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Sunday, July 13, 2008


Happy Bastille Day (tomorrow)

Turns out the blog has had quite a few predictions from last year that came out well. One was that quite a large percentage of hedge funds would go under in 2008, and that is already in the well. Quite a few others have announced moratoriums on investor withdrawals, indicating they are in trouble too. The latest indication is that hedge fund manager compensation formulas are starting to abandon the 2 and 20 standard that caused them to swing for the fences all of the time. (That formula results in management fees of 2% of assets plus 20% of investment profits). Instead we are starting to see longer term incentive formulas that at least make an attempt to align manager and investor interests. Still, I would not go near a hedge fund. Regulation is a good deal for investors, far outweighing the investment advantages delivered by managers of unregulated funds. Of course, I am not really a fund investor to begin with.

Another prediction on the money was that the Supreme Court would uphold an individual right to firearms, though limited reasonably. This was based on my originalist belief that the Constitution means what it says. To change the meaning and intent of the Constitution, there is an amendment process.

Some have asked me what I think of the Louisiana case where the top Court determined that the death penalty was not appropriate in a child rape case. I think this decision wasn't unreasonable simply on due process grounds, since the death penalty does not seem to quite fit the crime involved (though it would if the child had been killed).

Death penalty opponents would like to see the Court eliminate all executions based on the "cruel and unusual punishment" clause, but that would be Constitutionally incorrect given that the death penalty was not considered that when the document was written. It seems to me that once there is a consensus (as in most of the world) against capital punishment, a specific amendment should be proposed.

This has been a week where the world has said farewell to many fine souls who contributed much to the planet's progress and entertainment. Dr. DeBackey performed the world's first heart bypass surgery in 1964, and many of us have had our lives extended by that operation. Tony Snow played a significant part in the early success of Fox News Channel, then joined the Bush Administration as its Press Secretary, perhaps becoming the most popular figure in that unfairly maligned administration.

Sir John Templeton popularized global funds and international investing, calling the Japanese markets with special precision. His Templeton Fund Group was the exception proving the rule, a family of funds that provided exceptional and consistent performance for its investors. Mr. Templeton sold his fund company and devoted the rest of his life to philanthropy, particularly advocating causes that reconciled religion with science (reminiscent of the great American Quaker, Rufus Jones in the 1940's). Templeton was a popular guest on Wall St. Week with Louis Rukeyser and a member of that show's Hall of Fame. I particularly remember his appearance the week of the 1987 stock market crash, when he correctly reminded viewers that over any meaningful period in American history, no one who owned stocks outright (that is, without margin) had ever lost money. His calming message in the face of what seemed to be a cataclysmic market event was an initial step in the market's great recovery.
Mr. Templeton became a British subject and was knighted.

Bobby Murcer was a darn good ballplayer for many years, and also became a very good announcer. However, what I remember was his inability to hit homers at Shea Stadium during the two years the Yankees used it as their home field while Yankee Stadium was being refurbished. This had an unfortunate impact on Murcer's career, since Yankee fans were determined that he should be what he was not - a power hitter a la Mickey Mantle - but he got his act back together when he was traded to the Giants and Cubs, and continued to play well during his second term with the Yankees. By the way, as a Yankee announcer, Murcer was one of the few (along with Ken Singleton) who is not an annoying "homer."

Besides founding the Benihana restaurant chain, Rocky Aoki was a daredevil sportsman who ballooned across the Pacific Ocean and drove motorboats at frightening speeds. The miracle was that he lived as long as he did.

It's nice that David Wright was a last minute addition to the All Star Team replacing an injured player. After all, he is likely to be a legitimate MVP candidate this year. I am not a fan of the fans voting players onto the All Star team, but since I have so little interest in the game, I'll shut up about that little issue.


Of course the stock market is a shambles, but one thing to understand with all the earnings reports coming out this month is the concept of quality of earnings. What I want to see is how much of the reported earnings come down to shareholder equity. For example, compare the earnings reports of Fastenal (FAST) and General Electric (GE). Though neither stock is cheap on a price to book basis, I am encouraged by the increasing book value per share of Fastenal, while with GE, there is frustration that their nominally huge earnings seem to disappear somewhere when you get to the balance sheet. Yes, GE is moving gradually toward the value range, but it has more to do with reduced stock price than increasing shareholder equity.

I think this is less a knock on GE's basic businesses and strategy than a reflection of the aggressive accounting techniques the company used to smooth earnings during the Welch period. The Company's investors will be paying for that for a long time yet, as the "Welch premium for being GE" is totally removed.

Last Wednesday, I bought another 100 shares of Loewe's (L) at 47.03, a value buy.

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