Undervalued Weekly
The Undervalued Reports Company’s weekly newsletter
Towson, MD
November 22, 2003
www.dynamicinvestors.net/memberhome.html
*********************************************************************
You have received this e-mail because you replied to, or signed up for, an opt-in e-mail from the Undervalued Reports Company. To unsubscribe from this mailing list, send a message to uw@dynamicinvestors.net?=unsubscribe
*********************************************************************
Thanksgiving is coming and I can almost smell the turkey cooking. Without question, Thanksgiving is my favorite holiday. Not only is the best eating day of the year, but it’s always a guaranteed four-day weekend. Seriously, who can get up on Friday for work after eating all that food? Certainly not me.
In keeping with the holiday theme, I decided to shift gears from financial analysis this week to tell the Thanksgiving story, as it actually happened. It’s not the story you were taught in school, although it has many similarities. We can certainly forgive our educators for their ignorance. After all, nobody’s perfect.
But before we get into the feature story, let’s take a look at the news items from this pre-Thanksgiving week. It was a heck of a week in the financial world, and I would be remiss if I didn’t try to make some sense (or nonsense) of it.
Here’s your market data snapshot. The Dow Industrials were down 140 points, ending the week at 9628.53. The S&P 500 finished at 1035.28, down 15.12 points, or about 1.4%, for the week. My friends over at the Nasdaq dropped another 1.9% this week to 1893.88. The 10-year bond rallied almost 3% to finish the week yielding 4.14%.
Gold ended the week at $396 per ounce, down from last week’s close of $398. Gold briefly broke the psychologically important $400 barrier for a short time on Tuesday, before falling back. It’s going to be tough for gold to get over, and stay over, the $400 mark. But look out when it does, because this baby will run. During its last bull market gold reached as high as $850 per ounce. Adjusted for inflation gold would have to rise to over $2,000 per ounce just to match that high.
All of us want our stocks to go up, obviously. But if you’re playing the odds, what’ more likely to happen: stocks rally from their already lofty multiples after a 20 year bull market, or gold rallies from inflation adjusted lows after a 20-year bear market? Keep in mind that at the height of the last gold bull, an ounce of gold could buy one share of the Dow Industrials.
What are the odds that we get there again? And, more importantly, what does that mean for your investments?
Freddie Mac came out Friday with the restated earnings they promised. The earlier claim was that the understatement would be no less than $4.5 billion. So of course the understatement turned out to be around $5 billion. Just chump change I guess, since investors didn’t seem too concerned. You know what really amazes me? That anyone can understand Freddie Mac’s financials at all.
Obviously all three debt rating agencies understand the financials. How else could they reaffirm Freddie Mac’s AAA bond rating? It couldn’t be the unspoken assurance that the government will bail Freddie out if something goes wrong, could it?
See how nice it is to be a “government sponsored” entity? No matter how bad you screw up, everyone knows the government’s going to bail you out, so there’s no perceived risk to the investor. I wonder how the market would have reacted to, say, Wal Mart screwing up like this.
Morgan Stanley agreed to pay $50 million in fines to settle charges of mutual fund abuse. Following custom, the firm neither admitted nor denied the charges. That’s one of my favorite lines, “without admitting or denying the charges.” As though paying $50 million in fines doesn’t scream out “Hey. Look what we got caught doing!”
Putnam investors pulled another $7 billion out of their funds last week. Wal Mart announced that they were taking Putnam funds out of their employee’s 401k plans. CalPERS, the California Public Employees Retirement System, also decided to pull all of its $1.2 billion out of Putnam funds.
I wonder how long before there’s no money left with Putnam.
On Tuesday, federal officials arrested 47 foreign currency professionals in a huge sting operation dubbed “Wooden Nickel”. There’s more arms and legs to this story than I can possibly squeeze into one paragraph, so here’s a link to some information. There’s fraud, corruption, and even drugs involved in this scandal that stretches back 20 years.
I’ll be following this story in the blog.
In more economic news, September business inventories rose by 0.3% as automobiles piled up. It appears that consumers don’t want to buy cars when they can’t get the best incentives. We noticed that automakers call it cutting back on incentives. Everyone else calls it increasing prices.
The Consumer Price Index was unchanged in October, as energy prices fell. Gas, natural gas, and electricity prices were down. Food, housing and medical care all rose, canceling out the energy decline. This was encouraging news for the Federal Reserve, as they indicated that rates were likely to stay low for the foreseeable future.
Finally, the US dollar hit a five-year low earlier this week, before rebounding slightly to end the week at $1.189 / Euro. Tuesday, the government announced that purchases of US Treasury securities dropped to $5.6 billion in September, from $25.2 billion in August. It may be that people around the world are wising up to the impending dollar crisis, and aren’t quite as interested in holding dollar-denominated paper. They must have seen September’s trade deficit, which increased 4.4% over August’s numbers, to $40.2 billion.
Two years ago, the dollar was trading at $0.86 per Euro. It’s fallen almost 40% since that time.
There’s also talk of trade sanctions coming from the White House. The Commerce Department stated that the US would impose sanctions on Chinese textile imports, raising fears of a trade war. Of course, the administration is assuring us that the trading partners would work things out. One might pose the question: if we’re going to work it out, why do we need to impose sanctions in the first place? I guess it’s better not ask these kinds of questions.
Why do the president and his people think protectionist policies will help our economy? Has anyone in his administration heard of Smoot-Hawley, and how global protectionism helped prolong the Great Depression, leading to WWII? As though to emphasize the point I’m making, the European Union has threatened to slap tariffs on US products in retaliation for export tax breaks and support of the steel industry. They’re also threatening to follow the US by imposing tariffs on China.
What are these people thinking?
Protectionism is just plain stupid. But it sure sells to the gullible American public, which is all that matters during an election cycle. People don’t realize that all tariffs do is increase the price of goods, stifling economic growth. I sometimes think that Democracy is like a monster that eats its young.
At least Greenspan and his bunch of idiot savants are positive on the economy. I’m positive that I’ll be eating lots of Thanksgiving turkey.
Have a great holiday, everyone. Eat an extra drumstick for me, and I’ll be back next week with even more exciting commentary and insight.
*********************************************************************
Advertisement
The Most Unique Holiday Gift
Are you thinking about that perfect gift for the person who was everything?
How about stock in their favorite company, framed for display?
At OneShare.com you can purchase a single share of stock, and have it delivered in a frame, ready to be displayed. With the holidays coming, is there any better idea for the financially fit gift-giver?
Check out OneShare.com for yourself
*********************************************************************
Book Recommendation
If you’re a serious student of value investing, you’ve heard of Benjamin Graham. This week’s book recommendation is The Intelligent Investor, written by the father of value investing himself.
The Intelligent Investor was Graham’s way of translating the dry, technical language of Securities Analysis into something the average investor could understand. Consider it the bible of value investing, and something that all serious investors should read at least once, probably twice.
Warren Buffett called his mentor’s book “By far the best book on investing ever written.”
Who am I to argue? Get a copy of this book, and keep it close at hand always.
For more must-have books, check out the Dynamic Investors Required Reading.
*********************************************************************
Advertisement
The best source for business news is now available FREE for 4 weeks!
If you’re serious about keeping up with the pace of business, there’s no better source than the Wall Street Journal.
I’ve been reading the journal for a long time, and I can tell you that the content is so useful that I still have old issues and cut out articles scattered about my office. These clippings go back years, and I still find myself reading them and referring back to them.
You can’t go wrong with the Journal, and with four weeks free, you can’t lose.
Get better informed. Get the Wall Street Journal.
Subscribe to the Wall Street Journal and Get 4 Weeks Free.
*********************************************************************
The Real Story of Thanksgiving
In the United States, we celebrate Thanksgiving on the fourth Thursday in November, in honor of the pilgrims at Plymouth Rock. We give thanks for friends and family, and the good things we’ve experienced during the year, in the same fashion as the pilgrims many years ago. The tradition of Thanksgiving Day goes back to the original Plymouth colony, and in 1863 President Lincoln declared Thanksgiving a national holiday. It now stands as the second-most important national holiday, just behind July 4th.
The official version of the Thanksgiving story, as taught to millions of students every year, tells of a hard working people that fought to stay alive in harsh conditions. They befriended the local people, who taught them proper farming techniques. Through hard work and help from the local Indians, they produced an abundance of food for which they gave thanks, thereby starting the Thanksgiving tradition.
Unfortunately, that’s not exactly the real story.
The mythical Thanksgiving story begins in England, with the pilgrims climbing aboard a ship called the Mayflower. They were determined to sail to the New World in search of religious freedom. They landed in what is now Massachusetts and founded the Plymouth colony in the winter of 1620 – 21. It was a harsh winter, during which half the colonists died. The survivors plugged on, so the story goes, determined to survive.
The colonists learned farming techniques from the local Indians, and had a bountiful harvest in the fall of 1621. The colonists threw a gigantic feast in thanksgiving, and invited the Indians to join them. The governor of the colony, William Bradford, declared that day a “Day of Thanksgiving”. In one form or another, Thanksgiving has been celebrated every year since.
That’s a heartwarming story, but like most historical feel-good stories, it takes liberties with the truth. True, the colonists did land at Plymouth Rock in 1621, and there was a tough first winter. However, it actually took three years, not one, to achieve the bountiful harvests that we celebrate.
Governor Bradford documented the colonists’ story in his book, History of Plymouth Plantation. In it, he describes the initial economic system they instituted, which we would recognize as an early form of socialism or communism. This system required that “all profits & benefits that are got by trade, working, fishing, or any other means” went into a common store, from which everyone could take based on their level of need. Karl Marx would have been proud.
Of course, the system was plagued by laziness and corruption. Bradford tells us the colonists went hungry because they refused to work in the fields, preferring to steal food instead. Bradford described the system as corrupt, marked by “confusion and discontent”. For you see, not all the colonists were really pilgrims. The pilgrims were only a small group within the larger colony, and the others weren’t necessarily of the same moral fiber as the pilgrims.
When a society’s economic system has no profit motive, such as the colonist’s socialist system, it relies on the goodwill and morality of the people. This has proved a disaster wherever it’s attempted, and the Plymouth colony was no exception. Without motivation, the young and strong refused to work hard, complaining that it was unfair for them to “spend their time and strength to work for other men’s wives and children.” You can hear echoes of these same complaints in today’s criticism of the welfare state.
Needless to say, the colony’s socialist system produced a less than bountiful harvest in the fall of 1621. There was a feast at harvest time, but it was more a meal for survivors than a thanksgiving for plenty. There is no history of a “Thanksgiving” in 1621, nor of any proclamation by William Bradford.
*********************************************************************
Advertisement
#1 on the Wall Street Journal Business Bestseller list, and a New York Times Bestseller
What if Japanese investors in 1989 had a book to prepare them for that nation’s looming economic DEFLATION and 12-year bear market?
What if American investors in 1929 had a book to prepare them for the stock market CRASH and The Great Depression?
They could have used the forecast to prepare themselves — even to come out ahead. The lesson is simple: A crisis you see coming is a crisis you can avoid.
Avoid the coming crisis: http://www.elliottwave.com/a.asp?url=conquer&cn=DI
*********************************************************************
The famine brought about by the socialist economic system continued through 1622, after which the colonists decided to do make a change. Bradford writes that in 1622 “they began to think how they might raise as much corn as they could, and obtain a better crop.” Their economic system was unworkable, so they abolished it in favor of another.
Describing the failure of the colony’s socialist/communist system, Bradford wrote the following:
“The experience that has had in this common course and condition, tried sundrie years, and that amongst Godly and sober men, may well evince the Vanities of the conceit of Plato's and other ancients, applauded by some of later times; that the taking away of propertie, and bringing into commone wealth, would make them happy and flourishing, as if they were wiser than God.”
In other words, the failure at Plymouth proves that the socialist economy praised and theorized by Plato and others, both ancient and modern, doesn’t work.
In 1623 the socialist economy was abandoned, and a form of free market enterprise replaced it. Each family was given a parcel of land which they could farm, keeping the products for themselves. They could consume, trade, or store whatever they could produce. This simple change in economic structure eliminated famine in the colony.
Following the institution of a free market, Bradford remarked that “instead of famine now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God.” 1623 marked the year of the first Thanksgiving, with a bountiful harvest and celebration.
The harvest of 1623 was many times greater than the previous harvests, and the colonists probably felt that God had blessed them and their new economic system. They were certainly thankful for the harvest, and celebrated. During the celebration, Governor Bradford proclaimed November 29, 1623 as a Day of Thanksgiving, from which we get the name.
While the term “socialism”, as we know it, didn’t come into it’s current definition until the 1800’s, it was well known that the collectivist economy it describes produces only poverty and famine. From our most humble beginnings, the people of America knew socialism was an unworkable economic system, and the free market was the only source of wealth and abundance.
This understanding filtered down through many generations, and was embraced by the Founding Fathers in the documents upon which our country is based. They knew that freedom and private property led the way to prosperity, and built these ideas into everything they wrote. It’s the economic growth that comes with freedom that has made the United States the wealthies society in history.
As you sit around the table this Thanksgiving, look at the items you have laid out before you. Imagine the farmers who grow the vegetables and raise the turkeys, toiling to make a profit selling their products. Think about the businesses that package the food for sale, and the butcher who prepares your turkey. These people don’t work because they like you, or because they want to give you things. They work to make money, and in the process they provide you with the Thanksgiving feast you’re enjoying. So give thanks for these workers, and give thanks for the free market.
*********************************************************************
Advertisement
Save at Amazon.com
Spend $50 in Apparel and get $10 to spend at Amazon.com!
*********************************************************************
Quotes of the Week
"We are all faced with a series of great opportunities - brilliantly disguised as insoluble problems."
- John William Gardner
Science evolves from funeral to funeral, it is said. Each corpse is another lesson...another scientist gone mad and another theory gone bad. Each exquisite cadaver is another reminder that there are only two kinds of scientific theories - those that have been disproved, and those that have not been disproved yet."
-Bill Bonner, 11/21/03 Daily Reckoning
The Fab Five
This week’s ideas must have a Return on Assets (ROA) greater than 10. ROA calculates the amount of earnings per dollar of assets, and is a good indicator of efficiency. It’s also one of three parts to the ROE calculation, which makes it an important measure.
I’m looking for companies with an ROA over 10, less debt than equity, and a market cap less than $1 billion. I look for lower debt because companies can boost ROE by taking on tremendous amounts of debt, which brings other risks into play. I don’t want to deal with those other risks.
Symbol Name Price (COB 11/21/03)
PBT Permian Basin $ 8.20
SBR Sabine Royalty $ 27.36
BPT BP Prudhoe Bay $ 23.33
WRNC Warnaco Group $ 13.91
SJT San Juan Royal Tr $ 19.25
It’s important to remember that screening is only to be used as a starting point. I can’t tell you anything about these companies, except that they have very high ROAs, but I’ve never really heard of any of them.
Until next week my friends, happy investing. Don’t forget to forward this newsletter to a friend.
Sincerely,
Christopher M. Mallon
Have you checked out the Dynamic Investors Marketplace?
*********************************************************************
Attention advertisers!
If you’d like to advertise in the Undervalued Weekly, please send e-mail to chrismallon@dynamicinvestors.net. My rates are reasonable, and I’m willing to work deals for ad swaps and joint ventures.
Attention authors!
The Undervalued Weekly is always looking for quality original content. If you’d like to write an article for publication in the Undervalued Weekly, send a copy of your article to undervalued@dynamicinvestors.net. Include a one-paragraph abstract of your article, and a working e-mail address. I will contact you if your article is approved. I reserve the right to correct any grammatical mistakes.
To unsubscribe from this mailing list, send e-mail to
mailto:uw@dynamicinvestors.net?subject=unsubscribe