wearmanyhats

Yesterday investors panicked over the lack of a bailout and the market had the largest drop in history. It was so frustrating to see the sickening downturn in our portfolios.  Right now it might be a good time to relax and remember that the most of our stock picks have beautiful dividends to go with them.  These will be the first to rebound when people get their senses back and jump back in the market.

 People have lost their heads over this bailout, the very thing that has not been explained sufficiently, nor has the case been made well enough that it is necessary.  That said, let’s keep a clear head now.  During times of panic, and as people are wild about gold, now is the time to take some of the profits on gold that I told you to purchase on August 22, 2008.  Take a third or half, because once all this gets hammered out, the price will drop again.  But always keep some in case of an economic emergency.  If you have bought quite a bit, you can always do a 1031 exchange and buy into another precious metal.  Both platinum and paladium should rebound as the carmakers begin to sell cars once again.  They are both down over 50% since their highs.

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Yesterday I talked about how basic research can eliminate stocks from your buying list before they have any chance to damage your portfolio.   The springboards that come your way every day for investing stock ideas need to be thoroughly researched to make the grade to be included in your picks.  The ideas for this blog today came from Fortune’s list of the fastest growing companies, and to a first glance investor, they all look like companies to grab.

In fact, only one made the grade of good buys for me:  Bucyus International (BUCY).  This company is a mid size construction equipment company based out of Milwaukee that manufactures equipment that mines copper, coal, and gets oil out of sands.  Since it is a cyclical stock, it’s down right now.  But officers from all over the company are using that lull in the stock price to load up on it.  I love to see insiders trading; that to me is the best vote of confidence for a business.  I look to be sure the CFO is buying up specifically, because the CFO always has a better understanding of how the business is going to grow.  In fact, I rejected one other company on that list because while the insiders were buying like mad, the CFO was selling.  In this case, all the right people are buying.

BUCY will continue to benefit as this resources boom keeps going.  As oil continues to rebound and companies look to drill, BUCY will make money though the sales of its equipment. Profits have soared, almost doubling this past two years.  And after its huge drop yesterday, you can pick it up for a reasonable P/E of 14. 

Of course you will have to wait for the leaders on Capitol Hill to get their act together today and do something for the good of the American people.  Once that has been worked out, the market should rebound nicely.  Buy when this craziness seems to have abated.

Several years ago, some very good friends of mine and I were visiting over dinner.  The husband said to me, “Hey, I know you are really into investing…”

“Yes?” I asked warily.

“Well, I got a tip today from a friend.  He’s a salesman for a company out of Nevada.”  The enthusiasm made his eyes shine.  “He says we should buy this stock because it’s going to go out of the park.  See, right now the slots take coins, right?  I nodded.  “But this company makes the chips to turn out machines that let you just use your credit cards and they say the all the casinos are excited about going into these things.”

“What’s its P/E ratio?” I asked

“What?” he said, befuddled.

“The P/E ratio,” I repeated patiently. 

“I don’t know what that is,” he shrugged.  “I just know this guy said this stock is going to be hot.”

“I’ll check into it,” I said, writing down the call letters. 

“No,” said his wife, “Don’t miss out on this investment.  We’re so excited about it that we bought $10,000 worth!”

I promised I would research it, and when I did the next day, I realized it didn’t even meet the basic criteria of my stock picks:  the P/E was astronomical.  They pestered me about it, though, asking several times whether I had jumped in with them.  I assured them that I was watching it carefully, and I did, by asking them how it was going.

It soon got to be a painful subject.  First it went up a little bit.  Then it dropped steadily.  A year later I asked about how it had turned out for them, and they bitterly answered that they had lost thousands.

That’s what happens when you don’t do even basic research.  And research is essential to investing, especially with stock.  A good mutual fund manager will do the work for you, an ETF will not.  And since most people lack even the basic knowledge of investing, they get tied up in these kinds of back yard recommendations and then lose.  It is dangerous to their long term wealth, and it is one reason why I was so against President Bush’s plan to put our country’s retirement into the hands of the stock market.

That brings me to the real reason for today’s column.  Yahoo featured a September 22, 2008 article by Fortune that featured the top fastest growing companies.  A novice investor might be all over that list, buying like crazy.  For a researcher like me, the list is just a springboard for ideas.  Out of the top ten, only one made my list of ones worth investing in.  Tomorrow I’ll write more about it.

The old man and I sat at the greasy spoon, relishing in the conversation as much as just getting out together.  He had enjoyed the ride; the day was pretty, the kids were off my hands.  We nodded at friends we knew, but most of them were his friends, and they stopped by to chat.  Finally the cook came out, shook his hand and asked about his wife.

“Still the same,” said the old man, shaking his head sadly.  “I go in to see her, but she won’t talk to me.  I just can’t take care of her at home, but I think she’s mad at me because I can’t take her home.”  His lips trembled as he fought back the tears.

None of our words of comfort could provide a balm to his tortured soul.  And as I got up to pay my bill, I saw the cook reach over and put her hand on his, smile, and say, “You don’t have to pay, of course.”

“Wow!” I said to him later as we got into the car. “She sure likes you.”

He smiled, but his face had a far off look.  “Well, let me tell you about that,” he began.  “About three years ago she called me and asked if she could borrow $23,000.”  I gasped.  “And, of course, all my money is tied up most of the time, so I told her ‘no.’” 

“What did she need that money for?”

“Well, our hometown talked her into owning the local bar down there at the end of the road,” he said. I nodded.  My husband and I had hosted our groomsdinner there.  “And she wanted to buy her way out of bankruptcy.”  I winced.  The subject was getting close to home, because my husband and I had just done that with our own business.  He paused, then continued.  “A few hours later, she called back and asked to borrow $2000.  I asked her why the number had changed from so much, and she said that she had just learned that it was far easier to ask ten people for two thousand dollars and get it than it was to ask someone for twenty-thousand.”

“What happened?” I prodded.

“Well, of course we loaned it to her, but there were some fundamental things about that business that just wasn’t working, so she ended up bankrupt.  Well, she bought that little cafe that we were just in a little later, and now she’s trying to get back on her feet.”

“And your money?” 

“Well, shortly after your mother’s stroke, she came to me with all the money, and told us that she couldn’t live with it if Mom died before getting that loan back.”  Tears came into both of our eyes as he said this.  “And I never pay when I go eat there.  She never paid me any interest, but it doesn’t matter.”

That story stuck with me both with the kindness shown in a business deal, and the wisdom she used in getting the loan. It also made an impact on me in that you can not always buy your way out of bankruptcy.   Considering how tight the lenders are these days, I wanted to bring up that nowadays a business owner might need to seek additional funding from creative sources. May this cook’s humble idea rest in the back of your mind should you ever be in that situation.

Back when I was a little less wise, I invested at the bidding of one financial guru who was excited about Denison Mines (DNN)  I picked it up-nay all the investors in my family picked it up- at 7 and sold out at 11.   Today it is at $3.60/share and I am wondering what I was doing buying into that when it wasn’t even putting out a net profit!  That just goes to show you that I, too, can have a “What was I thinking?” moment.

But what I am thinking about now is how much better DNN looks now.  First, uranium is bottoming out, and the stock is at a P/E of 17.  The company is looking to expand its vanadium products and is using as many diversified products and services as it can to remain competitive and financially lucrative. Plus, its bottom line, its net profit has soared from nothing discernable in 2006 to $47 million in 2007.   Now THAT gets my attention.

So what to do?  Buy?  Not yet.  We are watching just as we did when TELOZ was approaching the bottom.  I like to give a bit of warning on this so you can search it through as well.  I figure if something comes up that is ugly, someone smart should mention it. 

I look at Denison as a takeover or buyout.  Billiton is always looking for something good to buy out; it only stands to reason that DNN and some other entity would marry.  The fast and furious buyout stage in gold producers has sort of come to a halt, but hopefully when lenders’ purse strings loosen, these mergers will get together and liven things up.  In the meantime, I’ll watch for a time to pull the trigger and get back to you on it.

One of my favorite magazines is CFO, a magazine intended for the Chief Financial Officers of companies.  I know, I’m sort of weird, since I am not a CFO, but it is a well written, interesting magazine that always helps me learn something new.  Unfortunately, between running two businesses, writing, and being a famly member, I don’t always get to read it on time.  Just today I lounged with one that had been lying around and came across an interesting article which put last week’s financial wildness into some perspective.

The article noted that more companies file for bankruptcy first, then allow buyouts to happen.  The benefit:  the new controlling company is not saddled with so much debt that they are burdened.  The downside:  the taxpayer gets stuck.

Now don’t throw rotten apples at me, please.  I’ve been trying to find the darned magazine since I first read the article so I can cite it. I promise to cite it in a future edition of this blog.  But the concept stuck solidly with me, and it got me realizing that it fits this Lehman Brother’s situation quite well.

 First LB  tried to hammer out a takeover with Barclays, then they filed Chapter 11, then Barclays began to offer buyouts for the various parts of Lehman’s that was financially lucrative.  Fianlly they received the approval of the judge to do so, so most will be legally solid.

Follow this thread of thinking then.  How many other big companies will die before they are bought out?  And how many creditors can be stiffed before no one wants to loan money or sell goods on credit?  What will that do to just general businesses?  Can this kind of trend continue before litigation makes it impossible?  Will the lawyers or the state legislators have to get involved? The next ten years will be very interesting in this regard.

Perhaps that is what led to last year’s tightening of legislation about the bankruptcy laws.  At the time, it looked as though the credit card industry was the only ones who would benefit.  Perhaps there is more benefit to businesses than meets the eye.

Finally, if you are the owner of a business that is looking to buy out another, watch the object of your takeover very carefully.  Do you believe it to be so economically unsound that you could wait for it to fail first?  Do you think you should offer a buyout package based upon bankruptcy first?  It might save you both money for blue sky and unplesaant surprises later. 

This is truly the time when you want to pull out your hair.  On one hand, some financial gurus point out spans of time when money invested in the market would have needed 20 years to have recovered. Then you have other financial experts who tell you that you won’t lose money if you don’t sell. What do you do now?  The answer:  it depends.

Here are some of the questions about your money.  Are you managing it or is someone else?  How often do you look at the bottom line?  Should you be doing it yourself or is your money manager doing a good job?  Have you been losing money or holding fairly steady?  Do you pay a large commission every time you trade?  Are there restrictions on those things in which you can invest?  All of these are very important questions.  This blog is for people who invest on their own, or who have more than a little bit of investing experience.  But the novice can learn much here.  Below are some things to consider when managing your accounts during these troubling times.

One thing:  don’t count on your money market holding the dollar value for sure.  That is one aspect of these government bailout talks right now, and the fussier the legislators become, the less likely your money market will hold its dollar value. In other words, if you put in one dollar in your money market, you are used to always having at least that one dollar.  Now we are not sure if that dollar will stay worth that one dollar.

Second:  High yield dividend stocks usually hold their value, but not all are created equal.  Look at our archives carefully for a few suggestions.  See, too, that we have sold some that have lost their dividend. 

Third: use forums like this for bouncing off ideas.  If you ask on one blog for their opinion, then a few others, consider which one seems the wisest.  All writers can do is offer their ideas, and some might be quite sensible. 

Fourth:  Don’t settle for lame advice.  I recently looked at a blog that advised, “Watch your money!”  The writer then proceeded to tell readers to not spend foolishly and a few other elementary ideas.  Wise money management needs to be a lifelong habit, not something you only get serious about when something’s wrong in the economy.  You need much better advice NOW with real answers to hard questions.

What kinds of questions should you be asking?  First, call your broker.  Is you account insured in any way?  For how much?  Most investment firms do not have FDIC insurance.  Buy many offer some insurance of some kind.  Next find out how many of your accounts are covered.  We, for example, have our Roths, Children’s Roth, and a regualr investment account.  Are all of them covered or do only one? These are questions you should know.  If you have a medical savings account in the same company, consider sending it to another brokerage.  Reacquaint yourself with your holdings and familiarize yourself with what each holding entails.  For example, what does your mutual fund say it is supposed to invest in?  How much has the value changed this last year?  

Develop a realistic plan to pay your bills should the whole money sytem freeze up for a day or two.  Put aside as much as you can in an envelope in your safety deposit box.  Does this Last, I wouldn’t ride out this market if I had dangerously exposed assets.  Mutual funds that are large growth or blue chip probably will get creamed.  Even commodities are taking a beating.  I don’t know when steel will turn around, and while ag commodities have been blizting, the ETF has not been reflecting that!  That’s why this is so dangerous. Putting it in the money market is even dangerous now.  Only precious metals and oil funds seem to be retaining their value.sound nuts?  Well, let’s put it to you this way:  Fox News interviewed Warren Buffet today about the government loaning money for a bailout, and he said, “Heaven help us,” if they fail to provide that money.   He is a very practical man, not given to drama.  If the man says it’s bad, it probably is.  What’s the worse that can happen from this advice?  Sometime you open your box and have a stash of money?  Ooooh, very bad, right?  Wrong! You can’t lose on this piece of advice.

Last, I wouldn’t ride out this market if I had dangerously exposed assets.  Mutual funds that are large growth or blue chip probably will get creamed.  Even commodities are taking a beating.  I don’t know when steel will turn around, and while ag commodities have been blizting, the ETF has not been reflecting that!  That’s why this is so dangerous. Putting it in the money market is even dangerous now.  Only precious metals and oil funds seem to be retaining their value.

What is the worst that can happen? you ask.  The worst case senario is that our money becomes worthless, jobs are lost, and we enter ten years of little money with declining numbers of jobs.  The problem is we are very close to that.  Then we would wonder if we would even get our dividends from our stock!  Precious metals will reign. 

I’m not saying the sky is going to fall.  I’m saying that it might, and you should be ready.  Share some thoughts and ideas here for others to see and keep listening to the new information daily.

Metals

For those of you who don’t read archives, you missed a couple of good questions from one of my regular readers, David, on how to buy metals.  GLD and SLV is the ETF way to buy the yellow and silver.  But platinum and palladium can be bought in gold bars and are way below their highs.  There is no reason to buy them in coin form, though if nothing else is available, then that’s fine.  Just make sure you buy from a reputable dealer and not a salesman.

How do you know if they are reputable?  Well, first off, don’t go to a coin solicitor, go to a good old fashioned coin shop.  Second, resolve yourself that there are not many dealers out there, mostly because of the huge amount of financial outlay that needs to happen.  Most are in big cities, otherwise they are paying another premium to the regional dealers.  I developed a relationship with mine by showing up and periodically buying.  My kids also buy.  I ask questions about something I want to purchase down the road.  But I never do this with a transient salesperson.  I found out who was the owner and didn’t pester him when he was busy.

I also take immaculate care of my coins so they command a premium when I come to sell.  That helps.  I don’t follow rare ones, though he has occaisonally told me about ones that are down momentarily in value.  And as discriminatory as this sounds, I make sure the commpany has been  in business for a while. Though I have done selling with younger businesses, I don’t bother with a relationship with them right now.  They could run right out of cash flow when buying and selling gets crazy.  And it will.

Consider coins for silver and gold, bars for eveything else.  The reason, consider if we were suddenly invaded.  If you had to grab slver to buy bread, every common man would understand silver.  If you grabbed a pretty platinum coin, a common person wouldn’t understand its value.  The same is true with palladium.  Why pay a premium for the beauty of the coin?  Let me know if anyone has any more questions.

 Mania;

You gotta love the drama playing out in Washington.  Someone is in crisis:  in walks the Federal Reserve chairman with the white cowboy hat to save the day, and suddenly the town sheriff comes in with a, “Hold on, Pardner!”  Poor guys who have spent hours trying to hammer out this deal only to sit for hours answering questions to the purse string holders.  Imagine the people on Wall Street and the stress they must be under!

The craziest thing is that the Senators and Represenatives are finally listening to the American public.  And the American public is wanting a good thrashing for all of those people on Wall Street that are going to walk away with millions no matter what!  Don’t you wonder a bit about all of this?  Millionaire Senators and Representatives scolding millinaire Wall Street execs in hopes of impressing average income people.  Interesting! It’s like the fox watching the henhouse.  And you have to wonder if all of these hearings are legitimate.

It will be tough to go after execs retroactively for this mess.  Putting controls or legal punishment on execs in the future may not be in the best interest of growing our businesses in this country.  Providing better regulation for some of these creative derivitives would be prudent. 

Rather than tying the pay to what other people make, perhaps compensation dependent upon the net profitability of the company makes more sense.  Either way, it should be interesting to see what all of these smart minds put together.

Morality:

 National Public Radio explored whether or not we are in this financial mess in this country because of greed. It was the flavor of the week for them:  blame the mess on greed.

Not once did they explore other reasons why people would mortgage their houses for more practical reason, such as a sudden and long job loss, or medical expenses, or to get their kid through college.  Not once did the NPR speaker acknowledge why “flippers” took on risk to create their own wealth.  The truth is, the common man would like to retire and not worry about money in his/her old age.  Flipping houses are a way to acquire enough to take care of you in your old age.  You sure aren’t going to get far ahead on minimum wage or even $10/hr. 

Instead greed was identified as the reason we are in the national state of financial chaos.  No one would dispute that some people were greedy.  But what about those who were not? And isn’t wanting a decent nest egg a worthy goal?

No matter what, let’s hope the lessons learned here will not come with a terrible price.

I had a different article today for the readers of this blog, but came across an stock that excited me, and let me tell you- the last few days have been so tough on Wall Street that it was nice to get excited about investing again.  Still, our portfolio was up today, so I know we are on the right track.

Whenever I recommend to invest in a value stock, I like to see a hefty dividend.   This one is only running under 7%, but I like so much about what I see that I’m still going to buy it.  First, let’s talk about the fact that the dividend for this stock has steadily increased.  Then let’s talk about how natural gas has been down a bit this past year.  Sooner or later, whether we like it or not, natural gas will go up.  That means more revenue for Targa. Not only that, but winter is on its way, and the almanac says it will be severe.  Increased usage in natural gas is expected, even if the majority of us wonder how on earth we are going to pay for it.  And local municipalities are concerned about the cost; I know our city was unable for the first time to secure a fixed price on the gas it has to buy.  Plus the clerk reports that the price of our fuel is going up double digits!

Like I’ve always said, if you can’t beat  ‘em, join ‘em.  That where Targa comes in. First, the financials look excellent.  And the insiders are buying like crazy.  They see good times coming. And if you act tomorrow, you can get in under the share price of what the insiders bought in.  Next, the stock is trading just a little above the 52 week low. The price had dropped because of Ike, but their operations were unscathed by the hurricane.  The turmoil on Wall Street pulled the prices down a bit, too.  Yesterday, however, it began to come back. I recommend a market order today, and then after today, a buy in at anything under $18/share.

I know that one other financial guru has recently recommended them. When I read that and gave it a glance I wasn’t impressed.  Then it turned up on my own evaluation run last night, and I looked into it more closely.  If you want to play this one even tighter, watch the markets today! If the Dow is down and this stock is up, grab at market.  The price went up well yesterday and might take a brief correction, thereby allowing you pennies off the initial price.

On a final note:  precious metals are sure on a tear. Watch the yellow metal and if you have gobs of it, consider if you want to take some profits at $1000.  Right now palladium and platinum are both undervalued.  Look to almost double your profits, possibly, with platinum, and even if you hold it long enough, you could triple the profits eventually on palladium.  You should hold gold, but it will be a long time before it doubles.  That’s probably not that true of the other metals.  Good luck and enjoy the profits.

Several weeks ago, I mentioned that if you were feeling brave, it might be a great time to jump in on Toyota (TM).  During last week’s correction, the stock dropped to its low and has come rushing back right into the same territory it was before all the bailouts. Now I’m wondering if it shouldn’t be our ”watch”  for the week.

We need to be patient and be sure the market is stable.  If the Dow is going to go down dramatically in the net few weeks, we can wait and buy in at a better price.  Why TM and not other stocks?  Well, most of our recommendations are hedged by strong dividends.  High dividends help make up for the loss in equity on a share price.  And since we are buying only when dividend stocks are at their traditional low, we benefit both from luxurious dividends and the future the stock holds for us.

TM doesn’t fall into the dividend paying investment category, but instead is a growth stock.  They are riskier during times of market instability.  In this case, we will continue to watch for market strength and then make a call to buy if the markets look more stable.

Toyota has suffered from the economic downturn in that people are not really buying cars.  But when they do buy, demand for Toyota’s cars are on the top.  While Ford and GM were making bigger gas guzzlers, Toyota sensibly invested in making a hybrid.  During this downturn, GM and Ford are at the drawing board trying to figure out how to catch up.  Toyota’s taking it current operations and streamlining it.  I like their business philosophy, and the care they take in managing their business.  This is one time in which you would be investing in the smart management, and that is always wise.

Let’s watch the stability of the market this week and check on the stock by Thursday. 

Back in 2004, financial advisors such as Martin Weiss and Larry Edelson began to advocate investing in China, Brazil, and other far flung places.  Their argument was simple: the U.S. was headed for bad times.  Their team of experts began to introduce their readers to new names like Posco, Gerdeau, and Lenevar.  With on the street reporting in China and Singapore, they kept everyone up to date on how construction had changed, how the population was on the move, and why they believed that the next bull markets were going to be overseas.

This new push to head overseas had a huge backlash of criticism from some of the biggest names on Wall Street. Their gripe:  who in the world would invest in some outside market when the best market in the world is right here in the good old U.S.A.?  During the 2005 money show, they even argued how irresponsible it was to invest in outside markets at all because you were putting your whole portfolio at risk from government policies that you didn’t understand.

I have not always agreed with Weiss and his team, especially during the great bull market of the 1990s.  He argued constantly then that the market would crash, but I felt the sentiment was in the favor of crazy P/E ratios and technology.  This time I agreed with Weiss about global investing, and I was glad to make money overseas right along iwth them.  But now my mind has changed again.

If you have a great deal of investments overseas, such as a global fund or any global ETF, listen carefully.  It is my belief that you need to choose your overseas investments very carefully from here on out to avoid losing money.  China, for example, will no longer have a rising market the way it has in the past several years, and not just because the Olympics are gone. 

Consider that we have been one of China’s biggest customers for many years.  When we get a cold and quit buying, China gets a major bout of the flu!  With the United States economy in trouble, buying overseas has been seriously affected. A July/August edition of CFO stated that 10,000 factories in southern China have been closed.

Another reason China is hurting is that it seems to lack the infastructure to deal with simple problems.  CFO cited last year’s snowstorms in China as an example.  It slowed everything in terms of getting the goods to market because what normally would have taken a couple of days to clena up here, took weeks over there. 

CFO also interviewed firms over there who were disgusted with the amount of scrutiny the government gave their businesses while rubber stamping the Chinese businesses.  It seems reasonable to expect fair play in the inspection processes. For these reasonss, 17% of the firms they had interviewed said that they were planning to move their plants out of China.

The slow leak of employment and the recent hike in fuel prices there as the government pulled away from subsidizing fuel,  will put unprecedented stress on local busineses.  The conclusion of the Olympics will naturally slow the construction and services industries there, too.  A slowing economy does not produce a booming stock martet.

Contrast that to Vietnam, which seems all too ready to accept those fleeing factory owners and Australians who are enjoying wonderful economic times, and the conclusion can only be this: only the most careful global investing will be profitable in the next few years.  Be careful whose advice you take, and make sure they can offer more proof than just new skyscrapers as evidence.