Which Way Now? 5 / 21 / 2009

Here follows a brief discussion of our current perspectives in these markets:

1. Value / value drivers: When we analyze different companies for the purpose of investing in their publicly traded stock we seek out companies that have grown their profits consistently over the most recent 3 year period. We then seek those companies that are both trading at an historic discount to its own P/E multiple at fair value and are also trading at a relative P/E discount to its peers. As we see it, our value drivers are simple - earnings and earnings growth. Can a company's management use its own assets to generate improved earnings over time? We can be much more analytical and research minded, but we are not investing 10,000,000 in any position, and therefor we remain unconcerned about incremental valuation metrics - asset turn over ratio aside.


2. Trading / stock market action: We remain very cautious in receiving and even listening to technical analysis. In our opinion, technical analysis is nothing more than the application of statistical analysis to historic sentiment. Whether the history being reviewed is 1 hour or 1 year, the use of statistics and graphs on buying and selling volume, speed and acceleration in either direction is dangerous. Technical analysis is dangerous because it assumes the market is rational and will recognize and anticipate value properly. Investing has risks, but fundamentals in our opinion reduces our downside risk while making us behave as owners of the business, not traders of common stock which leads to speculation, and ultimately to "investment" decisions that rely heavily on market timing and not business analysis.

3. Economic Drivers - There are none in today's market. Earnings, Labor, and productivity are still heading lower. All this talk of "decreasing losses" as an indicator of a forthcoming economic bottom is absolute spin. Decreasing job losses in a recession, that's like a meteor breaching the atmosphere. It may slow down, but it still has to hit bottom before it stops. And how are we to rely on government statistics and research analysts to provide us with accurate forecasting or information? We can't. Hundreds of millions of dollars are being paid to these professionals, and the information is not accurate. Its simply not accurate. Government statistics and research analysts are not audited. Corporate numbers are audited. Why are all revisions of government economic statistics downward revisions? Spin. Stick with audited numbers and consistent historic earnings growth.

4. Finance / monetary - Right now, the dollar is worth less than the Canadian dollar. In fact as of this morning, it costs $1.20 to buy one Canadian dollar. I'm old enough to remember driving with my parents on New England Toll roads and seeing signs that stated, "Toll: $0.25, Canadian Currency: c 0.40. In the last 20 years the value of the dollar has dropped by near 50% against Canadian currency. Folks Canada has managed its resources, its productivity, and its monetary policy much better than we have. Want another Greenspan era legacy? Our dollar is worth less than the Canadian dollar. Still think he was a genius? I respect Bernanke, but he has been left with a near impossible task. His only solution is to so devalue the dollar that the economies that rely on the value of the US dollar to function, and that's virtually all world economies, will be forced to devalue their own currencies. Watch. This will be reported by the media as the dollar strengthening. It will be reported as proof the Bernanke method works, when in fact any chimp can print dollars and sell treasuries at 14% returns. Bernanke, you are smarter than this, what you need to be is tougher. Face this administration, the one I voted for. It has gone so far afield, so fast, our great grand children will look at us like idiots. The generation that reduced America to a G8 participant rather than a leader.
Now for finance. Consumer Credit will shrink to 50% of 2006 levels. Consumer spending will not recover until savings begins to fill the lost credit gap. And this needs to happen in a shrinking economic enviornment coupled with higher taxes and reduced productivity. See what we are getting at here? Banks will not lend to even modest credit risks. So the Obama / Bush / Paulson / Geithner plan will not work. Until they fund real productivity and value creation AND that begins to take hold in the economy we will not see economic, financial, or monetary improvement. Green investing may be needed, but it will not create any significant productivity for years. What happened to infrastructure spending? It has gone with the wind. Any money we could have spent creating jobs and rebuilding our transportation, communication, and education infrastructures has been handed to the banks and they have created NO VALUE with it for the American people. These banks will offer financing only to the largest and most stable enterprises. And here's the good news, these are the enterprises we like to invest in at current discounted levels. Simply stated, the only enterprises (individuals as well) that will receive credit are those that really don't need it to fuel their expansion. The result will be an increased concentration of wealth among the already wealthy and a decrease of wealth among the middle class.

People, this is a call to you and your families. You must take control of your financial future. You must be productive and you must recognize how to create value. To do this look at enterprises that have created value and simply invest in them.

GE: 13.10
Dell: 10.74

As for American Express, we had a good selection there, but the government has stepped in and over regulated them. This to us is much like fraudulent reporting. Clearly AXP has been in lengthy discussions with the Government concerning the future of credit charges dating back 2 reporting periods. But none of that information was disclosed, as it should have been, by any of the credit card issuers to the investment public. Rather, they guided lower and then beat expectations...watch for more of the same as their revenues continue to decline. We move this position to speculative - It could double or be cut in half. So we take our first loss of $1.50 per share or 6%.


As for the Dow, our call is a retest of the new floor some where between 7,800 and 8,200 soon.

Build Value Every Day.

Bradford van Siclen








Conclusions