Investing Ideas

An excellent article by Bill Gross about how the FED is underreporting inflation. If you are a regular reader here you probably read this in my Article “Here’s a TIP buy TIPS” Bill Gross has an interesting chart in his article showing CPI composite for 24 countries. The article is a must read.
My simplified version of Bill Gross’ article is

Housing
The housing component of CPI is based on how much the house would rent for. The large increases in the cost of buying a home these last few years are not in the CPI since home prices went up but rent has not risen as much. Who cares that the majority of people own homes or want to buy homes, lets look at rent to reduce inflation numbers.

Geometric weighing and Substitution
Using geometric weighing, Goods and Services which increase in price are given lower weight because people would consume less of those goods and services.  So if milk and bread increases in price the government assumes we will eat less milk and bread. Substitution outright replaces what you consume, it says if people cant afford Steak they will buy burgers so lets look at burger prices instead. CPI is supposed to calculate how much the costs increase to live the same quality of life. The current CPI calculates inflation for a deteriorating stand of living.

Core Inflation
So how do you top the brilliant ways to reduce inflation pointed out above? Use Core CPI. The fed and government use core CPI which ignores Food and Energy.  Like i’ve said before I would like to see these people who do not eat, do not drink, do not drive or use electricity. The lower a persons income the higher the effect from Food and Energy. Someone on minimum wage or lower will spend 30-40% of his money on Food and Energy which the really wealthy might just spend 5%-10%.

I propose a solution, before becoming a fed governor the person has to live on minimum wage for 1 year. That should sort this out.

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One of the best places to get some great investing ideas is the 3rd Annual Value Investing Congress West which was held on May 6th and 7this in progress as i write this. The Value Investing Congress is a collection of some of the best and brightest value investors in the country. Most of the the speakers at this congress follow the Graham/Fisher/Buffett form of investing and will be sharing their best investment ideas.
This year the Speakers and their investment ideas were

I cannot guarantee the accuracy of the list above since im collecting the information from other articles and blog posts.

Disclosure : I own shares of Berkshire Hathaway. I do not have positions in any of the other companies mentioned above.

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Motorola peaked in 2000 at at about $60 per share, recently the shares traded as low as $9 giving it a market cap of just 20 Billion.

Value Trap?
Its easy to look at Motorola’s revenue and earnings and say that the company has performed badly. Motorola’s revenue dropped from 42.8 Billion to 36.6 Billion. Net earnings dropped from 3.6 Billion to a loss of 50 Million. Mobile Devices sales have dropped 33 percent. The company has not had a hit phone like its amazing Razr for quite a while. The handset business has fickle customers, people with no loyalty to a particular brand. Research and Development expenses are high and ongoing because a lot of people want a new, cool and better phone every couple of years (some change phones every year or less). Motorola has competition at the high end from Apple’s iphone and RIMMs Blackberry and at the low end there are more handset manufacturers than ever before.

Value Investment?
While the handset business has issues, thats not all Motorola does. It has two other business segments Home and Mobility networks and Enterprise Mobility Solutions. Click here to see the wide range of Motorola products and services. Since the company reports as a single entity most people miss how well the other segments are performing. This is why activist investor Carl Icahn has been pushing for Motorola to split the company. He wants them to either sell or spin-off the under performing handset division and Motorola has agreed. So lets value the company as two separate businesses? the handset business aka Mobile devices and everything else. While Motorola has been losing market share in the handset business but at the same time it Enterprise Mobility Solutions business is growing very rapidly.

Motorola’s business segments data from Motorola Q4 2007 Earnings Press Release and Financial Tables
1. Mobile devices. - For the full year 2007, sales were $19.0 billion, a 33 percent decrease compared to 2006, and the segment incurred an operating loss of $1.2 billion, compared to operating earnings of $2.7 billion in 2006.

2. Home and Mobility networks. -For the full year 2007, sales were $10.0 billion, a 9 percent increase compared to 2006, and the segment generated operating earnings of $709 million, compared to $787 million in 2006.

3. Enterprise Mobility Solutions. - For the full year 2007, sales were $7.7 billion, a 43 percent increase compared to 2006, and the segment generated operating earnings of $1.2 billion, compared to $958 million in 2006.

The Home and Mobility networks and Enterprise Mobility Solutions segments combined had operating earnings of 1.9 Billion, this gives Motorola an earnings yield of 9.5%. In my opinion at an earnings yield of 9.5% just these two segments of Motorola’s business are worth as much as the whole company. In addition Motorola has more Cash and Short Term Investments than debt and it has $3.8 Billion remaining under its current share repurchase authorization. Any value that can be extracted from the handset division is gravy. With Icahn winning seats on Motorola’s board I expect a lot of investor friendly changes in the coming months.

Full Disclosure: I own shares of Motorola which I bought at a higher price. I may buy some more.

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Within the last few months the US Federal reserve has cut interest rates from 5.25% to 2.25%.

How the dollar decline helps.
A decrease in the value of the dollar will make US exports cheaper and imports into the US more expensive. This should significantly reduce the trade deficit. US Multinationals which make a lot of their money overseas will do great. Financial companies will have access to cheaper money which will increase liquidity and profits for financial companies. Interest rates on housing loans should decline and Adjustable rate mortgages which reset will have a smaller increase for the time being. Here is an article on how to make money off the dollar decline.

The big question. Whats next?
Based on the reasons i stated above the market seems to think this is positive but I disagree. The reason the fed is reducing interest rates is because they see a major recession looming. The fed cites that “core inflation is under 3%”. Core inflation is also known as CPI excluding food and energy. If you can find people that do not eat, do not drink, do not drive or use electricity then by all means core inflation can be used. Personally I eat, drink, drive and use electricity so for me the Consumer Price Index is the real measure of inflation. Interest rates are supposed to be higher than inflation. The Inflation rate is currently over 4%. With interest rates at 2.25% people that hold Cash in savings accounts, CDs or money market accounts are losing money.

Here is a chart from the Cleveland Fed. Click the chart for a better image.

As you can see at the end of the chart, while Core CPI remains low the actual CPI has shot above 4%. So what protects your investment when there is high inflation? Treasury Inflation protected securities. If inflation remains at this level for a significant period the fed will be forced to increase interest rates dramatically to combat inflation. If the fed delays controlling inflation we may have a bigger problem. Lets just hope we don’t need to bring back Paul Volcker who had to boost interest rates to 20% and put the economy into a recession to combat inflation and end the stagflation of the 70s.

The easiest way to invest in TIPS is to buy the exchange traded fund TIP
Another new exchange traded fund WIP has recently started trading. WIP is a global TIPS fund with exposure to 18 Countries and 15 Currencies.

Disclosure: I do not own TIPS, WIP.

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6 months without a post. Its time to dust off this site again. I thought i could start working on the blog back in February, but i was wrong. There weren’t enough hours in a day. I was wishing for 48 hour days. Things are finally settling down (fingers crossed).

Its also been 1 year since i started this blog so its time to lookback and see how i did.

Next Warren Buffett or Berkshire Hathaway - MKL/WTM/LUK/BAM are up SHLD/IACI are not. This is a very long term play so its no use looking at it over 1 year

What I got wrong

• Is Google’s domination about to end. - They took market share from most competitors and shares have increased 25%. I still don’t like the company’s moat so I still don’t like the stock.
• Investing in the Video Games industry - I was wrong on the game developers i picked. ERTS and Konami have barely moved.
• Time for a market correction - I was right about the market needing a correction. I was wrong about when it would happen.
• Whats next for Sears Holdings - I hoped SHLD was all Eddie Lampert would work on but i was wrong, he is starting a new fund to invest in Citigroup stock. I also hoped to see some acquisitions/investments using SHLD’s money which is currently being used for stock buybacks.

What i got right

• Ka-ching in on the dollars decline. - The dollar is significantly lower against most currencies
• Valuing Berkshire Hathaway - On Aug 23rd 2006 I said the B shares which were trading at $3100 are easily worth $4000. One year later and they last closed at $3995.
• Richest countries in the world - People seem to have taken a liking to Canadian Energy and Australian Mining companies this past year.
• Water the most important natural resource - A 25% increase in the water index says it all.
• Has gold lost its glitter - With all the market volatility that took place this year Gold should have shot up but it didn’t.
• Investing in the Video Games industry - Gamestop and Nintendo are both up substantially

How did I do? You be the judge.

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