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Weekend Edition

The Best of The S&A Digest
Saturday, August 9, 2008

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 David Winters, CEO of the value-focused Wintergreen Fund, holds Norwegian bonds. He said the country has 4.5 million people, a lot of oil and gas, an entrepreneurial culture, and is very solvent. It's a "safe place to put some money for a little while," said Winters.
 
Winters isn't the only super-investor buying Norway. Jim Rogers told the crowd in Vancouver last week he's holding the Norwegian kroner. And, of course, he's still selling the U.S. dollar.
 
 The government's measure of consumer prices, the CPI, jumped 4.1% in June (over last year), the highest official rate of inflation since 1991. As the government steals your savings and lowers your standard of living via its massive, unfunded bailouts of banks and mortgage lenders, just remember that since the resulting inflation – the real price of socialism – doesn't appear on any ledger, it doesn't really count...
 
If you want to protect your money, Steve recently wrote an essay detailing one way to capitalize on the CPI's big numbers. Click here to read it.
 
 You might recall our controversial letters from the "chairman" of General Motors. He kept telling us things were going sour for America's leading carmaker at a far faster pace than anyone outside the company realized.
 
He was telling the truth: Last week, GM announced a $15.5 billion loss, including a $6.3 billion operating loss and a $3.6 billion cash loss. Sales fell 20% year over year in North America. Officially, chairman and CEO Rick Wagoner says he's still "comfortable" with the company's liquidity. Meanwhile, the company's CFO tapped GM's $6 billion revolving credit line for the first time, drawing $1 billion.
 
 Lest you think all is gloom and doom, Procter & Gamble showed off the pricing power of its 23 billion-dollar brands. P&G's net profit last quarter rose 33%, mostly due to price increases that more than offset higher commodity and energy costs.
 
That's how you know you've got a real economic moat on your hands, by your pricing power. And that's why you buy stocks like P&G when they get cheap and hold them forever. At 16 times trailing free cash flow, I don't think P&G is in Extreme Value territory, but it's something to keep an eye on.
 
 Value investor Tweedy, Browne released its second-quarter letter, and gave away a few interesting stock picks... The firm is buying Telecinco, Spain's largest television production company. Telecinco trades at four times pretax earnings, yields 17%, and has net cash on the balance sheet. Tweedy also owns Medikit, a Japanese medical device company trading at 1.6 times pretax earnings, yielding 2.5%, and holding net cash on the balance sheet.
 
 "If I had better foresight, maybe I could have improved things a little bit," Freddie Mac CEO Richard Syron said in response to accusations that he ignored warnings about the company's credit risks. "But frankly, if I had perfect foresight, I would never have taken this job in the first place."
 
I doubt that's true. Whether Freddie survives or not (we'd bet heavily on the latter outcome), Syron is sure to walk away a very, very rich man. Meanwhile, his company announced an enormous $821 million quarterly loss. This follows a $528 million loss last quarter.
 
 One more interesting tidbit from the Freddie results. The company's CFO, Buddy Piszel, says the firm's modeling of the housing market – which is probably the most sophisticated anywhere – predicts home prices will fall 20% from their peak. Piszel says prices have fallen 11% so far. "We are about halfway through."
 
If Freddie is already insolvent and the housing market decline is only halfway through, don't you wonder how both our Federal Reserve chairman and Treasury secretary could have testified before Congress last month that Fannie and Freddie were "well-capitalized"? If a private-sector CEO had told the same fat lie about his company, he'd be heading to jail.
 
Why doesn't the SEC charge Bernanke and Paulson with telling lies about publicly traded stocks? Some investors surely took these men at their word and bought shares.
 
Seems to me, our punishment for government officials lying to Congress and the American public ought to be at least as severe as what we dole out to CEOs and CFOs who merely lie to their shareholders. Don't our elected officials have any obligation to tell the truth?
 
Regards,
 
S&A Research




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