Dear Rising Tider,

I just posted the December issue of Rising Tide on line for you. This month we step away from all-value-all-the-time—slightly—and look at where growth fits in. There’s good reason to do that now, but read the issue and find out what some people don’t know and an alternative way of categorizing stocks that can improve your investing results.

Good wishes,

Lynn

Today I have been finishing up the December issue of Rising Tide, which I just sent off to design. So this message will be short and we’ll talk more tomorrow.

One interesting thing I have noted again today—of the 25 biggest price gainers today, 24 of them were stocks that sold for less than $4. Most of them were $1-something stocks. The same was true of the
25 biggest losers as well. Evidently the fiddlers and fool-around crowd is out there looking for wild ideas.

And one bit of puzzling bad news deserves immediate comment. Zacks has downgraded it target on Penn Virginia Resources (PVR). Zack’s target was $28, and now it’s $25. But since the stock is only $11.31, I am puzzled as to why that would bother anyone. The distance from today’s price to $25 is a 120% gain. Sounds like good news to me.

And, finally, in Congress, Treasury Secretary Henry Paulson is doing a bait and switch that makes Senator McCain’s suspension of his campaign to fly to Washington heal the bailout crisis in Congress look downright stable. Paulson begged for a $700 billion bailout fund to help mortgagees avoid foreclosures earlier this year. Now he says that’s a bad idea and the plan is working. What plan? The one he abandoned? Well, I am trying to figure that out… more tomorrow.

Lynn

You Thought 1929 Was Bad!

This must be the sore-tooth syndrome. Can’t help pushing on it to affirm it really hurts. I decided to look into bad markets.

The worst ever in the United States was the bear market of 1930-1932. We talk about the Great Crash in 1929, but that well-noted fiasco for all its abruptness was actually smaller. Stocks fell 47%, then recovered some. From Sept 1930 to July 1932, though, stocks fell 89%.

We’ve never come close again. I don’t expect to do so this time. But this bear market has moved into historic range. The second worst bear market was from March 1937 to March 1938, a 49% drop.

Since last Octobers peak, the S&P is down 43% so far. Nasdaq is a little worse, down 44%.

The pain is widespread, too. Of the 3,895 stocks that trade 50,000 shares or more per day, a full 70% are down as much as Nasdaq or more. The indexes actually make the situation look a little better than reality.

Hanging Onto Flotsam, Looking for Jetsam

Investors have a terrible choice in a market like this. Do they stay with the ship and hope that its boards will continue to support them even if the market dashes it to flotsam upon the rocks? Or do they look for other investments, the jetsam other investors threw off their own boats?

In a market like this, trading in one stock for another is not likely to change your fate. Not if 70% of stocks are down more than 44%.

In fact, 91% of stocks are now down from their 52-week highs by 25% or more.

The world is not in that bad a shape. Even in the banking sector, 91% of them are not failing. Most certainly, 91% of the world’s businesses are not teetering on the brink of failure.

Though earnings per share may take a hit, that’s a mere recessionary setback. The foundation of solid businesses—sales—is holding up. In our little club of active stocks, only 5.5% have seen their sales fall 25% or more in the past year.

You actually have several choices in this market. Now where to start? I think it begins with you….

What kind of heat is in your comfort zone? Markets recover. But it’s one thing to understand that logically, intellectually. It is quite another to watch your hard-earned money melt away like snow in April.

First step. Decide what you can live with. Get out when you get there. I am not a fan of the ubiquitous 25% trailing stop loss. As you can see from the numbers I ran a minute ago, most stocks would have hit their stops this year. Nonetheless, if watching a stock go down 40% is too painful for you, and nothing logical, historical or probable can make that pain any better, do what you need to do.

I happen to have a very high threshold for price changes. I worry when the business changes, not the latest market price. But I do not plan to spend my money in stocks for a long, long time. I also don’t have young children depending on me anymore. All this makes my situation easier than many other people’s are.

It’s no crime to let some pressure off yourself. You can cut the amount you have in stocks by half, or more, if it makes you sleep better. Sure this is a great time to be a buyer, but it is not the only time you’ll ever get.

Second, devise a strategy. There are several choices. You can use one or more of them. The main thing is to feel that you are working on a definite plan. Otherwise, the constant bad news from the market will overwhelm you.

Here are a few choices….

The dividend strategy— Go back to last month’s issue and reread it. Use this market to accumulate stocks with good dividends. Your base price will always be low. Thus your yield will always be higher than the amount later investors will get once the stock is back to normal. , And in the future when one of those blue chips is paying 2.5%, you will be collecting 5%.

An example. Coke now pays a 3.3% current yield because the stock is at $44 and change today. If it had stayed at its January 1 price, the same dividend ($1.52) would come to a 2.5% dividend.

The buyer who gets in today will always have that edge over the buyer who got in at a higher price. If you are shopping for dividends, now is the time to make hay.

The fair value strategy— This one takes a little more work on your part, but if you are a true self-reliant investor, you can give it a shot. The guiding question for this approach is not “what’s the price now?” but “what’s the stock’s reasonable price?”

Example–Applied Materials (AMAT) is now at a P/E of 12. It can easily handle a P/E of 18 and remain bullish. It normally runs in the 20s. But let’s call it 18. That makes today’s valuation 33% lower than it should be. And that understates the potential, because in order to reach 18 from 12, it would have to go up 50%. 

So to take Applied Materials 12-month earnings–$0.82—and multiply by 18, the stock has a reasonable value of $14.76. This is by no means excessive. And it makes today’s $10.25 price a steal. Hang on to that knowledge, watch earnings come in, and you should feel greatly reassured that the future will turn your way.

The Growth Strategy—I never consider value stocks to be simply anything that is cheap. Growth is always an element that establishes worth. But classic high-growth stocks tend to be exorbitantly priced in bull markets. A bear market like this is the one time you can buy growth at fairly low prices.

Example—we just added Nutrisystems to our stock list last month. It averaged better than 100% a year growth in the past five years and should do 18% or so the next five. It’s expecting 12% sales growth, which is quite strong. When the bull market is back, I don’t expect Nutrisystems to be going for a low P/E ratio anymore. This is the time to grab stocks that usually command premiums.

Those are just three approaches you can take. You can probably think of another variation—you can shoot for balancing sectors, for instance. The point is to use this market to work a plan you have definitely identified to yourself. That will give you a sense that you are accomplishing something, even if the market remains lousy for a few months yet.

Cheep Chicken

We have a problem to consider at Tysons (TSN). Or perhaps an opportunity. All the meat producer stocks have been crushed in this market. The worst is Pilgrim’s Pride, which has fallen  from $28.65 at the beginning of the year to 44 cents today.

Tyson is nowhere near that, but the market is causing a problem even if the hit to share price is a passing thing. Tyson has credit agreements that would need to be re-negotiated if its market cap fell too low. 

So let’s look at a few facts. S&P gives Tyson a BB credit rating. That’s the second highest “junk bond” level. It’s not dire, but bears watching. Part of the problem is that as a cyclical stock Tyson’s earnings can vary. And now oil and grain costs are higher than average, though they have gotten better. Plus the falling share price and risk of causing a credit covenant to kick in.

This does not mean Tyson is in danger of going under. Its debt to equity ratio is still fairly modest and its cash flow is good. Its current ratio at 1.8 means the bills are easily paid from current assets (like cash) as they come due.

Even so, Tyson has predicted a loss in the first quarter of 2009 because of high grain and fuel prices alongside softer demand. But this is already priced into the stock. Overall, the expectation is for 88 cents a share in 2009. Tyson should trade at about 16 times that, minimum. That would make this a $14 stock. It is now at $5.07 after today’s large drop.

The question is, how will Tyson’s business do over the coming year? The company has not cut production. It seems to be working on a plan to keep its volume up, which would pressure less secure companies out of the competition. It can afford to be aggressive since it is the largest company in the meat production business in the U.S.

To some degree, Tyson needs to overproduce for the recessionary market basket because of the way a chicken is built. Cheap bar food and restaurant fare like wings may hold up in demand while expensive skinless breasts fall. But every time you want two wings to sell, you have to take two legs, two thighs and the whole breast. This may clip Tyson’s margin a bit this coming quarter, but it will also put a lot more pressure on its competitors who are all smaller and have fewer distribution channels.

Tyson is also still working on alternative fuel, and the next Congress may well be much more friendly on that score than the current one. The next administration could hardly be less hostile. This constitutes a potential surprise the market is not pricing into the stock at all right now.

In addition, the current yield at today’s price is 2.1%.

If you have had enough pain, sell and go on. I can understand. But for now, this stays in the portfolio because once the recession ends—which will likely happen in 2009 at some point—sales will explode here. Tyson has continued it acquisitions and stayed on plan to capture global market share. It’s the right approach. Analysts don’t like it because they prefer to see the exact pennies per share they hoped for each quarter. Tyson’s plan is longer-viewed than that. On a two-year basis, Tyson looks just fine. In fact, on a one-year basis it should pull itself up, probably sometime after the first quarter.

Goodbye DHL

Yellow is my favorite color. Unless it’s on a DHL truck. It seems that every DHL delivery we’ve ever had has been troublesome.

You might enjoy reading today’s article in The Wall Street Journal. It is instructive. It lists a few of the reasons that DHL managed to screech into the U.S. market like a SWAT team on uppers, launch big plans, and reach failure in four short years.

It’s a reminder that business is not just numbers. Strategy matters. Among DHL’s mistakes, perhaps the worst was entering the market with an acquisition then failing to keep the top talent in the company that knew the U.S. scene. Well, I won’t repeat the article. Read it for yourself and give it some thought. < link: http://online.wsj.com/article/SB122609929212709771.html?mod=todays_us_marketplace > This kind of thinking is good for making investments, and it’s a lot more fun than looking at spreadsheets.

This has the biggest impact on direct competitors FedEx and UPS. We get a piece of the prize, though, because it also clears some room for Expeditors International (EXPD), which does freight forwarding and logistics.

EXPD reported its earnings last Friday. It beat expectations and set a record. But my favorite part was this quote from its CEO, Peter Rose:

The irony of reporting record quarterly profits in such tumultuous economic times is certainly not lost on us. We have great sympathy for those who have been victimized by the greed, avarice and deliberate desertion of time-proven principles of sound financial management that caused this mess in the first place.

Amen to that. We’ll call it a week.

It’s Election Day. How could that not be the most important thing on our minds today among U.S. voters? And this race holds considerable interest around the world we are told.

I’m going to leave you to the privacy of your individual choice and refrain from proselyting for one candidate or the other. I definitely have a vote preference, but there’s something good for us all in this race… Take a moment and think about this, it’s a rarity that is not getting much direct attention, though I bet you’ve realized it subliminally…

For the first time in ages, millions upon millions of us won’t feel that we have been   bamboozled, subject to the whim of idiots or scared to death by the other side’s choice. This time, many of us could live with either winner. We have a preference, but not a hatred.

We’ve all been in that valley of doom before. That awful feeling of peril and dismay when the wrong person won. Whatever your party choice, it’s happened to you at least once if you are 30 or older. Many Democrats adamantly loathe George Bush. Bill Clinton still makes Republicans blood pressure hit the danger zone.

For me, it was Richard Nixon, and he turned out to be better than I expected, despite his unfortunate ending.

There’s a theory in American History that the man (sorry, women) rises to the office of the U.S. presidency despite the flaws and baggage they arrive with.  But in this case, I believe you have two decent men to start with. Evidently I’m not the only one who thinks this.

The favorable ratings for both candidates in this race are off the charts. Both Sen. Obama and Sen. McCain reached the last week of the campaign with favorable ratings at the top of the pack in a Gallup poll. McCain scored an outstanding 57%, just one point below the highest of any candidate in the past 16 years. That high went to George Bush, at 58% in 2000.

Barack Obama broke all records with a 61% favorable rating.

That alone makes this an amazing campaign. Both candidates are widely respected. No wonder the lines are long today.

The irony here is that if these numbers hold, whoever loses will be the most popular loser in history—beating Al Gore 2000 in that spot.

Well, here’s hoping all those Florida voting machines hold up.

Dividends Roll In

Last month, I divided our stocks into two portfolio groups—the dividend payers from the straight capital gains strivers.

It gives a nice perspective, and something good happens even when the market is bad when you collect dividends.

The latest payers were Vale (RIO) with a 30.3-cent dividend on Oct. 21. Based on dividends received this year, that gives Vale a 3.9% current yield. However, if you bought at the beginning, in December 2005, you’ve benefited from a 2:1 split twice now. So you are collecting four times as much in dividends because that 30.3 cents is paid per share—not per original share. But it is still a return on your original investment, so you are now collecting the equivalent of a better than 12% yield on this stock. This is what dividends are supposed to do.

Paychex (PAYX) paid 31 cents on Oct. 29 and now has a 4.2% current yield

Landstar (LSTR) is among the companies that pay a very small dividend. But that’s OK because it is still a growth company. It paid 4 cents a share on the 30th. This gives it a tiny current yield of 0.4%. But put that in perspective—Landstar has enjoyed an average growth rate for the last five years of over 21% and expects to maintain a better than 15% growth rate over the next five. It is starting its dividend at the right place and you are still in line for sizeable capital gains with growth like this.

LaSalle Hotel Properties (LHO) pays monthly and delivered 8.5 cents a share on the 30th. Its current yield is now 7.2%.  This stock is also due for a nice rebound and just got an upgrade from Janney Montgomery Scott.

LaSalle’s 89.5-cent dividend is a cut from 17 cents earlier this year. That was a prudent move by the board to manage costs during a recession that is hitting hotels and travel businesses hard. LaSalle has managed quite well. But there’s a question you may want answered about all this…

Dividend Drama—Don’t Let Market Myths Scare You

Does a falling dividend mean the kiss of death?

Not really. Sometimes. But only in specific cases where the dividend cut in unexpected and accompanied with bad news.

Dividend cuts, or fluctuations, happen all the time with royalty trusts and often enough with some REITS (real estate investment trusts, pronounced reets). The stock may fall temporarily then rebound readily.

But astute investors are not stupid about business reality or the economy. LaSalle was punished no worse after its dividend cut than any other hotel company. In fact, its stock held up better than Felcor and Marriott, which did not cut dividends, or Host Marriott, which has not paid a dividend at all in the past year.

In fact, LaSalle has held up better than Hospitality Properties, which raised its dividend slightly.

So don’t worry about that cut. The dividend is still generous. Just let the recession pass.

Enjoy the Rally, And Here’s a Secret

After the punishing bear market weeks in September and October, it has been a relief to watch stocks make large improvements on the road back up.

Today’s winner is Expeditor’s International (EXPD), which surprised everyone by bringing in its best quarterly results ever. Earnings per share beat expectations and sales were almost as good as hoped, but it was the profit margin improvement that excited investors.

OK, sit up straight. Ears open… Sometimes I talk a lot, but this is important…. A little secret insider cue here: Transportation companies—truckers, that is—tend to do just fine with rising fuel prices. They get to levy surcharges. A recession that slows down shipping altogether is a problem, but high gas prices are not. There’s often a great catch for you buying a strong trucking company when fuel prices soar and everyone else is selling.  

It happens every few years, so tuck that knowledge away for the next time.
 

And that’s it for today. I have an election to watch, how about you?

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October Rising Tide Letter Is On Line

Dear Rising Tider,

Your November issue of Rising Tide is on line now. Because it can be hard even for value investors to feel like they are getting ahead when the market is throwing one of its fits, this issue concentrates on stocks that always pay. We have a new Always-Get-Paid portfolio made up of some of our current dividend-paying stocks and two new ones. I am also showing how much investors could have already banked in dividends on these stocks, as well as how much more you would have with a dividend reinvestment plan. Someday soon, when we spot a bull again, the difference betweem mere capital gains and total returns will be huge. But even in this market, dividends give you an edge.

Enjoy the issue,

Lynn

Payments are On the Way

October 24, 2008

Lynn Carpenter

Wall Street has a definition for a bear market—a drop of 20% or more. We passed that point in July. What you have seen lately is panic.

A few brave souls recently opined that the market was about to bottom or might have already done it. Then it looked for a much deeper bottom in Europe and Asia overnight and put eggs on the face of anyone who showed the least optimism. Not that they were wrong—bear markets have patterns. There really are sound fundamental and trading-wise reasons for optimism. Panics, however, do not follow rules. They are essentially irrational and unpredictable.

Since Andy watches the Asian markets, I had inkling what we were in for today, but I want to say that the reaction here gives me great pride in the reserve and common sense of the American investor.  The markets in India, Hong Kong, Korea and Japan fell 8-11% last night (yesterday). In Europe, most markets fell 6-8% this morning.

At this point, the U.S. stock markets are doing better. The Dow is down 3.7%. As a matter of fact, at the lowest point of this morning, we were still well north of the low the Dow set at 7773 on Oct. 10. Perhaps the bottom callers will find they were right.

Since you already have the November issue, you have in your hands as good a plan as anyone could devise for making a profit while the world seems to be falling apart. Reinvest dividends and build your asset base.

I can’t promise that your stocks won’t show further declines in price—no one can when the world is in panic mode. But you now see the rationale of reinvesting dividends. If you don’t have your dividend stocks in company dividend reinvestment plans, see your broker to get enrolled or go to the company websites. Most have forms online or the information you need.

Among our stocks, Vale (RIO), Paychex (PAYX) and Aptar (ATR) are paying dividends in October. Your reinvested money will buy more shares than usual at today’s prices. In November, Coke (KO), Pool Corp (POOL), Expeditors Intl (EXPD), Tysons (TSN) and Landstar (LSTR) are due to pay their dividends.

The popular press with its constant attention on the get-rich upside of investing does not do a good job of preparing people to deal with markets like this. Although we all know bear markets happen, the media overlook the fact that people who have money in stocks that they planned to cash out and spend when one of these bear markets attacks comes around are cruelly punished. Anyone who expected to take some stock winnings for a big purchase this fall he seen his or her dream shot full of holes. Last year the money was there. This year it’s not. A year from now it is very likely that the  money will be back. 

But I cannot overemphasize that a stock account is a working asset—it’s not a savings account. It’s no surprise to anyone that some stocks are bad, but it is a shock when people discover that in some markets all stocks look like bad stocks if you were to judge by recent price changes. We’re in that kind of market now.

Except for folding altogether, there is no guaranteed “safe” choice for you in the stock market, no foolproof sector to put stock funds in today. Not if you are looking for immediate positive action. However, there are a lot of good places to put money if you have a long-term horizon because good businesses are cheap.

The other thing we in the financial media do badly is to remind people that stocks are not lottery tickets. There is no lucky draw in guessing what the lucky numbers will be. Instead, shares are simply a percentage of a business. You can trade shares like lottery tickets, always betting on momentum—but the only way to really invest sensibly is to buy into a business with a positive long-term prospect at a good price. You will certainly hit patches like this at times, but ultimately, good businesses overcome them and investors who own stock in those good businesses prosper, too.

I wish I could send you a rah-rah message, but you’re a grownup. This is not a rah-rah market. You know its about patience and foresight now. Remember your long-term goals. Concentrate on the quality of the underlying businesses and wait for the panic to end. It will.

Lynn Carpenter

• Guess what? It Is Different This Time
• Lake Woebegon on Its Head—Where Every Stock Is Below Average
• Why This Is the Worst Bear Market You Will Ever Meet
• And Why It Has to Turn Around—the Lessons of 2000
  

Anyone who is not a delighted buyer in this market is a deeply unhappy person. Buying opportunities are the only good thing about it. The S&P is down nearly 40% since last October.

You already knew it was a bear out there, but let me give you the full picture.

We look at our own stocks at times like this and feel dispirited. Maybe even isolated and particularly inept. Responsible, thinking people always question themselves. But if your portfolio is uglier than a bear’s backside, it doesn’t mean you have been an idiot, a fool, or an uncommonly bad stock picker. Not today.

This is the broadest bear market you have ever seen, and that includes the 2000 crash. Some perspective:

The U.S. stock markets have slightly over 10,000 listings, but truthfully, only about 3900 of those trade actively enough (more than 50,000 shares a day on average) to consider truly liquid, mainstream ideas, and not silly penny-stock touts.

In that universe, you might think you’d find many better performers.

You’d be wrong.

Among these “real” stocks, nearly 2,300 are doing worse than the S&P. This is a rare situation when 60% of S&P-quality, serious, stocks are falling below average—especially when that average is losing so hugely.

But it doesn’t stop there. Some stocks are doing better than the S&P, but they are still losers. Among the reasonably liquid stocks only 13% are showing any positive returns in the last 12 months.

Seven Out of Eight Stocks are Losers in This Market

That’s right—Only about one out of every eight stocks has made as much as a half percent in the last year. The rest are losers.

There’s no sidestepping a market like that. There’s no “other corner” to run to. Your choices in a market like this are to (1) be a buyer for the long term and take advantage of today’s low prices, (2) grin and bear it, or (3) cash out and run for the hills.

So what do we make of the odds now that if you stay in the market you’ll be glad?

But It Won’t Last–Why Bear Markets Turn Around

It will probably do less good than a spoonful of Maalox for your stomach, but I’d like to reiterate—markets like this turn around. And they tend to do it sharply.

Another thing that people are losing sight of is important to you as an investor. This time, we were not in a stock bubble.  The current crash was not caused by overvalued stocks. This was not the dot-com hot-air-balloon of 1999.

That means that for most stocks, when you look at those highs from last year, those are reasonable targets. You should have every expectation that you will get to those highs again. Maybe in 6 months, maybe in 18—but I don’t see a 10-year wait and I don’t believe what the people who claim that are peddling. I already called a 10-year flat market back in 2000. It’s almost over. This is the dark before the dawn.

That’s worth pausing a minute to ponder. The situation—the chance of recapturning old highs was not like this in 2000. Just an example… When Broadcom crashed in 2000, it was overvalued. There was no fundamental reason for any cautious and informed investor to push it back to its former highs.

That time, Broadcom was already up 600% in a year and more brokers piled on to advise buying. The stock rose another 1,000% and brokers still started it as a strong buy. Yet the company had no profits, no near expectations of reaching them. Cash flow was negative. And the stock sold at 55 times its book value. 1.0 is perfectly matched, up top 4.0 is normal. 

This time there is a reason for some investors to buy. It’s not a stock I’d go for, but it is undervalued today and priced at a discount to its growth expectations. When the semiconductor cycle picks up again, investors holding Broadcom should do fine. That was not the case in 1999.

Broadcom was just one of many such stocks in the 2000 crash. There were good reasons why investors didn’t get their money back. But except for the busted financials, that is not the case this time.

Is S&P Sending a Secret Bullish Signal?

I do a lot of research, and I don’t think I have ever seen Standard and Poor’s put “fair value” and “target prices” so far above the current prices on so many stocks. S&P is begrudging of suggesting targets much above stocks’ current prices. They are far more conservative than the brokerage analysts.

It should also bolster your confidence in a market recovery to remember that this time the problem with stocks actually lies in a different asset class—real estate. It touches on stocks of companies heavily involed in real estate or which bought bonds and derivatives based on real estate. But otherwise, it’s a side issue.

Except for the credit flow worries, the effect on clean non-financial companies that are not head over heels in debt should be temporary – no permanent. Painful—oh yes, very painful. But passing. 3M will still sell adhesives, Deere will still sell farm equipment. And so on. 

So much for the spirit session.

Now for news…

The November issue is finished, I will be sending that to you tonight or tomorrow night. We have a new portfolio arrangement and more information on our stocks. I’ll expand on that in another note on Thursday, And I’ll also catch us up with the latest news on our stocks. So, get ready for your issue. It took massive research and number crunching, but I think you will like the results.

• Thank You for Letting Me Grieve
• Values Last a Lifetime
• Where Is the Bear Headed Now?
• When to Sell—And How to Know
• On the Light Side–A Darwin Award
• Thursday—More Portfolio Notes 
  

Andy sent you a message last Tuesday to explain why I was away, so you know where I was. In case you skipped that email, though, my mother had a stroke that Monday morning. She died Wednesday. I’m still utterly miserable. 

Because Andy covered for me at the beginning of the week and Jon Herring took over for both of us at the end, I was able to be with my mother for the full time as she slipped away.  All her children and grandchildren held her hands, touched her, and talked to her throughout her failing hours. I thank you for your indulgence in letting us have that time.

We all thought Mom had another 20 years ahead. We counted on it. She was radiantly healthy except for a spinal fracture from a fall this summer, and she was finally recovering well from that. Pain medications made her confused at times, but she did not tolerate them well when she was young, either. The stroke that took her was a surprise from nowhere.  No history, no reason to expect it. So, hey, go call your Mom for me if you still have one around to love.

Because Mom did not want a fuss—or even a funeral service at all—we kept it private. Still friends showed up over the days. It is interesting to see a parent you love through the eyes of her own friends. Again and again I heard two things—she was so generous and she was so kind. As several put it, “I never heard her gossip or say a bad word about anyone.”

That was her lesson to my brothers and I. Good fortune is meant to be shared as a way to give thanks and honor your own gifts. And there is no excuse for being a gossip. In fact, it’s odd that I ended up in this business at all, because talking about money or your neighbor’s business were both activities that no lady or gentleman would do. Both my parents made that abundantly clear. Since I still don’t talk about money—who has it, who doesn’t or how much something cost someone—at the dinner table, I guess Mom gave me a pass for talking about it the rest of the time. She did understand taking care of her assets.

Mom showed her innate generosity and kindness on the last day of good health. Her very last act was to return to the convalescent center she had just left the day before because she wanted to give a prized possession with a special meaning for her—a 20-year-old teddy bear from her sister– to a little girl who was a stranger. The little girl had cuddled it the day before then handed it back to Mom as she went home. According to my brother, the little girl was thrilled when they found her and brought the bear back, but Mom’s smile was even bigger. 

Thank you for letting me talk about her a little. And now we will move on…

When to Sell—Never in Panic

If you could plan life, you certainly would not put the death of a loved parent in the same week as a record-setting market crash. I am sorry I was at a funeral when it happened, but Jon spoke very well for me. And I would have said the same thing—a market that bad is bound to uncover great opportunities.

We’ve had a bit of discussion about what to do in markets like that around our Investors’ Daily Edge group. Some of us are for strict, mechanical stop losses. If it drops 25%–scat and don’t ask why. Others of us think there’s no one-size-fits-all response. Andy (Carpenter), Rick Pendergraft and I all agree that what you do on the selling end of business should relate to what you do on the buying end.

I am going to quote Rick, because he summed up a lot of our back and forth so well: “…you have to have your own style and your own plan and you stick to both.  Buffett has made a ton of money by being patient. That is his style.  George Soros has made a ton of money mostly on technical analysis.  William O’Neil has made a ton of money employing a very strict stop loss system.  The common thread is that they each have their own system and style and they stick to their discipline.”

Our style is to invest in value—which is defined by numbers plus a good business analysis—then stay with a stock as long as the company is on plan and meeting expectations.

Certainly, history tells us that big blowouts like last Friday are the absolute worst time to be selling. It is nothing but piling. And piling on to add to the selling volume ultimately drives your own price down in routs like that. Huge drops like last Thursday and Friday’s  have always been answered with big rallies.

That’s not to say that the entire drop from last week will be recaptured immediately. Nor is it to say that the bear market is finished. Stocks may still go down to last week’s lows again, or lower. But selling into panic… is just panic. You could not possibly do a worse thing. Even if you hit a stop loss, in a market-wide rush like that, you should suspend action for a day or two. And then if you still want to sell, you will get a better price a day later.

Knowing Enough to Sell  Is Related to Knowing Enough to Buy

It’s a conundrum. We never really know everything there is to know about any company. Even the best companies. And it is very hard to catch a well-run scam at all. The smartest analysts in the world were surprised by the low quality of assets many supposedly conservative banks held. We get to look at company results and broad numbers, like total assets in bonds or real estate in SEC reports and prospectuses, but we don’t get to see individual securities.

Even so, the market and the information available to us are good enough and true enough to trust most of the time. I would put that at greater than 90%. Whatever we don’t know, we do know a lot. And you can use that knowledge you had when you planned your entrance to guide your exit.

For instance… If you are strictly a technical trader, then you use those rules for your exit, maybe you get out when a trend line is broken. If you are a growth investor, you say goodbye when growth slows. And if you are value investor of the Warren Buffett type, which we are, you follow the business to make your decisions. The market price is merely a summary of the latest opinion—all the saints and sinners and escapees from insane asylums get equal votes. Often, too, the current market opinion is sullied by mindless fear or gilded by unfounded euphoria. 

So we will follow the business as always. That’s why we cut Asta Funding a couple of weeks ago—the business changed.

The other component in making a decision about whether to sell or not is your personal situation. Some people really cannot stand volatility. A 15% drop feels like a deathblow to them. If that’s the case, they should probably sell even though it might not be the best course for any other reason. Also, if you are trying to score a big win fast, you need to get out fast on adverse moves. However, if you are a long-term investor, you can ride out markets like this.

This seems like a good time to repeat my “endless loop” message: if you need to spend the money you are investing within five years, it should not be in stocks at all. You cannot count on getting the right sell price exactly on schedule.

This is very broad advice today. It’s not useless if you are pretty independent in following through from principal to execution. However, I will be writing you again this week with more exact guidance on all our stocks.

Is This Really a Banking Crash?

We know for certain what has bothered the market lately. Every bank failure and bailout glitch has sent stocks reeling.

But a decade or so from now, I wonder if that is what we’ll judge to be the real issue.

The market tends to move in long patterns. I am not an Elliott Wave analyst, and I don’t do predictions based on moon phases or sunspots, either. But there’s no denying the tendency the market has shown over and over:

When the market goes up extremely fast and high—call it a bubble or a runaway bull market—it tends to go nowhere for years after that bullish run ends.

• The bull market of the 1880s and 1890s led to a 21-year bear market at the turn of the century.

• A 17-year bear market followed the bull market of the Roaring 20s in the 1930s and 1940s.

• The bull market of the 1950s and 1960s resulted in an 18-year bear market in the 1970s and early 80s.

We had a heck of a bull market from 1982 to 2000, and now we are still in the answering long-term bear market. During these secular (that is, long term) bear markets, several rallies tend to occur. Then they fail. Each time some event seems to be the cause, but it is more likely that the real cause is a long-running market correction.

Here’s a chart worth some attention. I borrowed the original from The Big Picture blog and updated it a bit with a trend line added. Each time a bull market pops above the long-term trend, the market stalls. It takes years of “payback” before it again returns to its trend line. And when it does, it eventually gets too excited, exceeds the line again and stalls once more.

Looking at this picture, the current market drop is just more in the series that began in 2000 when the previous bull market went too far. And it looks close to reaching payback. I believe the current secular bear market will be a bit shorter than the two before it because we are already closer to the very long-term trend.

And I must say, the unending gloom and near-unanimous calls to get out of stocks and into bonds, treasuries, commodities, partnerships… etc. makes me very happy. When nobody has anything good to say about the market, the worse is probably almost over.

As for what’s going on lately—since 2000, we are still paying back our excessive buying in the 1990s. Think of it as stockpiling. You go out to Sam’s Club and buy 400 rolls of paper towels. No matter how good a deal you come across, you probably aren’t going to load up on more paper towels at a much higher price for a long while.

When the market gets too generous with gains during a bull run, it finally halts. Even if the economy does well or a myriad good things happen, the market will tend to withhold giving investors large, broad-based gains for many years afterwards.

I continue to believe that the next rally, possibly even a real bull market, is close to starting. I originally thought it would begin this fall, probably after the election, and that is still possible. But early next year is almost certain to see the start of some kind of rally.

Two General Principles

Just a thought… but at any rate, there are two things to be aware of at times like this:

1. When a market is crashing, all stocks go down. There is no solid relationship between daily prices and reasonable valuations. The best get hit along with the worst.
2. During secular bear markets, there are long trendless periods where investors cannot rely on the market to do the lifting for them. Only by picking stocks with sound fundamentals and growth prospects can they crawl out of the mud.

And Now, Something Lighter: A Darwin Award

We have news from EBay, in a manner of speaking. It seems the one-time Spice Girl Victoria Beckham and husband David, a soccer star, were missing a few dresses and soccer memorabilia.

The case might have gone unsolved. Classic detective modes would have been hard put to find the culprit. That’s because the thieves’ fingerprints were supposed to be there.

But the two housekeepers who made the heist auctioned their haul on EBay. With full contact info, of course.

EBay has now become a crime-fighting tool. The Drug Enforcement Agency routinely runs keyword searches to look for illegal drugs… such as anabolic steroids thinly disguised as “books on steroids” with $100 price tags.

Thursday This Week… More on our Portfolios

Because there is so much going on in the market right now, I am going to do some rearranging of our portfolio and I will give you some additional market comments on our stocks on Thursday. That will give us a couple more days to see whether the good reaction to the latest bailout and support plans holds up.

So that’s it for today, but expect to hear from me again on Thursday… or sooner if something interesting (or dreadful) happens.

October 7, 2008

Mary Brady

By Andrew Carpenter

A very nice old lady is lying close to death in an Annapolis, Maryland hospital.

She is Lynn’s mother, who had a stroke while she slept Sunday night.

I figure what’s taking her so long to go is that Mary Brady is toting a heavy load of life’s winnings to the cashier’s window. That takes a while.

She earned her winnings during her 84 years as a devout Christian… a woman who read her bible every day and who spent parts of each day in prayer.

A doting mother, Mary Brady subscribed to the “when my kids are bad or in trouble love them all the more,” school of parenting. She once told me that there was nothing her children could ever do that would embarrass her… “Even marrying you,” she added with a giggle.

And, she bestowed that same largess upon her grandchildren.

Now, I can’t exactly speak to my mother-in-law’s virtues as a wife. But the cranky old coot she was married to seemed pretty content right up to his demise, 12 years ago.

Sadly, I think I am going to have to break my promise about something she and I agreed that I should do at her funeral.

I promised to sing Rolf Harris’ old novelty song “Tie Me Kangaroo Down, Sport.”

You see, my mother-in-law is, well, a bit daft. She thought the following lyrics were hysterical:

Tan me hide when I’m dead, Fred
Tan me hide when I’m dead
So we tanned his hide when he died, Clyde
And that’s it hanging on the shed

But, you know funerals, lots of tension and grief sometimes brings out the worst in even the best people.

So, “Tie Me Kangaroo Down, Sport,” was probably exorcised from the funeral service on Mary’s 75th birthday – nine years ago.

That’s when Lynn and I gave her a new picnic table to replace the old one under one of her 100-year-old shade trees.

At the family birthday gathering, one of the cousins asked me if I was going to coat the new table with paint or weather treatment.

I looked at my mother-in-law and said, “That depends. Are you going to make another three years or 10 years? If it’s three there’s no need for either.”

She laughed her ass off, while the cousin was mortified and let everyone far and wide know it.

By now, you’ve guessed that events have me holding down the fort this week. Writing in Lynn’s regular Thursday space at IDE and Tuesday Rising comes as part of the deal.

Yesterday, while Lynn was in Annapolis, I made my very first trade for her The Optionist options service. In truth, I was merely following detailed instructions that Lynn had left me.

A 93% profit, it was another in The Optionists’ incredible string of winners – something like 75 in the past 19 months.

I thought of Lynn mother when I pulled the trigger on that trade, because the fact that Lynn is who and where she is today – a renowned investment and options authority – is kind of her mother’s doing.

You see, Lynn and her mother, along with Bill Bonner and his mother, go to the same church in West River, MD. Well, at least Bill did while he was living in the states.

The old church, by the way, is generally hailed as the finest example of “Carpenter Gothic” architecture on the East Coast.

Anyway, among his other feats, Bill Bonner is, as you know, Agora Publishing’s CEO.

Back around 1996, my mother-in-law ran into his mom one Sunday in church and, at some point, the conversation turned to kids.

When she found out that Lynn had just finished her Master’s work in linguistics, and that we were back living in Maryland, Bill’s mom suggested that Lynn contact Agora.

And, you know the rest. A lot of people made a lot of money thanks to a couple of old church ladies.

Very soon now, life’s circuitous route will find Lynn and her mom together in that old church’s sanctuary one last time.

Andy

Weekly Bulletin Exclusively for Rising Tide Subscribers

September 30, 2008

Lynn Carpenter

• Looks Like September Is Still the Cruelest Market Month
• Dropping Asta Funding
• Cash Is OK, But Watch Who’s Holding It for You
• What the Next Bailout Plan Needs, and What It Already Got Right

Recently Weak, But Not Chronically Impaired

From May 19 to yesterday, the S&P 500 fell 20%. It has had a terrible effect on our most recent portfolio picks. For months, I was pleased that no matter what the market, we kept making choices that did well. But their gains were new and quickly overwhelmed these last few weeks compared to big, old guns like Vale or Guess?

That makes it awfully hard to feel you are doing the right thing. I suspect that you have seen this phenomenon in many of your other stocks. You thought you were doing well, aw heck, you really were doing well, them wham the market throws your most tender new stocks onto their backs!

The calendar can distort your progress at times. For instance, the market for the year to date is only down 21%, almost the same as the summer to present drop. But any stocks you chose earlier in the year had more time to advance during a brief bullish run in the spring. Thus they probably had a better cushion against the latest plunge than your more recent ones have had.
 
Bear that in mind when you look over your investments. Also, be aware that huge sell offs like this one lately have an overwhelmingly strong tendency to reverse. And our recent stocks that started out well are still doing the right things in their businesses. They should make nice recoveries when the market improves, or sooner.

Goodbye To Asta—You’re In Trouble for Doing Nothing

However, I am going to make a cut in an old holding of ours that has fallen off the rails: Asta Funding (ASFI). It did well in past years for us and should be reveling in all the bundles of bad debt available for collection now. This debt is cheaper than usual to buy. That should mean growing margins for the company. Asta’s competitors are in the game and they’re having a good year.

But suddenly, Asta has stopped buying. I waited for an announcement that it was getting active again, and that hasn’t come. The company is saying nothing. We will cut this stock from our portfolio because it is no longer acting like the business we bought or following the procedures that made it successful in the past. I am not waiting for its quarterly report, but making this cut now.

Even Cash Is Weak

It can be hard to watch stocks in a market like this. So do remember the general rule: if you need the money you have in stocks within the next five years, it belongs in a much tamer asset, one you can tap whenever you are ready.

That, however, is a bit more of a problem lately than usual. Today, there is only one really safe place today for money if you want no more adversity—cash. As in FDIC insured bank accounts. Or nearly cash, as in T-bills. Even money market funds are risky because many of them hold bad mortgage assets. Lately some are refusing to return investors money to them.

Normally, I have no trouble waiting out a bad market. I’ve seen enough of them come and go.

There is one problem with the current situation that is different though. This time, the market is reacting to a real threat in the economy. The banking crisis has reached critical stage. If not resolved soon, it could do years’ worth of harm in credit markets. That will affect operations and profit margins in companies that have nothing at all to do with adjustable rate mortgages, liars’ loans or Structured Investment Vehicles.

Because of that, I am going to make some changes in the portfolio this coming month. The credit questions suddenly throw a lot of our expectations for future earnings into doubt. If not resolved soon and with great confidence, we will soon be seeing another round of earnings downgrades and lowered guidance.

Most of our hardest hit stocks, in fact, are ones that depend on a decent economy to make sales. I am going to put a few of these stocks in a separate part of the portfolio so that it will be more clear that they have big short-term risk.  Long-term, they are potential ten baggers, but I want to make it more clear which value stocks are steady and growing and which are actually of the “unloved and undervalued” category.

I am also going to start showing the role of dividends more clearly. It is especially reassuring to get those little checks at times like this, but they have far more power than that. We need to give dividends credit. More on that in the November issue, which I am researching now.

And now, I’ll give you my take on the next round of bailout legislation. This is going on the Thursday edition of Investor’s Daily Edge, but get the scoop here:

Bailing on the Bailout—Till Tomorrow

Today, Congress stopped for Rosh Hashanah. It’s not a bad idea to take a spiritual break about now.  The vote on a bailout failed on Monday, as you know. Work will resume tomorrow. But perhaps this time, Congress needs to serve up the next bailout plan with four qualities it missed in the last:

• Leadership
• Confidence
• Trust
• Transparency.

The mechanics of the bailout that failed were imperfect, but they were sufficient to the job of shoring up banks so business can proceed.

Any plan will be imperfect. But what will it take to make one work? And by that I mean to get housing lending and other credit back on track.

Start with leadership. Poll after poll shows that the average person is equally likely to be (1) angry that the bailout bill was not passed even if they aren’t sure how it works, or, (2) angry that the fat cats are getting all the money and believe it does nothing for them.  Few see the failed bailout as a help to borrowers or the rest of us.

The Leadership Vacuum Needs Filling

In fact, many of the things people hate or fear about bailing out rotten banks are addressed in the rejected plan. But the details were so badly explained people were unaware they even existed. The media spent much time reporting on personalities and politics and put nearly zero effort in actually discussing the plan’s content.

But don’t blame the media entirely. That’s a failure of leadership. No one has stepped up to clearly say, “This plan passes money through these institutions only to buy assets from them—at a loss to them and hopefully at a gain to the buyer. This will keep that problem from hurting us further, and this is how it will ultimately benefit you… ” 

No one has clearly said, “this is not a reward for errant bankers, the money has to go there first in the same way antibiotics have to go to the sick to avoid spreading disease to us all…”

No one has stepped up to explain how working this way will actually do more to get the credit system back on track than direct aid to homeowners will.

The failed plan (as well as the next version) attempts to do one thing: get those toxic asset-backed securities out of the system’s arteries so good blood can flow again.

This does benefit Main Street ultimately, because both consumers and business depend on reasonably available credit. The current lockup in lending is dragging the economy down, far more than the actual losses of the failed banks can do alone.

By the way, the market is already taking care of many bad banks. They are being seized or sold. So ultimately, the banks involved with the “bailout” money will largely be different from the banks that made the loans. It will be Bank of America, not Countrywide for instance that will be able to sell these distressed assets and do more lending.

But this message is being lost as well because the plan has such poor leadership to speak for it.

In the Land of the Blind, Can a One-Eyed Paulsen Be King?

The problem of leadership is that Treasury Secretary Henry Paulsen can’t inspire anyone even if he can and would do the job correctly–he spent too much time denying a problem for us to automatically feel good about trusting him at the helm. What? Suddenly he’s a visionary?

Paulsen’s failure, unfortunately, reflects backward to his boss, President Bush. Bush’s efforts to get a plan done are good, and I appreciate that he did step in. But the push to make his clueless secretary a key player is the plan’s weakest point.

I might add that neither of the presidential candidates said anything significant about the banking crisis at an early stage, either.

Leadership includes vision, and none of the above showed they had any in this area. So we need someone else to take charge.
 
So far, the proposed plans have put the Secretary of Treasury and Board of Governors of the Federal Reserve in charge, mostly the Secretary. No one is reassured by that. But it also proposed an Office of the Special Inspector General for the Troubled Asset Relief Program. How about putting out some trial balloon rumors on who that might be? A little practical politics would be good here.

The bailout should have a prominent face—but not the Secretary of Treasury’s. It should have a commissioner –or Special Inspector if you will – who will tell us how it proceeds. Regulations and future legislation would also benefit from the thoughts of an advisory council made up of people who were not part of the problem. Too bad we can’t draft Warren Buffett. That would inspire the country quickly. 

Looking for Ben—Franklin, That Is

By chance, this week I have been reading a biography of Benjamin Franklin. The not-yet- United States was in far worse condition in 1776 when Franklin went to France to beg arms and money for the Revolution. Our childish history books told us that the French were happy to help because they loved Franklin and hated the English.

That was not quite the way things went. France’s own war with the English (King George’s War here, the Seven Years War there) had too recently ended for them to want to get embroiled again. Aiding the colonies was not a free cheap shot. It was very risky. The aid began in stealth and with doubts.

Moreover, the colonies had no credit, no stature, and no established military. It was crazy to trust us.  Not even everyone in America was for separation from England. Franklin’s own son, governor of New Jersey, opposed it to the end. Franklin himself lived in Britain and worked there for many years trying to bring the colonies and mother country together before Britain’s actions finally turned him to the view that independence was the only course left.

Yet at a key point, a man like Franklin who spoke clearly was able to convince doubters abroad. Others at home, you know the names—Washington, Jefferson, Adams, Paine—did the same here.

Things were also worse in the Great Depression than they are now. The financial community has done itself a great disservice in preaching the felony of  FDR as gospel so loudly. The turnaround in the economy then had only some to do with New Deal spending and much more to do with the sense that someone was truly in charge. FDR was charismatic. People believed something better was possible—and they believed it in far worse times.

Oh Say Can You See…. What the Plan Is?

Transparency is critical to confidence. The failed bailout included monthly reports. That was barely noted in any news coverage. It is a critical point and one of the better provisions in the plan so far. 

Those of us out here on Main Street know we may have to swallow a plan we don’t wholeheartedly love. But we do want to know that the wheeling and dealing will not proceed under tables and behind closed doors.

Who is getting how much? On what terms? What losses and gains incur? What is the government paying for the bad loans it buys? Will it be 20% of face value, 50%, 80%. There is a huge difference and a delicate balance in that rate, which the defeated legislation did not even mention. The monthly reports will reveal that.

Also each $50 billion tranche will get its own report on how the prices were set. It would help if some guidelines were incorporated in the bailout legislation itself.

Wanted, Bankers Sober as a Bartender
 
Rebuilding trust in the banking systems is critical to real success.

We now have a few banks that did not get in trouble. They remained sober, boring and responsible. Just what a bank and bankers should be. Why are these banks not noted in the leadership, perhaps in an oversight committee to lead and interpret what is going on?

Banking is hard to understand. If Warren Buffett still admires Goldman Sachs, if Wells Fargo comes out strong enough to grab assets from the losers, as do other bankers, I want to know that people like this will be in on the deal. I don’t want the same clowns who screwed it up to be the ones in charge of the repair work.

Our view of bankers is tainted now. Time for the boring, sober, gray-suited crowd to run the recovery and build confidence again.

The actual bailout may last a few years. The rebuilding of bankers reputations will take much longer. Look back to the savings and loan crisis of the 80s. I had money in an S&L that was well run, friendly and convenient. But after the crisis, even good S&Ls disappeared. The very words “savings and loan” have a taint.

Now the word “bank” carries one, too.

Several sections of the bailout plan that failed directed it to “assist homeowners” and “minimize costs to taxpayers.” That is vague wording. Add some detail, Congress, and we may like your plan better.

It’s not that you won’t do those things—it’s that you need to say it louder and prouder before we believe you. Bankers have been gamblers—it is their reckless pursuit of fat profits on tiny margins, which can only be done with sleight of hand, that brought us to this stage. Time to stop blaming people who only wanted to own a home—perhaps their judgment was impaired, but they’re amateurs. Bankers were supposed to know better. It will take many years for “banker” to rank among admirable professionals again.

Believing Will Come from Seeing

Finally, the entire bailout, rescuer, reorganization or whatever you like to call it has one big job—to make us confident in our potential for growth and prosperity again. Available credit is key to that.

None of us here on the Main Street level have any interest in merely stopping old bankers’ wounds from bleeding out. If the bankers could bleed without hurting us, we’d let them do it.

We need to know that the plan’s assistance to banks will actually make the credit system work again for US. The bailout needs to express how it accomplishes that more clearly. What are the obligations of institutions that are allowed to sell their bad loans to government? Can they unload their troubles then still sit on money, keeping credit tight?

This is a concern because we already know that adding liquidity to a system and making credit from the Fed available does no good in itself. The Fed has tried that for months, but scared bankers almost ceased lending no matter how easy and cheap overnight money got or now many extra institutions were allowed to borrow directly from the Fed.    Making cheap money available is not enough.

I would hope that the next version of the bailout addresses the liquidity problem directly. We’ve had enough non-working trickle-down economics in America to be suspicious that saving a fat cat will end up helping a poor Joe.

Surely a new bailout plan will succeed and soon. Congress saw what could happen when it plays games. Let’s hope the next round is better than the last.