Lead Dog Investments

Lead Dog Trade Alert: Sell Texas Instruments at $32.95

2012-01-26T21:22:00.000-08:00

Sorry to say I was compelled to sell one of my former employers Texas Instruments (TXN) at $32.95 after the opening bell this morning. The stock sank some 2% lower by the end of the day as the millions of Lead Dog fans followed my lead and rushed for the exits after seeing my departure.

TI was a middling investment returning 74% over three-plus years for an annual return of 19% including dividends. Nothing to sneeze at but an under-performer vis-a-vis the entire Lead Dog portfolio which currently is returning about 29% per year. TI will continue to do just fine but I think it will be a market performer for quite some time. With a forward P/E of 17 and a P/CF of 11.4 it's hard to argue that the stock is cheap; and now with ROC and every measure of profit margins sagging below five year averages I think it's best to reallocate our gains to cheaper and/or higher-performing companies.

Speaking of which, I reallocated 1/3 of the sale proceeds to emerging market ETF iShares EEM while most of the rest will be invested in another large American high tech company that is performing just as well as Texas Instruments but costs about half as much when measured by any of the big four price ratios (P/E, P/S, P/B, P/CF). Of course I cannot tell you now because all those billion dollar hedge fund guys might use their high-frequency trading systems to step in front of us on the order queue so check back soon.

Great year so far! Good to see that Obama's scarily populist screed on Tuesday didn't scare the markets. I think we have pretty much learned to ignore all those Washington blowhards but it's still painful since some of us thought that Barry was different. He's not, and if he keeps Biden as his VP and Romney picks Chris Christie as his, my vote (and hence the entire election since the world revolves around my opinion) is up for grabs. Fun stuff.

2011 Performance Review

2012-01-03T16:22:00.000-08:00

Happy New Year! Aside from an ill-timed allocation to several emerging market ETFs, the Lead Dog Portfolio once again out-performed index averages by a comfortable margin. Overall the portfolio was up 9% but the individual stocks portion of the portfolio was up 15% (including dividends) compared to 2% for the S&P, 8.5% for the DJIA and -1% for the Nasdaq. Better yet, after one day of trading in 2012 we can claim 13 out of 13 winners and a 24% annual return for current holding:

When comparing the portfolio performance against three benchmarks--Recent Sells, Sentimental Favorites and StockScouter top 10 picks--my performance is also unequalled:

For what it's worth, the Sentimental Dartboard portfolio is filled with companies that I use and love (or like for emotional rather than rational reasons) but cannot own due to wacky valuations or other performance metrics. This Sentimental benchmark has been an especially valuable lesson AGAINST the old Peter Lynch advice to buy what you know and love. What a stupid idea. Just because I love Porsche's and vacations in Monaco doesn't mean that either is worth the money. Just for kicks, here is the detail for the the Sentimental Dartboard:

Out of the 11 holding in this portfolio, only TWO--Chipotle and and Tesla--outperform the Lead Dog portfolio annual ROI. Let that be a small anecdotal lesson to us all. Cheers!

Lead Dog Trade Alert: Buy Medtronic (MDT) at $35.20

2011-12-15T18:00:00.000-08:00

At least I bought something this Christmas season. As for presents, I refuse to conform to the callous consumerism of a pretend birthday party for a charismatic Jew that lived 2000 years ago. Besides, ya'll probably have enough stuff anyway. Count me in for the spiked eggnog, mistletoe, and good vegetarian eats, though.

So back to my Christmas spending, and yes it's on credit in true American fashion. Medtronic is Stockscouter's top pick currently and with good reason: forward P/E of 10, ROC of 13 and a yield of 2.75% which is about the same as the 30 year treasury note. That's right, you can lock your money up for 30 years at 2.75% or buy Medtronic and get the same yield, which incidentally is GROWING at 19% per year over the last five years, and have the opportunity for capital gains. Since the book value of MDT has TRIPLED in the last ten years while the stock price has ACTUALLY DECREASED by about 30%, I think Stockscouter has this one exactly right. So, yes E*Trade, I will take your 1.75% loan and leverage up (now at about 12% of non real-estate assets) while the rest of the world de-leverages from their wasteful ways of yore.

FYI, just in case you are wondering and haven't a google toolbar of your own, Medtronic is a medical device company based in Minnesota that makes pacemakers, insulin pumps and gobs of other non-pharma healthcare items. I mention Minnesota because there are two places where I refuse to directly invest--Florida and India--just because my personal experience is that both places have a higher percentage of ethically-challenged people. I lived in Florida for six months and India for one month so my prejudice is based on some anecdotal data.

On an unrelated note, I was encouraged this week by recent gallup poll findings that the anti-big-government sentiment is winning over the anti-big-business movement in America. Meanwhile, unions are so irrelevant that nobody bothers getting their knickers in a twist over them anymore.

My guess is most of the 26% that are against big business have never been employed by big business (if they have ever been employed at all) and/or are oblivious to the fact that most big business is actually owned by regular ordinary humans like you and me. Case and point: the nefarious big-business, big-oil industry:

Yes, we need to quit subsidizing politically-connected industries and we need to make the corporate tax lower and more equitable. Companies with the smartest accountants and best lobbyists should not pay lower rates than those with dim accountants like those from third tier schools like Washington State University. Ron Paul articulates these points quite well and I hope that the GOP selects him over the rest of the scary choices, not that any of them have a shot against Obama if the economy continues to improve. The fact that Fox News, Rush Limbaugh and the rest of the GOP establishment are actively campaigning against Paul makes me like him even more.

Year end results coming soon! This has been a miserable week, but the winter rally should start soon.

Lead Dog Trade Alert: Buy Something!

2011-11-22T10:43:00.001-08:00

Recent global turmoil (man, am I getting tired of saying that phrase) has lead the markets down and thereby induced me to increase my margin debt to about 8% of non-real-estate assets as I bought Qlogic (QLGC) maker of adapters for the Network Attached Storage market. My price on Friday was a full 7% higher than today's recent quote so feel free to invest like the Lead Dog at a serious discount.

There's a lot to like about Qlogic. First off, coming as no surprise to loyal readers, QLGC is cheap at a P/E of 10 and P/CF of 8. Such discounts you might find in moribund companies in mature industries but Qlogic has a one-year ROC of 22% and double-digit growth forecasts. Further, the Board of Directors just approved a $200M buyback which amounts to about 15% of the shares outstanding which, if fully implemented, will provide an immediate 15% turbo-boost on per share results.

Global and domestic concerns still abound, as they always have and always will. Yes, the U.S. is (still) mismanaged by a bunch of puerile, self-interested, venal dolts. It's astounding that our leaders cannot agree to simple no-brainers like lowering corporate tax rates and eliminating corporate subsidies in a revenue neutral way so that all corporations pay the same tax rate. Personally, I think corporate tax rates should be zero and personal dividends and cap gains should then be treated the same as all other income but I realize that such common sense is beyond the capabilities of the current batch of extreme thinkers (on both sides of the proverbial aisle). Also, why do we still have Saturday postal deliveries? Pennies? Nearly half of the military spending in the world? Multi-millionaires collecting social security checks? The list of low-hanging fruit boggles the mind and yet our feckless leaders cannot agree on even the most obvious fixes. Vote the bums out! Unless, of course, the opposing bum is worse the incumbent bum.

This being the holidays I have had plenty of opportunities to hear misinformed people debate politics and economics. The ignorance is varied and scattered but even the most learned overstates the "threat" of China and foreign oil, probably because Chinese and Muslims are ready villains for demagoguing politicians looking for a cheap vote. For the record, "made in China" products represent less than 3% of personal consumer expenditures (1% of which goes to US retailers and other non-Chinese middlemen), China owns less than 10% of US debt (roughly on par with Japan and the UK) and less than 10% of the oil consumed in the US comes from the Middle East. My guess is that the average American ~~dumbass~~ citizen thinks the situation is far more extreme. For more read this summary or for more on the China PCE numbers read this.

Not to toot my own horn but....

2011-11-04T18:07:00.000-07:00

HONK fucking HONK! Yes, the latest standings are out in the Good Judgement Team's Crowdcast forecasting contest (over 3000 participants according to the linked site) and I am leading. Numero uno! In your face Scott McKendrick, Terrell and you other 2998 suckas!

For those not inclined to check out the link, Crowdcast is an effort by Penn and Cal/Berkeley smarty pants funded by IARPA, a government organization led by ex-CIA people that is so secretive I can't even ascertain what IARPA stands for. Really, they have a whole webpage that explains the P stands for "program" but for the rest, well, if they tell you they will have to kill you. Or at least your iPad.

"The US Intelligence Agencies have thousands of highly-trained analysts with access to a vast store of privileged information. However, they have great difficulty efficiently synthesizing and surfacing this info actionable information. Often the “a broken watch is right twice a day” phenomenon encourages analysts to stick with the status quo rather than flag new conditions. These kinds of forecasting behaviors have real costs in dollars and in lives.

Despite its importance in modern life, forecasting remains (ironically) unpredictable. Who is a good forecaster? How do you make people better forecasters? Are there processes or technologies that can improve the ability of governments, companies, and other institutions to perceive and act on trends and threats? Nobody really knows. The goal of the Good Judgment Project is to answer these questions."

Anyway, I'm not quite ready to quit my day job--whoops, too late--to become a famous prognosticator, but I am pondering a name change to Nostevdamus and starting to write oblique and poetic predictions about dying kings, war and apocalyptic stuff in general. Red meat for the masses. And just like Nostradamus, if you make everything vague enough, the morons of the future will read all sorts of interesting stuff between the lines and make me seem really clairvoyant.

In all seriousness, I owe my current standing in this contest to equal parts luck, apathy in my competition, limited sample size and perhaps a little talent at such things. I will make another great prognostication here and now that I will not win this contest. Or even come close. With 3000 contestants, even if I am in the 99th percentile in forecasting "skill", the ultimate winner will need luck as well. Such is life.

Einstein said that the only really valuable thing is intuition. No amount of logic or reason would have led him to his crazy mind-bending concept of a space/time continuum. He intuited the concept and back-fitted the math to prove it. THAT is some crazy smart shit. I'm just glad he's not around for this contest or else the I would be bested by username "Relatively Al" in the above standings.

Lead Dog sells Altera (ALTR) at $36.56

2011-10-25T08:35:00.000-07:00

As of press time, and a few days of market exuberance after my Friday sale, you can sell Altera for about 5% more than I did. Doh! Oh well, I am not going to sneeze at a 141% gain annualized at 39%, tax-delayed since I held this stock in my IRA.

Altera just announced a lousy quarter with decreasing YOY and sequential revenues for the first time in years. Further, analysts are quickly downgrading the immediate future of Altera: in just 90 days, earnings estimates for 2011 have dropped from $2.61 to $2.39 and $2.77 to $2.28 for 2012. So, investors are being asked to pay 15X earnings and 14X cashflow for a company with negative earnings growth expectations. While I love Altera's five year ROC of 24%, it's current price doesn't match up with expectations.

I think the big picture of Altera shows some blemishes. Sure, they--along with Xilinx--dominate the FPGA semiconductor market and they will continue to do so for the foreseeable future. However, I think the FPGA market in general is going to face increasing headwinds. Why? As consumer oriented blockbusters like iPhones, iPads and Kindles hegemonize global consumer electronics, I see less opportunity for second tier suppliers of consumer electronics. Expeditious scale for the likes of Apple and Amazon means more full custom semiconductor solutions and less prototypes and low volume solutions that include FPGAs, which have far smaller one-time charges but much larger unit prices.

Further, an always reliable segment for FPGA companies is the military industrial complex that has managed to harangue an outsized piece of the American budget for too long. Romney, in deference to the Neoconservative nation building wing of the GOP, recently announced that he is not in favor of any defense cuts. I guess he thinks it makes sense to spend 43% of the world's military spending when we are about 23% of the world's economy. Obama, of course, is not much better on this front with his Afghanistan escalation and forays into Libya.

Incidentally, I reinvested most of this money in my three emerging market ETFs for asset balancing. I am still using small amounts of margin but very nearly back to (just) 100% invested.

Lead Dog sell alert (VALE@24.28): Call me skeptical but...

2011-10-11T20:42:00.000-07:00

the last six glorious days, with the S&P up a massive 9% in just six days, has the appearance of a head fake. And this coming from a glass-half-full kind of guy. I'll be a believer once one or more of the following occurs:

1) Technically, we need to break the S&P 1215 barrier against which we have bumped several times only to fall back into the low 1100s. The fact that we just hit a 13 month low on October 3 would suggest lower lows are more likely than a continuation of this salubrious week.

2) Europe gets its shit together. Hey, I don't know what the answer is (I only play an economic wizard on the internet) but I do know that uncertainty is anathema to markets. As of this afternoon, Slovakia (1% of the EU population) has nixed the Greece bailout plan that the other 99% of the EU had already passed which will probably cause global markets to reverse course tomorrow. Perhaps in a big way.

3) Volatility has to simmer down. The (common measure of volatility) VIX needs to get back down below 30, preferably in the mid 20s, from its current level of 33.

4) Fourth quarter earnings have to pleasantly surprise which I see as unlikely since anyone who was paying attention to their E*Trade accounts these last two months was unlikely to celebrate their sinking net worth with large discretionary expenditures.

As such, I have lowered (yet again) my margin to 4% by selling my remaining significant loser, Vale, at $24.28 or a 24% loss. A bit of my motivation was capital loss harvesting to offset rather large realized gains taken earlier this year in RJ Reynolds and Limited. Although Vale is still a huge fundamental bargain at a forward P/E of 5 the "E" in that equation is on a slippery slope with analyst expectations dropping almost 10% in just 90 days. My guess is that--if we so desire--we will be able to buy this stock at lower levels in the near future.

And now for a brief editorial on the Occupy Wall Street movement. Here are some snippets of my favorite post on the subject by Purdue philosophy professor Freddie deBoer (his entire post here):

Consider what the idea here is: that this protest becomes something worth considering when and only when it becomes about those who are most visible. Only when the young and college educated begin to express grievance, and only when that grievance concerns their material wealth and opportunity, do the protests begin to take off. It is extremely disturbing to me how quickly a movement opposing our system of prestige and wealth becomes a movement about those who thought they were entitled to succeed in that system. Complaining that a college education hasn't moved you into the material comfort and social strata you wanted isn't an argument against this system; it's a complaint about the outcome of the system that tacitly asserts the value of that system. When someone says "I have a law degree and I work as a barista," the necessary assumption of that statement is that their law degree entitles them to a certain material and social privilege. That privilege is precisely what animates the system they say they are protesting...

But they must recognize that the problem was always the promise, and not the failure to get what was promised. You can't, actually, have everything you want. You are not entitled to the life you have dreamed. And we are not so wealthy that we can all live in opulence. If the goal is merely to restore the condition of the previous two decades and add more people to the ranks of the middle class, then that is the problem reasserting itself.

Believe me, as someone who sometimes goes to extraordinary measures to make ends meet, I completely understand the frustration of not having as much money as I once thought that I would have. And, yes, we need to drastically raise bank capitalization rates, overhaul the mortgage finance system including killing Freddie and Fannie, indict people that clearly broke the law in the years leading up to the meltdown and probably a list of other items that curiously have not happened yet. And for this, I am grateful for the protesters but unsure why they are on Wall Street and not on Pennsylvania Avenue.

I leave you with the current Lead Dog Portfolio holdings and a look how the current portfolio kicks ass on the benchmark portfolios:

Realizing Some Losses, Reducing Leverage

2011-09-28T10:28:00.000-07:00

Yesterday I sold America Movil (AMX), the Latin American phone operator that is controlled by the world's richest man, Carlos Slim (only because he is not as generous as #2 and #3, Gates and Buffett). I sold at $23.23, 2.5% higher than the current price, for a total loss of 17% over 11 months or so.

AMX is still a terrific bargain at a price of 4X cashflow but the technicals indicate that the stock will first go lower before ascending toward intrinsic value. Just as Corning (GLW) is reappearing on my buy list after dropping 32% since I sold it almost a year ago, AMX remains a great company and might tempt me with future drops in share price.

But for now AMX was an obvious choice because of:

1) the aforementioned technical weakness.

2) my need to realize a small capital loss to mitigate rather large long-term capital gains that I realized earlier this year with Reynolds (RAI) and Limited (LTD)

3) my newfound trepidation about the market in general which motivated me to drop total margin investing from 11% to 6% of the portfolio. This was largely based on the S&P 500 crossing the 360 day moving average (something it rarely does) and its two unsuccessful attempts at regaining that metric, currently about 1215.

For the last two month, since the market nosedive that sent us below 1215, the market has been oscillating between 1215 and 1125 and it's just a matter of time before one of those levels is breeched. Historic reading of charts and seances with my Ben Bernanke limited edition Ouija board lead me to believe that we are going lower than 1125 before we go higher than 1215. Here's hoping I am wrong but for now I'm taking a few chips of the table.

Lead Dog sells TSMC from 11,000 feet...

2011-09-09T12:22:00.000-07:00

I am back from my 16-day 226 mile walk through the Sierra Nevada, specifically the justifiably popular John Muir Trail.

While away, sometime on August 23 when I was crossing from the east to the west side of the Pacific Crest on beautiful Silver Pass (see above), my sale limit order for TSMC hit at $11.68, a little lower than today's levels. 10% losers over seven months just don't seem like that big of deal when you are faced with such beauty (and are oblivious to the market's wild swings of the last several weeks).

As one is surrounded by such extreme beauty, crafted over 100 million years of seismic, glacial and other awesome natural forces, one automatically takes a longer view of all things. And while we don't have geologic-type timeframes to sit patiently waiting for a new 14,000 foot mountain to appear in our portfolios, I am convinced that we would all benefit--as investors and as emotional beings--from a little less attention to the daily and weekly spikes and valleys.

Let it go. If you lose everything, I know a really cool place for you to spend your summers (see above again). Winters are probably a tad cool so find a cheap beach in South America or Southeast Asia for those winter months. Not that I anticipate further significant weakness in the economy or markets. We ARE on the slow road to recovery and the pain of the moment has salubrious side-effects of forcing us to change the unsupportable status quo.

With this sell, I am still 11% on margin which, especially after today's free fall, seems just about right. Vis a vis my three benchmark portfolios (Recent Sells, Sentimental Darboard and Stock Scouter top 10s) the Lead Dog Portfolio is pretty much kicking ass at over 19% annualized gain vs about 6% for the best benchmark (and the S&P 500 index for a similar 14 month period).

Deep discounts! Lead Dog borrows and buys a piece of China

2011-08-08T21:02:00.000-07:00

The summer sale continues. This will end eventually and suddenly. Do yourself a favor and if you feel compelled to do ANYTHING, buy stuff. Or just sit. Don't be a slave to the primordial part of your brain that tells you to run away from scary. That's why God or evolution gave you a forebrain. Now use it.

This morning I bought NTES (NetEase), a Chinese internet portal, for $40.82. It dutifully rose and eventually closed at $41.37. So I got that going for me. My teaspoon of sugar on a minus 6% turd of a day.

NetEase tEases us with enticing five year growth numbers: ROC >30%/year, sales 28%/year, and book value growth of 32%/year. Could they be supplanted by the next big Chinese internet thing? Yep. But with only 36% internet penetration in China (vs. 77% in the US) and billions of people there is a huge opportunity for companies like NetEase to reap massive rewards.

Lead Dog raises margin levels to 9% with AHGP purchase

2011-08-07T09:20:00.000-07:00

On Friday I bought coal holding company Alliance Holding (AHGP) at $45.19, raising my margin levels up to 9% in the face of widespread market panic. How markets will react to the not-so-shocking "news" of the S&P debt downgrade is unpredictable but I will be buying into over-reactions to the downside on Monday.

Alliance is 75% owned by one of the 200 (or so) richest guys in the country, Joseph Craft. As CEO, Craft is cheaply paid at $700K, but one must wonder why we shareholders even need to pay that since this guy rakes in more than $100M in annual income from the nearly 5% dividend on the non-floating stock he owns. Oh well, while it's not the $1 we pay Steve Jobs for a job well done, it's certainly not the inconceivably ridiculous $50M that seven companies pay their CEOs. FYI, Lead Dog Holdings IBM and Exxon are near the top of the CEO pay list at around $30M each although one could weakly argue that such large, extremely well-run companies might warrant such pay. While we are at it, allow me to add Ichiro ($18M) and Chone Figgins ($9M) to the egregiously-overpaid-people-that-really-bothers-me list.

Alliance is super cheap at 6X cashflow and super profitable with a ROIC of 30%. Somehow they have managed to pay less than 2% of income in taxes every year since 2004 (when it paid 3%). Crazy, no? there is a good argument for 0% corporate income tax as long as we tax dividends and capital gains--long or short--as regular income. the bothersome point here is that some American companies are paying 35% and competing in a 20%-ish global market.

I will not give up hope up on those stupid asses in DC. Eventually they have to do something right. The S&P downgrade should be a clarion call that their first pathetic attempt at deficit reduction is not enough. Until we make serious efforts at entitlement and taxation reform our leaders and, in turn, our country's credit rating, will get the respect it deserves.

Well, that was bad timing

2011-08-04T15:17:00.000-07:00

I'm grateful that none of you got a chance to act on my Exxon recommendation before today's debacle. Now go buy it for 5% less than I forked over. Incidentally, I added to current positions today to bring my margin balance to 2%. If down is where we are going I will be buying more along the way. I have orders that will take me to 10% if tomorrow is anything like today.

Today was very disturbing, breaking through just about every imaginable support level.

Lead Dog Gets All Gassy with XOM

2011-08-03T21:12:00.000-07:00

I took advantage of recent market histrionics yesterday and lowered my cash position to 0% with my purchase of energy behemoth Exxon Mobil (XOM) at $78. Exxon's oil production is up 10%, natural gas production up 22%, cap ex and exploration up a whopping 58% (showing dedication to the future) while all fundamentals remain incredibly sound. P/E of 9, dividend of 2.4% (which grows about 9% a year) and a book value that has grown 12% per year for the last nine years. There are political uncertainties (see below) but the one certainty is that the world will need more oil in the next 20 years (at least).

Not that I am a particular fan of oil companies but this marks--along with my earlier purchases of ConocoPhillips and Chevron--my third dip into the oil bucket in the last year. I think investors might be avoiding the sector due to uncertainties with regards to the future of oil company subsidies (once on the chopping block but the GOP somehow saved for the time being) and the 18 cent federal gas tax.

Congress might do the right thing and quit subsidizing Exxon and other energy companies. That said, I think it is just as likely that Congress lets the gas tax expire (it is election season, after all) rather than have gas users pay for all the externalities for which they are responsible: pollution, obesity, sprawl/reduction of green space/environmental, etc.

Either way, I think sudden and dramatic change is an extreme longshot. Why do I think this? Exhibit A above. After all the deficit drama in recent weeks, you would think that some significant change might have resulted. Wrong. All we got is a lousy 5% spending cut and more than half of that is thus far unspecified. We can thank the Dems for such a weak effort on the spending cuts. Blame the GOP for squandering a golden opportunity to improve our taxation scheme--they should have agreed to eliminating corporate subsidies and personal subsidies that don't make any sense (like the mortgage deduction) in exchange for lower and simpler tax rates. Yes, you could have lowered rates, increased revenues and eliminated market-distorting handouts but, nooooooooo, those banal bastards wasted their golden opportunity.

Oh well. Life will go on and the market will continue to go up because the ECONOMY IS IMPROVING and will continue to improve. Really, how could it not. The housing industry is quietly creating pent up demand as it has been effectively shut down for three years and cautious corporations have been amassing piles of cash. Further, with TARP, QE1, QE2 and all those other loosey goosey Keynesian binges there is a ton of idle cash. Since GDP is roughly money supply * money velocity (how often money changes hands) all we need is just a little bit of velocity catalyst and this economy will ignite, if not explode. But worrying about future inflation is so not in the moment. For the moment, go buy a new iPad, backpack and tent as I have done in the last couple of weeks. Be the catalyst.

And buy your gas from 76, Chevron or Exxon. I will thank you later.

Summer update

2011-07-23T11:29:00.000-07:00

Things are looking up. Not that my net equity is as high as it was in 2007 but back then I, like most people, had an inflated sense of net worth due to a mini-bubble in equities and the monster of all bubbles in real estate. With the exception of some recent crazy IPOs (Linked In, Zillow et al) and private valuations given to the likes of Facebook and Groupon the market is PDC (pretty darn cheap). The Lead Dog Portfolio sports a median forward P/E of 11.85 and a median dividend rate of nearly 2%. And while the Lead Dog Portfolio will likely outperform the general market (considering the huge brain of its manager), I think equity prices in general are slightly discounted, especially compared to the prospects of bonds and real estate. As you can see by the graphic, the current portfolio returns a whopping 32% annually, with 10 of the 12 holdings returning more than 20% per year. (ETFs not included here). Perhaps more impressively, half of the portfolio has annualized returns of more than 40%.

Lead Dog Removes Lacy Underwear (LTD) and Gets Dirty (VALE)

2011-07-06T19:41:00.000-07:00

Today I sold Limited (LTD), owner/operator of Victoria's Secret at $39.16 for a 101% gain (105% annualized including two large special dividends of $3/share and $1/share in addition to the quarterly $.20/share dividend), invested about half of the proceeds in Brazilian mining company Vale (VALE) at $32.80 and kept the other half in cash, bringing cash back up to 6% of non-real estate assets.

So, yes, we have gone from covering Brazilian wax jobs to uncovering Brazilian ore. As painful as the tax hit will be on this two-bagger, Limited pricing seems a bit frilly for its prospects. With a P/E of 16 (the second highest in the portfolio behind much faster growing Altera) and a price/book of 11X, it seems Limited has a "limited" margin for error after doubling in such a short period.

Vale, on the other hand trades at a P/E of 10 (price/cash flow of 7), pays a healthy dividend of 2.3% that grows about 8%/year and has a five-year growth rate of 29% (sales and earnings, vs. 0% and 4% for LTD). Further, Vale returns 16% on capital vs. Limited's 10% (five year averages). Lastly, and perhaps most impressively, Vale's book value has soared from 71 cents at the end of 2002 to over $13 at the end of 2010. That's almost 45% per year! Clearly, Vale seems ready to out-perform LTD in the coming year(s); the only question is will it outperform by enough to compensate for the 15% tax assessment we pay when we sell LTD.

The last reason to like Vale is that I am working on getting 1/3 of my equity investments in foreign countries (largely accomplished with this action). The reasons for doing this are many and manifest including spreading currency risk, avoiding single-country (USA) shocks and exposure to faster growing economies. Yes, Brazil is a notoriously corrupt place to do business but any associated risk is probably baked into these discount prices of Vale.

And let's hope they ~~throw a Carnival bash~~ have a shareholder meeting in Rio soon.

Lead Dog Lowers Cash to 2% with more emerging market ETFs

2011-06-14T17:02:00.000-07:00

On Monday, I purchased EEM, the iShares emerging market ETF, at $46.46. For the moment, this concludes my foray into emerging market ETFs as my emerging market allocation (spread over three ETFs so I can compare relative performance) is now up to 20% of equity investments (the rest being in twelve US-traded stocks).

The bigger news (not that anything I do is particularly newsworthy--my repeated tweets of naked pictures of myself warrant nary a comment from recipients) is that I am dangerously close to borrowing money again to invest in equities. With the S&P down 100 points (7%) off its recent high late-April high, my guess is that it gets no lower than the March low of 1260 with 90% certainty that we will stay above 1200, the current 360 day moving average. If that moving average seems a bit too long-term, allow me to show you how remarkable it is (sorry about the missing X-axis but this is over five years):

Like a magnetic field, the market is usually repelled by the 360-day trend, having crossed it only two times in the last five years. If we were all-or-nothing type people (which I am not), we would have used this indicator to completely abandon the market in Q407 at about 1400 to re-enter Q409 at about 1050. Oh, how much richer we would all be? As it is, the painful experience of 2008-09 taught me to better adjust my market exposure based on the likelihood of success: surely someone should have twice as much invested at S&P=700 compared to S&P=1400, but unfortunately I was 100% invested at 1400. Fortunately, I used all the margin I could at the deep lows to offset some of this initial misallocation of funds.

Yet another lesson learned after 20 years of investing.

Looking forward, I have concluded that I probably will remain a renter for the foreseeable future based on Seattle price-to-rent ratios remaining one of the highest in the country. While in most cities the rent vs. mortgage comparison is reaching parity (with 20% down payment), Seattle mortgages are still about 20% higher than rent (for comparables). Add a down payment, HOA (or just maintaining a house) and taxes and renting remains a no-brainer. That said, I need to start regaining some real estate exposure in my asset allocation mix so my next purchase will likely be a REIT ETF. More on that when the time comes.

Lead Dog Trade Alerts, weekend edition

2011-06-12T20:34:00.000-07:00

Sorry I did not post these earlier but I was hiking up the Duckabush which, as it turns out, is an appropriate name for the trail (along with Hopatree and Fordarampage) in its current late-spring state.

On Wednesday I sold Alaska Airlines for $63.35 for a 45% gain (42% annualized) and used most of the proceeds to buy Chevron at $100.

Alaska is still very cheap at 4X cashflow and 8X forward earnings and yet the CEO just sold 85% of his shares at very close to the 52 week high of 70. I'm no conspiracy theorist but I do heed the actions and lack of confidence of the CEO.

My guess is that Alaska Airlines CEO Ayers thinks rising fuel cost is going to eat into company profits which leads me to the Chevron purchase at $100. While trading at similar fundamentals as ALK (6X cashflow and 8X forward earnings), CVX gives 3% dividends (ALK has no dividend) and has a much better historic returns on capital than Alaska Airlines.

Current cash available is down to 6% of the total portfolio and I intend to invest most remaining cash on any further weakness in the upcoming week. Stay tuned, could be tomorrow.

Lead Dog Buys VWO To Increase Emerging Market Exposure

2011-05-23T23:14:00.000-07:00

With the S&P off 4% from recent highs, I took advantage of the sale and bought VWO (Vanguard Emerging Market ETF) at $46.50 today. This brings cash to 5% and emerging markets (ETFs) to 10% of portfolio assets. The rest is in these twelve stocks:

Since gains in Alaska Airlines can now be considered long-term, I have put my shares for sale this week and hope to put proceeds into Chevron (CVX), i.e. away from the buyer of expensive fuel and toward the seller/profiter.

Lead Dog Erases Western Digital From Portfollio

2011-05-09T22:08:00.000-07:00

Today, after nearly four years and a 77% (16% annualized) gain, I sold hard drive maker Western Digital (WDC) at $38.24.

Although WD is still cheap by almost any measure (P/E=11, P/S=.9, P/CF=6), revenues, returns (on capital or equity) and margins are starting to shrink, shrinkage that might continue as consumer devices like iPads and iPhones migrate from hard drive to solid state (semiconductor) storage. There is still a need for hard drives but the market is increasingly monopsonistic which doesn't bode especially well for magnetic hard drive companies like WD and Seagate.

Incidentally, I reinvested 2/3 of the proceeds to the Powershares Emerging Market ETF (PXH):

The investment seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of the index called the FTSE RAFI Emerging Index. The fund normally invests at least 90% of total assets in stocks that comprise the FTSE RAFI Emerging Index and ADRs based on the stocks in the FTSE RAFI Emerging Index. It normally invests at least 80% of total assets in securities of companies that are classified as emerging market within FTSE's country classification definition. The fund is non-diversified.

The remaining third of the proceeds will stay as cash, raising portfolio cash allocation to 10% of NRE (non real estate) assets.

Buy the dip (although it may get dippier)

2011-03-15T08:24:00.001-07:00

This morning I bought Intel (again) at $20.25, just 17 months after selling the stock at $19.68. Other than Intel's hefty 3.5% dividend, we didn't miss much. And given Intel's valuation, fundamentals and technicals, it is due for a period of out-performance.

Intel trades at 7X cash flow and 10X earnings while return 23% on capital (one year). Currently at 10-year lows for price/sales, price/book, price/earnings, Intel sells as if it were a stodgy industrial. Which, of course, it is not. Intel continues to dominate the processor market in spite of stiff competition from the likes of ARM, Texas Instruments and Qualcomm. As importantly, Intel continues to lead the industry in design and fabrication process.

This investment lowers my cash to just 5% which I am thinking about allocating to an emerging market ETF if we continue to see political and seismic earthquakes shake the foundation of global financial markets. As long-term investors, we need to remind ourselves that, as tragic as the conditions in Japan and Libya are, neither represents a long-term risk to our portfolio. Yes, Japan GDP will tank for two quarters (or so) but the country will bounce back soon enough. As I have stated earlier in this blog, S&P 500 could easily dip another 5-7% (below 1200) which wouldn't alarm me at all--quite the opposite, I'll be buying into any future market discounts.

Lead Dog Trade Alert: sell CSCO at $18.84

2011-02-24T10:29:00.000-08:00

Sorry about the delayed posting (travels and skiing take precedence) but last Friday I sold Cisco at $18.84, bringing my cash up to 10% while realizing a 1% loss on the stock.

Cisco is down 22% over the last year putting it in the 21st percentile of market performers. Earning estimates, returns on capital and profit margins are trending down for Cisco which leads me to think that this under-performance will likely continue. Best to move on and I allocated the proceeds to Taiwan Semiconductor. Since the switch, Cisco is down 3% while TSMC is down 6%, thereby proving my infallibility.

The market has been ugly this week, a move that is not entirely unexpected due to the amazing prior six months. I wouldn't by surprised to see the S&P dip below 1200 (another 7% down) before continuing its secular upward trend. I might buy Gap (GPS) on a sudden downdraft and will assuredly utilize cash if and when the market dips further.

Lead Dog Trade Alert: Buy TSMC at $12.88

2011-02-17T18:50:00.000-08:00

This morning I purchased Taiwan Semiconductor (TSM) for $12.88. TSMC is the world's largest foundry when semiconductor design companies are increasingly adopting the fab-less business model. In fact, depending on how you do the accounting, TSMC could be the third largest semiconductor company in the world behind Intel (microprocessors, duh) and Samsung (shitloads of memory which don't require a lot of designing so their core competency is in process). Neither of these top two will likely adopt a fab-less business model soon but with a state-of-the-art fab costing about $2B (yes, B), it's hard to imagine any other semiconductor companies--old or new--deciding to outlay that kind of cash to control their fabrication.

And look at the numbers! No debt, 8X cash flow, less than 13 forward P/E, 4% dividend and return on capital in the 20s.

TSMC is not without risks. To my knowledge, all of their foundries are situated on Taiwan, a seismically active island. Any size-able earthquake will almost certainly ruin your WIP (work in process) and could shut down factories for extended periods. Further, there is a certain amount of political risk with China looming across the Taiwan Strait.

This temporarily depletes my cash position to 5% but I hope to sell Cisco in the next couple of days to get cash back over 10%.

Lead Dog Trade Alert: sell Reynolds America (RAI) at $32.69

2011-02-14T11:53:00.000-08:00

Today I sold my shares of Reynolds America, maker of (among other cancer-causing brands) Camel cigarettes and Grizzly chewing tobacco for $32.69, ending a an 8.5 year guilt-ridden holding period where my investment nearly tripled (including dividends) for an annualized return of 16.5%. Although I still own a few evil oil companies, my conscience feels a bit lighter now that I won't be profiting on the early oxygen-deprived deaths of my customers.

Tobacco is a strange business indeed. Since the product is more addictive than heroin (and on par with meth and crack), the industry typically has long-term customers. Unfortunately, not *that* long as smokers tend to die about 20 years earlier than non-smokers.

Acquiring new addicts/customers is increasingly difficult for tobacco customers as the exact pernicious nature of the habit is now indisputable and there are growing numbers of bold prohibitions against the demon plant. According to this New York Times article, private businesses led by hospitals and medical businesses are leading the way to screen for and deny employment of smokers. Considering the huge medical cost of smoking and our strange cultural norm of receiving health insurance from our employers, this trend seems likely to continue and expand.

Which leads us to an America where tobacco will still be legal but the opportunities to smoke so limited that usage is bound to wane, even if the total number of addicts does not.

Incidentally, I have managed my cash position to 10% after the very steady, near linear advance of the last six months (or the last two years if you discount a few bumps in the road). Newton's Law of Markets says that markets in motion tend to stay in a similar motion so I wouldn't count on an immediate reversal of fortunes, but we are long overdue for a little 10% correction (or so) and we want to have cash on hand to be able to buy at any upcoming sales.

Lead Dog Trade Alert: sell eBay at $28.07

2011-01-10T12:39:00.000-08:00

I just closed the auction on my eBay shares at $28.07 for a nice little double (and then some, 113%) and an annualized return of 42%. Sure helps that I bought these shares in November of 2008 when many were rushing for the exits.

On a P/E basis, eBay was the most expensive in the portfolio trading at more than 19X next year's earnings with an estimated earnings growth rate of only 9%. That's no bargain, and insiders are also selling high with very large cash-outs; for example, CEO Donahoe sold $7M worth of shares in the last two months.

With this portfolio adjustment, the range in forward P/E for current holdings is 9X -17X, but the 17X--Apple--is expected to grow earnings at 16% per year so very fairly priced. And now that we can all go buy our CDMA iPhones for Verizon, our gains in AAPL should more than pay for all those phones and cool apps.

I am looking to reinvest half of my eBay proceeds. Hewlett Packard (HPQ) looks enticing but I haven't made any moves yet.

Portfolio and performance review

2011-01-02T14:06:00.000-08:00

I thought this would be a good time to review the current portfolio holdings and performance, so here you go.

As you can see by the bottom line in the first chart, the current portfolio has returned 22% per year for a total return of 52%. That figures to a typical holding period of just over two years which is consistent with the (overly?) generous tax treatment of long term (more than one year) capital gains. In fact, for those of us with little income outside of capital gains, the extension of the Bush tax cuts allows us to continue making the first $34K/year of long term capital gains tax-free. And for you married folk, the feds double that to $68K to compensate you for all of your marital woes. Since limits are decreased by all other income, I am careful to be as unproductive as possible.

Although I am currently 7% leveraged, I aim to be about 5% cash at current market levels. Looking at the above chart for possible de-leveraging targets, eBay, Altera, Western Digital and Cisco are all nominees if their respective stockscouter ratings drop from seven to six.

Next, let's look at how the portfolio did against three benchmark indexes. The "Recent Sells" portfolio tracks the suitability of my current sell methodology. Considering the 22% to 11% annualized performance difference I am pleased that my current methods are yielding such a large differential. In fact, I tweaked my sell methodology to perhaps accentuate this difference by now selling losers with stock scouter ratings of seven, selling long-term gainers with ratings of six and selling short-term gainers with ratings of five. It should be interesting to see how these portfolios compare with this change. The "Sentimental Dartboard" portfolio is filled with companies that I love (Netflix, Tesla, Google and some solar companies, for example) yet choose not to own because of stock scouter rankings or personal screening measures. Here, again, the Lead Dog Portfolio has a better annualized return but not by much, which leads me to think that the heart is almost as good as the brain (if organs could invest). The "Stock Scouter Top 10 Picks" is filled with top 10 picks that I review but reject based on a cursory examination of fundamentals (price/cash flow especially), company performance (return on capital, specifically) and outlook (growth projections). Unfortunately, this benchmark portfolio of rejected stocks has significantly out-performed the owned portfolio, primarily due to the performance of two high-flyers: Network Appliance (which has quadrupled) and Broadcom (tripled).

What will 2011 bring? I, like others (no matter how emphatically they pronounce their opinions), have no clue. I suspect that January will have some selling of recent big gainers but large inflows from year-end bonuses and retirement account contributions. Retail investors will probably buoy performance for much of the rest of year which will be my sell signal to, depending on how quick and bullish the run-up. What then? Perhaps bonds if they get >10% cheaper, certainly NOT real estate yet (maybe next year?), perhaps just cash.

Happy and prosperous new year to you all (both of you)!

Lead Dog Trade Alert: Buy America Movil (AMX)

2010-11-17T13:37:00.000-08:00

This morning I bought Latin America mobile phone provider America Movil (AMX) for $56.20 per ADR share. AMX is currently a stockscouter top 10 pick and trades at nine times cash flow while returning over 20% on capital and doubling its book value in the last four years.

America Movil's Telcel branded service has about 80% market share in Mexico while its Claro brand is consistently #1 or #2 in markets throughout Central and South America. Cellular penetration is quite high thru the region so perhaps the fastest growth is behind us but as the global economic tide rises, more affluent customers will no doubt spend more on cellular services.

Compra esta compania!

Lead Dog Trade Alert: sell Adobe at $28.87

2010-11-03T09:31:00.000-07:00

This morning I sold ADBE at $28.87 for a total gain of 41% or 22% annualized. Of course you can photoshop those gains to make the gains look much larger and prettier.

Adobe is now a mature company with little sex appeal (join the crowd). Its tools are in the crosshairs of nimble startups and well-resourced industry giants. Case and point: early advertising for Windows 7 (an operating system, no less) focuses on simplistic cut-and-paste photoshop-like capabilities. Adobe will continue to experience pricing pressure after seeing net profit margins erode from a five-year average of 22% to last year's 13%. Return on capital has now dipped below 10% and earning growth is shrinking and will eventually evaporate. Added to this, Adobe had the second highest forward P/E ratio in my portfolio (at 19) and a stockscouter rating stuck at 6. Time to sell.

I will commit most of these proceeds back to the market. No, I am not worried about one spineless spendthrift party taking over for the other. In fact, history shows us that split power is typically good for economies and markets. Bill Clinton and Ronald Reagan--arguably the best two presidents in my lifetime--did their best work with a legislative branch controlled by the opposing party. Keep the faith!

Stocks that currently interest me include Taiwan Semiconductor (TSM), America Movil (AMX), Intel (INTC) and Google (GOOG).

Lead/Slow Dog Finally Updates My Market Moves Of The Last Week

2010-10-20T10:57:00.000-07:00

Hola (yes, my online Spanish course is doing me wonders) stock shoppers! Sorry about the dismally slow updates but I was walking around in the Desolation Wilderness of Tahoe when my limit order to sell Corning (GLW) at $18.95 hit last Thursday. GLW was a 82% winner (annualized at 41%) but a number of factors conspired to compel me to sell: first off, my stock leverage stood at 15% when my personalized model suggested a level of 9%; secondly, since 2010 is the last year for tax free capital gains (up to $34K income) I figured I would realize some capital gains, free of charge; and third, Corning's Stockscouter rating has been lagging in the 6 range, primarily due to insider selling and flattening growth projections (I guess we all didn't need the LCD in front of the toilet, after all).

However, I did reinvest about 60% of the proceeds in drug dealer Gilead Sciences. I purchased shares at $36.60 yesterday and the stock is up over 5% today. Wish I could say I was insightful or talented but I'm afraid I'm just lucky for the day. The company's products include Truvada, Atripla, Viread, Emtriva, Hespera, AmBisome, Letrairis, Ranexa, Vistide and Cayston. I have no idea what any of these pills do, other than make Gilead a ton of money. Last year's return on capital was 39% and yet this growth stock (five year earnings and sales growth rates are about 40%) trades at a paltry 11X earnings. No wonder Stockscouter has this as a top 10 pick.

Current margin leverage is 9% (compared to >90% for most real estate investors). Bullish times ahead?: the average 200 day return after a mid-term election is +18%. Part of this impressive result may be due a pretty small sample size but there is something to be said for the effect of removed uncertainty after the election. Regardless of what your local political hack (or news network) tells you the market really doesn't care which party wins control.

Just when I thought things were getting better...

2010-08-11T21:18:00.000-07:00

...this week came and shattered my rose-tinted glasses. Oh well, I'm still a believer that stocks are the best place to invest right now so I stand committed with about 15% leverage, a level that I will not completely zero until we hit levels about 20% higher than we currently sit (so a long time?).

But I did do a little rejigger in one of my retirement accounts today. Because it did not cost me any capital gains tax and moneycentral (MSN's financial site) quit assigning ASML a "stockscreener" rating, I decided to dump ASML (after a 10% gain over more than two years) and redirect the proceeds to oil giant Conoco Phillips (COP). Over the years, I have found the stockscreener rating to be very useful as a screener and as a timing trigger for sells. I essentially have been picking purchases from the stockscreener "top 10 picks" and then selling holdings whenever the stockscreener rating gets to a 4 (for winners) or 5 (for losers). Using this methodology, the Lead Dog Portfolio has returned about 17% annually over the last two years compared to 2% for a portfolio of current sells and about -10% for the S&P 500 index.

Since I couldn't really use this methodology with an unrated ASML, I decided to sell/bail and then reinject the proceeds into one of the current top 10 stockscreener picks. And two stood out: Xilinx and ConocoPhillips. There are good arguments for both (XLNX is fairly priced but with solid returns on capital of about 15% while COP is cheap (trading at 7X next year's earnings and 4X cashflow) but with ROC of only 6%. COP prices doubled over the last 10 but is down 30% over the last three years while XLNX is down 70% over 10 years and up 10% over the last three. I will almost always pick the stock with a better longterm return and in the midst (or the end ) of a shorter term down cycle. Besides, the current Lead Dog portfolio is a little overweight technology and underweight oil anyway so I opted for big oil.

And remember, yes oil companies have been evil in the past but we can be rest assured that a bulk of the industry evil worked at BP. In the perfect world, BP will be driven to extinction and more responsible oil companies will be allowed to continue with one less competitor.

Lead Dog Trade Alert: buy Limited (LTD) at $21.84

2010-06-30T17:09:00.000-07:00

This morning I leveraged the portfolio with women's underwear by purchasing Limited (LTD), corporate home to Victoria Secret. My price was $21.84 or roughly the price of a two-inch-square piece of silky undies. Since I don't have a girlfriend and pink thongs don't exactly flatter me, I chose the former. Leverage, now at 17%, has been systematically raised with the falling market. Let's hope the future has less falling markets....and more falling panties?

LTD is trading at 7X cashflow and 11X next year's earnings projections which is pretty cheap for such a respected and recognized brand. One cause of alarm is that LTD is highly leveraged with debt/equity of 1.28. Normally this would scare me away from a stock but I think smart companies can wisely use leverage while its historically cheap (now) to accelerate growth once consumer spending returns. Let's hope LTD uses this debt to outperform expectations.

The end (of something anyway) is near.

Lead Dog Trade Alert: sell Nucor (NUE) at $42.95

2010-06-14T09:33:00.000-07:00

This morning I sold long-time holding Nucor for $42.95. Total returns were 18%, annualized at 4%, mostly in the form of dividends. My primary motivation here is to de-leverage a bit after a strong rebound week in the markets, but Nucor also has a troubling trend in profit margins--gross margins have decreased from the five-year average of 17% to 4% of late--and the technicals (charts) look pretty lousy as well.

With the US auto industry on the long road (made longer with the help of US taxpayers) to oblivion and new residential and commerical construction on a multi-year hiatus, I don't see how the US steel industry is a good bet for the long haul. Sure, there are other uses for steel, but I'm now focusing on companies and industries that have comparative advantages in developing markets (which are the only ones growing substantially of late). Certainly China and India can make all their own steel; in fact, they can probably easily meet all of our needs as well.

We can never be sure of anything, but based on the latest survey of sagacious bespectacled economist, we can be very confident that we will not see a double dip recession (see chart below). I think that the spring downturn in stocks was accentuated by a few freak and reversible issues: most notably the gulf spill/crisis, Israel's general militant craziness and a (hopefully anomalous) jobs report. Yes, the gulf will take years and dollars to fix, but BP will likely be on the hook for most of the clean-up expenses...as it should be.

Lead Dog Trade Alerts: sell FSLR and buy ALK

2010-05-21T16:07:00.000-07:00

This morning I swapped solar company First Solar (FSLR) for petroleum-burning Alaska Airlines (ALK), selling FSLR for a 15% loss in a month or so (yikes) and re-investing in ALK at $43 and change. I am still sympathetic to the whole solar movement but since this entire industry is pretty much subsisting on European subsidies that Europe can no longer afford, there will be an inevitable industry fallout in the coming months and years. So I decided to take a trip on Alaska Airlines, home of the scary eskimo logo on the tail (I think that they would love to redesign that awful logo but perhaps are afraid of the political correct whack-jobs calling them racist).

Anyway, ALK is strategically entrenched in the West and Alaska--two areas that see long-term interstate migration from the less desirable parts of the US (anywhere east of the rockies)--while it sports impressive operational results. Trading at a forward P/E of 8, 4X cashflow and .4X sales, ALK is experiencing growing margins amidst industry-wide consolidation talks and increasingly confident consumers. Airlines are always a little scary given their huge capital requirements and history of financial troubles, but we'll take a flyer on this one.

Buy the stock, and then book a flight!

Lead Dog Trade Alerts: buy AAPL at $241

2010-05-20T08:21:00.000-07:00

This morning I bought Apple (AAPL) for $241, roughly double what I could have paid one year ago but an 11% discount off of the $272 all-time high of last month. With the S&P quickly approaching the 52 week trend line for the first time since boldly (positively) crossing it last July, my hunch is that this was a little bull-market correction and that we will resume the longterm positive trend ASAP (like tomorrow, probably). I would give an 80% chance that this week is the low point for the year, but if we seriously break under the one-year trend line (the most predictive in my experience of all trend lines) then all bets are off, and we are probably heading for a long, depressive period. Life is dangerous, take a chance.

Wow, just a few weeks ago I had an order to completely clean up my margin debt and then this happened. So now I am 12% leverage--nowhere near 2009 levels--but probably appropriately leveraged for my risk tolerance and life situation.

Why Apple? Hasn't all the easy money been made on Apple? Perhaps, but one can easily make a case for Apple on a fundamental basis. 5 year revenue growth rates of 39%, 5 year income growth rate of 100% (per year!!), healthy and growing profit margins, 30% return on capital and a long winning streak of awesome products. Perhaps I am a slow learner since I finally got the message with the incredible and incredibly successful iPad.

Take a bite of Apple. It will be the Apple of your eye. It's as easy as (apple) pie. Or some other not-so-original pun.

Lead Dog Trade Alerts: sell TLM, buy FSLR at $132

2010-04-21T08:57:00.000-07:00

Yesterday, Lead Dog sold oil company Talisman (TLM) for virtually no gain or loss and today reallocated the proceedings to Arizona-based solar company First Solar (FSLR). I bought FSLR at $132 and it immediately went on sale for $128. But at least I'm still green (even if I am not making any green).

After nursing repeated pollution-related sinus infections in Asia (not to mention the inability to enjoy some great Himalayan views) I have concluded that I (and the world) need to skiddat out of oil and quickly convert to cleaner alternatives.

Also, as I continue to track longterm returns of current holdings, recent sells and other model portfolios, my experience (and data) lead me to think that stock selection is not as important as I once thought it was. Suffice to say, that I am becoming an "efficient market" acolyte the older and wiser (and more humble) I get. Rather, the way to amass wealth prudently is thru saving (duh), appropriate asset allocation, market exposure management (using debt in down markets, cash and other safer alternatives in overblown markets) and tax minimization (thru infrequent trading, managing capital gains to ensure preferential tax treatment and harvesting capital losses when appropriate).

I will still pay attention to market fundamentals and technical indicators but my investing philosophy will henceforth be more subjective, "big picture" and socially responsible. I will still post my investments for the time being but I would remind the reader that my stock selections are not the panacea to their financial woes and that first and foremost they need to clean their personal balance sheets and start amassing capital thru savings. Yep, and to lose weight you need to burn more calories than you eat. With those two sentences you can now strike all investing and diet books from your reading list.

Lead Dog Trade Alert: sell ICFI for $23.25

2010-03-22T19:36:00.000-07:00

Hi Guys! Long-time-no-write-to. Up until now, there was no reason to make any dramatic moves as the market kind of waddled around. With the reason uptick, however, it's time to further de-leverage. With the sell of ICFI at $23.25 (14% gain over two years for an annualized gain of 7%), I have reduced my margin to just 4%. This is not meant to be a guideline for you as your life situation and risk tolerance will no doubt be unique to mine, but I would describe the trend has changed from extreme under-valued to modestly under-valued. Once the market heads into the upper 1200 (S&P) I will eliminate margin altogether and start building cash or bond (depending on rates) hoards.

Why ICFI? Mostly technical--it has dropped below moving averages and seems to bump against resistance when trying to break out to the positive. Also, since this is an only modest winner, we limit our capital gain taxes vis-a-vis some of the higher flyers like Microsoft (which I also contemplated unloading but will hang on to for now).

I am off to tramp around Everest (yes, THE Everest!!) so I leave market-watchings to you all until early April. Peace and prosperity (inw hatever form that prosperity appears)!

Steve

Lead Dog Trade Alert: sell Vanguard Total International

2009-12-08T02:46:00.000-08:00

Today I am selling Vanguard Total International Stock Index (VGTSX) for $14.83, a 1% loss annualized at about 1% for the 15-month holding period. This move is just a continuation of my de-leveraging effort: my current margin exposure is less than 10% but the fact that I am still on margin (even a little) reflects my general bullishness. It is a safe bet that we will not see the likes of 2008 (to the downside) or 2009 (to the upside) any time soon but I am a firm believer that the economy will continue to improve and idle capital will be re-invested in markets (stocks and bonds first, eventually real estate).

Lead Dog Trade Alert: buy Talisman Energy (TLM) at $16.91

2009-10-02T10:40:00.000-07:00

Energy appears to be a bargain again, so I picked up some Talisman Energy stock yesterday and you can buy it for 2-3% less today. Talisman is an oil and natural gas exploration and development company based in Calgary. It currently trades at 9X trailing earnings with 27% net profit margins and a 20% return on equity. Since the portfolio was technology-heavy for outperformance early in the bull cycle, I will now attempt to rebalance for mid-cycle performance. Energy companies should do quite well as global energy demand resumes pre-recession levels growth rates.

Here is another great article criticizing Obama's protectionism. The central thesis is that protectionism helps poor consumers in the importing country (America, in this case) as well as poor producers in the exporting countries. Almost everyone loses, but the poor lose relatively more at the expense of the politically-connected unions.

"When he was running for president, Mr. Obama explicitly endorsed higher prices for T-shirts for every American family to save jobs in the small and declining apparel sector. At a debate before union members in Chicago in August 2007, he said, "People don't want a cheaper T-shirt if they're losing a job in the process. They would rather have the job and pay a little bit more for a T-shirt."

The future president ignored the fact that every poor family must buy those shirts to keep themselves clothed, yet only one-third of 1 percent of American workers make clothing or textiles of any kind. A wealthy politician or TV commentator need not care about the price of a T-shirt or other everyday consumer items, but millions of poor and middle-class American families do care."

Lead Dog Trade Alert: sell Intel (INTC) at $19.68

2009-09-29T12:20:00.000-07:00

Sorry about the late notice (I am busy selling and packing by worldly belongings in preparation for my SE Asia walkabout) but I sold Intel yesterday at $19.68 (summer of love) for a 28% gain or annualized gain of 29%. Intel's five-year sales and earnings growth has now come to a screeching halt (both near 0%), perhaps a sign of things to come as central processing becomes less important as more applications get ported to the internet.

While I am a tepid Obama supporter--he benefits from comparisons to his abysmal predecessor--the administration opted for politics over economics in its recent decision to slap tariffs on tires made in China. According to an excellent article by George Will in the Washington Post NONE of the 10 domestic tire companies supported the 35% effective tax increase on American tire buyers. Certainly, Obama's economists didn't support this decision since, according to a recent survey of Economic Association Members, there are few (if any) issues where economists more uniformly agree than in the desire to remove all tariffs and other trade barriers.

This was a payback to unions, plain and simple. China is already threatening to escalate the trade war by restricting American company access to Chinese markets. Frowny face for Obama.

Lead Dog Trade Alert: sell Accenture (ACN) at $35.04

2009-09-10T17:21:00.000-07:00

I sold Accenture today at $35.04 for an 11% loss or 9% per annum. Nothing against Accenture but de-leveraging a bit more while everyone else appears to be rushing into the market seems like the smart thing to do. Besides, Accenture was under-performing the rest of the portfolio and was one of only three losers (out of 17 investments) left in the portfolio. Even after this sale, the Lead Dog Portfolio is still leveraged at 20% debt to equity--yes, I'm still bullish as normalcy returns to the economy and markets.

Thanks to liberal use of margin and beneficent investments in technology, the Lead Dog Portfolio is up 44% YTD and 71% from the March 9 lows. This performance compares nicely to the S&P 500 gains of 13% YTD and 44% since March 9. If only I could pull a mulligan on 2008!

Lead Dog Trade Alert: sell Smith Internation (SII) at $29.35

2009-08-29T11:02:00.000-07:00

We finally begin our de-leveraging process by selling the biggest loser in the portfolio, oil exploration and producer Smith International, at $29.35 or a 52% loss or 54% annualized loss. Margin debt is still at 26% debt/equity for the portfolio--while high, this ratio pales in comparison to the real estate debt/equity ratios for most real estate investors, myself included. While I don't typically advocate borrowing money to invest in equities (loan expenses will typically negate gains and, as we have seen with real estate markets of late, leverage magnifies downsides as well as upsides), prudent use of margin loans in under-priced markets is a great way to outperform the market.

Case in point: the Lead Dog portfolio is up 35% YTD and, while my net worth is still down over 20% from the 2007 highs, I have recovered nicely from March, 2009 lows. Equanimity is the key: while some panicked out of equities in hopes to "rescue what remained" in their portfolios, Lead Dog doubled-down on stocks and took advantage of extreme interest rates to refinance a mortgage.

Now what? Beats the shit out of me but my guess is that, as the recession ends (it probably already has) and profit growth returns and retail investors start chasing performance (as they always do to their detriment), that markets continue rising thru spring of 2010 (with some corrections sprinkled in). As followers of this blog know, I am a buy-and-hold investor with average hold times of >18 months so I will not make sudden moves in and out of the market; that said, Lead Dog equity sales in the next six months will likely be unaccompanied by a purchase as I slowly take money off the table. This was the #1 lesson of the 2008 crash: while rushing in and out of markets is futile for all but the very best traders, I have learned the value of scaling my equity exposure based on current risk/reward perceptions. My personal target is to be margin-free if the S&P hits 1200 in 2009: that's still almost 17% higher than today's levels. Bottom line: stocks are approaching fair value but with the economic and emotional winds at their back, they will likely perform quite well over the coming 9 months.

I have been a renter of my residence for some time and I plan to take advantage of the current real estate turmoil eventually, but probably not until spring of 2011. Government stimulus (low interest rates, first time buyer programs) have propped up housing prices for the time being, but with the biggest waves of foreclosures yet to come, I am content to wait another 18 months.

Final note: I am flying to Bangkok on November 4 and will be traveling throughout SE Asia, Australia, New Zealand and wherever my whimsy takes me for an indeterminate amount of time (somewhere between two months and life). I plan to continue updating this blog with investment actions and will probably update life status and whereabouts on Facebook.

Current Lead Dog Portfolio

2009-06-01T17:01:00.000-07:00

It's been a while since I reviewed the portfolio, so I am taking advantage of the current awesomeness in the market in attempts to make my stock picking prowess look especially good. For the year, the portfolio is up 23% (boosted by 30% margin which I will start to de-leverage if/when the markets rise further) and the current portfolio is now returning 11% per year. Not bad, and I expect it to be a little better at the end of the year, after taking some requisite dips/rises, wax/wanes or whatever metaphor you prefer for shorter-term price wobbling.

I see a lot of skeptics point to 2009 S&P 500 earnings estimates and corresponding P/E's of 17-18 and mistakenly conclude that the market is over-valued. What these pessimists forget is that we are not buying 2009 earnings in isolation but the present value of an enterprise's earnings/cashflow in perpetuity. While we already know that earnings won't be so swell for this year and probably next, we can pretty safely assume that the 25 year expected returns of most companies are not drastically different from what they were one year ago. In other words, equity investors way over-reacted by tanking the market in 2008 and I think we are set up for above average returns for the foreseeable future.

Anyway, that's one opinion for you to munch on for a while. Here's the current portfolio:

Stock Symbol	Company Name	Total Return	Annualized Return
ACN	Accenture	-20%	-22%
ADBE	Adobe Systems	43%	222%
ALTR	Altera	16%	66%
ASML	ASM Lithography	-15%	-13%
CSCO	Cisco	2%	34%
GLW	Corning	53%	201%
EBAY	Ebay	39%	80%
IBM	IBM	25%	43%
ICFI	ICF International	30%	25%
INTC	Intel	8%	22%
MSFT	Microsoft	15%	200%
NUE	Nucor	26%	8%
RAI	Reynolds America	67%	9%
SII	Smith International	-49%	-62%
TXN	Texas Instruments	4%	7%
RIG	Transocean	-20%	-19%
VGTSX	Vanguard Total Intl	-17%	-23%
WDC	Western Digital	20%	10%
	Total Portfolio	13%	11%

Lead Dog Trade Alert: buy Cisco (CSCO) at $19.09

2009-05-07T09:14:00.000-07:00

Yesterday, Lead Dog went to the technology well again with yet another icon: Cisco. Back in the tech-bubble apex, Cisco traded at roughly 4X today's price , yet sales were 1/4 what they are today. So if I am crazy to buy CSCO today that makes me 1/16 as crazy as the "investors" that were buying in 1999. Which reminds me of a guy I met in a Manhattan Beach party during the bubble who, after boasting that he recently quit work, exposed his financial secret: every time he needed more money (rent, vacation, new couch, whatever) that he would just buy some CSCO stock and sell it a few days later. Manifest sagacity.

Just in case you don't know, Cisco is a networking conglomerate building modems, switches and routers so we can all watch cats play the piano on the internet. Cisco will profit mightily as we upgrade the internet infrastructure yet again to accommodate HD cats playing the piano. I purchased CSCO yesterday at $19.09; as I type this, you can do better.

Looks like we are hovering almost exactly half way between the 65 and 250 day trendlines, a logical resting point for the current bull market. Today's trading (especially for a tech heavy portfolio such as ours) is an expected one step back. I expect to be two steps forward in the near future.

Lead Dog Trade Alert: sell Petro-Canada (PCZ)

2009-05-06T09:32:00.001-07:00

Lead Dog sold PCZ yesterday at $34.27 for a 37% loss. Petro-Canada's growth forecast has taken a noticeable plunge and cheap oil only hurts the earnings prospects of its inchoate oil sands projects. As of a few minutes ago, PCZ was trading for just under $37 so you can squeeze a healthy 7% more out of this investment than I.

So, when we bought PCZ almost a year ago, an anonymous reader of this blog posted his disapproval. While -37% performance is not good, PCZ did outperform about 65% of all stocks during this timeframe, so there's a good chance that we outperformed Mr. Anonymous on this one. UNLESS, of course, the anonymous one had the foresight to stick his money under the mattress, but he didn't bother to suggest an alternative (or point to his blog where his selections and performance can be sniped).

We will see small corrections ahead, but I would treat these as buying opportunities. The VIX is re-approaching normal levels, i.e. the fear and panic of the last six months is waning. With that, will be new commitments to equities and higher prices over the long haul.

Lead Dog is currently up 15% YTD, whereas the S&P is still down a few points and the Nasdaq is up 7-8%.

Check out this fun/disturbing article which claims that only 53% of Americans think that capitalism is better than socialism. Dumbass says what? This is a serious testament that economics needs to be taught in high schools. Or history (see USSR, North Korea, Cuba) needs to be taught better. Maybe we can ship the unconvinced 47% to Cuba or Venezuela and watch the sudden epiphanies. Capitalism is clearly imperfect: its two main drawbacks (IMHO) are its susceptibility to booms and busts (no need to site examples here) and the unequal distribution of assets. That said, its clearly the least bad system that consistently creates FAR HIGHER aggregate wealth, standards of living and (my favorite) personal freedom.

Lead Dog Trade Alert: sell Valero at $21.11

2009-04-23T11:23:00.000-07:00

Yesterday Lead Dog continued its oil purge and sold Valero (VLO) for $21.11, a 71% loss, 48% annualized. Earnings have been decimated (join the crowd) and estimates for future earnings are shrinking--sure, VLO trades at 7X current earning estimates so it will probably not go much lower, but there are plenty of investments with similar P/E *and* with expectations of growth. Oil stocks may deliver over the next decade, but one has to start worrying about longer term prospects as industrialized nations start to ween themselves off of the sticky goo.

Lead Dog Trade Alert: buy Microsoft (MSFT) at $18.57

2009-04-15T11:13:00.000-07:00

This morning Lead Dog took advantage of Technology weakness and bought Microsoft at $18.57, near its 12 year lows. Indeed, Microsoft is facing major challenges as the computer world evolves from a desktop computing/storage paradigm to a web-based one, but I think these threats are easily comprehended in today's prices.

Microsoft is trading at 10X earnings although its five year return on capital is 24%, balance sheet is rock solid ($20B in cash) and its dividend now approaches 3% per year. Sure, Microsoft's heady growth phase is long since passed but it probably has never been as attractive as a solid long-term value investment. The challenge is to put the cash hoard to good use (stock buy-back, anyone?) and avoid investment missteps like the (thankfully) aborted Yahoo purchase.

Could March 9 Be THE Bottom?

2009-04-11T10:11:00.000-07:00

It's looking like March 9th might be the ultimate overblown capitulation, but there is still a likelihood that this bottom will be tested/re-visited and an increasingly small chance that we will go even lower. Wherever the bottom occurs is mostly irrelevant at this point as we are WAY below fair market values. Recovery is inevitable and we all should be maximally--whatever that means for your situation and tolerance for risk--exposed to the stock market at this point. In fact, I am considering increasing my current 20% margin exposure (but remember I have no dependents and high tolerance for risk so your exposure will almost certainly be lower).

Why so bullish? Now that it's clear that the world will go on--hopefully with a less leveraged and less materialistic society--consumer confidence is creeping back.

The individual consumer--comprising roughly 70% of the economy--is the keystone to recovery. Our leaders are swiftly implementing unprecedented amounts of Keynesian stimulus which will indeed stimulate in the short run but in the long run will create bigger government and bigger debts. They should stop digging (the debt hole that we will have to eventually crawl out of) and let the consumer--along with continued loose monetary policy--carry the load from here.

From a technical view, I like to look at market indexes in comparison to 20 day (one month), 65 day (one quarter) and 250 day (one year) trend lines. Most notably, I pay attention to the crossing of a trend line which signifies a change in market attitude. And here's where we get to more good news: aside from a brief blip in early January, the S&P is now trading over its 65 day moving average for the first time since June, 2008 (ie when this whole mess started). To boot, the VIX (essentially, a fear metric) is down to levels last seen in September, 2008.

The Lead Dog Portfolio is UP 9% YTD thanks in large part to recent purchases in technology. The Nasdaq Composite is the only major index that is also up in 2009.

Lead Dog Trade Alert: sell Pioneer Drilling

2009-03-03T12:29:00.000-08:00

Lead Dog sold Pioneer Drilling (PDC), yet another oil company for yet another big loss. The details, if you must: $3.96 selling price for a 71% loss, but only 43% on an annualized basis (my sole remaining optimistic brain cell continues to work overtime in search for silver linings). Oil service companies have a rough outlook--for instance, the fiscal 2009 earnings estimates for PDS have cratered from $1.18 to $.03 in just 90 days. When you think about it, this makes sense. Big horizontal--meaning they do everything from finding to drilling to refining to retailing oil-- companies seem to be better inoculated from large revenue and profit jolts because oil demand is fairly inelastic, i.e. when gas is $4, we buy almost the same amount as when it is just $2. The service providers--like Pioneer Drilling-- are a different story altogether: if conglomerates no longer need incremental (beyond that which they internally fund) drilling services, they will most quickly relieve outsourced resources.

From a market perspective, I cannot think of a worse time to ENTER a market. Volatility is high (VIX=50) and as you are all too aware, November 22 lows did not hold up. We will continue to drift down and eventually establish new lows, from which to compare future turnaround efforts.

While this may be a terrible time to enter the market, it's probably an even worse time to exit. So there you go. Turn off CNBC, just sit on what you got, and file your (preferably unopened) brokerage statement under "fine mess". And, if you have anything left on the sidelines (lucky you), get ready to buy. Just not now.

SWM seeks silver lining

2009-02-21T08:53:00.000-08:00

Another brutal week, but hope lives. While the narrowly-focused, bank-heavy DJIA dropped below November lows, the more broad-based indices like S&P500 and Nasdaq Composite have so far sustained prior lows. This is great news, as "tested lows" create a stronger psychological floor in preparation for future advances. If, however, these lows do not hold up, the market will likely continue to drift downwards (10%?) as it seeks a new floor. Next week will be telling.

On a related note, economic professor Bradley Schiller had a great op-ed in last weekend's Wall Street Journal. Schiller's thesis is that current fears, and fearmongering, are entirely inappropriate as the current recession--while indeed a doozy--is nowhere near the Great Depression. Of course present pain is always felt more acutely than memories (or grandparent's stories) of much worse times. Quote:

This fearmongering may be good politics, but it is bad history and bad economics. It is bad history because our current economic woes don't come close to those of the 1930s. At worst, a comparison to the 1981-82 recession might be appropriate. Consider the job losses that Mr. Obama always cites. In the last year, the U.S. economy shed 3.4 million jobs. That's a grim statistic for sure, but represents just 2.2% of the labor force. From November 1981 to October 1982, 2.4 million jobs were lost -- fewer in number than today, but the labor force was smaller. So 1981-82 job losses totaled 2.2% of the labor force, the same as now.

Job losses in the Great Depression were of an entirely different magnitude. In 1930, the economy shed 4.8% of the labor force. In 1931, 6.5%. And then in 1932, another 7.1%. Jobs were being lost at double or triple the rate of 2008-09 or 1981-82.

Lead Dog Trade Alert: buy Altera at $15.32

2009-02-18T10:05:00.000-08:00

Lead Dog bought programmable semiconductor manufacture Altera (ALTR) for $15.32. With the VIX trading higher at 48 and the DJIA approaching November lows this is not the optimal time to inject more money into the market, but I am committed to being 120% invested if/when this market finally turns positive for good. The way I see it, I am OK with paying 6% on margin loans to ensure that I am fully invested at the first 10-20% upswing which I am hoping will happen soon. That said, there's plenty of bad news out there that could force us below November lows. Altera returns about 24% on capital and trades at only 12X cash flow--more sound investments are hard to find in any market.

Great article from Greg Mankiw's blog detailing economic policies on which most economists agree. Worthy of note, 93% of economists agree that tariffs and import quotas reduce economic welfare, 85% agree that agricultural subsidies should be eliminated and 90% agree that companies should be allowed to outsource to foreign countries. Strange then that Obama and his democratic cronies in Congress should keep the bogus "buy American" clause in the stimulus bill; silly political pandering that will hurt our standing in China, India and the world in general.

Lead Dog Trade Alert: sell British Petroleum at $43.89

2009-02-12T10:08:00.000-08:00

Lead Dog sold British Petroleum (BP) at $43.89. Like the sale of Unit Corporation earlier this week, I am wary of BP's diminishing estimates: in just 90 days current and next year earnings estimates have shrunk form $7.79 t $4.89 and $9.16 to $6.98, respectively. While current valuation ratios are enticing, one should expect these estimates to continue on their downward trend. Further, the technicals on BP (and other oil sector stocks) are woeful, trading below trend lines and performing relatively poorly in an already depressed market. Look for sales proceeds to be re-allocated to another technology stock.

Those who know me, know my frustration of over-simplified and ignorant criticism of free market capitalism. Below, in a video that warms my heart, my economic hero Milton Friedman counters Phil Donahue's reductive/socialist babble. In this embarrassingly unequal battle of wits, Friedman politely and clearly points out the error in Donahue's--and others who prefer to think with the hearts, rather than their heads--views.

Lead Dog Trade Alert: buy Adobe (ADBE) at $20.58

2009-02-10T11:27:00.000-08:00

This morning Lead Dog bought internet publishing software company Adobe Corporation for $20.58. Adobe sells for 9X cash flow, 12X earnings, has little debt, returns about 18% on capital and seemingly capable of withstanding much economic turmoil. Notwithstanding a terrible day in the markets today--a smart-money recoil to the stimulus plan and the administration's initial pronouncement regarding the new bank recovery agenda--technology still looks prepared to out-perform other market sectors. Even with the Nasdaq down 5% today (so far), the Nasdaq composite still trades above the 65 day moving average. My guess is that this is a bull market correction as the S&P 500 is still 10% higher than the November 20 lows; that said, volatility (VIX) is back to 47 so that the anticipated recovery will continue to be a perilous slog. I am certainly NOT giving the "all clear" to wary investors but I continue to maintain about 20% leverage in my belief that the November 20 lows will not be breached.

Looking at historic employment statistics (a definite trailing indicator while equity markets are leading indicators), it is reasonable to conclude that we are within 6 months of the employment nadir. If that's the case--and there is no guarantee--stock markets should soon start to predict this inevitable turnaround with rising prices. Yes, I am an eternal optimist, but there has to be a few of us, eh?

Lead Dog Trade Alert: sell Unit Corp (UNT) at $28.05

2009-02-09T12:16:00.000-08:00

This morning Lead Dog took advantage of oil strength and sold Unit for $28.05, a 42% loss over 25 months for a 22% annual loss.

Unit is still a bargain by any measure-- forward P/E of 8, a price to book of less than 1, little debt and solid ROC (15%)--but I decided to harvest some tax losses, diversify (fully 1/3 of Lead Dog positions are still in the oil sector) and reallocate funds to more promising sectors like technology.

I don't see the oil stock lovefest re-igniting soon as the technicals (relative performance, especially) is dismal and the earnings estimates are still in a downfall; for instance, Unit's 2009 earning forecasts have dipped from $5.55 to $3.34 in just 90 days; cause for pause when evaluating that enticing P/E of 8. That said, I'm still bullish on oil for the long haul (10-20 years) and plan to maintain over-exposure (just not extreme exposure) to the sector.

Looks like the market is waiting for the stimulus package to work it's way thru the bicameral branches--it's anyone's guess how markets will react once a package is signed by Obama, and its even a wilder guess on the efficaciousness of the eventual package (and how we deal with the massive implied debt and the looming financial catastrophe with entitlements, especially Medicare). If you want to read what a good libertarian congress would pass as a stimulus please read Harvard Professor Jeff Miron's article on CNN.com. Among items such as repealing the corporate tax altogether (I would be happy with 25%), imposing significant carbon taxes (hooray!) and withdrawing from our imperialist missions in Iraq and Afghanistan (two hoorays), Miron advocates for renewed support of free trade and limiting of union power.

To these last two points, it's good to see Obama push for--and the Senate pass--an amendment to eliminate "buy American" clauses in the original Senate bill. Clearly this provision would have run counter to WTO agreements, raised prices artificially, and acted as a giant "F you" to our foreign trade partners.

On the downside, as Greg Mankiw reports, Obama just issued an executive order that permits federal agencies to require union workforces on federal contracts. Clearly this was not on the recommendation of top economic advisors like Larry Summers who is known to clearly state that unions are a major cause of long-term unemployment (among other ills) but Obama made political points with the still powerful unions that helped get him elected.

Win some, lose some.

Every day is sunny in Obamaland

2009-02-06T10:52:00.000-08:00

The Lead Dog Portfolio was up every day this week, an encouraging sign as the S&P 500 pierces the 65 day moving average yet again (after similar advances in early January were later crushed) . While this development is promising, I wouldn't back-up the truck until volatility simmers--the VIX is still over 40, a relatively high number which indicates excessive fear. Fearful investors are cautious and not likely to contribute to aggregate demand of equities. If VIX dips to the 30s (next week?) we will likely see more money flow to stocks, supporting higher prices. May markets find tranquility soon!

On a different note, there is a great cautionary tale on feckless government spending in Japan in today's NYT (author Martin Fackler). My favorite paragraph:

In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan’s Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.

A good "why Bush sucked" accounting (if you needed convincing)

2009-01-24T11:01:00.000-08:00

Good read from a good libertarian writer. My favorite quote:

Mr. Bush's legacy is thus a bizarro version of Ronald Reagan's. Reagan entered office declaring that government was not the solution to our problems, it was the problem. Ironically, he demonstrated that government could do some important things right -- he helped tame inflation and masterfully drew the Cold War to a nonviolent triumph for the Free World. By contrast, Mr. Bush has massively expanded the government along with the sense that government is incompetent.

Subsidies for homeowners

2009-01-21T11:53:00.000-08:00

Here's an interesting article from the Richmond Fed on the complicity of our dubious subsidies--most notably the home mortgage deduction--in the housing bubble. It seems like a re-think on such lousy tax policy might be the silver lining to the current housing debacle.

There is a similar stark unfairness to our current healthcare taxing scheme: those who receive employee-provided healthcare don't pay tax on the benefit/income while their employers write off the expense of providing it; and yet, an individual who wants healthcare has to purchase it with after-tax dollars and gets no tax write-off.

"Fair" trade is anything but fair for foreign workers and US consumers

2009-01-16T11:19:00.000-08:00

Unionists and other protectionists often tout the benefits of "fair trade" over "free trade". In fact, "fair trade" is a euphemistic ruse designed to disadvantage foreign manufacturers and limit the choice of American consumers. Here is a great anecdotal op-ed from the NY Times Kristoff.

2008 in review (and revulsion)

2009-01-13T10:18:00.000-08:00

Enough has been written about the historically lousiness of 2008 so I will make this brief. Just the facts. Dividend rates of 2% were used in DJIA and S&P figures while 1% was used for Nasdaq.

Returns, including dividends:

2008: DJIA -32%, S&P -36%, Nasdaq -40%, Lead Dog -43%

3 Year annualized: DJIA -4%, Lead Dog -8%, S&P -8%, Nasdaq -10%

5 year annualized: Lead Dog 0%, DJIA -1%, S&P -2%, Nasdaq -4%

10 year annualized: Lead Dog 6%, DJIA 2%, S&P -1%, Nasdaq -2%

The 10 year returns are the most astounding to me in that investments made over 10 years ago yielded nothing. Some of this under-performance can be attributed to an unrealistic baseline in the heart of the dotcom bubble but we can say--with much certainty--that equities are currently under-appreciated and under-priced. This will not go away overnight, or over a year, but patient stock investors will be handsomely rewarded at some time in the not-so-distant future.

Lead Dog Trade Alert: Buy Corning (GLW)

2009-01-12T11:14:00.000-08:00

This morning Lead Dog purchased Corning (GLW), maker of fiber optic cabling and LCD glass, for $10.27. Corning is yet another erstwhile dot-com wunderkind brought down to almost unimaginable price levels. GLW now trades at 3X cash flows (from which it pays 2% dividends) while it maintains prominent positioning in two high growth markets: LCD glass and fiber optics. LCD will probably eventually lose out to LED in many applications but LCDs have a long way to run. The fiber optic backbone of the internet is closing in on the home--the question is will consumers pay mightily for an internet connection worthy of high def video, or be content with free and fuzzy Youtube feeds via their 1M/sec wireless connections.

Historical and long-term forecasts (discounting anomalous near-term forecasts) indicate sales and earnings growth in the the teens. With Corning debt/equity at record lows (the company was way too leveraged in the boom years), GLW is hitting on all cylinders: great balance sheet, great operation, great prospects...and cheap!

Lead Dog Trade Alert: (forced) sell of US Tobacco

2009-01-10T09:56:00.000-08:00

US Tobacco (UST) was sold at $69.50 on January 6 for a Lead Dog gain of 17%, annualized to 87%. UST was acquired for cash by tobacco behemoth Altria.

Lead Dog will quickly reinvest most of these proceeds to regain its desired leverage of about 25% of assets. With markets up over 20% from their lows, I expect at least another 20% in 2009 as we bounce from panic-driven lows. I am no Pollyanna about the economy but many stocks trade at absurd multiples (of earnings, sales, cash flow, whatever).

I will be posting 2008 results (spoiler alert: I did crappier than market indices) on Monday. Since my long-term results still significantly exceed the markets in whole, I will continue publishing my selections. At some point, however, I might be sufficiently humbled to advise you to ignore all "market gurus" (even me, gasp!) and buy market indexes exclusively.

Lead Dog Trade Alert: sell Seagate (STX) at $5.29

2009-01-07T11:34:00.000-08:00

Earlier this week, Lead Dog sold Seagate at $5.29 for a loss of 70%, or 74% on an annualized basis. You can still sell for $5.40 as of this posting.

Seagate has a 10% dividend, a P/E of 3 and a price-to-sales of about .25. All of this sounds a little too good to be true, and it probably is; hence, the advice to sell. Seagate has a relatively high level of debt and the short-term prospects of virtually all non-web-based technology companies is not good. IT departments have no cap ex budgets for at least the next three months and the world's consumers are more worried about keeping their jobs and homes than buying a new computer or iPod.

We already knew that the long-term prospects for hard drive manufacturers is certain death (unless they successfully reposition into semiconductor (Flash) based drives) and now with the prospect of a profitable end of life gone, it's time to jump the sinking ship while we still have some (30%) of our initial investment.

This was not a good investment (best to stay in companies with no imminent demise), compounded by "100 year flood" type market conditions. Shit happens. Lead Dog still holds a position in Western Digital, which has equally cheap fundamentals but way less debt. We will likely look for a more profitable exit point later this year.

Energy independence is the wrong goal

2008-12-22T08:25:00.000-08:00

Good article from last week's WSJ by Arthur Laffer on the chimeric "energy independence". Quote below:

"The only real solution is Al Gore's proposal to offset a carbon tax dollar-for-dollar with either an income or payroll tax reduction. If a carbon tax increase were offset dollar-for-dollar with an income tax rate cut, I for one would strongly support the policy. The economy would benefit because the progressive income tax does far more damage than a carbon tax would, and we'd use less oil. It's a win-win situation. Yet this perspective appears to be totally outside the Obama team's ken."

Americans are worst people in the world

2008-12-19T14:43:00.000-08:00

Reason Magazine reports that America has set a new record for jailed citizens in 2008, solidifying our position as the most incarcerated country IN THE WORLD. Land of the free? My ass.

Roughly one in five state prisoners and more than half of federal prisoners were serving time for drug offenses. Way to go, drug warmongers. You really made us safe, not to mention the cruel underworld that you enabled in South and Central America. Our government has done some pretty odious things in our history but this ranks high. Where's the outrage? Since a disproportionate amount of these unduly incarcerated citizens are minorities my hope is that our first minority President might do something (anything!) to reverse this abomination. The drug war is futile, costly, life-ruining, freedom-stripping and arbitrary; or perhaps not so arbitrary when you consider the current failed policies are supported by pharmaceutical companies that would prefer you to get hooked on Valium, Vicodin, Xanax and all the other crap they peddle to make us all feel happier and more fulfilled, i.e. numb.

To be clear, I'm not advocating for the use of drugs--just a free society where someone can choose to kill themselves with whatever weapon (french fries, tobacco, alcohol, cocaine, gun, etc.) he desires...and where the rest of us just mind our own business.

Optimism returning?

2008-12-16T13:05:00.001-08:00

OK, perhaps optimism is not the right word, but certainly the markets are less depressingly moribund, and with good reason. Treasuries and bond yields are at historic lows, real estate prices are definitely not going up any time soon and even global markets will likely underperform the US equities markets because foreign governments have been less aggressive in their economic resuscitation attempts. Further, I think money will flow to the US before more risky developing markets as investors dip their toes back into the investing waters. Bottom line, the S&P 500 just broke its 50 day average for the first time in over three months. I'm no technician, but the chart appears to be an inverted head and shoulders pattern. If that's the case, look for markets to move sideways for the rest of the year and then start the long recovery in January. In any case, you should be at the most aggressive end of your stock allocation holding range. For me (45 years old with no children) that means 120%. No time for toe-dipping; dive headfirst and hope the water isn't frozen.

Bubble psychology

2008-12-15T13:09:00.000-08:00

Excellent article from Virginia Postrel in the Atlantic, in which she details an experiment on the psychology of market bubbles by a Dutch economist. Turns out we humans are driven by emotion more than reason. I'm shocked! Say what you will about Lead Dog's dismal performance this year, the longer term results are still better than the indexes largely because we pay attention to fundamentals (also the reason why I've been a renter for many years). Money quote:

For the price to track the fundamental value, says Noussair, “everybody has to know that everybody knows that everybody is rational.” That’s rarely the case. Rather, “if you put people in asset markets, the first thing they do is not try to figure out the fundamental value. They try to buy low and sell high.” That speculation creates a bubble.

Buy high/sell low is one of the most reductive investment "strategies" around. I much prefer the strategy of never underestimating the stupidity of the average investor, a lesson I learned the hard way (is there a better way?) by shorting hugely over-valued internet stocks as they bubbled up in the late 90's.

Speaking of lessons, the primary one that I am taking from the current malaise is to adjust market exposure based on market indices. In other words, I had no business being almost 100% invested when the S&P was over 1500, a level at which the market was clearly ripe for a correction (the extent of which no one but the most miserably pessimistic could have predicted). Being 60% exposed at the market peak would have left me with about 20% more capital now, an amount that it will likely take at least a year to recover. Lesson learned, and to that point I am now 120% invested as the current market is clearly oversold, notwithstanding the daunting headwinds on the economy. I will ease that exposure to 100% gradually as the S&P gets back to 1200. Since it's now under 900, I'll be using some margin for a while.

Life at the tail of the bell curve

2008-12-11T13:47:00.000-08:00

I think the source of this chart is Daily Kos. As you can see, 2008 is lining up to be an historically bad year--matched only once in the nearly 200 year history of the S&P 500. With current returns fluttering around the -40% number there is a good chance that we will improve to the second column (and thereby contributing to a much nicer looking bell curve). Now that I think about it, adding a new column for +60-70% returns and placing a little 2009 box would make for an even nicer bell curve. Here's to shapely bell curves in your future.

One way to fund the auto bailout

2008-12-09T11:30:00.000-08:00

Yes, smart people can agree that the auto bailout makes no economic sense. It does, however, make political sense for midwestern and democratic politicians so it has become a fait accompli. The only thing uncertain (as of "press" time) is the form and size of said bailout, and how quickly some of these companies will die anyway. But always one to make lemonade out of lemons, I propose we pay for the bailout by ceasing the pointless, endless and feckless "war on drugs", which just so happens to cost taxpayers the ten of billions that the auto industry wants right now. Since we celebrated the 75th anniversary of the repeal of another unsuccessful prohibition (alcohol) last week, the prohibition of other drugs received some press recently, including Ethan Nadelmann's Let's End Drug Prohibition in the Wall Street Journal, quoted below.

"Consider the consequences of drug prohibition today: 500,000 people incarcerated in U.S. prisons and jails for nonviolent drug-law violations; 1.8 million drug arrests last year; tens of billions of taxpayer dollars expended annually to fund a drug war that 76% of Americans say has failed; millions now marked for life as former drug felons; many thousands dying each year from drug overdoses that have more to do with prohibitionist policies than the drugs themselves, and tens of thousands more needlessly infected with AIDS and Hepatitis C because those same policies undermine and block responsible public-health policies."

While some may argue the points of legalizing "harder" drugs, I would think reasonable people can agree that marijuana is the 300 pound gorilla in the room: less addicting than alcohol, nicotine and caffeine and certainly less de-habilitating than alcohol. If we are going to be consistent, we need to either legalize both marijuana and alcohol, or neither. As a start, Obama should allow states to decide drug laws for themselves without the threat of fed involvement. Next, close the office of "drug czar" or at least make the position an academic one that evaluates trade-offs rather than a chief peddler of anti-drug propaganda. Just a few baby steps toward a federal government that minds its own business, limited as it should be.

House of cards

2008-12-05T11:36:00.000-08:00

From the Wall Street Journal article "The Future for Home Prices":

In a poll of 2,000 adults, real-estate-data provider Zillow.com found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks -- but 51% said it was a good time to buy a home.

In other words much delusion remains in the collective minds of real estate investors. I have never understood why people think real estate is a relatively good asset class: while there are certainly rich real estate investors, you have to ask yourself whose richer: Warren Buffett or Donald Trump? And with long-term returns of 4-5% and the need for copious use of leverage, real estate is an illiquid, risky way to get rich. Perhaps the answer lies in the name: real estate is in fact "real"--it's something an investor can see whereas equities (stocks) are a confusing mystery to some (most?).

With government subsidies (via the mortgage deduction and subsidized mortgages thru the likes of Fannie Mae), a principal residence might be a prudent investment when real estate prices are bubble free (which they clearly have not been for at least five years). That said, government involvement clearly distorts/inflates the market and coerces many should-be renters into very imprudent real estate investments.

Bottom line: stocks have probably hit bottom and will probably outperform the long-term return of 8% over the next few years. Real estate will probably struggle to achieve its longterm return of 4-5% while the mortgage industry and regulation restructures (you mean i need a down payment and a job for that mortgage?) and the public re-calibrates its misperception that real estate is a desirable investment class.

Good post from Greg Mankiw

2008-12-02T08:52:00.000-08:00

Know hope. We are in good hands, so says Greg Mankiw. My only beef is that neither presidential candidate took the high road and explained to the electorate why regulation and higher taxes are generally bad and free trade is generally good for them. No, both Obama and McCain spoke to the lowest common denominator of Americans that want their unsustainable jobs at unsustainable wages yet still want to reap the rewards of cheap goods and services from China, India and Mexico. Oh yeah, and more entitlements at the expense of rich people and those evil corporations.

"What would you call a group of economists who are skeptical of regulating mortgage markets, who think unemployment insurance and unions increase unemployment, who say that tax hikes retard economic growth, and who believe that the recovery from the Great Depression was a monetary phenomenon rather than the result of New Deal fiscal policy?

No, it is not a right-wing cabal. It's Team Obama."

No more auto bailouts

2008-11-19T11:04:00.000-08:00

Other than the fact that the Dems owe labor unions a favor, there is no rational (unpolitical) reason for the US government to meddle in the auto industry. The car companies and their unions have made their own deathbeds, let them go to sleep.

As we can see from the above chart, unions have forced US car companies to pay WAY ABOVE (about 65%) market price for auto labor. And its not like the Japanese are using Appalachian slave labor: at the risk of sounding elitist, I would say $44/hour is rich considering the average education/skill level that I presume is necessary for these jobs.

While I still have my doubts about the banking bailout, I also realize that the US absolutely NEEDS a banking system; we do not need an auto industry, much less one that creates sub-standard cars in terms of quality, reliably, styling, fuel efficiency and probably any other metric you choose.

So here's my suggestion (as if anyone asked). Let's assume that 1M workers will be immediately displaced if Chrysler, Ford and GM go under on the same day. Obviously, this is the worst case scenario and an unlikely one at that since each will probably first have last-gasp bankruptcy periods before their ultimate demise. No doubt many of these trained auto workers and car salesman will be quickly snapped up by foreign car companies who need to fulfill their increasing US demand, but let's assume for the sake of this worst case argument that all 1M are left jobless. Rather than wasting $50B on a politically motivated Hail Mary that will most likely just delay the inevitable, why not invest $10B in the displaced workers? If my math is right, that's $10K per employee. Give them an educational tax credit so they can train to be healthcare workers or something else that the market demands. You could throw in an extra $15B in extended unemployment benefits and still save $25B off the currently mentioned $50B bailout/sinkhole. Of course the unions are more concerned about the unions than the 1M people that need to be re-trained for a modern economy.

Time to buy?

2008-11-13T15:29:00.001-08:00

The below chart is extracted from an excellent (and fairly optimistic) article in the Wall Street Journal:

What this chart shows is an amazing correlation between the price that markets pay for a dollar of dividends and the expected return for the following seven years (hence the abrupt end at around 2001 on the orange plot). With dividends recently spiking to 3%--due to price declines and not, sadly, dividend increases--the markets seem well positioned for the coming years. You may comment your own interpretations, but here are the three salient points I take from this chart:

1) Since 1945 there has only been a very brief time in 1967 where stock investors' seven year return was negative. We are dangerously close to negative returns for the past seven years, and we probably would be there if not for dividends and the post 9/11 downturn. The point is for investors with patience and reasonable expectations, the stock market is still a wise investment choice. Now more so than usual.

2) Judging by this chart alone, since 1994 there has not been a better seven year investment period than the one starting now. I would argue that it might be the best buying opportunity for a far longer period because the investment alternatives (bonds, real estate, etc) were far more enticing in the years before 1994.

3) The chart suggests returns will be about 2.5X for the next seven years (a "1.5" on the chart for 150% return), give or take an X. This represents a 14% annualized return for those courageous/shellshocked enough to stay in the market. If you somehow escaped the carnage, good for you; now put your money back in the market. For those of us who clung on for the dizzying ride, congratulations, the ride is coming to an end. Barf bags are available in the seat pouch in front of you.

The article lists the usual caveats and extraordinary risks we face right now so no one is going to give you any guarantees (other than the grim reaper and the equally chipper IRS representative). Like I have said before, it appears we are in a U-shaped correction that will start to take off (the right side of the U) once volatility settles down. I am sure there is still some de-leveraging to take place but my guess is that there is a vast sum just waiting for the dust to settle.

Two populist parties is two too many

2008-11-12T08:21:00.000-08:00

Great article from last week's WSJ on the dumbing down of Conservatism. Thankfully, America rejected this insidious creep towards populism and we can hope that the Republican Party will eventually re-emerge as a thinking man's party once again.

But "populist chic" is just the inversion of "radical chic," and is no less absurd, comical or ominous. Traditional conservatives were always suspicious of populism, and they were right to be. They saw elites as a fact of political life, even of democratic life. What matters in democracy is that those elites acquire their positions through talent and experience, and that they be educated to serve the public good. But it also matters that they own up to their elite status and defend the need for elites. They must be friends of democracy while protecting it, and themselves, from the leveling and vulgarization all democracy tends toward.

Lead Dog Trade Alert: buy EBay at $13.16

2008-11-11T09:45:00.000-08:00

I thought the day would never come that I would buy EBay, but these times are indeed interesting. We are clearly creating a U-shaped bottom in the markets so, notwithstanding any (more) unforeseen disasters, it looks like our darkest days are behind us.

And what a bottom it is. Today we bought EBay for $13.16, down from over $58 just a few years ago. While EBay may not have the cachet it once had, it's sales and income are at all time highs and expected growth is 27% per annum for the next five years. Price to cash flow is 7, price to earnings is 9 and the whole company can be purchased for $17B when the company has $7B in cash and other current assets. Hmmmmm, so for a net of $10B we can buy a company that has $10B in sales per year and $2B in income. Good brand name, few viable competitors except maybe Craigslist which is 25% owned by--get this-- EBay. Go figger. At these prices, EBay won't be a stand alone entity for long.

Lead Dog Trade Alert: sell BJ Services (BJS) at $12.41

2008-11-08T08:26:00.000-08:00

BJ Services blew threw much of our Lead Dog money, down 53% or an annualized 36% after we sold at $12.41. Oil just isn't working right now, although we are still heavily weighted in anticipation of an eventual oil recovery.

As for the name, this will give me pause in the future when contemplating investments in Hand Job Car Wash and From Behind Jeans Company.

President Obama: please watch this video...

2008-11-04T14:40:00.000-08:00

and get real on free trade. How is it that America is manufacturing more stuff than ever and China's manufacturing employment is heading lower? Automation is the correct answer even though Chinese, Indians and Mexicans are more convenient bogeymen for American politicians and dumb-asses with microphones (Lou Dobbs). As our first "look different" President, Obama needs to stand up to unions and educate the electorate on some of the basic principles outlined in this video. Jobs and economies are not static--any country that tries to make them so, is tilting at windmills.

Let's Hope Obama reconsiders his sketchy tax plan

2008-10-26T08:08:00.000-07:00

...especially his reluctance to cut the onerous corporate tax rate. Here is a great real-world example from Greg Mankiw of how Obama's high taxes will effect the average investor.

"That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario."

It's a shame that McCain's superior positions with regards to taxes, trade and healthcare have to be delivered by such an erratic, uninspiring, intellectually-challenged candidate; not to mention that said candidate is holding the banner of a deservedly self-destructing Republican Party. Clearly, this economy doesn't need more burdens of any kind and my instinct tells me that Obama's tax increases/wealth redistribution schemes will be reconsidered. Let us hope anyway.

Lead Dog Trade Alert: sell Goldcorp (GG) at $16.01

2008-10-24T15:35:00.000-07:00

This morning Lead Dog sold Goldcorp for a 46% loss, annualized at 49%. Oy, the carnage continues.

Punish poor performance

2008-10-23T08:42:00.001-07:00

There was a time when libertarians voted reliably Republican (see Goldwater, Reagan). Even Bush II courted our votes when he ran in 2000 as a limited-government "compassionate conservative" who would not partake in nation building. Boy were we fooled. It's now clear that the 15% (or so) of Americans that describe themselves as libertarian are politically homeless. Our only hope is a complete dismantling of the Republican Party as outlined in Randy Balco's "Why the Republicans Must Lose":

"Which brings me back to why the Republicans need to get throttled: A humiliated, decimated GOP that rejuvenates and rebuilds around the principles of limited government, free markets, and rugged individualism is really the only chance for voters to possibly get a real choice in federal elections down the road.

Of course, there's no guarantee that's how the party will emerge from defeat. But the Republican Party in its current form has forfeited its right to govern."

Race HELPING Obama?

2008-10-21T13:58:00.000-07:00

In spite of all the angry white people videos on YouTube, Gallup thinks that Obama's race will actually help him in two weeks:

"While 6% of voters say they are less likely to vote for Barack Obama because of his race, 9% say they are more likely to vote for him (because he is black), making the impact of his race a neutral to slightly positive factor when all voters' self-reported attitudes are taken into account."

Count me as one of those 9% "more -likely" (it sure isn't some of his economic policies). Electing a black president shows an unprecedented level of open-mindedness in this country. It also suggests that man--for all his still remaining faults--is still evolving. My hope is that Obama governs as brilliantly as he campaigns, and that the world continues to be more peaceful, more wealthy, more healthy and more free.

Lead Dog Trade Alert: buy IBM at $87.95

2008-10-16T10:55:00.000-07:00

The discount shopping continues (but at 20% leverage it will probably stop now) as Lead Dog bought a little computer company (and another one of my alma maters) IBM at $87.95. IBM trades at a forward P/E of 10, price to cash flow of 8 and yields a 2% dividend. Sounds ridiculously reasonable to me.

Think, people

2008-10-15T09:09:00.000-07:00

A reader sent me the NY Times chart that is floating around the internet, as proof that Democrat presidents are better for stock market returns than Republican. I responded in the comments of my prior post, but Greg Mankiw does a much better job in Republicans, Democrats and Stock Returns.

"The bottom line: Trying to isolate the differences between the parties using this kind of stock market data is silly at best."

The New York Times should know better not to publish such tripe, or at least do so with the title "Interesting, Meaningless Chart to Support Your Already Made Decision to Vote for Obama". C'mon people, don't just eat what's thrown in front of you: think!

I say this is an empathetic libertarian who wants the current conservative incarnation to self-implode so that it can resurrect itself into the secular, peaceful, liberty-loving movement that I could vote for. Go Obama.

Why do we subsidize home ownership?

2008-10-13T16:41:00.000-07:00

One little-mentioned cause of the housing bubble is government subsidized home ownership thru the deductibility of mortgage costs. Clearly, this subsidy lowers the cost of a mortgage and thereby increases the prices that consumers are willing to pay for their abode, driving up prices as result. I've never understood why a homeowner is allowed to right off mortgage interest, yet renters are left out in the financial cold. Aren't renters generally more in need of a subsidy then homeowners? Some brave politicians--Bush among them--have suggested making changes to the deduction, but special interest groups (mortgage lenders and real estate brokers) have worked furiously to successfully quell such changes.

This and other issues are addressed in "Not everyone should own a house" by Australian financial writer Janet Albrechtsen.

Now, to make matters worse, Obama is proposing that we add a 10% tax CREDIT on top of the existing deduction. This, on top of all sorts of other credits and tax-code contorting gimmicks amount to what the Wall Street Journal calls "Obama's 95% illusion". The salient point of the article is that about 35% of American pay NO INCOME TAX already so their tax "cut" is actually a handout.

"For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase "tax credit." Mr. Obama is proposing to create or expand no fewer than seven such credits for individuals."

This is unfortunate. While I support Obama on social issues and Iraq, his tax plan is a step in the wrong direction. Don't get me wrong--I support a generally progressive tax scheme, but why not simplify and flatten the tax code? Remove market-distorting deductions and credits and just make the first $50K (for a family of four, $20K for a single guy like me) completely income-tax free? This is rhetorical question to which I already know the answer: special interest and the weak-kneed politicians who refuse to stand up to them. Obama included, despite his rhetoric.

Lead Dog Trade Alert: buy US Tobacco (UST) at $59.87

2008-10-10T10:47:00.000-07:00

Well I was right in one respect--I am unable to predict a bottom as we keep going lower today. Lead Dog increased market exposure this morning (now leveraged to 16% of capital) and purchased US Tobacco at $59.87. UST makes and markets popular chewing tobacco under common brand names such as Copenhagen, Skoal and Husky; it also owns St. Michelle and Stag's Leap wineries.

"Chew" is a safer and cheaper alternative to cigarettes and--like all addictive substances--enjoys an inelastic demand curve. In fact, growth might now exceed UST's reliable 3% growth as consumers trade-down to cheaper ways of getting their nicotine fix.

Lead Dog Trade Alert: buy Intel (INTC) at $15.60

2008-10-09T13:30:00.000-07:00

Who would have thunk that a value investor like me would ever own Intel? 8X cash flow, 13X earnings, returns on capital of 16%, dominant market position, 4% dividend. Yes, you can buy a 4% 30 year treasury note or you can buy 4% dividend-paying Intel at bargain basement prices. You do the math.

Blackjack players count cards to help them determine when the odds are favorable to them. Investors, like good gamblers, know to increase their bets when their odds of winning are higher than normal. Now I don't know if today's investment is going to be a winner, but I do know that Intel at $15.60 is more likely to be a winner than last month's $22 price. Everyone is so busy de-leveraging that there is too much selling/unloading/trashing of assets, and a notable absence of brave buyers. Result: plunging prices. Lead Dog is doing our patriotic duty of providing what liquidity we can. Yes, we did borrow some of this (our leverage is now 7% of capital) and at these prices I will borrow/buy more.

In Tuesday's debate it was good to see that Obama did not repeat his blooper about the Bush Administration loosening Freddie and Fannie regulations. These actions, in fact, occurred in 1999. On the other hand, the McCain campaign gets increasingly surreal when John announces a $300B direct transfer from taxpayers to stupid/greedy/unlucky homeowners and their stupid/greedy/imprudent lenders. Was this Sarah's idea? Certainly no sane economist's, I hope. Apparently McCain is trying to make a landslide--rather than a mere trouncing--of our upcoming election.

Lead Dog Trade Alert: sell Manitowoc (MTW) at $12.57

2008-10-08T11:41:00.000-07:00

This morning Lead Dog sold Manitowoc for a 66% loss in less than seven months--better than most financial stocks but worse than my ill-fated Riyadh bikini shop. On the bright side (yes, I'm still trying for bright sides) this transaction will be completely deductible after larger capital gains in Quanex and WH Energy earlier this year.

Lead Dog is 5% leveraged and will increase that on any further dips--still, far lower leverage than the 97% of investment banks and >120% of many homeowners that proved catastrophic.

Lead Dog Trade Alert: buy Texas Instruments for $19.81

2008-10-07T13:31:00.001-07:00

Always the contrarian, as the greatest de-leveraging since 1929 unravels, Lead Dog is going on margin (not much, 5% of portfolio so far but I will add more if we go lower) to buy stocks. This morning, I bought my alma mater Texas Instruments for $19.81 (the year I graduated from high school adding auspiciousness to the buy). TI is down 50% in a year and now sells for 7X cash flow and returns about 20% on capital. This is impressive stuff. The threat is that many companies--Intel included--have publicly stated they are targeting TI in its core market of cellular, but I will vote with my dollars on the TI team. I know many of the top dogs at TI, having trained and worked with them 15-20 years ago, and these guys are very smart and capable.

So why do we borrow money in the greatest stock fiasco of our lives (for those under 70, anyway)? Because it feels very wrong and scary. Just as moving your weight over your boots (and thus perpendicular) to a very steep ski slope goes against what your mind tells you to do (LEAN INTO THE MOUNTAIN AND LIVE), we must fight the counter-productive tendencies that are pre-wired in our little monkey brains. I know that the "fight/flight" instinct has long-since triggered in most of us. Stay calm, and read "For Investors, Dealing With a Loss of Control". Quote below:

"In other words, when our sense of control is threatened, we feel the natural urge to pretend that whatever information we do have is more complete and reliable than it is. Imagining that we know what's coming next (even if we think it will be bad) gives us a slight feeling of comfort.

As an investor, however, it's absolutely vital to separate what you can truly control from what is beyond your control. The only thing you can know for sure is that stocks are steadily getting cheaper. You cannot control whether or not the market will continue to trash stocks, but you can control how you respond.

If we are not headed into a depression, panic hardly seems justifiable."

I guess "pro-life" doesn't refer to wolves

2008-10-06T09:22:00.000-07:00

I know who Bono-the-mostly-good-dog would want me to vote for:

Why we invest in oil

2008-09-30T11:35:00.000-07:00

From Fortune, an interesting article about iconoclastic oil analyst, Matt Simmons, and his prediction for $500 oil. While the owners of oil and drilling rights certainly benefit from this, it's not clear to me that refiners and drilling services will necessarily reap as much. Also, once oil nears $200, citizens will start to revolt and demand higher taxes from oil corporations, in spite of oil companies' historically average profit margins. So, investing in oil seems like a sure thing but as we have seen of late, there's probably no such thing. From the article:

"Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?"

May we live in interesting times

2008-09-27T11:46:00.000-07:00

Dramatic times indeed. Investor equanimity is certainly being tested as the great de-leveraging continues. The pain will continue and then pass. I have great confidence in Paulson and Bernanke, and it looks like they will get almost exactly what they requested from Congress, which didn't screw the pooch as bad as it normally does.

For a good Bailout 101 primer, read Facts on the Government Bailout from Brett Arends, WSJ.

"This bailout probably isn't going to cost the taxpayers anything like $700 billion anyway. That's the figure being bandied about. But it's just the tag put on the upfront investment. OK, no one on Wall Street knows how to value these subprime assets and related derivatives. And nobody wants to own them right now. But they aren't going to be worthless. If Uncle Sam buys them, holds them for a while, and then sells them in an orderly fashion, he should get a lot of the cost back – maybe even most of it."

Thank you Ms. South Carolina, and now for Sarah Palin's question...

2008-09-25T18:19:00.000-07:00

i think that round goes to Ms. South Carolina....

Watch CBS Videos Online

Miss South Carolina debates Sarah Palin

2008-09-25T17:59:00.000-07:00

for the sake of gender neutrality, i am sure there is a mr. south carolina that is just as dim.

Protectionist Parody

2008-09-24T09:34:00.000-07:00

Yes, this video is funny, but the underlying point is serious: you don't build a robust economy of tomorrow by protecting yesterday's jobs/industries. Government needs to get out of the way of economic change, and the candidate of change should be explaining this dynamic to the populace, not criticizing companies that "ship jobs overseas". That populist pandering (McCain is just as guilty) is so stale and stupid it deserves skewering:

Obama Promises To Stop America's Shitty Jobs From Going Overseas

Lead Dog Trade Alert: but Vanguard International (VGTSX)

2008-09-22T09:27:00.000-07:00

This morning Lead Dog bought Vanguard Total International Stock Index (VGTSX) for $15.31. VGTSX is a global index fund of sorts with very low expenses .27%, although the actual expense is a little higher since VGTSX buys a few other international funds for its portfolio, thus incurring costs for those funds.

As downtrodden as US markets have been, global markets have been outright dismal. Russia and China are down 50%--give or take and can change minute to minute--just this year. Fundamentals are even more encouraging: while the world P/E reached 24 in the glory days of 1999/2000, it is now 10; similarly, price-to-sales ratios of 1.5 just last year have now dipped to .9. Bottom line: the world is cheap, Lead Dog did not have enough international exposure and--since I personally don't have access to all of the world's equities--index investing is by far the best way to add international exposure.

Lead Dog Trade Alert: sell WH Energy WHQ for a big gain

2008-09-19T10:16:00.000-07:00

Sorry I've been missing for so long. I have been doing a lot of hiking (in absence of my 24/7 dog care duties) and pretty much avoiding the market in its paroxysm of selling. As some of you have pointed out, Lead Dog is not doing so well this year (but in line with market indexes), but as a long-term investor I tend to sit still while the financial mess swirls around me. Not to say that this isn't a painful time, but our solace is that we own the exact same percentage of the exact same companies that we did several months ago; the only difference is that the market--right or wrong--places a 20% lower value on those assets. Assuming our investments are not over-leveraged messes (see Bear Stearns, Merrill Lynch, AIG, Lehman, WaMu et al) these companies will continue on their profitable ways and the markets will again realize the value of these future streams of profits.

That said, Smith International (SII) completed its acquisition of WH Energy (WHQ) for a 111% profit for Lead Dog, or a 62% annualized gain. Specifically, we got $56.10 for each share of WHQ plus about 1/2 a share of SII. Makes me harken back to the days when my net worth was on a steady upward slope! Oh the good times. Anyway, this is not the ideal time to be taking capital gains since we already had an even bigger gain when we chose to sell Quanex earlier this year, but we hadn't a choice in this matter. We will not sell losers for the sole purpose of offsetting these gains, but suffice to say the portfolio is rife with capital loss opportunities right now, and we won't be shy about shedding those whose outlook looks bleak.

Hang in there! For some nice photos of my various treks visit my Facebook site. Among other wanderings, I conquered (OK, endured) Washington's #2 (Adams) and #7 (Stuart) mountains this year.

Best long term investment of my life

2008-08-19T16:23:00.000-07:00

This is the last Bono tribute with which I will tempt you (honest).

Good energy policy starts with $10 gas

2008-08-16T17:44:00.000-07:00

Read all about it here. Excerpt below:

"you knew it was rush hour because 50 percent of the traffic in every intersection was bicycles. That is roughly the percentage of Danes who use two-wheelers to go to and from work or school every day here...It means less traffic, less pollution and less obesity. "

And yet, where is the whiny outrage? Turns out Denmark is the happiest place on earth.

Speaking of which, it looks like I will be heading to one of the gloomiest places next May for a 27 month business consulting gig with the Peace Corps--of the five countries for which I am tentatively planned, the average happy score is minus 1.09. Since all the countries are former (and reforming) communists, one might conclude there is an inverse relation between big central government (communism being the most extreme example of BCG) and the state of the human spirit. For now, I'll do what I can to get that average to -1.08.

Lead Dog Trade Alert: sell Commercial Metals (CMC)

2008-08-14T07:50:00.001-07:00

Late yesterday, Lead Dog sold CMC for $26.56 for no gain and no pain (if you ignore the effects of inflation). CMC just missed analyst estimates by a wide mark in their latest quarter, its second straight 38% decline of year-over-year profits. Of course CMC may bounce back but its safer to assume where there is smoke there might be fire. Surely, there are better risk/reward scenarios out there.

When Strategists Dictate Economic Policy

2008-08-11T11:15:00.000-07:00

Greg Mankiw writes about the oil windfall profits tax proposal of Obama. Taxing one company's profits at different rates than another is political pandering, unjust, and just plain stupid. Tax the CONSUMPTION of an increasingly scarce commodity, not the PRODUCTION. America "got" how ridiculous McCain's gas tax holiday proposal was, but the Robin Hood economics of stealing from oil companies is raw meat for the masses (especially when they are promised a cut of the takings). Obama's proposal may be politically smart but it's economically stupid and spineless.

Cloudy Summer

2008-08-09T16:04:00.000-07:00

Performance of late has been awful, due to a reversal in oil and commodity prices that encouraged fast (not necessarily smart) money away from these investments. Year to date performance, including dividends:

Lead Dog: -11%

DJIA: -11%

S&P500: -11%

Nasdaq: -9%

Such rough times are not fun as one anonymous poster to this blog will attest. He lamented that the June buy recommendation of Petro Canada is down 22% (there are worse performers in the portfolio but perhaps this is the only one that he decided to act on). While I understand the level of frustration, I would encourage an investor with such a temperament and unrealistic expectations to buy index funds or--even better for those who cannot stomach tough times--money markets. Facts are:

--All investments don't pan out. As much as we want all stocks to move in a positive linear fashion, some don't. That's life. While I'm at it, let me inform this poster that every day is not Christmas, too.

--Short-term market vicissitudes don't always reflect long-term intrinsic value of companies. Oil prices have corrected 20% from market highs of earlier this summer but that does little to bely the macro-economic influences that lead me to think that oil companies are solid long-term investments. Remember that 25,000 new drivers hit the road EVERY DAY in China while prospects for new sources of oil are scarce. This doesn't even begin to comprehend the demand from other large and fast growing countries. Besides, notwithstanding Obama's desire to tax American oil companies higher than all other companies (contrary to the recommendation of nearly every economist), well-run oil companies will continue to make hearty profits even in the unlikely scenario of another 20% drop in oil prices.

Americans Demand New Bubble

2008-07-29T07:06:00.000-07:00

When all else fails (and in this market all else has failed), laugh.

Tax implications Obama vs. McCain

2008-07-27T09:39:00.000-07:00

Interesting--seemingly unbiased--analysis on effects of candidates' tax proposals on various income classes. Since I am far from the top 1% of wage earners (much less top 20%), I would apparently be better off with Obama; what is not considered in this analysis is the larger and longer-term effects of stripping the country's most successful/productive/job-creating people of 10% of their income. A drastic markdown in the confiscatory corporate rate (35%!) would certainly ameliorate the negative effects on the economy as a whole.