Just One Man's Opinion - 21 July 2005

by JMac

MUTUAL FUNDS -

Mutual funds are a great the average investor, as defined in my first article (July 1). There are thousands of them out there, They consist of stocks, bonds or indexes. Recent scandals have tarnished the image of the industry, but one of the family of funds that was not sullied was Vanguard.

First, I will disclose that my wife and I have a mutual fund portfolio, IRA's and a 401k that consists of 90% Vanguard Funds, including the S & P Index, Total Market Index, Russell Small Cap and Mid Cap Index. We started out several years ago with six or seven different funds and after weeding out the losers were left with mostly Vanguard funds.

There is so much to like about Vanguard it is hard to know where to start.

John Bogle started the indexing craze in 1975. He has written several insightful and easy to read books on the subject of mutual funds. He has been a consistent critic of the industry. His critiques have proven to be true in the latest revelations, uncovered by Eliot Spitzer and others..

Today, the company is run by his longtime protege, John Brennan, and the index funds by Gus Sauter. Bogle argued for years that the industry was "ripping off" investors with exorbertent costs, hidden fees and questionable trading practices.

Bogle correctly points out that expenses count. Expenses, loads, redemption fees and tax inefficiency can cut as much as 25% or more of your gains.

LOADS - do not buy a fund with a front-end or back-end load. They take your money right off the top before you earn a dollar. There are a multitude of no-loads funds out there. Do not buy a fund with a redemption fee incurred in less than one year.

EXPENSES - What a rip-off ! If a fund is charging more than 1% for expenses forget about it.

TURNOVER - if the fund is turning over more than 50% of its holding in a year, run away. They are "churning" and making profits on the "rebates" (kickbacks) they get from trading houses.

The average expense ratio for all funds in 2004 was 1.40%. Vanguard's is much less, usually with no-load. The Vanguard Total Market Index Fund has an expense ratio of 0.19%!

How do they do it? First, they are an investor owned company, i.e. when you buy a fund you also are buying a piece of Vanguard, like a mutualized insurance company. Second, they are HUGE. They now manage 850 billion dollars, second only to Fidelty. Companies want Vanguard's seal of approval so they strive to perform and please this giant once their stock is in one of its funds.

PERFORMANCE - The Vanguard S&P Index outperforms two thirds of the managed funds nearly every year. The Vanguard Health Index Fund and Vanguard Energy Fund have been two of the top ten performing funds for the last ten years.

There are a lot of very good fund families out there, including Dodge & Cox, which I also own. However, few are as investor friendly and operate with such efficiency AND integrity. Many of their funds require only $50.00 to get started and will accept as little as $100 after that. Do your own research. There are a lot of great books out there which can guide you no matter your investment goal, style, or income. Be sure and look at Morningstar ratings and comments. Somewhere there is a fund, or funds that offer you every investment vehicle that currently exists, stocks, bonds, convertible bonds, options, hedges etc..

If you want to get rich fast, look elswhere, but if you want peace of mind, go with the best of breed - Vanguard.

GOOGLE WATCH - Jim Cramer predicts Google will be added to the S&P 500 soon. If that happens, all the S&P index funds will have to buy it.

Just One Man's Opinion - 20 July 2005

by JMac

Hewlitt-Packard/Compaq - will massive lay-offs (15K) and restructering save this former great ? Maybe. Was there ever a worse coupling ? Oh! wait...AOL/Time-Warner, Lyle Lovett and Julia Roberts.

Just a Hunch Department - Congress and the Administration become scared off by the recent military build-up by the Chinese; they nix the deal for them to buy Unocal. BP, T. Boone Pickens or Exxon step up as patriotic "white knights" and scoop it up at $70; Justice Dept. looks the other way.

Ford - lousy quarter for operating profits outside of financing division. My advice to Billy Ford: sell the franchise to the Brits, the finance arm to GE Capital and turn out the lights in Dearborn. AVOID

GM - Two billion dollar investment in hybids (too late), healthcare costs $1500 per vehicle, massive retirement benefit obligations. Contract talks with UAW begin in 2006. Will they stand up to the Union ? I doubt it. AVOID.

AFTERTHOUGHTS - Regarding the essay on the energy "crisis" of July 19, here are some investment plays : Arch Coal, Transocean Drilling, Shlumberger and Halliburton.

Just One Man's Opinion - 19 July 2005

by JMac

These are the "dog days of summer". Not much to talk about in the market, so how about an essay ?

THE ENERGY "CRISIS"

Congress loves its rituals. In the 70's and 80's in every session there was a "Civil Rights" bill introduced. Finding no new wrongs to redress they then switched to energy in the 90's, with the "Energy Bill of [fill in the year]".

Politicians from both sides of the aisle rush to the podium with proposed legislation that would "make America energy independant". Every year congressmen/women are plugging their pet energy projest (usually one that is being promoted by one of their contributors). Bureaucrats, lobbyists and Hollywood know-nothings wring their hands before sub-committees and committees foretelling the impending doom of civilization as we know it. Soon, they wail, we will be returning to the caves lit only by candle light.

Fear not, it is all poppycock. In 1927 a well respected British engineer and economist conducted extensive research and concluded that the world's supply of oil would be exhausted by 1980. In that same year (1980), Jimmy Carter proposed legislation that would deregulate the price of oil and gas. Senator Howard Metzenbaum, D-Ohio, (the "D" stands for demagogue) railed against his president and said that it would lead to Americans paying $2 for a gallon of gas! Immediately upon his inauguaration, Ronald Reagan took off price controls through an executive order. In 1982 the price of a barrel of oil plunged to $10. Howard's prediction did eventually come to pass, BUT it was not for another twenty years.

Today, respected oil analysts estimate that there are perhaps seven TRILLION barrrels of oil on our planet. That is more than all the oil consumed in history. The wells in Saudia Arabia and Alaska will run dry someday, but replacement discoveries and new refining technologies have kept up with demand. The Western Canadian tar sands, for instance, contain a potential as large as OPEC's current reserves. One tiny nation (Qatar) has proven natural gas reserves sufficient to supply the US for forty years. In the US we have coal reserves for the next four hundred years (we are the OPEC of coal).

However, someday fossils fuels will be depleted. What the Luddites and scare-mongers forget is Einstien's proven theory : E=MC2. No, I do not mean nuclear power. I mean the earth can NEVER run out of energy. ALL MATTER IS ENERGY in another form! The paper clip on the desk in front of you and the dust bunny under your bed contain potential energy.

SOLAR - Everyday the sun drenches our planet with more energy than we could hope to use.

GEOTHERMAL - The earth is a machine. Below the crust is a gigantic furnace producing heat (energy) that is clean and reliable.

COAL - We have the technology to produce oil and gas from coal. The Germans practicaly ran their entire war machine on synthetic oil.

HYDROGEN - It is the most abundant element on earth. The oceans are full of hydrogen. We can, and will, extract hydrogen fron sea water and return the water to the oceans, or desalinize it for drinking water.

BIOMASS - There is abundant, easy to recover, methane gas in the thousands of landfills throughout the US. In addition the garbage itself is potential fuel. Then there is ethanol; we are the OPEC of corn, also.

TIRES - There are over 250 million discarded tires in the US and over 20 miillion are added annually. Each tire contains the equivilent of four gallons of oil; that is one BILLION gallons of oil.

We have the know-how to utilize all these sources today, but they cannot compete with $60 oil ...yet.

Your great-great-great grandchildren will travel in cars, trains and planes fueled by hydrogen/solar power plants. Electricity will be generated by synthetic oil, clean burning coal, geothermal wells and garbage.

Today's price of gaoline is not driven by a supply shortage, rather it is being pushed up by a spike in demand in China and India and the fact that no new refinery has been built in the US for twenty-five years!

What we really need is for Congress to take a year off, go to their local community college, take Economics 101 then read Adam Smith's "Wealth of Nations", published in 1776... and then take another year off.

P.S. -

Want to get oil to $20 a barrel and put the Department of Homeland Security out of business? Pull all US combat troops out of the Persian Gulf.

Just One Man's Opinion - 17 July 2005

by JMac

HEY dude! Where's my money? - Cisco is sitting on a mountain of cash, but still refuses to pay a dividend. What's up with that?

VALUE PORTFOLIOS -

A value investor looks to buy stocks that are selling at a discount to their intrinsic worth with a view towards holding them until the market recognises that worth and then sells at a profit (as oppossed to the growth and income investor). The following are stocks which are priced below what I consider their "fair market value". The first number is their close on July 15, 2005, the second is their fair value (FV), as I see them:

Boston Scientic - $27.45, FV - $40.00 (dominates the stent market)

Golden West Financial - $66.00, FV - $90.00

Goldman Sachs - $106.00, FV - $119.00

Microsoft - $26.00, FV - $33.00

National City - $35.75, FV - $44.00

QUALCOMM - $35.50, FV - $45.00