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Of Sun and Stars and Dogs (Question of the Week)

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Radio broadcasting via satellite certainly sounds like a better mousetrap, technologically, and has many advantages for the consumer. It is probably the wave of the future. However, companies on the leading edge (make that "bleeding edge") of a new technology have to find out what WON'T work as a business model before they discover what will. At that point, if they're too far in debt from their R&D and initial failed efforts then they'll go under. The shareholders will take a tax writeoff and the employees will get work elsewhere. Ultimately the experienced people will be hired by the next company to try the technology which, having learned from the earlier failures, is more likely to succeed.

Assuming the government allows the merger, a combined SIRI and XMSR might survive if the resulting company is stronger. For example, I've read that Sirius' signal is less likely to drop out on cities, and XMSR less likely to drop out in parking garages, gas stations, tunnels, and other covered spaces. But both companies have a load of debt. I'm wondering if even Worldspace (WRSP), which is not yet profitable, will survive. We're in a worldwide recession which bodes ill for retail goods and services.

The same kind of concerns have prevented me from placing large bets on solar stocks. Although solar will be a major source of energy, until now it took more money (and energy!) to create a solar panel than you could get back from it in savings. Solar technology is now on the very edge of crossing over into practicality but I'm still not betting on any of the current companies to survive. Once solar becomes more widely used there will be new problems we can't guess at.

For example, everyone thinks solar energy is "safe". That's only because it is so darned inefficient at present! One scenario (and this crosses into the realm of science fiction only for the moment): let's say Saudi Arabia developed the ability to gather all the sun's energy falling on their desert and transmit it off to China's factories (and weapons). The entire desert would go cold and dark. The world's air currents would no longer be affected by its radiated heat. What would this do to the climates of other countries?

And then there's the unknown factor of government help (or interference). Should our government continue to subsidize solar? Should the FCC have allowed more satellite broadcasters in order to encourage a wider variety of business models? Or should it have limited the field to only one, initially, to give it the revenue from all potential customers?

That's why I've steered clear of investing directly in either the sun or the Dog Star so far. If a large, traditional broadcaster picked up Sirius at bargain-basement prices (just to get the rights to that cute logo if nothing else) I might consider investing in the next reincarnation of the company.

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In with Infrastructure for Long-Term Investing?

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I'm reading more articles in the media, recently, about how bad the economy is and plans for band-aid bailouts. This leads me to ask, "What would I do if I were President? And what publicly traded companies might benefit from my plans?"

Well, I definitely would NOT just hand every citizen a tax rebate. For one thing, it is inefficient due to the money wasted on the cost of administering that and, more important, there are better uses for the funds. To improve the overall economy I'd try to improve the infrstructure that supports it. (A definition from Wikipedia: "Economically, infrastructure could be seen to be the structural elements of an economy which allow for production of goods and services without themselves being part of the production process, e.g. roads allow the transport of raw materials and finished products.)

Not that this goal is easy. When you come right down to it, the present credit mess grew from an attempt to improve the economic infrastructure in such a way that would enable more of the population to become homeowners. This is a very sensible, stabilizing idea which got out of hand due to greed. I would support some bailouts for financial institutions because they are a vital part of our system which needs to be fixed fast.

Looking at the bigger picture, I remember Al Gore saying that he invented the Internet and everybody laughing. He didn't, of course. But his support contributed to the US leading role in its development. And the 'Net is certainly infrastructure just as much as roads and bridges. Speaking of our bridges, they're starting to get worn out and are in danger of collapsing. How about tax credits to companies which repair them? As an added benefit, they would employ more workers laid off by the housing bust. Speaking of workers, we need to implement a national health plan because keeping the workers in good shape is as important as keeping the bridges in good shape. This doesn't mean I'm in favor of the government running our hospitals directly. (As somebody else put it: do you want the efficiency of the Post Office combined with the compassion of the IRS?). And then there's education, the most important element of an information-age infrastructure.

Hopefully the President we elect next will take this approach. So, long-term, way past the end of SLO2 and the elections in November, I may look for companies likely to be again offering credit to low-income families, building bridges, advertising loss-leader generic drugs (as some large companies already are) or importing books from the Singapore math curriculum (already approved for use in California schools).

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Some In, Some Out: Going with the Flow

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I used to screen to find a decently priced growing company with strong financials then glance at its industry briefly to see if there were a predicted downturn. With this bear market, I am choosing an industry first then looking at the companies doing best in it.

I've found some prospects but need to get cash to buy them. Recently I sold all of my Morgan Stanley India Investment Fund, Inc. (IIF) Unfortuntely, none of my current non-performers look to me like clear losers long-term; so Monday I am selling some of them down to a smaller portion of the fund. The stocks I'm partially selling are: Claymore/BNY BRIC (EEB), E-House (China) Holdings Limited (EJ) , Tsakos Energy Navigation Ltd. (TNP), China Moble Ltd. (CHL), iShares MSCI Malaysia Index (EWM), LB Foster Co. (FSTR), HDFC Bank Ltd. (HDB), Hughes Communications (HUGH), Sanofi Aventis (SNY), T-3 Energy Services (TTES), Roper Industries (ROP), Invitrogen Corp. (IVGN).

Here's what I plan to buy unless there's major developments between now and the time my fund has more cash.

New Oriental Education & Technology Group (EDU) is my bet for capitalizing on the August '08 Olympic games in China. It should it be doing well currently, preparing workers to communicate in foreign languages. More important, I believe that the games will give a boost to an ongoing interest in education about the wider world long after the athletes have departed. Unfortunately I believe it is too late to buy some of the other stocks being suggested as Olympic plays because hotels are already booked up, travel plans made, etc. While researching EDU I had a bit of luck stumbling across tiny competitor ChinaEdu Corporation (CEDU) which went public only around 1/1/08. Although too small for the SLO competition portfolio, I added it to my Magic MicroCaps (MMC) fund.

I'm considering buying back Ensco International Inc. (ESV) an offshore contract drilling company which is perhaps on the upswing again. Then, I want to get more UltraShort Technology ProShares (REW) as, unfortunately, I think it will do well between now and the end of SLO2.

Although there will be a continuing need for steel, I've read that steel companies may not make as much money this year due to the increasing cost of iron. So I want to instead invest in more companies directly mining iron ore and have decded on Rio Tinto plc (RTP) and Cleveland-Cliffs Inc. (CLF) In addition, I'm buying Bucyrus International Inc. (BUCY) which supplies industrial tools and services, including mining machinery.

Speaking of supplying services, I'm interested in ICON plc (ICLR), an Irish company doing contract research for pharmaceutical, biotechnology, and medical device industries. Although the big pharma/bio companies go through unpredictable ups and downs depending on product approval, the smaller company doing the testing seems to have steady work and profits regardless.

Then there are investments in gold and in currency trading, two areas where I'll stick to ETFs for the moment as I know nothing about these fields. I plan to buy the ETF streetTRACKS Gold Shares (GLD). When it comes to currency, I'm looking at CurrencyShares Japanese Yen Trust (FXY) CurrencyShares Swiss Franc Trust (FXF) and others. There seems to be no such thing as an ETF which trades in a "basket" of currencies.

In the past the only advice I've read on the subject of currency trading is, "The individual investor should not try it. It's too complex and risky." But that's what they used to say about foreign investing, too. We'll see.

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More Out & In: More Flow to Go With

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I thought I'd done a thorough job of adjusting to the current bear over the weekend and setting up my sell/buy plans for Monday, see previous post.

Then Jonathan Coyle: left me a comment that, for currency trading, look at UDN. It is an ETF which is bearish on the dollar vs a number of other currencies. It was just what I'd been looking for; so I bought that rather than the currency ETFs I'd just written about.

I had not planned to sell any of my education stocks (APOL, DV, STRA) even though they were down because that industry should do well in a recession. Then early on Monday I saw an article pointing out that both Apollo (APOL) and DeVry (DV) depended heavily on the ability of students to get loans; however Strayer (STRA) depended very little on student loans. With the recession of '08/'09, neither SallieMae nor other financial institutions are likely to have much cash to lend. So I sold APOL and DV but kept STRA.

Next I added up my holdings in ETFs. In the SLO fund we're only allowed to have 25% in those funds. I discovered that after my recent acquisition I was at 33.08%. I would have been at 24.21% without the aquisitions! This was thanks in large part to recent growth in UltraShort Financials (SKF) and UltraShort China (FXP) while almost everything else fell due to Bear Stearns. I decided to save all my ETF allotment for shorting, which I can't do any other way. So I sold the following ETFs: MOO (agriculture), EWZ (Brazil), EEB (BRIC), EWP (Spain), EWM (Malasia) and finally the GLD (gold) I had just bought. Really, with more research I can find a gold mine to replace GLD and it is time I tried to do more of my own thinking about various industries and foreign investments.

This still leaves me 2.37% too high in ETFs at end-of-day Monday. However, we're likely to have a small, temporary resurgence in the market tomorrow which will put my short bets (UDN, SRS, REW, FXP,SKF) down below 25% again. Ultimately, maybe I'll just have to take some of the profits in SKF and FXP.

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Trading vs Investing

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Having better positioned my SLO fund for a bear market, of course there was a rally last week and it sank like a stone. At least I do not need to worry about my short -ETFs rising and taking the fund out of compliance.*

I am not going to undo my basic position because I believe for the next several months (and longer) we will have much more of a bear market than a bull market. Yet, a few of my stocks did go up slightly during the rally. For a few of them, I put in a sell order (with limit price) but am keeping 1 share each to make sure I don't lose sight of them.

As an addition to the strategy of creating a bear portfolio, I will stockpile some cash** and try trading rather just investing. On each bear trend I will have to keep selling excess short-ETF stocks to stay in compliance anyway, thereby raising more cash. In addition, I'll continue to sell (down to 1 stock) any of my non-ETFs whose surge looks like it was caused by the bull or bear market.

I'll use some of the cash to buy back those of my 1-stock-remaining companies who look like a good bet for the future or the next up or down swing.

Although this sounds like a simple plan it really isn't because there is the little problem of timing. In the Marketocracy forums, wildmap posted that on recent charts the bear legs have had about 5 interim peaks before hitting bottom whereas the bull legs have had only 3. Gazing at the charts until I'm cross-eyed I just can't see which points people count as a peak on an overall up or down line. However, one thing is certain: looking at the leading indexes since around mid-November the uptrends are relatively short and steep whereas the downtrends are longer. At least this is the way it looks to me. So when good news seems to start an uptrend I'd better move fast to sell any stock which has taken a good surge and not worry about whether it will go even higher in the next day or two.

Mainly, though, I'll continue to simply look for stocks in industries predicted to do well in a bear market. It occurs to me that if we have an interim bull just before the end of SLO2 this will put me near the bottom of the pack if I'm not there already. C'est la vie. I'm still betting we won't see the start of recovery from this recession until mid 2009.

FOOTNOTES:
* You are allowed to have only 25% of your fund in ETFs but I don't know how many days out of compliance it takes to disqualify you.

**You may only hold up to 35% if your portfolio's value in cash but you have to be in compliance with this rule only for the majority of the quarter.

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Gold and Commodities

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I can never quite think of gold as a commodity since, in spite of a few serious applications, its main uses are to create frivolous jewelry and ornaments and to act as money. Actually, since currencies are no longer on the gold or silver standard it could be called ultra-money. Yet its price usually rises and falls along with commodities as a group.

Half the gurus online say that gold will continue to rise for some time and the other half say it's peaked and is about to plunge. The same is true of opinions on commodities in general. Certainly the recent bull rally seemed to prove the 2nd half right. I'm not so sure of that in the long run, though. The major concerns I've read are as follows.

* In a recession there is less demand for commodities like metals for construction and manufacturing. So commodities fall.
-- BUT the current demand for steel, etc. has been driven more by China and other developing countries. Those countries are not in recession, and they may not experience as big a slowdown as the US. There is disagreement on how dependent on the US China may be.

* Depressions are often accompanied by dollar deflation. When the dollar becomes stronger the price of gold, other metals, and commodities in general, falls.
-- BUT the current US recession has not caused inflation to slow. We have stagflation. Due to the nature of this economic slump (a breakdown in our financial institutions which is likely to continue for quite a while) the government will need to print more dollars for yet more rescue efforts. And the Iraq war requires more money yet. So I predict inflation for the forseeable future. As the dollar falls, commodities, especially gold, rise in value.

*Gold and commodity indexes have really spiked up recently. This looks like a peak.
-- BUT look at commodity index charts, over about the last 20 or 30 years. Commodities have been in the doldrums compared to stock indexes which have grown strongly. There is still more room for growth in gold and commodities.

*When recovering from a recession, the growth stocks tend to recover faster, not commodities.
-- BUT yet more ARMs are still scheduled to reset and more solvency problems still to come. We are nowhere near the bottom of this recession, much less starting to pull out.

It boils down to the optimists shorting these stocks and the pessimists, like me, going long. With so many investors turning optimistic on the reporting of each bit of encouraging news, an agile trader could make money by switching in and out of gold and commodities on each temporary turn of the market.

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Liking or Leaving LDK (Question of the Week)

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I've already given my reasons for not investing in either solar or satellite radio in an earlier posting. Here we have a booming industry but know that most of the companies directly in it will fail. However, as others have pointed out you can still ride that kind of rocket by investing in secondary companies providing goods and services to all those winners and losers. As a provider of multicrystalline solar wafers, polysilicon materials, and wafer processing services, LDK almost falls into that category. I say "almost' because (again as others have pointed out) photovoltaics, too, is a rapidly advancing industry; so their products and services could quickly become obsoleted. Nevertheless, when a country, city, homebuilder or individual decides it is cost-efficient to switch to solar they have to start somewhere. Should they wait for next year's developments and buy expensive petroleum products for an additional 12 months?

In LDK's favor, they are based in China, a country which is serious about alleviating its horrible pollution problem and has the money to fund their efforts. So China may encourage solar energy to replace coal in their own country as well as producing components for export.

On the other hand, China's inexpensive production of polysilicon is dumping an increasingly nasty amount of toxic waste into their environment! The inexpensive production will become more expensive when the country imposes environmental controls.

We all know there's no such thing as a free lunch but we just keep hoping.

If I were investing in solar, LDK would be a leading contender for a place in my SLO2 portfolio. But I'm still holding off.

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