Category: Articles

Just when you thought consumer home equity induced spending was dead due to a slowing market and tightened credit standards, a new product promises to put some juice into it. REX & Co, backed by a subsidiary of AIG (AIG) has a new product that lets homeowners tap the value of their homes without taking out a loan.

The novel product gives homeowners cash for their equity in return for a portion of the proceeds from the eventual sale of the home. For instance, a homeowner who has a $500,000 home can extract $100,000 of that by giving REX 50% of the change in the home value. So, if the home is sold in 5 years for $750,000, REX receives half the increase, or, $125,000. If it sells for $600,000, they receive $50,000.

It is a break from the traditional debt based equity extraction option homeowners currently have and is available in California, New Jersey, Virginia, Florida, Washington, Colorado, New York and North Carolina. Founder Thomas Spoonholtz expects it to be available nationwide within a couple of years.

He aims to have it sold through mortgage brokers with up to a 2% of proceeds fee and homeowners will have to commit to hold the home for a set number of years or face “early exit” fees or 5% to 25%. This approach will appeal to retirees looking to maximize the extraction of equity from their homes without incurring interest payments. Younger borrowers will like the fact that their debt ratios will not increase and the effect on their credit scores will be non existent. It will also allow for higher borrowing limits since the home will be held for a minimum time frame, increasing the equity available.

What this product essentially does is allow current homeowners to borrow “future equity” in their homes and not pay interest charges.

Since “Woodstock For Capitalist’s” weekend in Omaha is now over, a bit about Berkshire and it’s leader. No one will will argue or dispute his past success and what he has done for shareholders. Nor will anyone attempt to belittle the atmosphere and honesty in which he runs the organization and the culture he created. That being said, being a former Berkshire (BRK) shareholder I would not consider purchasing shares until Buffet steps down. The reason? $40 billion in cash and no plans to spend it. Berkshire is, in essence an insurance company that pays no dividends. It’s results the past two years are due to one factor, no major catastrophes.

Buffet has the ability to “buffer” shareholders against the eventual catastrophe and it’s impact but refuses to part with his cash. Insurance industry profits have been at all time highs the past two years and even Buffet himself has acknowledged that this cannot continue. Berkshire earnings increases over that span have been due solely to insurance profits, not investing gains or increases in it’s other operating segments. Industry pricing has already come down and we are one active hurricane season away from watching those record profits evaporate. When they do, Berkshire shares will take a hit with them.

Here is my issue, Buffet has the power to insulate shareholders from this eventuality. His recent purchase of 10% of Burlington Northern and 15% stake in USG marked the first time this century he has taken a meaningful stake in any company. In the past 6 plus years he has dabbled in shares of Wal-Mart, Home Depot, Lowe’s and others without making any meaningful foray into them. When Berkshire was experiencing its meteoric rise, it was due to Buffet making huge investments in a handful of companies. Now, the definition of huge changes as your size does. $100 million to Berkshire in 1975 was significant, but today is 2% than of what Buffet has on hand to invest. That being said, Buffet still has the ability to make portfolio changing investments, he just chooses not to. Berkshire’s investment portfolio today resembles a mutual fund with small positions in over 30 companies that are bought and sold regularly. In the past Buffet has said “Wait for a fat pitch and then swing for the fences”. Why isn’t he doing that? Considering the investment possibilities Berkshire has, his recent investing record is one of bunts, not big swings. He has also said in the past “if you would not buy the whole company, why would you buy a single share”? Using his own logic, I have to ask “Warren, if you are going to invest $160 million in Home Depot, why not $1 billion” The theory still holds, if you would not buy 100 shares why buy one share and if you would buy one share, why not a hundred of them? An investment of 4% of his available cash is not “swinging for the fences”

25% of Berkshire’s current market cap is it’s cash. Shares trade at a PE of 15 times earnings and given it’s earnings ability and financial stability, that should be higher. The reason it isn’t? People recognize that the $40 billion will be sitting there next quarter and next year and in today’s low interest rate environment, money in the bank does not impress anyone. Put it to work and Berkshire’s multiple will expand.

Unfortunately, that will not happen until Buffet retires and someone else runs Berkshire’s investments.

So states are in the process of suing paint companies Sherwin Williams (SHW), NL Industries (NL) and Valspar (VAL)for products that have not been produced in 50 years now. Why are not these same states taking action against items that are affecting children that are being produced today, affecting children today, being used by them today, sold to them today?? Why are we so concerned about a product that has not been produced, sold or used in more than half a century? Here are the current lead recalls:

WASHINGTON, D.C. – The U.S. Consumer Product Safety Commission, in cooperation with the manufacturer named below, today announced a voluntary recall of the following consumer products. Consumers should stop using recalled products immediately unless otherwise instructed.

Name of Product: Antique White Furniture from the Cottage Collection

Units: About 2,000

Importer: The Land of Nod®, of Northbrook, Ill.

Hazard: Some of the recalled furniture contains paint with high levels of lead. The lead level exceeds that allowed by the federal ban on lead-containing paint which is designed to protect children who might ingest paint chips or peelings. Lead paint is toxic if ingested by young children and can cause adverse health effects.

Description: The recall includes the following furniture and item numbers. The item number can be found on a label located on the back of the product. The shelf kits include one shelf and two shelf supports for use in the Low Rider Bookcase, the Double-Door Armoire or the District 28 Armoire.

Sold by: Land of Nod® catalog and Web site nationwide, and The Land of Nod® stores in Illinois and Washington from September 2003 to August 2006 for between $50 and $1,100.

Manufactured in: Mexico

WASHINGTON, D.C. – The U.S. Consumer Product Safety Commission announces the following recall in voluntary cooperation with the firm below. Consumers should stop using recalled products immediately unless otherwise instructed.

Name of product: Multi-colored and solid-colored sidewalk chalk.

Units: 50,000 packages

Manufacturer: Manufactured by Agglo Corporation, Hong Kong (China), and imported by Toys “R” Us, Inc., Paramus, NJ.

Hazard: The multi-colored and solid-colored sidewalk chalk contains high levels of lead, posing a risk of poisoning to young children.

Description: The sidewalk chalk is packaged in a clear-plastic backpack-type carrying case with these words on the label: “Chalk To Go…Totally Me!…24 pieces, sidewalk chalk in different colors, fun chalk shapes.” The label on the package also says “Conforms to ASTM- D4236.” The sidewalk chalk comes in several shapes: butterfly, spider, ice cream cone, bottle, cylinder, and triangular stick. The chalk pieces are solid-colored or multi-colored, including red, blue, green, yellow, and purple.

Sold at: The sidewalk chalk was sold at Toys “R” Us stores nationwide from March 2003 to November 2003 for about $4.99 per package.

Manufactured in: China

Remedy: Return the sidewalk chalk to Toys “R” Us for a refund.

So here we are. Products full of lead being imported into the country and sold to parents for use with their children. How long has this been going on? Could this be the “public nuisance” poisoning children. I find it much more likely that a child playing with chalk or a toy ingests it from their hands or from the air as they erase it vs. a kid gnaw on a windowsill. Since we cannot prove the source of lead in children, how can we arbitrarily exclude all these other more likely sources?

CSX (CSX) provides rail, intermodal and rail-to-truck transload services that are among the nation’s leading transportation companies, connecting more than 70 river, ocean and lake ports, as well as more than 200 short line railroads.

Its principal operating company, CSX Transportation Inc., operates the largest railroad in the eastern United States with a 37,170-mile rail network linking commercial markets in 23 states, the District of Columbia, and two Canadian provinces. Headquartered in Jacksonville, Florida, CSX is the gateway to the west for goods coming into eastern ports and the main hauler of products coming from the Midwest to be exported.

Earnings in 2006 grew 64% and CSX increased it’s dividend 50%. Management predicts record revenues cash flow and profits through 2010. The key drivers? Gas and ethanol. Diesel fuel price increases disproportionately affect trucking vs railroads. It has become increasingly cost ineffective to ship goods long distance by truck as prices have risen. This has pushed more users to go the the railroad who, due to this increased demand volume have been able to add fuel surcharges to offset their increased fuel costs. In ethanol, CSX experienced 24% volume growth in 2006 shipping the corn based fuel. CSX is the main shipper of ethanol from the Midwest to the east coast. It passes through it’s Chicago hub and from there to points east. This market will only continue to grow as mandates and demand do. When Archer Daniel’s (ADM) reports “strong ethanol demand”, this is good for CSX.

These factors lead to CSX producing cash from operations of $2.1 billion, $1` billion higher than 2005. To return this to shareholders, at the end of 2006 the board approved another $2 billion to be completed by then end of 2008. Today’s announcement of another $1 billion means that a total of 15% of the company’s outstanding shares will be off the market by the end of next year. This is a huge win for shareholders.

The rail business is booming and CSX is doing its best to reward its shareholders.

Apple (AAPL) begins selling it’s revolutionary iPhone this summer and it will mark the end of the string of hits for the company. Billed as “your life in your pocket”, it will sell for $599 with a one year or $499 with a two agreement through AT&T wireless. The company has had a string of hits since it introduced the iPod and it’s shareholders have benefited sending shares from $7 in 2003 to the $100 they sit at today. The introduction of the iPhone will be the first miscue for the company and send it’s shares, priced for perfection tumbling. “Why”? you ask.

More Isn’t Always Better:
The beauty of the iPod was and is its simplicity and singular purpose. It enabled even the most tech phobic of us the ability to operate and enjoy it. Because of this sales have been phenomenal. There are several versions of mp3 player phones out there and none of them are big sellers. The reason? The market does not want them together. I do not want to have to turn of my music to get a phone call. If I am driving my family in my car and we are listening to the iPod, having to turn off the music to answer my phone becomes a major hassle. The same holds true for any event that I use the ipod to play music at. Having both in one creates problems, it does not solve them. Why would I pay $600 for this, or, buy an iPod in addition to this in order to avoid the hassle?

One Carrier:
All of have cell phone agreements and have a cancellation fee. This varies from $100 to $150 dollars. This price need to be added to the costs of the iPhone for those who want it right away or will cause a lag in initial sales. This lag will allow cell competitors to create their own, cheaper versions to compete, hurting future sales.

Touch Screen
Being able to make a call simply by pointing a finger at a number is an feature touted for the phone. How is this any different or accurate than scrolling on my blackberry? This feature will lead to frustration as users who do not point exactly at the number they want will keep initializing errant calls.

“All In One” Historical Issues:
How many people have had TV/VCR or DVD combos or the dreaded all in one fax, scanner, copier? Now, how many regret that decision? When you have an all in one you then become a slave to that device. If either breaks, the both units must be replaced. If a newer, better version or either comes out, you cannot purchase it because it then entails buying both again at considerable cost. Now, when you consider the unimpressive reliability history of the iPod and the cost to attempt to repair them (usually it is cheaper to just buy a new one), it is not an unrealistic stretch to consider that you may be purchasing one of these every 2 or 3 years. An expensive proposition.

What Should Apple Do?
This is the easiest part. There is no reason to have an 8GB iPod on the phone. Give us a 2GB capacity so we can put our favorite stuff on it and listen when we want and cut the price to $299 and you may have something. A $599 phone will not gain mass acceptance no matter what it does, especially when people can still get it’s functionality from their existing devices. Also, the exclusive deal with AT&T was not a very bright idea. Until it is expanded to all carriers, you will have nothing more than a little niche product.

The real winner in all this? AT&T, not Apple or its shareholders.

Here is a freebie for the defense teams at Sherwin Williams (SHW), NL Industries (NL) and Valspar (VAL).

From the US Dept. Of Agriculture , Forest Service Lab in Madison, Wisconsin in January 1949 in a paper called “A Standard of Quality for House Paint”. “Pure white lead paint, usually classified as group L type lA grade 1, is an excellent paint for some uses, especially where repainting may be put off longer than is generally desirable”. What makes this “classification system” detrimental to those currently suing lead paint manufacturers is the opening paragraphs:

“You can now buy house paint and barn paints labeled by the maker with both his trade brand and a classification recommended by the U. S. Department of Agriculture. The classification is a form of quality standard. It tells briefly what kind and grade of paint you are buying. The trade brand tells, as it always has, who made the paint and expects to be held responsible for it. Together, classification and trade brand supply all that is needed to buy from reputable sources with an eye to quality as well as to price.

The USDA classification plan was suggested by the Forest Products Laboratory after more than 20 years of research in the painting of wood. Under the plan there is a classification for every kind of house or barn paint for wood buildings.

Paint buyers should think of grade chiefly as a guide to the way paint should be used for best and most economical service. Although grade 1 (more lead in pigment) of suitable group and type is likely to be the best purchase for most work even if it costs a little more, good work can still be done in many cases with paint of grade 2 or grade 3.”

After 20 years of research, where is the “danger warnings” for lead paint by the US government? In fact, they classify lead based paint and recommend it to consumers as the “highest quality.” How were “leadless” paints described on the 1 to 5 scales (one being best)? “There are also leadless paints of groups TZ, SZ, or STZ for use particularly where there may be hydrogen sulfide in the air, which blackens paints containing lead. The leadless paints are of type 4D or, if they are low-grade paints, sometimes type 5.

What is also of important note here is that the USDA was running tests in the 1950’s, to determine the best paint for household use using paints with lead pigment in them. This means that even in the 1950’s when many paint makers had stopped making lead pigment based paint for household use the US Gov’t was still running tests for a classification system that determined lead pigmented paint was the most desirable due to it’s durability. The result? Master painters were able to purchase their own lead and added it to paint to improve its performance. How can we now hold paint companies responsible?

Here is an equation that does not work for me. Paying 32 times earnings for a company who, if it hits the high end of analyst estimates, will grow 9.4% this year and maybe 17% next. When you consider this company has missed the last three quarters estimates, and four of the past 6, one has to wonder what investors are thinking.

The company?

Whole Foods

Two years ago if I wanted organic foods, I had two choices, Whole Foods or the local health food store. Since Whole Foods was the low cost purveyor of those items, sales at WFMI surged and investors enjoyed a huge run in the stock. Today I can go to Sam’s Club, BJ’s Wholesale or and of my local markets and get organic food. The question now is, since I can get the same items, cheaper, at numerous other locations, why go to Whole Foods? The answer is I wouldn’t and not many other people are either as same store sales growth last quarter was non existent at .3%. Further dampening the outlook is there is no growth impetus for the company on the horizon to justify the lofty PE shares now enjoy.

In an effort to jump start sales in February they agreed to purchase the Wild Oats Markets chain that lost $16 million last year. Revitalizing this chain will not be that easy as cash on hand for WFMI has plummeted from $267 million to $46 million in the last 12 months and cash from operations has seen a steady decline during the same period. Even should they sink the money into this chain, sales growth from it will not be impressive due to the much smaller square footage at Wild Oats locations vs. Whole Foods. Simply put, investments in Wild Oats will need to be accomplished by the addition of debt without tremendous payoff, further squeezing margins.

Much like Starbuck’s, Whole Foods is a company whose best years are behind it. Competitors have encroached on its theme and the originality that made it such a fast grower is gone. Both companies are selling products that are perceived by most people as equal to their competition for higher prices. In today’s price sensitive environment, that is not a recipe for growth.

It especially does not deserve a PE over 3 times its growth rate. Current investors of Whole Foods are in for a painful lesson in growth vs. the premium investors will pay for shares

With summer coming upon us a few tidbits.

• Weekend readership is expected to plummet so my posts on the weekend will be more of the quick read variety
• Forbes Online pickup another article. You can read it here. I have agreed to provide them the articles first before they hit the blog going forward so they have them “hot off the press” so to speak. They will be published under the Personal Finance section in an area they call the “Adviser Soapbox” . I will let you know going forward when they appear. Currently it looks like every couple weeks, depending on my output.
• Has anyone heard from Geoff Gannon? As one of my favorite blogs to read (Gannon On Investing), it has been while since his last post. Here is hoping everything is ok.
• Some of you may have noticed that I have also been providing the site 24/7 Wall St. some exclusive content. I do not know how long this will last but if you keep an eye out there, you will find some additional articles. I tend to give them one or two articles a day. Some of them will appear here after they run there first. Others do not really pertain to the focus of this blog so they will not.
• I have received some fantastic email questions lately and are in the process of turning them into posts. Due to the news cycle and the timing of events it may be a week or so until they reach the blog but rest assured I am working on them.
• Please keep the email comments and questions coming. I take criticism as well as compliments as long as it is constructive and not petty or nasty. I have taken suggestions from viewers and implemented them into the blog. I like to think I am smart enough to know I do not know everything…..
• Over the coming week I will attempting to make some changes to the blog layout. If you log on and things look bizarre, it is just me fumbling my way through computer code and learning it on the fly. Rest assured any oddities are temporary and hopefully the end result will be better..

Thank you for reading, have a great weekend and Happy Mother’s Day to all out there.

What? Why would I advise you to sell your wireless phone service stock at a time when more and more people are using cells phones for everything? We now get our emails, news alerts, text messages via our cell phones and more and more people are even forgoing their land lines to use a cell phone exclusively. If you have been out lately, people cannot seem to function without their cell phones. How can I possibly advise people not to own stock in this industry?

One word: SKYPE

On Thursday Research In Motion (RIMM), in an stunningly under reported event announced:

SHAPE Services announced today the release of a new version of its IM+ for Skype Software for BlackBerry® smartphones from Research In Motion (RIM) (Nasdaq: RIMM; TSX: RIM).

IM+ for Skype Software by SHAPE Services is a mobile client for Skype Software. It enables voice and text communication with other Skype users as well as cost-effective calling to landline or mobile connections. IM+ for Skype Software uses SkypeOut credits for voice communication ensuring cost-effective calls to any number around the globe. For users of Skype Unlimited plan (only USD 29.95 per year) IM+ enables almost free calling from a BlackBerry smartphone to any PC with Skype or any landline/mobile number. All you need is a BlackBerry smartphone and IM+ for Skype Software installed.

Providing desktop-like access to a familiar Skype experience from any mobile device is the plan of SHAPE Services. In the nearest future the company is going to release versions for Windows Mobile Pocket PC, Windows Mobile Smartphone, Palm OS, Symbian OS and J2ME devices. A WAP version for universal access from low-end devices is also in the company’s plans for the upcoming months.

I guess it was only a matter of time in retrospect as technology in our cell phones advances, desk top like functionality should also.

A $30 annual fee for unlimited calling? The only question here is how fast people will begin buying blackberries and switching to the lowest cost cell plan from their providers. You can buy a blackberry from any provider and instead of paying $100 a month for cell service, pay $30 a year.

Once this catches on cell company profits will tumble..