Is Sarah Palin the mistake that will cost McCain?

Today, John McCain announced his choice for VP and he chose a little-known former beauty Queen as his running mate.

While Palin has an interesting past: she was captain of her High School State Championship basketball team, a runner-up in the Miss Alaska pageant, a former sports caster, a mother of five, a tri-athlete, a hunter, a fisherman, and now the Governor of Alaska; you can't help wondering if she was chosen primarily for two reasons:

1. Because she is a woman.


2. Because she is attractive.

In addition to the two points above, Palin, who appeared on the cover of Vogue, IS pro-life and pro-gun and therefore embraces two important conservative issues. But, was she the most qualified candidate? Or was she chosen because she was an attractive woman?

Regardless of how you answer those questions, the Democrats are going to make that claim over and over and over for the next two months.

I can almost here Joe Biden at the Vice Presidential debates: "Ms. Palin: I know Hillary Clinton. I'm friends with Hilary Clinton. I served in the Senate with Hillary Clinton. And you, Governor are no Hillary Clinton."

Don't get me wrong, I'm not saying Palin isn't qualified or a wonderful person. I don't know that much about her. What I'm suggesting is that the perception will be that McCain chose a women to try and capture the votes of disgruntled Clinton supporters AND that he didn't chose the most qualified woman available.

A Vice Presidential pick cannot win the election, but it can lose one. It took awhile, but Dan Quayle ultimately did in the first George Bush.

In many ways Palin embodies some of the negative traits of former VP candidates Thomas Eagleton, Geraldine Ferraro, and Dan Quayle.

Like Quayle she is viewed as being inexperienced. Unlike Quayle she seemed to pass her introductory test without looking like a deer in someone's headlights. Let's hope she can spell potato.

Like Ferraro she seems to be a huge gamble designed to save a floundering ship. Regardless of what the polls say, and they still show the race as being close in a number of key states, the McCain camp saw the need to take a big risk at this juncture. On the positive side, the pick has created huge interest in Republican ticket. 40 million viewers tuned in to watch Obama's speech from Denver. The Republicans were not going to get that kind of interest until the addition of "America's Hottest Governor" to the list of speakers.

Possibly most disturbing, like Eagleton, Palin may have some skeletons in her closet. There are stories claiming that she is being investigated by the State Legislature for arranging to have her ex-brother-in-law fired from the State Police Force. I don't know if there is any substance to these rumors and don't expect that they will be resolved in the next 66 days. However, the very mention of such a scandal might lead many to question further John McCain's judgement in picking the Alaska Governor as a running mate.

What does this mean for the market?

I think it increases the chances that Obama wins the election. I think that means that we need to prepare for a continuation of the current see-saw environment. The stock market doesn't do well during the first year of a new Presidency anyway and some of Obama's rhetoric regarding taxes and healthcare is bound to be scary to many.

On the plus side, the economic data is getting better and we are nearly 8 years into a bear market that began in early 2000.

I don't think we need to fear a huge crash, although we may test the lows around 10,800. But, I also don't think we should be expecting big stock market returns in the near future.

Standfast Performance Better Than Most!!

A client called the other day and asked about our performance. The question was were we doing well or were there other, better, places to invest? That prompted me to do some research and justify our existence both to the client and in my own mind.

This is what I found:

So far this year, our accounts are down on average about -7.50%. (Some are down a little more, some are down even less)

I hate losing money and negative 7.5% is not my idea of a good return in normal times.

BUT, how does that compare with other options?

Here are the year to date returns on some popular mutual funds:

Fisher Purisma -12.50%
Vanguard Index 500 - 12.70%
American Balanced - 8.75%
T Rowe Price Growth Equity -12.36%
American Growth Fund - 9.94%
Fidelity Contra -11.96%
American Funds Cap World G&I -11.72
Fidelity Magellan - 15.34%
Fidelity Diversified Int'l - 13.51%
Investment Company of America -11.97%
Kemper Dreman High Return Equity -20.05
Gabelli Asset -11.97
Janus Balanced -3.96
Templeton Growth -16.3
Janus 20 -3.5

Obviously, there are lots of mutual funds and there are others that beat us. Many of those funds were commodity funds and bear funds (funds designed to go up when the market goes down).

The best performing commodities fund was up 22.48% this year. But, beware, that same fund is down -12.50% in the past month.

I was surprised to see Janus doing so well. Most of us forgot about Janus after the debacle of the early 2000's. But, they beat us!

Here is the performance of some popular money managers:

Black Rock Core -13.31% (thru 6/30/08)
Alliance Bernstein Value -16.73 (thru 6/30/08)
Lord Abbett Value -15.04 (thru 6/30/08)
Great Companies -12.25% (thru 8/22/09)
Fisher Investments -14.50% (thru 5/31/08) Estimated. (Their fund is -12.5% through 8/22/08)

Indices:
S&P 500 -13.82 (8/22/08)
Russell 1000 - 11.2 (6/30/08)
Russell 2000 - 8.11 (6/30/08)
Russell Mid-Cap -6.81 (6/30/08)
MSCI EAFE -10.96 (6/30/08)

The MSCI EAFE is the Morgan Stanley European Australian Far-Eastern Index. It is the most popular index for Foreign Stocks.

One last investment to consider, Berkshire Hathaway.
Berkshire Hathaway stock is down -18.57% year-to-date.

Compared to many other investment options, WE HAVE DONE EXTREMELY WELL.

We have succeeded in doing what we set out to do. By remaining defensive in these tough times, WE HAVE PROTECTED YOUR CAPITAL IN A DECLINING MARKET!

I wanted you to know that I'm very proud of what we have accomplished for you this year.

I believe that when we look back on this period of time, we will say "This was our finest hour."

The Rains Have Stopped!

Late this afternoon, the rain stopped suddenly.

I expected that it would continue raining intermittently, but we have barely had a sprinkle since.

I took advantage of what I thought was just a lull to visit the office. Everything there is fine. In fact, in spite being on lower ground and closer to the ocean, it looked better than the house.

On the way back we drove to take a look at the beach. There were people swimming! I guess that one person's emergency is another person's amusement.

Rain, rain, go away!

Tropical Storm Fay continues to dump prodigious amounts of rain on our area. Right now it is falling at a rate of one inch per hour. It does not appear at this point that we will have any flooding at our house. I have not been to the office since yesterday.

I have worked from home since yesterday. We lost power several times during the day yesterday. It is amazing how many things need electricity!

The storm is moving to the west and we expect that this will be largely over sometime this evening.

On a brighter note, the market is up today and most of our positions are doing well.

Oil jumped up yesterday to just under $120 per barrel.

This was a price number we identified almost one year ago as the upper limit of fair value.

Looking forward to some sunshine this weekend, we remain cautiously optimistic about the markets.

Tropical Storm Fay

Tropical Storm Fay continues to hang off the coast about 50 miles south of us. We keep hoping and praying that it will move inland.

Our offices are closed today. Right now I am working from home. I will do that as long as we have electricity. So far, we have not gotten any terribly bad weather. But today we should get 6-12 inches of rain. That coupled with the high winds may cause some flooding and power outages.

I have moved most of our and your important files into plastic boxes and stored them in a safe location. Our electronic data is securely backed up and also stored in a safe location.

The creek behind our house is tidal and has risen quite high. I estimate it would still need to rise another 3-5 feet in order to flood. High tide is in 1 hour and then again after midnight.

Oreos in China

Watching the Olympics this evening I saw something that amazed me even more than Usain "LIghtning" Bolt's runaway 100 meter victory.

I saw a special on Oreos. Oreos, well known to American consumers, have become quite popular in China. Kraft sells two types of Oreos in China; the traditional round Oreos that we all grew up with and long thin, four-layered, Oreos designed for the Chinese market.

A standard size package of Oreos costs about 70 cents in China. Unfortunately, that is quite expensive for many Chinese consumers. So Kraft, the maker of Oreos, released a smaller package that cost 17 cents. That amount was just right for the targeted Chinese consumer.

The rest of the sales success is credited to two old-fashioned American traditions: in-store promotions and advertising. A popular Ad shows a younger member of the family teaching an older member the proper way to eat an Oreo....sounds familiar.

Kraft acquired Nabisco in 2000 when they were still a subsidiary of Philip Morris. Philip Morris bought Nabisco from RJ Reynolds and merged the newly acquired entity into Kraft-General Foods before spinning Kraft off last year.

Kraft Foods continues to be one of our largest holdings.

Stand Fast!

Aluminum Corporation of China

We made another small investment today. We purchased shares of China Aluminum (ACH) at $20.99.

Many of you may remember that we bought this stock in April of 2007 at $28.05 and sold it on July 31, 2007 at $50.43.

I couldn’t resist buying the stock back at these low levels.

The 52 week trading range is $20.32 – 90.95.

The Return on Equity is 27.62%

The dividend yield is 3.85%

The book value is $15.38 per share.

The PE Ratio is under 7.

The PEG Ratio is 0.5.

The Growth Rate is 14%.

As I said, we made a small investment. I don’t want to make any big bets on China. I also don’t want to commit large portions of our cash.

Chinese stocks have been getting hammered of late. As you know, we like to look for bargains. This seemed like one.

Stand Fast!

The Four Best Stocks We Own: Johnson & Johnson, General Mills, Philip Morris Int'l, Intel

This year has been a tough year. The market has see-sawed back and forth. Many stocks suffered meaningful declines. Most stocks are down from the first of the year. So, it isn't hard to identify your recent winners.

In that category, four stocks stand out for us.

Johnson & Johnson (JNJ)

General Mills (GIS)

Philip Morris International (PM)

Intel (INTC)

All four are up between 10 and 25% for us this year. (Although, it should be pointed out that we did not own Intel and Phillip Morris for the whole year.)

What do they have in common? About the only thing is that they all have substantial overseas sales. Three of the companies sell consumer products, but the products are substantially different, although they may loosely fit into the old lexicon as consumer staples.

Consumer staples should do well in bad times, so I guess that three of the stocks make sense.

All four stocks have a "wide moat." This is a term that was coined by Warren Burffett and refers to a company that is in an industry where there are "high barriers to entry." In other words, it would be extremely expensive for a start-up company to attempt to compete with J&J or Philip Morris.

Other consumer staples companies that we own including Unilever, P&G, Colgate, Kraft, and Coca-Cola, have not done as well. Some are roughly flat or down only a little for the year. But, they are not up as much as the four mentioned above.

We bought J&J and Intel at prices we thought were bargains. That helped!

Philip Morris International was a spin-off from Altria. We sold our Altria shares just after the spin-off. There is an old Wall Street adage that say's spin-off companies are often better to own going forward than the parent.

General Mills is in some ways the hardest to explain. The stock was purchased at a reasonable price at an unpropitious time and it still went up about 10% at a time when other food companies were treading water at best.

I still like all four of these companies, but I would warn about getting caught in the trap of presuming that because something has done well recently it will continue to do well.

In the next day or two, we will post a list of some of our current favorites.

Meredith Whitney and the Surreal Life

The entire Meredith Whitney story has taken on a surreal quality.

Since writing our article yesterday I have been searching on-line for stories and articles discussing other peoples reactions to Whitney's newly-minted fame and "Fortune"

I found this article from the streetinsider asking, as we did, "Is this the bottom?"

I saw a video where Meredith's husband, WWE "superstar" John Layfield suggested tongue-in-cheek that this was HIS chance to give back to the "smaller people like you."

Fortune actually interviews Whitney at a WWE event. (Certainly the first place most of us would think of to discuss Wall Street!)

During the interview Whitney exclaims about an over-acted, choreographed, injury, "No, I'm telling you, it's real,".....this time.

By and large the reaction from most sources is similiar to mine. This is the sort of thing that you see at the end of a cycle, not the beginning.

As I scoured the various news articles relating to this event I couldn't help thinking that it had the same surreal paparazzi quality familiar to most current media offerings.

I was also shocked to see that a handful of sites had links to our article. (I'm guessing that some kind of web-crawler must search the internet for headlines and then automatically post links.)

And I can't help wondering if Layfield and Whitney might not be the next reality stars. After all, fellow WWE Wrestler Hulk Hogan has his own "reality" show and while he is certainly more famous than Layfield, he doesn't have a famous wife.

Meredith Whitney on the Cover of Fortune

I often look for contrarian signs at the top and bottom of market cycles. Things like a USA Today cover showing bulls charging up the steps of the New York Stock Exchange with ticker tape streaming from their horns or cartoons of bears feasting on the carcass of a rotting bull.

I saw something today that struck me as such a sign. I’m talking about the picture of Meredith Whitney on the cover of Fortune magazine. I met Meredith at my 1st Wedding. She was a guest of one of my more successful Cornell friends and she made it obvious that she felt she was slumming in New Jersey in the company of a bunch of Cornellian’s. (Ms. Whitney was a graduate of Brown living in Manhattan. And, for what it's worth, my now ex-wife had a similiar attitude towards the Cornell gang!) At the time she was working for CIBC and someone suggested that we might have something in common since we were in the same industry. We had a strained conversation for about an hour the night before the nuptials until one of us made some excuse.

Needless to say, I was somewhat surprised to see Ms. Whitney become the most recent Wall Street darling and overnight sensation in October of last year when she correctly predicted capitalization problems at Citi-Bank would lead to a dividend cut. Since that time she has been a regular on CNBC and the other financial broadcasts. After my wedding she parted company with my friend and married a professional wrestler and part-time financial expert.

For the past 9 months, she has been ubiquitous in the financial press. Appearing everywhere with a message of doom and gloom for the capital markets. Analysts who vault to fame are usually short-lived and they usually continue to re-broadcast their original, award-winning, message. Anyone remember Elaine Garzarelli Joe Granville, or Abby Cohen? I think seeing Meredith on the cover of Fortune may be a sign that the worst of the credit crunch is behind us.

Bubble Gum

Dear Friends:

It certainly appears at this time that another bubble has burst. Oil prices have plummeted over the past two weeks from a high price of over $150 to under $115 today. Nine to twelve months ago with oil prices around $70 per barrel we suggested that the price of crude oil might rise as high as $120 per barrel. This proved to be optimistic.

The conventional wisdom about bubbles is that:

1. They last longer than anyone expects.
2. They tend to grow beyond all reasonable proportion.
3. They tend to burst when least expected.

We definitely saw a bubble developing and could only wait patiently for it to burst.

The recent sharp declines in the price of oil coupled with the decline in other commodities leads me to believe that we have seen the bursting of another bubble.

Some examples (other than light sweet crude):

Gold hit a high of over $1000 in mid March and $980 on July 15 and has continued to fall today to $823 per ounce.

Copper prices peaked in mid July at $4.10 and have now dropped to just over $3.40.

Shares of Rio Tinto, a popular mining company that mines just about everything, have declined from a high price of $558 in mid May to today’s price of $347.


In the past decade we have seen three major bubbles; Tech Stocks, Real Estate, and Oil/Commodities. This is highly unusual. Some economists suggest we may see the boom/bust cycles more frequently in the future. I’m always leery of any suggestion that things will be wildly different in the future than they were in the past, but these prophesies of continued bubbling and bursting may prove to be accurate.

With oil prices headed lower and the dollar headed higher I think we can expect this rally to continue into the near future. I would not encourage anyone to jump in to this rally with both feet. I expect to see marked fluctuations as the summer wanes and we move into the election season.

The GOOD NEWS is that the market’s recent recovery has helped our account values immensely.

We have nibbled at a couple of stocks in some of our accounts with large cash positions, but we intend to remain guardedly optimistic in the short-term and uncertain in the mid-term.