Stocks Update, 8/22/08

Numbers below are based on prices at mid-day on August 22, 2008. Positions below have at least a $2,500 basis or current value of at least $2,500.

What's new? I don't list my mutual fund activity here, because activity is so sparse, but I added to my mutual fund positions in T. Rowe Price's EMERGING EUROPE & MEDITERRANEAN fund (TREMX). The fund is 61% Russian stocks and its value decreased after Russia invaded Georgia (imperial notions are considered bad for any economy). I cite TREMX and its majority Russian holdings because it's important to look at the actual composition of a mutual fund before buying it. Many people think they are diversifying when they buy funds with different-sounding names. Mutual fund companies are selling similar products and have to differentiate based on names and other advertising. I had a friend recently show me his portfolio, and he wondered why he had lost so much money over the last year when he felt diversified. I looked at his portfolio--almost all the funds held the exact same names (e.g., Google, Chevron, and other well-known big caps). Lesson: always look deep inside the fund, not just at the cover.

Having said that, I've taken my own advice and diversified. I recently opened new positions in Gold (GLD), China (GXC), and KOL (energy ETF).

My main regret so far? I wish I'd waited before going into the Malaysia ETF (EWM) and Indonesia Fund (IF). I've been averaging down, and it's getting expensive.

I continue to believe IF will be a good long-term hold over a 10 year horizon. Indonesia was part of OPEC until a few months ago. It left OPEC after being unable to meet its production targets. Although Indonesia is blessed with natural resources, including crude oil and natural gas, it now imports more oil than it exports. Once Indonesia is better run, gains should come. I also love its national motto: "Unity in diversity."

Malaysia is in an enviable situation with good weather, peaceful citizens, natural resources, and many entrepreneurial residents who understand Chinese culture and can attract investment from China and neighbor Singapore. I am hoping both EWM and IF will be lifetime holds in my portfolio.

What's my outlook for the market? Choppy, lots of sharks still circling around, and any chum thrown in the water may result in a feeding frenzy. In plainer English, the market will probably move sideways due to short sellers still making bets and hedge and mutual funds not moving in to buy stocks just yet. Any bad news may result in a temporary market capitulation. I'm a not a posterboy for the practice, but it's hard to be a "buy and hold" investor these days. My advice? Keep the faith, but diversify.

Open Positions
CCT = +1.82
EWM =-6.42
EWS = -9.31
EZU = -4.39
GLD = 0% (excluded from avg)
GXC = +0.32%
IF = -9.49
KOL = +6.88
SWZ = -6.51
YHOO = -4.69

[Average of "Open Positions": losing/negative average 3.53%]

Closed Positions:
Held more than seven days but less than one year (from May 30, 2008):
CNB = +10.0
EQ = -8.83
GE = -6.4
INTC = 0.0 (excluded from average; insignificant movement)
PFE = -5.5
PNK = -16.7%
PPS = -2.8
VNQ = +2.37 [sold 8/7/08]
WFR = +0.9 (approx; based on partial sales week of 8/4/08 in two separate accounts)
WYE = +2.4%

[Overall Record: Lost an average of 2.82%]

Held less than 7 days:
DUK = (0%, excluded from avg) [8/07/08 - 8/14/08]; GE (1.0%); GOOG (0.8%) [7/28/08 - 7/29/08]; GRMN (-6.2%) [Sold 8/5/08]; ICE (2.0%), MMM (0.5%), MRK (0.1%), NVDA (8.0%) [8/12 to 8/13/08]; PFE (1.3%), SCUR (15%); SO (-0.3%) [Sold 8/5/08]; TTWO (4.3%) [partial sales on 8/5/08, 8/7/08, and 8/8/08]

[Overall Record: Gained an average of 1.68%]

Daytrades:
PFE = +0.5%
GE = +0.5% (Updated on July 14, 2008; bought at 27.15, sold at 27.30)
XLF = +4.3% (Updated on July 15, 2008)

[Overall Record: Gained an average of 1.76%]

Compare to S&P 500: losing/negative 6.92%
[from May 30, 2008 (1385.67) to mid-day August 22, 2008 (1289.80)]

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

I.O.U.S.A.

Nothing particularly exciting going on these days in the world of economics. The market is going sideways, with not much to kickstart it. Here's an article on the release of an interesting film, I.O.U.S.A.

http://news.yahoo.com/s/ap/20080822/ap_en_mo/buffett_box_office

Some excerpts:

Peterson said the meager U.S. rate of savings today means that roughly 70 percent of the nation's debts are being bought by foreign investors, and that could create geopolitical and economic problems for the country.

[70%?! Seventy percent of our debt is owned by other countries? &^!$#!]

The U.S. government owed roughly $53 trillion more than it had at the end of the 2007 fiscal year

[53 trillion?! &^!$# &^!$#!]

Sometimes I dream we live in a perfect world, and the new President's Cabinet will include Pete Peterson, David Walker, and Richard Fisher. [crossing fingers]

Property Tax Info, 2006

The link has old data, but still worth a look-see:

http://www.taxfoundation.org/research/show/22607.html

Even after Prop 13, California is in the top 10 in median real estate taxes paid ($2,510).

The Tax Foundation's research section is fun to browse. I found this report, comparing state spending with federal money inflow:

http://www.taxfoundation.org/research/show/266.html

How is New Mexico getting twice as much back as it's paying to D.C.? Also, I assumed California (#43) was getting the worst shake of all, but New Jersey, Nevada, and Connecticut are getting the least back from D.C. relative to the taxes they've paid to D.C. The only state with nothing to complain about? Rhode Island, which pays out a buck and got a buck back from the feds.

Book Excerpt

Saw this in the Atlantic Monthly, and had to share.

William Graebner, in his book, Patty's Got a Gun, talks about consumerism. He explains the last eight years, a time of extended executive power and debt, in one neat paragraph:

[There was] the sense that ordinary people had been conditioned by the public schools and drugged by materialistic consumer affluence into uncritical acceptance of their circumstances.

In other words, pass the soma. Even Mr. Huxley couldn't have said it more concisely.

Yahoo to Google: Et tu?

"Google Faces Defamation Lawsuit in India," read a recent WSJ article. Here is a summary of the article:

A small Indian construction company is demanding Google disclose the name of a person who used its blogging service (blogger.com). A blogger using the name, "Toxic Writer," criticized the Indian construction company, running afoul of local defamation laws. An Indian court ordered Google India to reveal the identity of the blogger. Google's India subsidiary removed the blog, but hasn't yet revealed the identity of the blogger.

Stay tuned... Jerry Yang and Terry Semel must be watching this with no small measure of schaedenfraude.

May You Live in Interesting Times

After applauding the federal courts and their judges, I received a loss in one federal case (after the judge sat on the opinion for over 8 months), and the very next day, another federal judge issued sanctions against me (a first) and my clients for over 11,000 dollars, without a hearing, because he believed we should have kept a case in state court rather than assert federal court jurisdiction.  Although the removal to federal court provided my clients additional time, and the sanctions were paid in full, the net result still left me questioning the experience my clients received.

This brings me to Rafat Rule #2: systems don't matter--people matter (more specifically, people with integrity).

We assume the U.S. system is the best in the world, in no small part because of the rule of law. But any system requires people to behave with integrity and honesty, and any system that attracts such people will succeed. Thus, even if the federal court system is better than the state court system due to several factors--more efficient discovery rules; the ability to call a judge during a deposition instead of having to get up and file a protective order or motion to compel; lifetime appointments, allowing judges more leeway to make tough decisions; clear deadlines issued at the beginning of each case, etc.--if you have an octogenarian federal judge who hasn't practiced law in 40+ years or who delegates to law clerks that lack extensive practical experience, even an inherently superior system won't necessarily lead to fair results.

Our systemic superiority should not cause us to be less vigilant. For example, even if the free market system is inherently better than centralized planning or socialism, if the people in the system do not have the relevant or recent experience or are out-of-touch, results will be poor. This is why Singapore, despite not practicing Western-style free markets, is more successful than the U.S. in spreading wealth and stability--with the best people in government, Singapore's system can be more centralized, and as long as it adjusts quickly to any mistakes, Singaporeans will be prosperous. What does this mean for Americans as we adjust to a period of less prosperity? It means we can learn from other countries, and we cannot assume our systemic superiority will allow us front seats to economic growth.

In principle, I agree a constitutional republic should be more successful than a country with centralized planning. The advantages of a constitutional republic with elected representatives are twofold: one, eventual accountability; and two, the diffusion of power, allowing a statistically higher chance of having good (and bad) representatives. But without honest, diligent people in any system, there is nothing inherently good or bad about an American political or economic system versus a British system, or a Russian system vs. Singaporean system. For example, one could reasonably argue the Singaporean and Russian systems, despite being more centralized, created more wealth and prosperity for more of their people than the British and American governments in 2008. This recent, perhaps brief, reversal in economic prosperity is going to create a conundrum for political scientists and economists. How do they explain why a Singaporean system has done better for its people than the American system, if centralized planning has no place in politics or economics? This reversal in fortune should lead to more analysis of the roles of ethics and accountability in government systems.

With Singapore, my hypothesis is smaller communities automatically generate some form of accountability, and this accountability leads to more "morality" in the form of closer ties in the community. All this takes me back to Rafat Rule #2: systems don't matter--people matter.

Update on October 17, 2008: the company that received sanctions of around 11,000 dollars just filed for Ch 11 bankruptcy. Looks like the lawyers might be the primary people benefiting at the end of the day.

Greenspan Wants More Educated Immigrants

According to yesterday's WSJ (8/14/08, David Wessel, A1), Greenspan agrees with my pro-immigration views, at least with respect to educated immigrants:

"The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said...

"Perhaps 150,000 of [new households] are loosely classified as skilled...A doubling or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale--and hence stabilize prices."

So far, so good; however, the Journal makes a mistake when it tries to do its own analysis:

The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes would accomplish that...

The Journal doesn't seem to understand that skilled immigrants mainly come to the States by way of H1-B visas and would settle in already-strong economic areas, such as San Jose, San Francisco, Chicago, and other large, diverse cities.

The housing crisis is mainly in places where mortgage brokers and lenders granted credit to low-income employees or workers with unsteady incomes.

Las Vegas, NV is a prime example. Although Vegas is a strong union town, too many uneducated people entered the market with hopes of making it to the middle-class. The city simply couldn't absorb all of its new entrants. As for attracting educated foreigners, how many M.A.s in Physics does a casino need?

Stockton, CA and Merced, CA have become notorious for their high rate of foreclosures. Their residents are mainly non-college-educated workers. While that situation may change because of the new UC in Merced, for now, if you have a PhD in engineering, would you end up in Merced, CA or San Jose, CA? (And yes, that's a rhetorical question.)

When residents bought homes outside but near Boulder and Denver, Colorado, they forgot the law of supply and demand. When you live near cities with only 1/2 million (Denver) and 100,000 (Boulder) residents, there's not enough demand to justify a large, immediate increase in supply. While Denver does have Qwest and ProLogis, there aren't enough companies there to sustain an inflow of high tech talent. In contrast, in Santa Clara County, I get lost driving in Sunnyvale because there are so many little streets that lead to massive warehouses filled with tech companies I've never heard of.

Greenspan is still correct in his pro-immigration view, but there's a missing step. We need companies to open new branches outside of the major cities. Perhaps if the government changed the H1B program to increase the cap on companies willing to place educated workers in mid-sized or smaller cities, educated immigrants could be a boon to overlooked cities suffering from the economic downturn.

Greenspan has recovered some of his credibility--he said this in November 2002:

It's hard to escape the conclusion that at some point our extraordinary housing boom...cannot continue indefinitely into the future.

Then again, this is the same person who said this in October 2004:

[Home price declines] "likely would not have substantial macroeconomic implications... (2004)

And this gem comes from October 2006:

I think the worst of this [housing price decline] may well be over. (2006)

At the end of the day, we need more skilled immigrants or immigrants willing to work hard, but the question is where should they go? State governments and smaller to mid-sized cities should be more active in working with national and local corporations to set up the infrastructure necessary to attract foreign talent. It's a win-win situation for everyone. Local residents and businesses would benefit from higher prices due to increased demand. Foreign talent gets to come to America and make more here than they would elsewhere. I hope the local governments of Merced and Stockton are reading and thinking outside the box--if they don't follow the Rafat Rule ("being pro-immigration necessarily means being pro-capitalism"), more Southern cities like Louisville, KY, will beat them to the punch.