No Moss

Sell Altria During Market Hours

Well, there are a lot of issues on the table from digesting UST. Primarily, 2009 will be fairly flat because of the recession, perhaps some increased taxation, and laying off of redundant UST employees. MO will probably look pretty good in 2010, when they have achieved full synergy with UST and Middleton (the cigar company).

No advertising expense, a concentrated product line (with the exception of their wine company), and nice investment in SAB Miller, high markup, stupendous cash flow...I don't find a lot to dislike.

The Renminbi as a Reserve Currency (Part 1)

China has a huge population (900 million) that is living at little above the subsistence level. It has been politically stable for a little more than three decades, and I use the term stable loosely. At the local government level, the Communist Party is horrendously corrupt and unpopular. It's currency is not convertible, and it is doubtful that the financial infrastructure exists to make it so. China has yet to make significant investments in human capital, i.e., education, health care, and a viable retirement system. It is living off the Mao population boom, exploiting the cheap labor that that generation produced. Rising expectations and a declining population will reduce the competitive advantage of what is now a serf-level labor force.

We in the industrialized world have made China the workshop of the world. But China has made a bargain with the devil, that is, they have taken on the risk of labor market volatility. Because their production is largely OEM (that is, they only manufacture goods, they don't design or market them), there are relatively few jobs for the millions of new college grads. In any case, those new college grads can't compete with graduates of American or European universities. The idea that there is anything in China approaching an MIT or a Stanford is laughable.

Finally, China is burdened with an antique language that only about 50-60% of its population has mastered. Just learning the characters for the language absorbs years of the educational process.

I'd give China a few more years before they're ready to rule the world.

Natural Gas Could Cure What Ails America

Well, natural gas is sitting at less than $3.00 as I write (that's per million BTUs or per 1,000 cubic feet). The actual cost of LNG from the Arabian peninsula has to be computed as the wellhead cost plus the cost to convert to LNG, the cost to ship, the cost to reconvert to NG, and the cost to deliver to the consumer. At present, Arab countries would have to give us the gas for nothing in order to compete, and maybe even subsidize the conversion process.

You can argue that extensive use of gas would push the price up, and that's true. But LNG shipping and receiving capability would be quickly overtaxed, so those prices would go up too. There is an incredible supply of natural gas in the US, and there's no bottleneck in its supply. The ability to drill and deliver is all in place.

Changing the mentality of Americans is the critical step here. Big oil and the oil service industry, the car-makers and associated parts industry, and service stations and repair shops are all afraid of the change to anything away from the internal combustion industry.

Big oil has been a source of contributions, the mother's milk of politics, ever since Lyndon Johnson brought in Brown and Root's money during the third FDR election (1940).

Thailand has managed the shift to LNG pretty easily, as an example. While they have far fewer service stations than the US, it is also true that a partial shift to LNG could be handled with only a few stations along interstate routes, and the use of LNG to power fleet vehicles, such as urban public transportation and local delivery vehicles, which can return to a central location for refueling.

Instead, we piddle along without a coherent energy policy, pursuing such idiocy as ethanol, which, when corn-based, consumes as much energy as it produces.

Electric cars are fine, but you have to remember that the electricity they use has to be produced by something, and in America's case that is primarily by coal.

The path of least resistance at present is to offer lip service to "clean energy" and "energy independence" while doing nothing to actually accomplish it. Oh, I forgot, we funded the purchases of new cars, the great majority of which run on gasoline. Made those sheiks in Saudi Arabia happy!

Last Thursday Was the Bottom - It's Time to Get Back in

Bank of America is a stock I've owned at various times over the last two years. I have generally made money with the stock, the last time buying 200 at 39.xx and 100 at 19, then selling out at 36, and I was lucky to get out at the one-time return to the 30s. I recently bought again at $12.90, hoping that the dividend will hold at 1.28. This is a stock which got out of subprime in 2002 or so. Ken Lewis is a very good retail banker, but he may have overreached with Countrywide and Merrill Lynch, but at $12.90, or even under $15, the stock is just too cheap to pass up. This stock will never be in the teens again, in my opinion. Buy now and keep it forever, it's just too big to fail. It has a huge investment in China Construction Bank, and that will be an incredible investment when normalcy returns to Chinese stock prices.

What little I know about water transport stocks scares me, and that is volatile prices, spot markets, and ship inventories. Good dividends when times are good, though.

Oil? Well, anybody that doesn't believe oil will come back is crazy. The bottom we are seeing here has delayed people solving the problem of oil dependency, so we're no better off than we were before. Demand is down now, but will return when things perk up a bit, and any sign of shortage lures investors and hedgers into the market. I mean, a barrel could be $100 in March--it's just that volatile.

Diageo: The Coca-Cola of the Alcoholic Beverage Industry?

Good comments on Diageo. You capture the essence of Diageo, that is, unmatched stable of brands and unmatched scale of marketing and distribution. The marketing leverage comes from the fact that their marketing and distribution infrastructure is scalable, that is, it doesn't add a lot of expense to take on another brand. You can see the benefit to Diageo and the mannufacturing company in their recent agreement with Grand Marnier.

You can see a direct relationship between Diageo and the British Pound. Intuitively, the stock should benefit from the fall of the British pound in the last year (and vice versa for its recent rise). However, the stock is widely held internationally, so in fact it seems to fall on the Pound's weakness and rise on its strength.

Try comparing a chart of the British Pound to the price of the stock over the last year.

You don't mention how you arrived at the value of $64. I'd be surprised if the stock remained in the sixties once the growth in volume resumes, and I expect that to be the case this year (fiscal year ending June 30th, 2010). You have to remember that fiscal year 2009 coincided with the worst recession in modern memory.

You might want to check the spelling of Ketel One.

Crude Reality: How Long Can Oil Stay Down?

Well, the best I can figure about the oil markets is that it moves very quickly as you get away from the equilibrium point, i.e., when supply equals demand. Look at the steep rise in oil prices when there was pressure on available supplies, and the steep drop when demand fell below the available supply.

That's just observed behavior, without any statistical backup. Global statistics are hard to come by, anyway.

Demand will continue to rise as the developing countries emerge from poverty. The obvious example of this is China, which went from being a net exporter of oil to a net importer.

We're looking at a temporary dip in demand as if it were a permanent development. What is more likely is a surge in demand as we start up our economies again sometime this year and starting burning that $1.50 a gallon gas.

Don't Miss the Coming Gold Bull

Buy gold before the sky falls. People love the idea of gold because they see it as a safe haven. It has always been, at its best, a temporary haven. When the economy is bad, when the dollar loses value, gold rises. The problems is, it sputters and falls when the economy improves. Would you want to hold gold in prosperous times, with the dollar holding its own and reasonably safe investments returning 10%? Versus 0% for gold? Well, probably not, and rational investors would be selling gold in those circumstances.

Gold is us 8 years in a row, but it's just about where it was at its peak in early 1980. After that, it went into a long period of trading between 250-450 before starting to rise again in late 2005, when it was 430 at the beginning of the year.

Perhaps you could surmise that gold has already peaked again and will fall on hard times if the economy bounces back. If it does, look for the price of gold to drop like a lead balloon.

Otherwise, listen to the gold bugs who scream of huge gains to be made by buying at the top of the market.

As Oil Bottoms Out, It's Time to Go Long - RBC

The price of oil probably operates on its own fundamentals and market conditions. Finding a correlation with the NASDAQ could be purely or mostly coincidental. The NASDAQ reached its peak in 2001, and oil reached its peak in 2008. The fall of the NASDAQ by 70% took place over 7 years, the fall of oil by 70% took place over a few months.

I would agree that oil prices are too low to last, but I have no idea how long they will last at this level. Futures indicate prices will rise, but it is apparent that OPEC actions have far greater influence on prices when demand is strong than when demand is weak.

What Is McDonald's Thinking?

"Their balance sheet is so terrible; their net debt to net debt plus equity is up over 73%. What this means is any impairment of its assets will cause shareholder equity serious damage - and consider that 2.18 of its book value of $3.02 comes from Goodwill. In a rising rate environment this stock could suffer serious damage."

Sorry, I had to laugh at this analysis. Their "net equity" includes a huge debit (reduction of equity) for treasury stock. For those unacquainted with the term, treasury stock is stock that has been repurchased by the company. While this nominally reduces equity, it is actually a huge plus. The company could pay off all of its long-term debt by either sellling half of its treasury stock, or alternatively pay off its debt in a few years by ceasing to buy back stock for that period.

Goodwill arises when you pay more for an investment than the book (historical) value of that investment. The net difference is booked as goodwill. To give you an example of how that works, if you bought McDonald's today, you would pay far more than its book value--hugely more. Just on the basis of real estate, they have $21 billion in net book value (asset historical cost minus accumulated depreciation) which is actually worth, I would guess, at least three times that amount. Do you think McDonald's would actually sell an urban corner lot purchased 20 years ago for what it paid for it, much less its net book value? Then you would have to pay for the value of McDonald's as an incredibly successful business (the term goodwill actually stems from the reputation of a business and the value of its brand).

MickeyD is a formidable cash machine. It generated about $6 billion in cash flow from operations in 2008, and used about $4 billion of that to repurchase stock. The real question is whether MCD's shareholders are better served by paying off debt or by repurchasing stock and receiving dividends.

The mistake that most people make in analyzing MCD is to think of it as a restaurant company. It is a huge REIT, a franchisor, and a restaurant company. As a REIT, it collects increasing rent revenue even as the net book value of the rented properties decreases. This accounting anomaly gives rise to the use of FFO, or funds from operations, as a method of computing the real return (and the source of dividends) for REITs.

What it is also becoming is an investment company, it business plan being to actually invest in companies that purchase land and property for new restaurants. This allows them to increase their return on assets.

Diageo: Better Trading Opportunities Abound Elsewhere

Good point about the currency fluctuations. The British pound has been on a wild ride in the past year from $2.00 to $1.40 back to $1.65, which is something like the normal level.

You might also point out that the movement of the stock in the last year traces the movement of the pound, i.e., down a ton and back up about 20%.

Long-term, this is a great investment. They have an unparalleled lock on the world's best liquor brands, and they have a distribution channel that is unmatched. And these two things are scalable, that is, they can add new brands and volume without too much of an increase in cost.

Their recent forecast didn't offer much hope, but I'd say they'll be beating their forecast of low single digits. Why? Well, the worst 12 months of the last 70 years are behind us, and they increased their profits in that period (even net of currency fluctuatons).

Western Goldfields: Cash Is King

Yeah, I'm not at all a gold bug, but this mine has turned profitable and has been written up as an outperform by Reuters (Dec 11). Reuters estimates an EPS of $.17 this fiscal (calendar) year and $.29 next year, which, along with the good cash position the company has, should pull the stock price up to $3 or so (my guess).

Merry New Year: Cheaper Oil, Silver Options

Well, I like the article whose link I am providing ( by Daniel Dicker):

biz.yahoo.com/ts/08120...

Basically, Daniel mentions the huge contango that exists now (current price of $43 vs December 2009 futures of $57), plus credit issues that constrain the investment in futures and lead to deflation. The strong dollar is a major factor in keeping prices down. We've got winter fuel oil and cheap gas prices in the US to fuel demand.

What we haven't had is any geopolitical event of note recently.

Demand for oil will continue to drop until it doesn't, and then the turnaround could be very quick. China's demand for oil edged up in October, according to Reuters and this Seeking Alpha article:

seekingalpha.com/artic...

Short oil? Wow, that would be incredibly dumb at this point, given the low possibility of reward and the virtually unlimited possibility of punishment.

Realty Income: 'The Monthly Dividend Company'

Good timing on this recommendation. It was down 3.99 today.

What Does Warren Buffett See in General Electric?

Actually, Buprestid, Warren Buffett does own a significant position in GE from previous purchases (7.8 million shares). You can view his (actually Berkshire Hathaway's ) holdings as of 6/30/2008 at this web-site:

www.marketfolly.com/20...

His largest single holding is Coca-Cola.

What Does Warren Buffett See in General Electric?

This is the second article in which this author, who holds a short position, has postulated a drop from $21 to $10, without supporting his position. Well, I believe the stock will be $30 next year. I have no support for that position either. I am long the stock.

If I were short the stock, I would certainly be making unsupported statements to the effect the stock will halve in value by next year. Flog if long, flame if short.