As you’re reading this, I am nowhere near my computer. In fact, I’m not even in the office today. I spent the last three days increasing my “wealth.”

We all have different definitions of the word. Some of us give it a strictly monetary connotation. There is nothing wrong with that. In its most straight-forward definition, wealth is the abundance of money.

But if I can take the risk of getting touchy-feely for a minute or two, I’d like to take it a bit further. To me, wealth is the abundance of everything good in our lives.

If that truly is the case then move over Warren Buffett and Bill Gates, I am one wealthy guy. I bet you are too.

Like I said, I just spent the last three days with my beautiful, young bride and her equally stellar mother.

We spent the weekend at the beach. It’s Alaskan mother-in-law’s first trip to waters of the Atlantic. The opportunity to share my life-long passion with somebody that has never witnessed its majesty before is something I wouldn’t trade for even the hottest of stock tips.

But we had to cut our trip short. You see, in just a couple of hours, I’ll get the first snapshot of my largest investment yet (literally and figuratively). My wife is just ten weeks into what is going to be a lifetime love affair. She gets her first sonogram at five this afternoon.

Talk about wealth.

I could go on and on, but you don’t care. What you care about is your own wealth. There has never been a better time for an audit.

With soldiers killing soldiers, hedge fund managers stealing billions, a government that has lost its way and a country that appears to have dropped all moral responsibility, it is vital for folks like you and I to figure out how we value ourselves.

What is it that we want?

Health. Family. Stability. Food. Love. Life. Liberty. Happiness.

Of course, financial wealth plays a large role in all of those things. After all, if money is the root of all evil, isn’t the foliage of that is good?

As so many of us out here in the world of finance fight against Washington’s latest moves, it is important to set the issue of money aside. Too often, our political thoughts hinge on the question, “What’s this going to cost me?”

But what about all those other things?

How is healthcare reform going to affect my unborn child? How is a bigger government going to make it easier for me live a stable life? How are bonus caps going to make it easier for me to stay in love with my wife?

None of those things impact our real “wealth,” yet our government is hell bent on the idea that they are going to make all of our lives better.

Like I said last week. Vote ‘em all out. You’ll be wealthier for it.

Super-investor Warren Buffet once said that his investment philosophy was to buy stocks when others were fearful, and to be fearful when others were buying. Right now isn’t the time to be fearful along with the herd; it’s time to stock up on stocks.

As I predicted earlier in the year, right now the market is zooming higher like there’s no tomorrow.

Let’s begin with this chart of the S&P 500, a good proxy for the broader U.S. stock market…

As you can see, shares of U.S. companies have been soaring. In fact, from a low of 667 on March 6 to a recent high of 1033, the market is up a mind-boggling 366 points.

Translation: U.S. stocks have improved a whopping 54.9% in just a matter of months.

The fact is the market made positive moves long before the economy was showing a ton of life. And if you don’t jump in early, you’re likely to miss the best moves.

And now, with the 960 level for the S&P 500 — the top of the resistance range — clearly out of the way, U.S. stocks are now setting their sights on the next big resistance level of 1313, set way back in August of last year.

Now, getting there won’t be a straight line: 300-plus point moves don’t usually happen like that. So there will likely be the occasional, healthy pullback along the way.

But there’s no doubt: From a technical perspective, the 1313 level on the S&P 500 is the next order of business.

And don’t forget: When we make it back to this level, we’re getting very close to the pre-recession highs of 1500-plus. While that’s by no means a done deal, there’s little doubt we’re headed in the right direction at a solid pace.

But it’s not just the market’s technical factors that have me jazzed. The fundamentals are on the right track, too…

Fundamentals Improving Big Time!

For a while now, I’ve said that the housing market got us into this mess and the housing market will get us out.

Well, the facts are in: Housing is beginning to show consistent signs of life.

Sales of existing single-family homes jumped 7.2% in July compared to the month earlier. That’s the largest increase since the National Association of Realtors began tracking data way back in 1999. Plus, it marked the fourth monthly increase in a row.

In other words, the improvement in the real estate market isn’t just a flash in the pan. It’s here to stay.

But that’s not all. Compared to July 2008, home sales were up a solid 5%. That’s the first year-over-year gain since November 2005. And that means the real estate market is showing significant legs, even when dealing with tough year-ago comparisons.

Another positive: The improvement in home sales is geographically broad-based. Take a look at this chart…

As you can see, home sales improved across the board during July. In fact, they’re up 13% in the Northeast, 11% in the Midwest and 7% in the South. Only the West region showed a small 2% decrease.

And it’s not just the real estate market that’s showing solid fundamental action. The broader economy is looking good, too. According to Federal Reserve Chairman Ben Bernanke…

“Fears of financial collapse have receded substantially… After contracting sharply over the past year, economic activity appears to be leveling out, both in the U.S. and abroad, and the prospects for a return to growth in the next year appear good.”

And he’s not alone. According a survey of economists by the Wall Street Journal, 28 of 45 respondents say the recession is already behind us, and 16 say it will end by December of this year.

I don’t know about you, but that’s a hugely bullish factor to me. But there’s more: GDP forecasts are also on the rise. Take a look…

As you can see, economists are calling for a big improvement in GDP over the next year. In fact, even though GDP contracted 6.4% and 1% in the first and second quarters of this year respectively, analysts are looking for improvements for next four consecutive quarters in the 2.1% to 2.8% range.

Bottom-line: Stock prices are zooming higher and are now cleared to take out levels not seen since August of last year. In addition, strong fundamental factors — including an improving real estate market, a huge call for an end to the recession and solid GDP projections — are adding solid foundation to more price surges. And no matter how you slice it, that’s positive for your portfolio.

Best wishes,
Wayne Burritt

Source: Stocks Are Set to Rocket in September

And to cap it all, we are about to close the first half of 2009, with all the consequences in terms of portfolio adjustments that need to take place.

The Treasury debt placement was well received by the markets.   We saw these issues amply oversubscribed and trading well after their placement.  This was very encouraging.  End of the half adjustments also saw a bid coming back into the U.S. dollar.  And, with the Federal Reserve issuing a statement in which they are not expanding quantitative easing further, the ghost of hyperinflation is delayed for the time being.

With all the slack in the U.S. economy there is no room for manufacturers to pass cost increases on to consumers.  As the fiscal and monetary stimuli become ingrained, this will change.  But for the moment, the great fears of a runaway monetary base have been moderated.

This view is also supported by the commentaries of both Warren Buffet and General Electric Co. (NYSE: GE) Chief Executive Officer Jeffery Immelt.  The oracle of Omaha saw no recovery yet in his numbers.  And Buffett’s group holdings are diversified enough, and he and his management team are as well connected enough, to be ahead of any recovery.

Similarly, Immelt commented that the underpinnings for a recovery were in place.  And he also observed that China, and some government-driven emerging markets are strong and could be driving U.S. exports.  He did mention that the thrust of aircraft engine orders come from abroad rather than the United States.

In this column, we took early and aggressive advantage, starting last October and December, of low market valuations.  The market did not price then the strong monetary and fiscal stimuli that were devised to bolster the economy.

Without the Fed’s strong measures and quick actions, we would have fallen into a deflationary spiral and much deeper downturn.  But the Fed’s actions normalized markets one by one; starting at the epicenter, the interbank and money markets, and moving outward in concentric circles through mortgages, and student and car loans.  These actions helped bring the corporate bond markets and the equity markets back to life.

Stocks appreciated the Fed’s effort, as the market shifted its valuation from an “end-of-the world” scenario to a deep recession scenario or better.  But that trade is over.

As Warren Buffet says and Jeff Immelt implicitly recognize, the recovery will take a long time to materialize.  There are still huge numbers of homes facing foreclosures, and the slack in the U.S. economy is very pronounced.  We need to see some more good news in order to justify higher valuations.

Ahead of this realization by the market, we have been in profit-taking mode for the most volatile stocks and moved to hold for longer-term recommendations.

The Standard & Poor’s 500 Index has recognized this and had started moving sideways with a very slight downward bias as of late.  Do not construe this to be bad news.  In fact, the cup-and-handle formation in the S&P 500 usually precedes a sharp move up.

That is a very distinct possibility that we will eventually be playing with many of our existing ‘Buy’ recommendations, as well as with new ones, should the scenario materialize.  But we need to get over the cap-and-trade and healthcare reform humps.

If the cap and trade legislation passes, the overall cost of energy will go up, taxing the whole economy, and there will be a shift to renewables, creating many jobs in this industry and ample profits.  We need to see these issues defined before pulling the trigger in most hugely actionable trades.

So, I started screening different income-generating strategies and I discovered a great way to have both upside with high-yielding, yet low-default bonds, and at the same time enjoy dividends from mammoth companies that are likely to keep paying them: The TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW).

I normally shun from recommending funds.  Why pay management fees when I can come up with a similar strategy on my own and recommend it to you?

But there are two circumstances that make this case different:

• When there is such a level of expertise behind the strategy that it would be almost impossible for a non-expert to replicate with a decent chance to obtain similar results.
• And when the value of diversification is huge, and such diversification is unavailable or almost impossible for the individual investor to obtain.

Both of these reasons are huge factors here.  Let me explain.

Let’s start by explaining what this fund has in its belly.  It can invest from 50% to 60% of the fund in tax-free municipal securities and between 40% and 50% in equities and other income securities.  So we are not only playing the rally in bonds that stand to benefit from the markets’ realization that we are in for a longer recession than expected, that inflation is very subdued, and that the debt placements by the U.S. Treasury were well received.

It helps the bond market a lot to have seen that the Fed did not continue expanding its quantitative easing.  So why not benefit from this by buying high-yielding, tax–free bonds?

We are going to get both capital appreciation and a high yield.

The fund is positioned right now some 54% in munis and 10% in other income. And it is well diversified in 59 strong large caps with an average market capitalization of about $55 billion that pay an average dividend yield of 4.85%!

The key to the strategy is executing precisely in the muni world, given the fund’s higher weight in it.  Also, this very specialized asset class requires detailed credit analysis of municipal and project finances.  The beauty of most munis is that these jurisdictions have taxing power and they are careful to keep their credit ratings.

In fact, fund’s holdings are 42% in AAA-rated bonds, making it 88% of the bond holdings rated single A or better.  In addition, it has a duration of 15 years, which will be beneficial to returns with a bond rally.

But as many in the market learned painfully last year, “not all AAA bonds are made equal,” and many went straight to default.  I have known this for a long time and have always done my own research on credit quality, never relying on rating agencies.  Because of this discipline, I was able to get out of Enron, Worldcomm, the toxic-waste-laden structured investment vehicles, and innumerable securities well before they were downgraded to junk.

So why am I sending you to a muni-heavy fund, at a time that the US municipal and state finances are under such pressure?  Because I know the manager of the fund very, very well.  He is not just your typical fund manager.  He is someone that has been at the top of his class for decades.  He is extremely well known by his clients, issuers, and Wall Street, which grants him top-level access.

I used to work a few offices down the corridor from Vincent Giordano at Merrill Lynch Asset Management and cannot even begin to tell you how much I have learned from him over the years.  He was responsible for bringing the municipal bond management of the firm up to above $60 Billion from $2 Billion by the time he left to start this fund.  He did that on the basis of exemplary and disciplined performance, leveraging the superb distribution network that Merrill Lynch has.  “Vinnie,” as all his friends call him, is the poster-child of discipline, never becoming complacent and always questioning his own assumptions.  This requires inordinate amounts of reading, research and consulting the best sources in the market.  He is a master of risk-reward analysis, which is the key in any investment.

But get this:  The fund is trading at a 12.46% discount to Net Asset Value.  That is, as a closed-end fund you are buying exposure to the securities it holds at such discount to what you would have to pay just to buy them yourself.

In addition, the fund yield is an amazing 9.50%, most of which is tax free, since it is coming from munis.

Hence, on the back of a very supportive fixed-income environment and to keep a toe in high-dividend, strong large caps, we go for an expertly-managed and well diversified balanced muni-equities fund.

Recommendation: Buy the TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW) at market (**)

Source: Buy, Sell or Hold: The TS&W/Claymore Tax-Advantaged Balanced Fund is a Diversified Profit Play with a High Yield

The Financial Times led off one headline column this week thundering:

“The world economy will this year suffer its worst performance for more than 60 years with a serious risk that 50 million people will lose their jobs, international organizations warned yesterday.”

The consensus has gelled. Now it’s just a matter of who can come up with more staggering figures. The IMF says global output will fall for the first time since the World War II. And 50 million are a lot of people.

Where to invest is the question. In pockets of strength is one answer. Where might these be?

Warren Buffett likes railroads and recently upped his stake in Burlington Northern. He now owns 22% of the company.

The railroads are interesting because they have put up increases in earnings despite declines in freight volume. Union Pacific (NYSE:UNP) reported a 35% rise in fourth-quarter earnings, despite a 12% decline in carloads. CSX (NYSE:CSX) reported a 16% gain in earnings. Burlington, Buffett’s darling, reported a 19% increase. Canadian National Railway chipped in an 11% increase.

A good chunk of those increases is due to a lag effect in fuel surcharges. When those fuel surcharges come down, as the price of oil is now much lower, so too will some of those earnings. But not all.

In fact, railroad executives have been pretty confident in their ability to continue to raise prices on their customers. Railroads have to compete with truck and other means of transport in many cases. The railroads say that even with the increases, it’s cheaper to ship by rail than it was 28 years ago — adjusted for inflation.

Railroads are also pretty green. One rail car can carry freight 436 miles on one gallon of fuel, according to the American Short Line and Regional Railroad Association. And it emits far fewer carbon emissions than a truck, at a time when that could be very important.

Even so, the freight volume falloff has investors worried. Union Pacific chief James Young said that freight volumes fell 18% in the first three weeks of January. In some areas, the drop-off is really something — like the 60% drop in auto-related freight Young cited.

Whew, you see stuff like that and you think the world must really be coming apart at the seams. Still, Buffett is a buyer, and the prices might discount a lot of bad news already. Many of the big railroads trade for single-digit price-to-earnings ratios, and the industry as a whole goes for about 9 times earnings.

Buffett isn’t the only one taking a look at railroads. Donald Coxe, another investor I respect, thinks it is also a good time to be looking at the railroad stocks. “They benefit from lower energy costs,” he writes in a recent note to clients, “which may offset a significant percentage of the cutback in top-line revenues during the recession. Coming out the other side, they should be core investments.”

David Winters, of Wintergreen Advisers and another investor with a good long-term record, also likes railroads. He calls them “unduplicable franchises” protected by huge costs of entry.

In addition to railroads, there is timberland. As I’ve noted before, timberland values have held up well in this mess. The Wall Street Journal recently ran a piece on timberland and included this chart.

How can timberland values continue to climb when nearly everything else is going to pot? The WSJ quotes Jeremy Grantham of GMO: “As long as the sun shines, the trees will grow. Timber will never be an orphan.” Timberland appreciation for the past decade was 4.1%, versus a negative 3.8% for the S&P 500, according to the WSJ. That kind of long-term appreciation has always been timberland’s great appeal.

The other great part about timberland is if timber prices are unfavorable, you just don’t harvest your trees. You let ’em grow. And their value increases anyway. “Trees keep growing 4% per year, no matter what happens to inflation, interest rates or market trends,” says Dennis Moon, quoted in the WSJ story. Moon is head of U.S. Trust’s group overseeing timberland. “You don’t have to cut them down this year if that doesn’t make sense.”

Source: Buffet’s Investing in Railroads in Early 2009

• Warren Buffet’s Berkshire Hathaway Inc. (BRK.A, BRK.B) is investing 3 billion Swiss francs ($2.6 billion) in Swiss Reinsurance Co. (ADR: SWCEY ). Swiss Re, which is expecting a net loss, said it is also seeking another 2 billion francs on the capital markets, the Associated Press reported.

• Renowned global investor Jim Rogers said he’s keeping his money out of weakening Russia – saying there is “a good chance Russia will continue to disintegrate into more than one country” in a Bloomberg Television interview. “I am not optimistic about the continuous stability of Russia,” Rogers said.

• Ford Motor Co. (F) is talking with China’s Geely Auto Holdings Ltd. (PINK:GELYF) about unloading its unprofitable Volvo unit, several sources told Bloomberg. Ford has also contacted China’s Chery Automobile Co. and Chongqing Changan Automobile Co. about Volvo, the people said.

• LVMH Moet Hennessy Louis Vuitton SA (ADR:LVMUY) said net income dropped 4.2% to $1.5 billion (1.14 billion euros) in the six months ending in December, missing analysts’estimates for second-half profit, Bloomberg reported.  The world’s largest luxury-goods maker said higher handbag sales failed to offset slumping demand for Hennessey cognac and Moet champagne. The financial crisis has crimped demand for even the most expensive luxury goods, eroding sales in the $230 billion (175 billion-euro) luxury goods market.

• U.K. Prime Minister Gordon Brown signaled he won’t block bonuses to executives at Royal Bank of Scotland Group Plc (ADR: RBS) as lawmakers stepped up pressure to adopt a U.S.-style plan capping pay. While he told reporters he supported President Barack Obama “strongly” on the need to change the way bankers are rewarded, he twice refused to say he’d ban bonuses at RBS, Bloomberg reported.  The U.K. government is taking a 70% stake in RBS after the Edinburgh-based institution tapped part of the Treasury’s 50 billion-pound recapitalization fund.

• U.S. mortgage rates jumped to their highest levels since December this week, frustrating efforts to bring mortgage rates down to levels that will spur demand and help the hard-hit housing market begin to recover, Reuters reported. Interest rates on U.S. 30-year fixed-rate mortgages rose to 5.25% for the week ending February 5, up from the previous week’s 5.10%, according to a survey released Thursday by home funding company Freddie Mac (FRE).

• The National Retail Foundation said current economic stimulus legislation might not do enough to spur consumer spending and repeated its call for a series of temporary sales tax holidays. The retail trade group estimates that the proposed tax holidays would save consumers about $20 billion, or $175 per family, reported. The U.S. government would reimburse states for the lost revenue.  The proposal comes as the NRF forecasts a 2.5% drop in retail sales in the first half of 2009.

Source:  Global Investing News Briefs Friday, February 6th, 2009

Warren Buffet continues to show investors why his name is consistently at the top of the list of richest Americans. The man makes deals that simply work, no matter what happens in the industry or economy surrounding him.

Take this week’s news as a prime example. Buffet wanted to diversify into the nuclear-power industry, so he offered to buy Constellation Energy Group (NYSE:CEG) for $4.7 billion. It was a pretty low bid and drew plenty of criticism from shareholders.

But most importantly, it drew bids from other competitors.

Shortly after Buffet made his bid, French utility giant Electricite de France stepped in and made an offer for just 50% of Constellation’s nuclear operations. It was willing to pay $4.5 billion.

Naturally, you would think Buffet would walk away from the deal with his tail between his legs. But you do not become a multi-billionaire without the savvy to hedge your bets. Buffet had a termination clause in his contract with Constellation that allowed him to prance away with almost $1.6 billion in profits after the proposed deal went sour. Not bad.

How does he do that?

With Buffet’s kind of investing intelligence, it is certainly no surprise to see another one of his prized holdings making bold moves today. Coca-Cola Enterprises (NYSE:CCE) boosted its 2008 earnings estimates this morning and issued a strong forecast for 2009. As I write, shares of the iconic company are up by more than 10%.

The economic maelstrom is having dramatic effects on the cola manufacturer, but the impact appears to be nothing the company’s management team cannot handle. The company is cutting unnecessary operations, increasing brand integrity and reducing supply chain waste. They are margin-increasing moves that will lower the company’s exposure to economic headwinds.

What is most intriguing is the impact macroeconomic factors are having on the company. With a well-known, inexpensive product, Coke does not have to worry about declining sales. It is not as if people need credit to buy a two-liter bottle of Sprite.

So while most firms are struggling from a lack of demand, Coke has the enviable position of actually being able to take advantage of the deflationary pressure storming the economy.

Today’s report shows how falling commodity prices are a boon to the company’s bottom line. The cheaper its inputs, the higher the company’s profit margins.

Repatriating profits

But what investors really need to pay attention to are currency fluctuations. Coca-Cola has a huge global exposure. Its products are sold through an array of currencies, but its profits are calculated in dollars.

If the dollar continues the downward spiral it is enduring this week, revenues repatriated from euros and yen could be significantly higher this time next year. Instead of one euro buying $1.37, right now the company can get $1.43. The story is even more dramatic with the yen.

The news from Coke is more proof that Buffet’s buy-what-you-use strategy has increasing merit.

Throughout the last few months, consumer staples like McDonalds (NYSE:MCD), Campbell Soup (NYCE:CPB) and General Mills (NYSE:GIS) have all proven to be strong, market-beating investments. That theme’s importance will only increase as the economy continues to slow.

If you are a traditional value investor like Buffet, look in your pantry for investing ideas. Stick with companies with broad economic exposure and a product lineup that will remain in high demand no matter how bad the economy gets.

It is how Buffet got rich and it is how you will boost your portfolio into something worth bragging about.

Source: Coca-Cola (CCE) teaches us a valuable lesson

This from Money Morning:

Although still seen as the world’s economic superpower, the United States has found itself with a myriad of problems: Skyrocketing federal debt, growing annual budget deficits, an almost nonexistent personal savings rate, and the dubious honor of being the country with the largest current account deficit, of which trade makes up the largest part.

A trade deficit occurs when you are importing more than you are exporting — in other words, you are consuming more than you are producing. So the next time you are at Wal–Mart (NYSE:WMT) or Target (NYSE:TGT), take a look around. Just about everything you can purchase there comes from another country.

Economists are generally split over what the economic impact of a trade deficit is on a country. Those who defend running a trade deficit argue that when the United States sends money to another country for its goods or services, that country will take that money and invest it back into the United States, in one way or another. In economist Milton Friedman’s opinion, having a large trade deficit meant that your country’s currency is desirable. He believed that a trade deficit simply meant that consumers had an opportunity to purchase and enjoy more goods at lower prices; on the flip side, a trade surplus implied that a country was exporting goods its own citizens did not get to consume or enjoy, while paying high prices for the goods they actually received.

However, as those on the other side of the argument point out, countries with large and long-term trade imbalances also maintain a low national savings rate. Conversely, those countries with trade surpluses (such as Germany, Canada, and Japan) have a high national savings rate. Those arguing against trade deficits believe that gross domestic product (GDP) and employment will be pulled down by a large trade deficit over the long run. As goods flow into the United States from other countries, the country is losing opportunities to produce these goods domestically, which subsequently has an adverse effect on U.S. jobs.

Somewhere in the middle of these two sides is the world’s richest man, Warren Buffett. Buffett believes that, on a whole, trade is a good thing for America, but that over the long term, running “large-and-persistent” trade imbalances will be problematic for the United States.

Buffett realizes the importance of having the average American understand big economic issues, like the trade deficit. As a result, he wrote an article in 2003 for Fortune magazine, called “Squanderville vs. Thriftville.” This parable of sorts was designed to simplify for the readers the problems inherent in trade imbalances.

“Economics tends to put people to sleep,” Buffett told us when we sat down with him in his office at Berkshire Hathaway Inc. (BRK.A, BRK.B), where he is CEO and largest shareholder. “And I thought by creating a couple islands with inhabitants of quite widely different activities that it might get across a point that otherwise they get lost on.”

In Buffett’s story, he outlined two side-by-side islands: Thriftville and Squanderville. On these islands, land is the capital asset, and these primitive people only need food and produce only food. At first, the citizens of both islands work eight hours a day and produce enough to sustain themselves. However, as time passes, the Thrifts realize that if they work harder and put in longer hours, they can produce a surplus of goods and then trade what they produce with the Squanders. The people of Squanderville like the idea of working less — and all the Thrifts want in exchange for these goods are “Squanderbonds,” which are denominated in “Squanderbucks.”

As time goes on, these Squanderbonds begin to pile up and it is clear that the Squanders will have to put in double time to eat and pay off their growing debt. “Meanwhile,” writes Buffett, “the citizens of Thriftville begin to get nervous.

Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.”

“At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat — they have nothing left to trade — but they must also work additional hours to service their debt and pay Thriftville rent on the land that they so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.”

In a nutshell: Buffett’s story illustrates that any short-term actions have long-term consequences that sometimes people don’t think about in the short run. This is true of the United States.

“Our country’s ‘net worth’,” Buffett writes in the introduction of his Fortune article, “is now being transferred abroad at an alarming rate. A perpetuation of this transfer will lead to major trouble.” And it may be more than just economic trouble. History shows that countries with similar trade and debt problems are fertile ground for political movements we’re not accustomed to in a democratic society.

In 2007, the total U.S. trade deficit was $738.6 billion, which was down 9% from 2006. Much of the decline could be attributed to a decline in the value of the U.S. dollar. The popular argument suggests that a lower dollar makes production of goods in the United States cheaper and therefore more attractive to buyers of U.S. goods overseas. Exports would go up. And in fact they are, each year.

Some would argue that the dollar is being kept weak to help close the trade gap.

“If I could finance all my own consumption today by handing out something called Warren Bucks or Warren IOUs and I had the power to determine the value of those IOUs over time, believe me, I would make sure that when I repaid them 10 or 20 years from now that they were worth less, per unit, than they are today. So any country that piles up external debt will have a great temptation to inflate over time, and that means that our currency, relative to other major currencies, is likely to depreciate over time.”

And this is just what the United States is doing. From November 2002 through August 2008, the dollar has fallen more than 50% against the euro. Some experts will argue that a weaker dollar benefits the United States — at least where the trade deficit is concerned.

What is not pointed out in this argument is that a falling dollar – paired with low domestic productivity – means that the country is consuming more than it produces. In that sense, since the dollar is losing purchasing power, Americans are paying more for these imports, and the rise in these import costs erases any sort of benefits the country would have seen because of a falling dollar. In other words, America is getting fewer goods for the same amount of money — but that isn’t slowing down the rate of American consumption.

“In the past six or eight years,” Buffett explains, “the United States has started consuming considerably more then it produces. It’s relied on the labor of others to provide things that are used every day. Because the country is so rich, this can continue for a long time, and on a large scale — but not forever.”

Buffett likens it to a credit card. “My credit’s pretty good at the moment,” he says, which usually draws snickers from the audience. “If I quit working and have no income coming in but keep spending, I can first sell off my assets and then, after that, I can start borrowing on my credit card. And if I’ve got a good reputation, I can do that for quite a while. But at some point, I max out. At that point, I have to start producing a whole lot more than I consume in order to clean up my debts.”

The trade deficit aside, Buffett doesn’t believe that the economic situation in the United States is as dire as many of the other experts with whom we’ve spoken have made it out to be. While he warns to not “bet against America,” because he believes that we have a healthy overall economy, what does keep the Oracle of Omaha up at night is the imbalance between imports and exports.

“The rest of the world is buying more and more of our goods all the time, but at an even greater rate, we’re buying more and more of theirs. More trade, overall, is good — as long as it’s true trade. If it’s ‘pseudo trade,’ where we’re buying but not selling, I do not think that’s good over time.”

This is why the U.S. trade deficit remains high. The United States is consuming more than it is producing. The country’s dependence on foreign oil, automotive parts, and cheap consumer products from China accounts for almost the entire deficit.

[Editor’s Note: The following essay was adapted from the book, “I.O.U.S.A.: One Nation. Under Stress. In Debt,”a companion offering to the critically acclaimed documentary “I.O.U.S.A.”]

Source: A Trip Down the Road to Squanderville

As a sign of the times, InBev’s Chief Executive Carlos Brito did it with style – appearing on an interview-style video on InBev’s web site that directly addresses the fears of the legion of Anheuser workers and drinkers – jobs, foreign ownership, brand synergy.

“I think what’s in important here is that Budweiser the beer will continue to be brewed in the same brewers – we don’t have plans to close any brewers – by the same people according to the same recipe,” Brito said. 

The proposed merger, which appraises Anheuser at a 35% premium, is a combination of high performance and common sense, he said.

“This company is going to be the world’s leading brewer,” Brito noted, calling the merger a natural step. “It’s going to be among the top five consumer goods companies in the world.”

InBev’s line of beers includes Stella Artois, Beck’s, Hoegarden and Brahma.

Anheuser is the maker of Budweiser, Busch and Michelob brands. It also owns a 50% share in Grupo Modelo, Mexico’s leading brewer, and a 27% share in China brewer Tsingtao, whose namesake beer brand is the country’s best-selling premium beer.

News of the proposal sent shares of both companies up in morning trading today (Thursday). And that’s a more elemental to the proposal than before now that the long-time Busch family-run brewer owns only 3.5% of the company’s shares.

Instead, the top shareholder is Warren Buffet’s Berkshire Hathaway (BRK.A, BRK.B) with a 5% stake. And with controlling power dispersed, it’s much easier for shareholders to push the deal through.

Anheuser-Busch said in a statement that its board of directors will evaluate the proposal carefully and in the context of all relevant factors, including the company’s long-term strategic plan.

“The board will pursue the course of action that is in the best interests of Anheuser-Busch’s stockholders” and “expects to make its determination regarding InBev’s proposal in due course.”

Beverage Providers Stirring Global M&A

Yesterday, (Wednesday), Merrill Lynch & Co. Inc. (MER) analysts said that Foster’s Group Ltd. (OTC: FBRWY) – Australia’s biggest beer and wine maker – may be a takeover target after it conducts a review of its wine business.

Earlier this week, Foster’s cut its earnings forecast and announced a $730 million write-down of its wine unit, causing Chief Executive Officer and Executive Director Trevor Louis O’Hoy to announce his resignation from his post.

Should Foster’s put itself on the block, it would join Anheuser, InBev and other major global beverage providers that have been on the giving and receiving end of billion-dollar buyout offers.

In March, France’s Pernod Ricard SA won a highly contested auction to buy V&S Group – makers of Absolut vodka and Cruzan rum – from the Swedish government for $8.9 billion.

In January, Carlsberg A/S and Heineken N.V. (OTC: HINKY) agreed to buy Scottish & Newcastle PLC for $15.4 billion.

And late last year, British-owned SAB Miller PLC (OTC: SBMRY) and Canada’s Molson Coors Brewing Co. (TAP), agreed to merge their U.S. brewing operations.

Source: InBev Offers Anheuser $46.3 Billion, a Deal That Would the Create World’s Largest Brewer

Chinese shares have fallen so much this year that its markets now offer bargains galore. Just about everywhere you look, some of the world’s most exciting companies are going for a song. China’s “great spring sale” has kicked off. And we’re going bargain hunting.

Take the Guangshen Railway Co., for example. It operates trains in China’s richest province, Guangdong. Analysts expect that its net earning will grow by 41 per cent over the next two years. Contrast that with America’s second biggest railway company Burlington Northern Santa Fe. Burlington is expected to grow earnings by 31 per cent over the same period.

At the end of last week, Guangshen was trading at a price-to-earnings ratio of 17.3. Burlington was trading at a P/E of 20.8. So, right now you can pick-up the faster growing Chinese company at a 17 per cent discount to Burlington.

Why am I focusing on Burlington? Because investment legend Warren Buffet sees it as one of the best investments available in the U.S. He has bought about 20 per cent of the company already and is keen on adding to his holding.

Guangshen isn’t a one-off case either. Look at Aluminium Corp. of China Ltd. (Chalco). It is offering investors twice the profit growth of America’s Alcoa Inc – the world’s biggest aluminium company. Chalco’s Hong Kong listed shares now trade at a P/E of 14.5. That puts them at an 11 per cent discount to Alcoa.

So many bargains… so little time…

China’s CSI 300 Index, which tracks the leading companies on both of China’s stock markets, has fallen by 32 per from its October peak. That’s the biggest decline among the world’s 20 biggest equity markets. Hard luck if you were already invested in it, but excellent news if you’re looking to get in.

The slump has narrowed the CSI 200’s price-earnings gap with the Standard & Poor’s 500 Index to just 13 per cent at the end of last week. It was 139 per cent at its October peak. Companies in the CSI 300 now trade at an average price-earnings ratio of 26.4, down from a record of 52.8 in October. So, right now, they’re just slightly above the 23.4 ratio for the S&P 500. And China’s higher growth rates justify that.

But take a look at the Hang Seng China Enterprises Index. It measures the performance of 42 major Chinese companies that trade in Hong Kong. It has been cheaper than the S&P 500 since March and is now valued at 18.1 times profit. That puts it on a 12 per cent discount to the U.S. markets.

China is over-sold

That brings me back to a point that I have been making here in this newsletter – The Asian markets have been massively oversold. A correction was in order, but the current sell-off has gone beyond what can be justified by the fundamentals.

The CSI 300 surged by 478 per cent over the last two years as China’s economy continued to race ahead and the government increased the supply of state-owned shares. But valuations clearly got well ahead of themselves. The rally fizzled this year on fears that prices had outstripped earnings prospects, that new share sales would overwhelm demand and that the highest interest rates in nine years will slow profit growth.

But those fears have been overblown. Chinese companies’ earnings actually grew by 5.5 per cent in the first three months of this year. Things haven’t gone so well in America. U.S. companies profits have dropped by 16 percent in the first quarter. China is clearly the better bet right now. Even after this years’ declines, the CSI 300 is still 322% higher than it was three years ago.

A good time to buy in.

So, the correction in China provides a good opportunity to get in. A lot of the best companies are now trading on very attractive valuations. Even if we make allowance for overly optimistic growth forecasts for some of them, they still offer much better value than you are getting in the West right now.

How do we best play this? I like the country’s transport sector. The Chinese economy is still booming; and so is most of Asia…

I am tremendously bullish on Asian shipping companies at the moment. Right now, I see fantastic value in this sector, and nowhere better than in China.

Regular Profit Hunter readers will be receiving my brand new Chinese shipping recommendation very shortly. Get in on this service now so as not to miss out on our latest tips, reports and much, much more…

Regards

Manraaj Singh

Profit Hunter
Editor

Source: Chinese Share Panic Gives Us Once in a Lifetime Opportunity

The underlay of these two emotions are complacency and lethargy, respectively.

The current rally which took the sensex up from 14,700 to 17,700 may lead investor to become complacent, or sanguine, for old times sake. They ought not to. Better buying opportunities should come later.

The reason for the caution are that both domestic and global factors warrant a display of caution. General elections at the Centre are due next year, but expected to be called late this year as the ideological strains of smiling for a family picture will start telling and as a coalition Government turns into a collision Government. States like Karnataka are going to the polls shortly.

Governments, except under severe pressure as in 1991, tend to take foolish economic decisions. As elections approach, they compete even harder for foolishness, bordering asininity. Parties in Karnataka are promising things like free power, a complete waiver of farm debt and other things, in order to curry political support. This largesse, of course, comes from Government (hence tax payers) coffers and not from party coffers which, logically, it should. One way to bring a measure of sanity would be to ask political parties to bear a part of the cost (say 10%) of electoral promises from party funds!

Foolish decisions take their toll on companies and on the economy; thus on stokmarkets. The subsidy provided for petroleum products is estimated at Rs. 77,000 crores, comprising petrol (7,300), diesel (35,700) PDS kerosene (19,100) and LPG (15,500). This is borne by the Government and upstream and downstream oil & gas companies who are partly compensated for the losses through issuance of bonds. The downstream companies such as IOC, BPCL and HPCL are financially haemorrhaging and have become highly leveraged. They do not now, have money to import diesel without which road transport would come to a halt and economic growth would not be the expected 8.5% or more.

With crude oil prices relentlessly rising (they hit $ 126/b) the subsidy burden can only balloon and the foolishness of the subsidy policy only exacerbate. A rebalancing of our energy mix is needed and the main hope is gas, which, fortuitously, we have discovered in good measure. Gas, however, would remain buried under the sea until its pricing, now in dispute, is expeditiously resolved. We cannot afford the luxury of a slow moving judicial system; the issue has to be settled soon and with finality.

The foolishness of Government interference and its impact on companies is also evident in the telecom sector. In Mar 2006 BSNL, a wholly owned Government telecom company, launched a tender for some 45m lines. Being a Government entity, the tendering process was subjected to challenge by writ, and finally the tender was drastically pruned on ministerial instruction. BSNL, which then had 17.6m customers, grew to 40.7m customers two years later. Private sector Bharti Airtel, not subjected to meddling, has grown from 19. 5 to 62m customers in the same period.

Bharti is now seeking to expand overseas, by trying to acquire MTN of South Africa (not to be mistaken with MTNL, which Bharti would be reluctant to acquire, given the differences in work culture). BSNL is now opening a new tender for 93m. lines, worth some Rs. 40,000 crores, which would have equipment suppliers salivating and one hopes that the Government has learnt the errors of micromanaging and doesn’t do anything foolish to interrupt it.

Yet other examples of Government pre election actions are in its arm twist of steel companies in both public and private sector, to bring down prices, never mind higher input costs, which they have agreed to now. The prices would, naturally, play catch up once elections are over. Or in the ban on future trading in agro commodities in order to contain inflation is another. Even though a Government committee found no link between prices and futures trading, this was banned. Consequently prices of soya oil, e.g. have soared, instead of fallen!

In fact there is now an illegal market in Indore, called dabba market, which trades in commodities like soya oil and settles trades through the unofficial hawala route. The ban is completely irrational and only a gesture towards containing inflation, without success. The market for the commodity is being exported. If this is not Kafkaesque, what is?

In corporate news of interest, L&T is undertaking a restructuring which would involve hiving off of a dozen operating subsidiaries, thus unlocking a lot of value. The parent company would have a board to guide these subsidiaries and to manage the L&T brand, which is estimated to be worth $ 2b. It is one way to protect the company from takeover; perhaps the trigger was the likely sale by SUUTI (the SPV formed to take over distressed UTI 64 assets) of its 9.1% stake in L&T.

The US $ slid against the Euro and other major currencies, but, surprisingly, especially with elections around the corner, has strengthened against the rupee, which went up to over Rs. 41.5 to the dollar. Perhaps due to massive RBI intervention in buying the greenback.

Globally, too, there is need for caution. Warren Buffet has warned of further pain in the financial system, though not, thankfully, of a panic. Panic was caused by excessive fears of counter party risk having slowed credit growth and was averted by the actions of the US Fed whilst rescuing Bear Sterns. Poor quality securitised mortgages were exchanged for higher quality Government bonds. It seems to have worked in restoring confidence for now. The US Fed seems to have suggested an end to cuts in interest rates.

The sensex fell on all five days of trading last week, losing 862 points to end at 16737. Of the 30 stocks, only two, viz Tata Steel (which contributed 35 points) and HUL (1) were in the black. Major contributors to the decline were RIL (156), L&T (117) and ICICI (99). The Nifty lost 245 points to close at 4982.

It is possible that there could be another rally to take the sensex back to 17,500 levels. If and when that happens, remember the title of this column.