Posted by Davy Bui on September 1st, 2010 in Enlightened-American Portfolio
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THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET

• Enlightened-American Portfolio: +1.0% through August, 2010 (my actual IRR, including cash balance)
• DJIA: -4.0%
• Nasdaq: -6.8%
• S&P 500: -5.9%
• DJ Wilshire 5000: -4.9%
• Russell 2000 (smallcap): -5.0%

Emblematic of much of the year’s trading, our portfolio managed to eke a positive gain for the month even as the major indices lost 5+% en masse. Of course, we have seen these imbalances swing just as wildly back in the other direction in recent months so now is not the time to get too congratulatory or comfortable. Finance folklore holds September and October as particularly eventful months in the market trading so plenty of action lies ahead.

Nevertheless, a 1% return this year while retaining significant cash holding must be viewed as a success. As members know, I have begun to slowly put that money to work, in small companies entirely dependent on the US economy for their well-being. While both businesses are struggling, I conclude that both are sustainable over the long term and are too heavily discounted at the present. At times, successful investing must be accomplished by pinching your nose while buying “stinkers” and hopefully this is one of those times.

Still, an interesting approach continues to gain hold in my thinking. As reports of municipal and government struggles to deal with burgeoning debt and welfare obligations continue to come in, the idea that corporations — beholden to no one (not even shareholders in some practical cases!) and adaptable to all sorts of economic conditions — may present the best vehicle for investors to ride out any upcoming turbulence. However, not any ol’ corporation will do; we must seek out those monoliths which have become institutions in themselves and of course, the price must be right.

Members have already witnessed investments in several large mega-caps, with a few more names in serious consideration. All offer decent-to-attractive dividends which promise to increase annually.

Don’t expect any moves today, when stocks are up 3-5% across the board but don’t be surprised if further mega-cap additions are announced.

[This post excerpted from the latest EA-Premium portfolio overview.]

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Posted by Davy Bui on August 18th, 2010 in Gurus, Pro's Picks
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If you have a strong case for other managers I should include, send me an email or post in the comments below. Also, keep in mind that I use a perl script to parse these filings into the spreadsheet format and some information may be misrepresented. As always, YMMV.

• Seth Klarman Q2 2010 13F Holdings Spreadsheet
• Bruce Berkowitz Q2 2010 13F Holdings Spreadsheet
• ValueAct Capital Q2 2010 13F Holdings Spreadsheet
• ValueAct Small Cap Q2 2010 13F Holdings Spreadsheet
• Mohnish Pabrai Q2 2010 13F Holdings Spreadsheet
• David Winters Q2 2010 13F Holdings Spreadsheet
• Jim Puplava Q2 2010 13F Holdings Spreadsheet
• Boone Pickens Q2 2010 13F Holdings Spreadsheet
• David Einhorn Q2 2010 13F Holdings Spreadsheet
• John Paulson Q2 2010 13F Holdings Spreadsheet
• Meryl Witmer Q2 2010 13F Holdings Spreadsheet

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Posted by Davy Bui on July 28th, 2010 in Market Commentary
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Another week, another ride — in this case, a ride up as the major indices got back to even on the year and erased 2010 losses. Since most stocks enjoyed gains last week, a fair number of stocks dropped off our watchlist and a few saw double-digit gains. However, we must remain unaffected by the markets’ whipsaw action and focus on the true drivers of long-term investment growth.

As such, the two names catching my eye this week is one of the few stocks which saw a loss last week and a new name to the list — both operating in the healthcare industry.

Johnson & Johnson (JNJ) is enduring a tough year, with broader health care reform dovetailing with recall and FDA issues to drive the stock lower. And yet, is there any doubt JNJ will weather this storm in fine condition? The Enlightened-American has owned JNJ in the past but we sold due to disinterest in the stock’s slow-and-steady prospects.

Of course, this was in a pre-2008 market crash world — it is one thing to state preservation of capital as a main investment objective but perhaps it takes a traumatic experience like late 2008/early 2009 to truly imprint this paramount goal into an investor’s psyche. In these uncertain times, the prospect of JNJ’s slow-and-steady returns coupled with a 3.5% yield that promises to grow annually looks mighty tasty.

The other enticing watchlist stock operates in the health insurance space. Like many of its peers in the insurance space, it sells at a sizable discount to free cash flow but faces the spectre of health-care reform and the uncertain prospects which come when Uncle Sam is a large customer. Combine this with the paltry dividends offered by the industry as a whole and I have been reticent to move into this space.

However, readers should be aware of my bias toward dividends  and draw their own conclusions.

[This post is excerpted from the latest watchlist article from EA-Premium.]

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Posted by Davy Bui on July 26th, 2010 in Economy
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In a case of be careful what you ask for, Bloomberg looks at US Treasury yields, the government’s borrowing cost, running at record lows: Deficits Don’t Matter as Geithner Gets Lowest Yield.

I am reminded of the famous Eagles song, “Hotel California” and the line about checking out but never leaving. But perhaps the more illustrative example would be the adjustable-rate mortgages that helped inflate the housing bubble.

Remember as long as the US deficit is not reduced, in effect, it is constantly being rolled over, i.e. refinanced. Thus record low yields on the 2 year and 10 year Treasurys could allow the feds to gorge on debt today only to face higher yields when the debt matures tomorrow, much as the subprime borrower used ARMs to buy more house than they could afford, eventually losing the house once the rates reset and they were unable to refinance.

Bernanke, Geithner and their cohorts are making a massive bet that deficit-financed stimulus will allow the economy to grow into its ability to pay for this debt. However, nearly two years after TARP and direct economic intervention, true economic growth has yet to occur, as evidenced by stagnant wages, high unemployment and anemic spending — key drivers for a 70%-consumer driven economy.

Is the US at risk of a market “margin call”, a la Greece? After all, Japan has managed to deficit spend for decades (to little avail) without having interest rates spike. Greece is now experiencing social unrest amidst harsh austerity measures while Japan’s lost decade is often a reference point for the current US economic plight. While major differences exist between our situation and theirs, neither outcome looks promising.

However, the key quote from the article comes from Geithner:

“If you look at financial markets, say, look at how much the Treasury is paying to borrow today, there is a lot of confidence, not just of Americans but investors around the world, that we’re going to find the political way to do it,” Geithner said. “There’s no alternative for us. We’ll be able to do that.”

Any observation of the American political landscape throws much doubt onto this statement. Washington has never been more polarized, despite the election (or perhaps because) of Obama. When the time comes, the political will and reconciliation needed to accomplish “austerity” measures most likely won’t exist.

After all, if the Euro crisis has shown us anything, it is that markets enforce discipline, not politicians and bureaucrats.

Who can forget Bernanke’s infamous assertion that the “subprime contagion is contained”? Now his partner-in-crime wants us to trust potentially the largest subprime borrower of them all, the US Government?

Heed Bernanke and Geithner at your own peril.

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Posted by Davy Bui on July 19th, 2010 in Market Commentary
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The market’s refusal to set on a clear course in either direction demonstrates the level of uncertainty now confronting the economy and investors. Whereas many pundits had previously posited economic recovery was clearly at hand, the latest round of economic data and indicators are forcing a double-take at such a hastily drawn conclusion. Today, the latest report to give cause for caution came from the housing sector as homebuilders’ confidence fell to levels last seen during the height of the financial crisis due to concern over the tax credit expiration.

Additionally, earnings reports have been spotty with some notable disappointments mixed in with the expected upbeat forecasts. Just hours ago, International Business Machines (IBM) reported a second consecutive decline in services revenue, indicating that a rebound in corporate spending is not yet upon us.

Do we have a better handle on which way the economy and markets are going to head from here? Sadly, no. Thus we continue to focus on finding specific value situations and refrain from making bets that hinge on calling the macro situation correctly.

In recent weeks, we have opened several new positions in stocks. However, the market’s trading range has precluded us from adding more to these positions.

The market’s continued downward drift has added significant new names to our watchlist, with two more making this week’s list. Both stocks are retailers, one operating in the food segment and the other in clothing/fashion.  The grocer carries much higher capital costs and thus delivers lower returns while the clothing retailer’s prime task is managing its brands and inventory which requires less capital investment.

Another point to take into consideration is the admonition from noted value investor, Mohnish Pabrai, to never invest in a retailer. Today’s top trends are tomorrow’s faux pas and predicting which will prevail is a fool’s errand for most, decidedly non-fashionable investors.

[This post is excerpted from the latest watchlist article from EA-Premium.]

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Posted by Davy Bui on July 5th, 2010 in Enlightened-American Portfolio
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THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET

• Enlightened-American Portfolio: -1.2% through May, 2010 (my actual IRR, including cash balance)
• DJIA: -6.3%
• Nasdaq: -7.0%
• S&P 500: -7.6%
• DJ Wilshire 5000: -6.5%
• Russell 2000 (smallcap): -3.9%

Even as our portfolio drifts into negative territory, our performance gap relative to all the major indices widens this month. And while relative performance is small consolation for losing money, we must be realistic about investment objectives. Achieving absolute returns is nearly impossible with a long-only, retail investment strategy (i.e. stocks, bonds, no esoteric asset classes). As Buffett so often stated during his hedge fund days, our aim must be to lose less than the market during these downturns and so far, so good.

Yet even with the market at 2010 lows, there remains a paucity of cheap, attractive investment opportunities.  Other than an energy services company detailed for EA-Premium members, I am struggling to find situations worthy of substantial capital investment. Several stocks remain on the cusp for serious consideration but are not yet screaming buys.

My post title, “Rally In Remission”, assumes too much. Unlike many market pundits, I am not convinced the awesome rally begun in March 2009 was not itself a remission from a larger, secular and still-present bear market. If so, it is possible the remission rally is over and another market downturn is now ready to resume. While my investment strategy is not predicated on being able to spot and call market upswings/downturns, our cash holding is nevertheless well over 40% and positions us well should we head lower.

As always, I cannot condone deferring investment on fears of further market drops. If value presents itself, we must buy with full awareness that prices could go still lower. Thus, it is important to build our positions in stages, giving us room to average down and take advantage of future lower prices.

[This post is excerpted from the latest Enlightened-American Premium portfolio update.]

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