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WHERE WE ARE SEEING SOME VALUE

WHERE WE ARE SEEING SOME VALUE

We are seeing stocks getting cheaper in the U.S. and abroad, and we are making up lists of good values.  We see some values in the U.S., and we see even more values abroad.

There is no big short term reason to get fully invested.  We continue to hold Treasury bills as a large component of our portfolios, but we do see more values emerging.  We believe that there is time to carefully analyze the opportunities and companies.  In our opinion, after careful analysis, making some purchases of good companies will produce long term profits.

SOME OF THE CHARACTERISTICS OF ATTRACTIVE INVESTMENTS FOR THE NEXT FEW YEARS

1. Companies should be self-financing.  Outside capital will be hard to find, and costly, so a company should be able to generate internal cash flow to fund its growth.

2. Companies should be located in countries or in markets where growth is still possible during a period of deleveraging and consumer retrenchment.  Obvious examples are necessities like food, clothing, utilities, and low cost consumables (household goods).

3. Other alternatives are consumer goods, infrastructure, and utilities in countries like China, where economic growth is still strong.  Companies should do well in markets where many consumers are acquiring goods for the first time, and the country is adding ports, dams, roads, and railroads at rapid rate.

4. During a period of economic retrenchment and deleveraging, well managed and well established companies are favored.  Companies with good contacts and strong relationships, built over years of doing business, are better positioned when people become more cautious and frugal.

WHAT IS NOT ATTRACTIVE

Financial service related industries are not attractive.  This includes: insurance, banking, stock, and real estate brokerage.  An article from the Telegraph in the U.K. points out the problems with derivatives…they still represent a potentially huge problem for all of these industries.

The article says what we have been trying to convey for a long time…derivatives are a big bomb, and the bomb has yet to explode.  Lehman’s derivatives are a tiny fraction of the entire derivative market.  The over-the-counter derivatives market is many trillion dollars, and it has no transparency, regulation, or central clearing agency.  In summary, no one knows who has made or lost what…and no one knows if the losers will pay the winners on settlement date.

Click the following link for a picture from a knowledgeable source.  http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3211647/Fears-of-Lehmans-CDS-derivatives-haunt-markets.html

Thanks for listening.


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