The Barnard Observer
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Home Vault Misc Contact c2003-08 Thomas Barnard
Warren Buffett
Inflation/Deflation/The Dollar
Imagine you're Ben Bernanke. If you lower rates, the dollar will go into a tail spin with these possible consequences: Arab nations will go off the dollar for payment of petroleum. No one will want to invest in America because they'll take a loss when they repatriate the funds. China, for example, which has been a huge buyer of our debt, might stop buying bonds. Then where are we? Do we have to fork over Taiwan? And Kuwait, which we saved from extinction, has already has had to adjust its currency because of the falling dollar. On the other hand, if you raise rates, variable mortgages will go up and foreclosures will go through the roof. Consumption, that die hard supporter of our economy, tanks. If you're Ben, you just have to pray that you can leave things as they are for as long as possible.
The balance of trade is nothing special but the deficit is going down. If we leave Iraq, there is even talk of a surplus. And if there is a surplus, this will help the dollar. But I would not expect any such help. Nor would I, as a practical matter, expect help from whoever follows the current administration.
A very unhappy scenario is arising out of ethanol. The price of corn is quite high, and this has consequences. Not enough soybeans have been planted. Estimates say we are short 8 million acres of soybeans. This will mean the price of soybeans will go up, and everything based on soybeans and corn will go up. Like the feed for cows, and milk prices. And everything that milk goes into, like bakery goods. You see what I mean: a very ugly scenario has arisen out of a very lousy idea: Corn into ethanol.
The best we could hope for would be to deflate the idea of ethanol. It works in Brazil because sugar is twice as efficient in making ethanol as corn. But I would expect nothing of the kind. McCain buckled under, and so will everyone else. Farmers like the money, and why shouldn't they? But I say, let them make their money leasing out wind power and solar sites. And we should use incentives encourage those things, and drop any incentives for ethanol, to keep them in line.
But where does this leave us as investors? Gold is starting to look better, but lower deficits must be sapping some of its strength because it's doing nothing now. High tech companies, especially those involved in alternatives will look attractive as long as oil is high. Batteries, alternative means of storing energy (see below) also may have a role.
Again, if I were the government, I'd make the ease of permitting refineries my number one priority. Anwar doesn't look like it would change very much, at least that is the view of T. Boone Pickens. I'd remind the Saudis that high oil prices will bring on unrelenting creativity in the States. But, in fact, I'm not sure the avalanche of creativity can be stopped at this point like it was in the 1980s. Already, I'm reading about solar manufacturers who expect to be at the same cost as coal pretty soon. If that is the case, plug-in cars will become standard and that will take some of the sizzle out of oil.
Japan and Deutschland have both used incentives to bring on solar energy. The way I understand it the Japanese ended incentives in 2005 when solar power became comparable with standard sources of energy. Why are we sitting on our haunches?
But for the meantime, oil is quite high, and the really pernicious effect it has had on investors is that it has kept the Dow down quite substantially, perhaps as much as a couple of thousand points. If alternatives together with storage alternatives really appear to be competitive with coal and oil, then the price will start to slip out of them. As it is, I must confess I erred in selling Suncor. The rule is not to sell the oil stocks until you hear them cry uncle (or glut). When you hear glut, get the hell out. I have not heard glut, although I did hear that inventories are good.
The period in between high oil prices and new alternatives, though, could be quite tricky. What would make me most comfortable would be to be invested in high tech alternative energy that is or will be competitive with oil and gas. I think that would make me the happiest.
The Dow hit 14,000 but for European investors it's not such a big deal because the dollar has been in a persistent decline. But for dollar-in-decline Americans there is cheer: it is likely that in the next couple of years even higher highs are the prospect. One reason, of course, would be that a lower dollar makes our exports more attractive.
A concern of mine is that there is little in the cupboard for government to use if an ugly scenario develops in which jobs are lost, houses are sold in foreclosure sales, when borrowing shuts down from improved borrowing standards. Home Depot which benefited from borrowing, will be in a world of hurt. And if consumption fails in a big way, what can the government do to stimulate the economy if the Fed cannot do anything about rates, and the government has already lowered tax rates far below the level necessary to conduct a war in Iraq plus everything else. Keynes theory is based on the idea that the government borrows in hard times to get things going, and then in the good times, pays down the deficit. Nothing like that is happening. In a storm, there may be few tools the government can use, and that could be hard times in America for years. It has already lower taxes, and interest rates may be beyond their control.
Warren Buffett
One does not always have to look so far to find good investments. Just look at what the smart guys are doing. Warren Buffett is preeminent among such smart guys. Here's a list of current holdings:
American Express
Anheuser Busch
Burlington Northern
Coca Cola
Conoco Phillips
Johnson & Johnson
M&T Bank
Moody's
Norfolk Southern
Petrochina
POSCO
Tesco
US Bancorp
USG Corp
Wal-mart Stores
The Washington Post
Wells Fargo
White Mountains Insurance
I have highlighted the more recent purchases. Warren Buffett is joined by George Soros in ownership of Burlington Northern and Norfolk Southern. So, you get two gurus for the price of one. Buffett thinks the double stacking of railroads gives them a competitive advantage they haven't had in years. POSCO, a Korean steel company has had a very good run recently, but the steel business is going gangbusters. Beijing has been using a lot in its preparation of the 2008 Summer Olympics. You've seen the commercials for "esurance," that's White Mountains Insurance.
Tech
I still haven't changed my mind. Networks are everything. You're going to want more bandwidth for video and HD video and telephonic video, and you'll want it for the five thousand channels of television that will become available through the internet.
At this point I prefer Cisco and Intel. AMD has gotten Intel on the right path. Microsoft will do okay. It will plug along, but you might starting looking for more lucrative prospects elsewhere. It is no longer the huge growth engine of the 1990s. When you get as big as the economy, you grow with the economy. To wit: Microsoft is looking to defend its patents, and work a deal to get something out of freeware, such as Linux. You worry about these things less if you are growing at 30% rates. But when you growth stumbles along in single digits, then you devolve into these tactics.
Beacon Power
I have a flyer for you. I came across Beacon Power (BCON) in an article in Science News about flywheels. Think of flywheels as a means of storing energy, say, aside from batteries. The rotating unit can absorb energy or restore energy. My understanding is that some hybrids autos use this. Beacon Power will use flywheels to deal with spikes in the nation's electrical grid. Spikes up and down are a problem for the grid, and as I understand it, nothing has been done to solve such problems since the blackout in the northeast a few years back.
This may be a timely stock. It certainly has been volatile. Since I first started watching this stock in May when it was $.92, then it rose in a few weeks to $2.30 or so. Then it went back to the $1.40's. Friday it was back to $1.85 on heavy volume.
It is certainly a risky stock. There are no sales to speak of, but their technology has been approved in New York, California and recently for a bunch of other states. It was that recent event which appears to have triggered the stock action, though it has also been rumored to be up because of problems in California's grid. But the volume on this stock is very great. On Friday the stock traded over 10% of the outstanding stock. Last month 200,000-500,000 shares traded each day. This month it's 2,000,000-10,000,000. Obviously, this is a vehicle for big traders, hedge funds, market makers, and when the little guy gets in deep enough, they leave him holding the bag. So, you look out if you step into thing.
Something I Never Knew
The movie Bad News Bears was written by Bill Lancaster, son of Burt Lancaster. The Walter Matthau character was based on his father, Burt, who could be very grumpy. The girl pitcher, played by Tatum O'Neal was actually based on the writer himself.
And Now a Couple of Messages from Our Sponsor
Update on My P10B (Potential 10 Bagger)
As of my last newsletter I was a little shy about recommending this stock. I am less shy since the last time I wrote about this because a billionaire has stepped in with money and experience. He has sold similar small companies in the same businesses to big guys (which made him his billion). He's suddenly running the show. It's nice that a billionaire affirmed my sense about this technology, but the stock still has a long ways to go.
The great customer list I have always admired + a new version of their product + more cash + this new investor + a low price on the stock = this the best time so far to own this company. Still looks like a ten bagger to me. I think this stock plus a few others I have found in my reading are very interesting speculations indeed. So, I am ready to accept partners for the Barnard Partnership. Contact Tom Barnard at 708-386-9300 or tbbarnard@yahoo.com.
A Very Interesting Life Insurance Product on the High End
I have never been particularly big on life insurance, which I sell from time to time, mostly term life to young parents, but here comes a product that might have interest to investor-types who want to provide for their upscale families and against estate liabilities. This product has certain requirements and is not for the average Joe. This is only for those with assets. It does not require premium payments, however, it does require collateral against which to borrow the premiums until, presumably, the cash value of the stock indexes overcomes the cost of borrowing and the cost of insurance. If you are interested in this, contact Tom Barnard at 708-386-9300 or tbbarnard@yahoo.com.
July 22, 2007