Poor Richard’s Report
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My Mission: God has uniquely designed me to seek, write, and speak the truth as I see it. Preservation of one’s wealth, while providing needful income, is my primary goal in these unsettled times. I have been given the ability to evaluate, study, and interpret world and national events and their influence on the future of the global financial markets. This gift allows me to meet the needs of individual and institution clients. I first evaluate situations on a fundamental basis and then I confirm them on a technical basis. In the past this has been reasonably successful.
A History Lesson to Be Relearned?
In the darkest days of the great depression Socialism first started to creep into our form of government. It seemed that Capitalism had failed and the educated elite were experimenting with Communism. They were called “pinkos” and Senator Eugene McCarthy would go on a boozed-up onslaught of slander against them 20 years later.
The point I am trying to make is that socialism does not work. It stifles creativity and tries to create a classless society to be governed by fat and nasty bureaucrats who consider the rest of the population as meager.
Capitalism is not dead. What our leaders failed to do was to properly supervise the so-called “new debt instruments”. The robber barons of the 19th century are the hedge fund operators of today. A bail out is a way of covering up for one’s mistakes. (I thought bail out meant getting out of jail.) All we are doing is supporting a bunch of losers. When giant corporations sink, it stings like a nest of hornets, but some of the strong always resurface. A couple of great bankruptcies will be remembered for decades if not centuries. We have been conscious of wealth creation, but not how we have fashioned it.
In my last letter I noted that the market had turned up. I did not expect the voracious rally that ensued. I did have cold feet and urged caution because with no “uptick rule” the shorts were caught in a massive squeeze, which sent prices soaring into outer space. I now believe that the market has bottomed, but the popular average may not have.
I wrote in my November 25, 2007 letter that markets top out stock by stock. Now the reverse is happening. The small and mid-capitalized stocks are bottoming and firming up. The large capitalized stocks are the last to surrender their gains. This is because the sellers of smaller stocks seek safety in larger companies. It is the greed factor and they just can’t wait patiently on the sidelines.
As I recently looked back over my previous letters I was impressed, and yes, even proud of my stock and market calls. I was equally surprised at most of my political comments. Some were so bad they were downright funny. Jay Leno would have a ball reading them. So, I want to apologize for being a bad politician, but I suspect that some of my regular readers don’t take my political comments too seriously. I hope.
FDR called economists “economic royalists” but Spiro Agnew (remember him?) had a few choice phrases that could be applied today. (Spiro, you were 40 years too early.) Try “netering nabobs of negativism” or better yet an “effete corps of impudent snobs”.
This is a brand new ball game, with new players, new managers, and new owners. The new game is how to avoid paying taxes legally. We are going to be taxed from hither to yon. Some old stand-bys might go bye-bye. Home mortgage deductions? Many charities will probably have to prove they really provide a service.
If you belong to a major denominational church with a solid history of service I can not think of better place to contribute. You get to watch your money while earning a deduction.
Preferred stocks with a qualified dividend selling below its call price will provide you with an 85% TAX DEDUCTION. A preferred yielding 10% means an 8.5% tax-free return to you. A municipal bond yielding that much is heading for the sewer. I would only buy municipal bonds if you plan to hold on to them for at least two years. Muni traders do not like to buy back what they have dumped on you.
Don’t do any business that depends upon the government of a country that is a dictatorship. Dictators run it for themselves, not for you. In the United States, the House has the real power. They vote on the budget. Your local congressman might be in favor, but the other 400 odd members can be against it. If the house does not pass it, forget the senate even considering it. Remember that the public believes the Congress is really “the pits”, EXCEPT their own Congressperson.
I tend to favor Canadian Stocks right now. The Canadians stand proud and tall and have not wallowed in the same mud we have. They have companies that are well managed, with extremely low valuations and healthy dividends. I believe the Newalta Corp (Nasdaq NWLTF), which I have mentioned at a higher price, has now bottomed.
One of the many truisms in this business is that most past performers do not participate in the next bull market; they become a source of funds for buys of smaller companies. One of the reasons for this is that large corporations find it more difficult to change direction, just as it takes a giant super-tanker 20 miles to change course.
Mutual funds are really in a tough bind. They mostly all own the same stocks and, since they have chased the individual investors to the sidelines, they have no one to sell to. If they have too much redemption they can legally distribute stock instead of cash. This is another reason why the popular averages might be making new lows, while the general market has bottomed.
In March of 2000 the NASDAQ Index was 5132 and today it is around 1652. In the same time period the S & P 500 Index was at 1553.11 and today it is in the 856 area. This is a graphic example of when governments fail to supervise the financial markets. Much damage has been done, but no one has stepped forward with concrete proposals to stop the slaughter.
Our guilt is not going unpunished. At the G-20 just completed in London, President Obama agreed on international “high standards” for the regulation of “Systemically Important” companies to be sponsored by a new global Financial Stability Board (FSB). The United States will be just one of the 20 chairs on the FSB board. Whatever the consensus is with the other central bankers from the G-20 nations in respect to any regulations put forth, our Federal Reserve and the Securities Exchange Commission (SEC) will then impose them on our economy. (Does the US Senate have to ratify this? I think not.) What our Congress has to do is re-introduce the safeguards put in place in the 1930’s and modernize them so that we will never have to suffer this ignominious affrontage again. To regain our regal throne we must set out standards once again higher than others, so that all nations will again trust us.
We must adapt to new philosophies. We buy a home to live in and enjoy our surroundings. We must buy a home that we can afford – not on a wing and a prayer.
We must learn to save. Cash is king.
Any corporation that has accepted funds from the Government is dead meat – at least for 5 years- maybe 8.
We buy stocks because they have a useful product, provide a useful service, and pay a handsome dividend with the expectation of further increases.
The stock market has bottomed, but all that means right now is that the slide is basically over with.
The President has taken a big political and economic gamble. For this to work he must have the backing of the Democrats in Congress. He could get BUSH-WHACKED!
Gillian Tett, an award-winning reporter for the Financial Times writes about the Gold Standard Debate Roars linked here: Gillian.email@example.com. Many responsible investors believe that this is the way to solve our financial crisis. The four-decade experiment with a fiat currency based upon governments being credible is being pushed to its limits. The US reserve of gold is so small, relative to its monetary base, that a price of $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the US, the price would be more than $9,000.
“But what this debate does show is just how much cognitive dissonance-and utter uncertainty- continues to stalk the markets. It might seem almost unthinkable to propose a return to a gold standard, in other words. However, the key point is that the last 18 months have already produced a stream of unimaginable events,” she writes.
So while we have this crisis, I do not see gold collapsing far from these levels of $900- unless we find a viable cheap energy substitute.
Cheerio !!! Monday, April 13, 2009
Richard C De Graff
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This report has been prepared from original sources and data which we believe reliable but we make no representation to its accuracy or completeness. Coburn & Meredith Inc. its subsidiaries and or officers may from time to time acquire, hold, sell a position discussed in this publications, and we may act as principal for our own account or as agent for both the buyer and seller.