atlantic Richfield, or ARCO), Standard Oil of Indiana (AMOCO), and Standard Oil of Ohio (SOHIO) all became part of British Petroleum, so some part of BP's market cap of $226 billion would be owned by Rockefeller.

Continental Oil Company, one of the 34 companies of the Standard Oil Trust is now part of Conoco Phillips, which has a market cap of $100 billion.

The Ohio Oil Company became Marathon, with a market cap of $30 billion.

Here's how arcane the connections prove: J. Paul Getty bought control of Tidewater Oil Company, part of the Standard Oil Trust, which in turn got bought by Texaco, which in turn got bought by Chevron (the former Standard Oil Company of California).

South Penn Oil Company became Pennzoil, which became part of Shell. So, he would have a taste of Royal Dutch.

I haven't even mentioned the pipeline companies, of which there were at least 10 such companies after the 1910 anti-trust action.

In short, there are very many oil companies today that John D. would be collecting dividends from. His fortune today, excluding any dividends would probably be in excess of $150 billion, which would make him a very rich man. Certainly, one of the richest Americans who ever lived.

Your Chance on a 10-Bagger.

I think I have nailed a 10-bagger, that is, a stock that I expect to go up by 10 times its current price. I have been able to do this from time to time, and I think I have one again. It is a tiny tech company, but its roster of customers and partners is nothing less than spectacular. It is in the infancy of a business that is going to be huge. It is a company I have owned for over two years now, and while interesting when I first bought it, now looks a damn sight better. I think one thing that might prevent the full realization of its profit potential is that it might get bought out.

Sorry, more than this I am not willing to share - a man has to make a living. I am willing to invest funds that are brought to the Barnard Partnership in this stock. It may take another couple of years for this to play out. Large cap stocks are getting all the attention now, and it may take a couple of years to get the word out. And there are many downsides. It has never made any money, but I'm thinking this is going to change, and that might even happen in the current year. And the loss last year was a little over a million, not millions. Moreover, they have already announced that revenues will double this year. Another problem is that its proprietary information has not been protected, though they intend to pursue such protection. Employees with proprietary information may depart and this may adversely affect the company, although options have been liberally granted to employees, so they may have adequate incentive to see it through. An eight hundred pound gorilla is interested in the business, and has bought several of its competitors, so there's a big threat. The float is so small at the moment that I myself own more than the average daily shares traded. On Friday, I did nearly half the trading. If I buy more on behalf of partners, liquidity would (at present) be a problem. It would take time to wind down a big position in the current situation. Once the word gets out, liquidity should no longer be a problem.

Another road block is that the company does little to promote itself, and even worse, some of its customers prohibit any public mention of the company in their agreements. For example, a potentially huge new agreement with a company that is the largest in its class (market cap in excess of $100 billion) got no press release in September, was not on Yahoo Finance, and I only found it by idly browsing the company's website. I was shocked. I called to check on the lack of an announcement, and learned of the confidentiality agreement that prevented any publicity. And on these accounts, it may take a long time for the word to get out. But I think word will inevitably get out, but for now it is an advantage for the hunter. It gives me time to back up the truck. The stock is dirt cheap if I read their prospects correctly, so dally if you want, but while I am warning that it may take a long time; on the other, it is so cheap it could double or triple in a single week, and if it did, then my official 10-bagger prediction might necessarily be dropped to a 5-bagger or less.

Probably everyone in the 1990s had a 10-bagger. I had a few: Aware, Human Genome, Incyte, Entremed, Viropharma. Looking back, it was all vapor. Incyte and Human Genome have done little with their DNA knowledge. Viropharma's virus drug hasn't gone anywhere. Aware's DSL products have not made them any huge profits, and and Bristol-Myers has given up on Entremed's antiangiogenesis drug, which might be a shame for anyone who has cancer. Unfortunately, I was not good about selling, and the price of all of these stocks went back to their starting points.

How did I find this new proposed 10-bagger? Well, it came in the mailbox. Someone was hawking the stock. I get a million of these solicitations. Usually over the fax, not through the mail. It was a pump-and-dump scheme, and I bought it at the high (the dump). But I liked the product and prospects so well, I decided to stay with it, and rode it down. You can find good stocks anywhere. In the 1980s I bought a stock called Alza, also discovered through a mailing. They had a drug delivery system that doled out drugs in a body slowly over time. I bought at $3. At $9 a friend I got into it sold out. He was very happy. I sold at $18, and was happy. My brother held it up to $36, but sold it when it dropped back to $18. From $18 it went to $200, and eventually merged with Johnson & Johnson. I suppose there are lessons here. Even selling out with a 6-bagger, there was another 10-bagger after I sold. So, from my original buy point it was really a 60-bagger. Well, so much for war stories.

Since 2000, I only had one really good 10-bagger, j2 Global Communications. I was pooh-poohed for investing in old technology, the fax, even if it had a twenty first century delivery system, i.e. email. But it worked out very well, and this time I was able to cash out with my full 10-bagger. As regards my potential 10-bagger, it has won "product of the year" awards. It is not vapor. It might be the most interesting small company I've ever come across, including Alza, which I just mentioned above.

If you're interested in making an investment, email me at tbbarnard@yahoo.com.

October 21, 2006