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Portfolio Holdings & Strategy: May 2010

My single largest holding continues to be the SPDR Gold Shares ETF (GLD). I’d prefer my gold bullion play to be the Central Fund of Canada closed-end fund, which also holds silver bullion, but it has been selling at a premium. So I settled for GLD.

I also own four gold mining plays: Newmont Mining (NEM), Goldcorp (GG), Agnico-Eagle Mines (AEM) and the Market Vectors Gold Miners ETF (GDX). NEM, GG and AEM have reported good quarterly results, and if the price of gold holds up, I expect all these to do well. GDX is a modified market capitalization-weighted index of publicly traded gold and silver miners. I bought GDX to ensure I’d get proper diversification of major gold miners.

In the tech/media/telecom area, I hold the following stocks: Microsoft (MSFT), Geeknet (LNUX), DirecTV Group (DTV), BCE Inc. (BCE) and a small position in Media General (MEG).

MSFT is up a lot since I bought it for less than $19 a share, but I’ve held on since it looks to have more upside. The company is entering its strongest product upgrade cycle ever. LNUX is a small outfit with a collection of web-related assets. Its e-commerce business is more valuable than the market cap. It will be interesting to see what management does. I have sold enough of DTV to get my original capital out, so the holding is a free ride for me. MEG has been a disastrous investment, and represents permanent loss of capital. BCE pays nice dividend in Canadian dollars, which feels good since I’m living in the US.

In the property & casualty insurance sector, I own Fairfax Financial (FFH/Toronto), EGI Financial (EFH/Toronto), and NKSJ Group (8630/Tokyo).  Fairfax and EGI are based in Canada and NipponKoa in Japan. Fairfax is one of my largest holdings in the portfolio, but I’ve sold enough of it to get my original capita out, so it is a free ride. NKSJ formed out of the NipponKoa merger with Sompo Japan earlier this year.

King Pharmaceuticals (KG) recently got hammered because it looks like its new tamper-resistant pain drug won’t get government approval.

Cheung Kong Holdings ADR (CHEUY) has been up nicely since I bought it during the global financial panic. Li Ka-shing has been buying the stock.

I continue holding Capital Southwest (CSWC) and a small position 3i Group PLC (III/London). CSWC is up recently yet still sells for less than book value. I expect to hold this stock for years to come. And it is the only stock I own where my broker is instructed to reinvest the dividends. 3i is down a lot since I bought it several years ago. It has made some very good payouts in the past, but I must say it may prove to be a lousy investment like MEG.

Lastly, I hold Superior Industries International (SUP). I don’t expect much from this until things pick up in the auto sector. Yet management maintains a strong balance sheet and I’m patient with the dividend near 4%.

My cash position is relatively small -- right around 5% of assets.

Monday, Monday, Gold, Etc.

Yet again, things have been busy in my non-blogging world. And since my non-blogging world puts food on the table, you know which I must pay attention to.

While non-gold-related holdings account for the majority of my portfolio, the fact that I put roughly 20% in gold mining stocks, on top of the 10% position in GLD last summer, has never been regretted by yours truly.

I could regret my commitment to gold and gold mining stocks at some point. But I don't think so. If I lived in Canada or Australia I may not have gone in as heavily, yet I suspect I'd still have some position.

We saw a real run on the banks in the Panic of 2008. Last week we saw some sort of panic, and I think it was more than just a "fat finger" mistake. And at some point -- I don't know when, it could be several years in the future -- we'll see a government debt panic.

So, while I'll acknowledge the possibility that I may one day wish I hadn't had my exposure to gold and gold miners, I also think I may one day wish I'd put more into the sector. No one knows the future. We're all in the fog of history.

Peter Brimelow discusses gold's great week last week in his MarketWatch column. Here's part:

Edel Tully, the gold analyst for UBS, also flagged this demand for bullion in a comment on Friday:

"Our Zurich and Geneva sales desk experienced exceptionally strong demand for small bars and coins...demand yesterday was the greatest that we have experienced since 2008...Coin demand is so intense that supply is struggling to match... German investors have turned to gold."

This is a moment when an accurate strategic view could be invaluable. The remarkable Australian service The Privateer offers one forcefully in its weekly commentary:

"Last week, we titled this report 'A Watershed Week For Gold?' Note the question mark (?) at the end of the title. This week we are removing the question mark. The market 'action' of the last five days has definitely confirmed the hypothesis....what was signaled last week by Gold refusing to go down as the world debt markets seized up again was confirmed this week.

"This time, there are only four global investments left fighting it out for supremacy. They are, in no particular order, the US Dollar, US Treasury debt, German sovereign debt - and GOLD...in the face of this renewed headlong rush into 'safety', Gold is up substantially in terms of EVERY major paper currency in the world - INCLUDING THE US DOLLAR!"

And more:

The idea that something seismic is happening to gold is definitely gaining credence in more conventional, non-gold bug investment circles. James Steel, gold analyst at HSBC, commented on Friday evening:

"Gold seems unlikely to retrace significantly until the reason for its rally -- escalating sovereign risk worries -- abate...we believe that buying interest in gold is unlikely to diminish appreciably, short of a clear resolution to the crisis."

MarketVane's Bullish Consensus at only 78% -- last year's high was 89%. And our Hulbert Gold Newsletter Sentiment Index is at 46.6%. versus 68% last year.

Food for thought. There's no shortage when it comes to gold.

Levy Harkins Moves Into Gold Miners

If you caught the hour-long Jim Grant-fest on Bloomberg TV's Taking Stock program that I've blogged about, you saw Michael Harkins. He's a partner in the New York-based firm Levy Harkins, and has contributed to Grant's Interest Rate Observer and (I'm sure) appeared at Grant's conferences.

Harkins and his partner write this in their partnership letter last month:

In our last letter to you, we said we knew better things to own than gold bricks.  Then we almost instantly began buying gold mining stocks.  We don’t mean to be perverse, things just work out that way sometimes.  We have been buying an exchange traded fund that owns shares in the largest gold mining shares because the shares have severely lagged the rapidly rising price of gold.  You need no reminders from us as to why we think inflation is likely; letter after letter is full of our exhortations on that score. But for the first time in living memory, gold stocks are cheap on an honest to goodness earnings multiple basis, and if gold goes higher, they will really look cheap.  Note, this is not a tracking fund, which can expose long term investors like us with terrible tracking errors.  The trust owns the underlying shares themselves, and gets us instantly diversified, so we don’t accidentally own the mine that has the cave in.

I suspect, though I don't know, they may be talking about the Market Vectors Gold Miner ETF (GDX), which is one of my plays in the gold mining sector.

What they say at the end about diversification is true -- that's why I bought GDX as well as Newmont (NEM), Goldcorp (GG) and Agnico-Eagle (AEM).

If someone wants to not risk buying a few individual gold mining companies, GDX is a way to go. Another would be to invest in the Tocqueville Gold Fund, which is actively managed.

And on a related note, news broke overnight that two Aussie gold miners -- Newcrest and Lihir -- were merging. If the merger goes through, the new entity will be one of the largest gold miners in the world. Interestingly, Lihir has until June 8 to field competing offers, rumored to be from the likes of Newmont and Barrack. We may be on the verge of a new wave of consolidation in the mining industry.

Bearing Asset's Bill Laggner on Greece, Goldman and More

King World News has a new interview with Bill Laggner of Bearing Asset Management. He discussed the debt problems of Greece, other EU countries and, of course, here in the US. He also talks about Goldman Sachs -- you might remember Laggner and his partner Kevin Duffy being interviewed by Barron's some months ago. They revealed being short Goldman and I imagine that move has paid off nicely.

Laggner also talks some about gold. I know Bearing owns gold, but I don't know if they're just in bullion, or have exposure to gold mining stocks.

Three miners I own -- Newmont Mining (NEM), Goldcorp (GG) and Agnico-Eagle Mines (AEM) -- have all reported good results lately. Especially NEM. This group, along with my fourth gold mining play, the Market Vector Gold Miner ETF, is in the black with gold's move up this past week. We could be seeing the start of the gold miners no longer lagging the metal itself.

If that's the case, I'll be a happy camper. I have conviction that will happen at some point -- but I don't know when.

Capital Southwest Sells Long-Time Holding

Portfolio holding Capital Southwest (CSWC) doesn't make news often. Today it announced it is selling its wholly-owned Lifemark Group for $84.75 million in cash:

"Lifemark has been part of the Capital Southwest portfolio since July 1969, when we made our initial investment. As our longest investment holding, Lifemark is an example of how our capital enables management teams to consistently think and act long-term," stated Gary L. Martin, chairman and president of Capital Southwest. "It is in the best interest of our shareholders to pursue this transaction now. The market is ideal for us to use the capital from this sale to invest while the opportunity is high and the availability of alternate funding is low. This allows us to add companies to our portfolio that provide a great long-term benefit and return on investment to our shareholders."

Capital Southwest estimates that $46.2 million of the proceeds will be retained for future investment and $24.4 million will be paid in long-term capital gains tax on behalf of its shareholders. Based on an individual tax rate of 15%, it is estimated individual shareholders will receive a net tax credit of $3.73 per share effective 12/31/2010 from this transaction. The transaction is subject to the approval of the State of California.

CSWC has seen its stock price move up nicely recently. Yet the shares still trade at a discount to book value. While it is by no means a big dividend payer -- yielding less than 1% last I checked -- it is the only holding where my broker is instructed to reinvest the payouts.

No one can predict the future, but I expect this is a holding that will remain in the portfolio for many years to come.

Jim Grant on Bloomberg's "Taking Stock" Program

I mentioned the other day that Jim Grant was on Pimm Fox's Taking Stock program for the full hour. I didn't know of a link to it, but David of Finance Trends Matter was kind enough to provide the link in the comments section.

David posts the link on his blog, which you can find here. Check it out.

Marty Whitman used to say that most of the news we hear and read regarding markets is "noise." That has never been more true than now. And that's why Grant's appearance on Bloomberg and his op-ed in the Washington Post that I posted about a few days ago are so welcome -- not to mention valuable.

Fred Hickey Q&A with Barron's Online

Barron's Online is running a short interview with Fred Hickey, editor of The High-Tech Strategist newsletter and one of the most interesting members of the Barron's Roundtables.

Hickey talks about a lot of tech companies that I don't own. But one that I do is Microsoft (MSFT), which is a large holding in my portfolio. Hickey has been bullish on MSFT recently, and hasn't changed:

Going forward, all the new product upgrades will be a boon. I had taken some shares off, in Q4, when the stock was very strong, cutting the position in half. This was the only quarter you could see any disappointment. I've been saying it can go up 50%, 45%. They had blow-out numbers in Q4, they were outstanding. I think you'll see those numbers return when we see July and September and January numbers. I think we could see Microsoft regain some cache. People were very negative a couple years ago. People called it the next Smith Corona, which was insane. People thought they had lost their way. It takes time to turn around that kind of sentiment. There's the threat of Google with its "Chrome" operating system software, and the threat of Apple's Mac gaining share. The Internet search business, with Bing, would be upside if it works. If Bing continues to gain share, and they add Yahoo's piece to it, then it's all upside. You're buying Windows, and Office, and Sharepoint [collaboration software], which is fantastic, and MS Exchange [email server software], and they all work together, and it's the dominant business platform. There's some concern about their position in phone [with Windows Phone 7 software], from Apple and Google, but I don't know why. It's not a big part of their business.

And here's his view of the big picture:

It's more cloudy than it's ever been because there's more intervention in the market than there's ever been. The market is not an effective pricing mechanism right now. The economy wouldn't be rebounding as it is without this economic stimulus that is really unprecedented in this country's modern times. And I think that's what's driving this market higher. It is a liquidity-driven market. I worry about that. I would prefer to see a crisis occur. I don't think the path we're on is the right one. I don't think we should be printing money. Coming out of that bubble in 2002, we saw tremendous asset inflation that didn't help our competitiveness, and we were kicking the can down the road. We're going to get a short-term labor market rebound, I'm afraid, but it's not going to be a real one.

I'll only add that nothing has happened to make me re-think my gold and gold mining stock positions.

Jim Grant: Let Bankers Fail

With financial legislation pending in Congress, Jim Grant's op-ed in today's Washington Post (HT: RealClearMarkets.com) makes for timely reading (and re-reading). A few parts:

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits.

Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail. Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors.

And this further down:

"The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's. Gradually and by degree, starting in the 1930s -- and then, in a great rush, in 2008 -- the government has nationalized it.

Finally, this:

Until 1999, Goldman Sachs was a partnership, with the general partners bearing general and unlimited liability for the firm's debts. Today, Goldman -- like the vast majority of American financial institutions -- is a corporation. Its stockholders are liable only for what they invested, no more. And while there are plenty of sleepless nights, the constructive fear of financial oblivion is, for the senior executives, an all-too-distant nightmare.

The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism. By all means, let the bankers savor the sweets of their success. But let them, and their stockholders, pay dearly for their failures. Fair's fair.

Obviously, I think you'll want to read the ENTIRE thing. It'll prove well worth your time.

Also, Grant appeared on Pimm Fox's "Taking Stock" program on Bloomberg TV for an entire hour earlier this week. Hope you caught it. It may be archived on the Bloomberg site. I haven't had time to search it. But anyone who didn't see the program should check around this weekend.

Another Example Why Thomas Donlan is THE Best Editorial Writer in America

From his latest in Barron's:

Bernanke is the man who has done more to put off the day of reckoning than anyone else in the world, and he is providing liquidity by the supertanker load.

He assured the world that he intends to carry on:

"Today, the economy continues to operate well below its potential, which implies that a sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable."

Instead, Bernanke thinks the U.S. should charm the world into extending more credit, by offering what he called "a credible plan for meeting our long-run fiscal challenges."

A plan -- not action. As Robert M. Bleiberg, who thundered from this page from 1955 to 1991, said many times, "One needn't be a flim-flam man to be a central banker, but it helps."

As if to demonstrate, Bernanke added: "Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term."

A free translation: If we can con the world into thinking we are serious about curbing our deficits and reducing our debts in the future, the world's investors and savers will lend us even more money at lower prices right now. Then we will have more economic growth and we will curb our deficits without pain.

It's humbug. Economic growth comes from savings and investment, not credit-card consumption.

More on Microsoft from Fred Hickey in Barron's

Microsoft (MSFT) is a major holding in my portfolio. So Alan Abelson's column in Barron's (scroll down) caught my eye when he wrote about Fred Hickey (of The High-Tech Strategist newsletter) and Hickey's continuing bullish view of the company:

Not only has the company's Widows 7 proved a big winner (in contrast to its predecessor, Vista, which was a disappointment for sure and even a borderline bust), but Fred has high hopes for the new operating system that he confidently expects to enjoy a wave of demand from business buyers. He also believes the upgrade of what he calls Microsoft's other cash cow, Office, shipments of which are slated to start in June, will meet a warm reception.

Moreover, he is quite enthusiastic about relatively recent and promising new additions to the product line, like the SharePoint server, Bing search engine and Microsoft's "Project Natal" for the Xbox 360 game console, scheduled for unveiling June 13.

He contends that the stock (ticker: MSFT) is still something of a steal at 16 times depressed trailing earnings. Fiscal third-quarter profits, you might take note, are due to be released Thursday.

As Fred points out, Microsoft's software is firmly entrenched in most large business enterprises and its sundry software offerings are "complex and interoperable," while Google's comparable products just aren't in the same league.

"In this overpriced, dangerous stock market," he says, "I regard Microsoft as a great gift." Despite his usual aversion to hyperbole, he calls it "the most valuable tech stock in the universe." And, he waxes on, "Microsoft generates huge cash flows, pays a nearly 2% dividend, has a stock price upside of, say, 50% if the bull market continues to run, and limited downside if it does not."

I agree this is an overpriced and dangerous market. But an upside for MSFT of 50%? I don't know about that, yet would love to see it come about.