Chancellor OH! Bama
Research for Online Investors

by John Dalt

02/25/09

The Chancellor addressed the nation last night. The parallels are eerie. In my elementary school, Hitler was never referred to as a socialist. Did you know that Hitler sent Vladimir Linen to Russia in 1917 to ferment a revolution? Australia beware, you may want to bar Hillary a visa!

One of the newsletters I read repeated their salutation to Oh! Bama, the ‘rally killer’ this morning. After his address last night, the foreign markets sold off. His lack of specifics is madding. Investors want to know what plans are in place to stabilize the financial markets. The address was little more than his pat election stump speech. There is more to governing than elections. Most of the ‘stimulus’ spending does not kick in until 2011, just in time for the next election cycle!

I was reminded today of a great way to play the increase in oil prices. If you believe the price of crude will rise as the economy improves, you may want to look at Prudhoe Bay Royalty Trust (BPT). BPT collects royalties on oil produced in the Prudhoe Bay oil field. As oil goes up, their royalty increases. They currently pay 8%.  

The current market downturn has forced us out of some good stocks in our long-term portfolio.  This is tough, but it is important to stop the bleeding and conserve money, so we stay in the game.  The murky business climate coming out of Washington, combined with earnings season has really hammered our portfolio.  Investors are trying to re-price values they assign to stocks on a P/E ratio.  As earnings go down this lowers the value of the stock.  In addition, in a bear market investors tighten the ratio.  Here is a little back of envelope math to show what is happening. 

BULL Market: 

ABC Company earnings per share              5.00  

Bull Market P/E                                          15 

Share Price:                                                $75 

BEAR Market: 

ABC Company reduced earnings per share  3.50 

Bear Market P/E                                          9 

Share Price:                                                 $31.50

This explains what is happening to good companies in a tough business climate. If they report lower profits, or even forward guidance that is bearish, their stock takes a beating. Even if they are maintaining profit levels, investors are lowering the multiples they price into their shares. Then you end up here: 

Bear Market: 

ABC Company maintains earnings              5.00 

Bear Market P/E                                         9 

Share Price:                                                $45.00  

Long-term investors are still sitting on the sidelines, waiting for the market to give a clear signal that the bottom has been reached. Everyone has their opinion, mine is we see a rally, and then head back down into the 600’s on the S&P500. If I thought we were headed up from here, we probably would not sell any long-term positions, as the prices are discounted to ridiculous levels, but they might get even cheaper! It seems the only players in the markets are traders, and long-term value investors. Warren Buffett and others like him are making deals that will pay off in the long term. I would love to invest like Mr. Buffett, but he makes mistakes too. Buy and hold is great if you can stand a 50% drawdown. I cannot, and I do not think you pay me to make recommendations that have that possibility. When one of our stocks breaks down, we have to get out preserving out capital. BRK is down 45% off highs of last summer! Mr. Buffett lives in a different world than our subscribers, he does not have bills to pay, children in college, etc. Buy and hold sometimes puts blinders on investors. Looking at portfolios of major funds, I am amazed to see holdings in newspapers. This business is 2009’s answer to wealth destruction. Berkshire owns the Buffalo News. If they had sold it when profits began evaporating, think how much better they would be with cash to invest in other promising businesses with a future. Do not get me wrong, I am not trying to criticize; I just do not think I could recommend any newspaper business as an investment.

A cartoon that fits tax time and the new spending plans in Washington. 

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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