:) Ben Bernanke should date Jessica Simpson

Some of of you think I’ve been too harsh on Federal Reserve Chairman Ben Bernanke. I apologize. To show Bernanke how nice I am, I’m writing this post to show him a way to keep his reputation intact no matter what happens to the economy and financial markets.

Until recently, Tony Romo of the Dallas Cowboys has been dating singer Jessica Simpson. The media blamed her for Romo’s mistakes on the field and the Dallas Cowboys losses. Of course, they didn’t credit her when things were going fine for Romo and the Cowboys.

But all this gives me an idea. Helicopter Ben should date Jessica Simpson. She should show up to watch him at FOMC meetings and Congressional hearings. You know that Helicopter Ben would NEVER be too cheap for her, because all he has to do is print extra money to accomodate all her trips to Rodeo Drive. If anything happens to the economy, everyone has an easy scapegoat – her. After all, Jessica is the dumb one who had to ask if Chicken of the Sea is chicken or fish, thought buffalo wings were made out of buffalo meat, and spent $1400 on a set of Egyptian bedsheets that she ended up not even sleeping on. So the media can then blame everything that goes wrong with the economy and financial markets on her, and Helicopter Ben and Easy Al.com can get off scot-free.

NOTE: I hope I made it clear that this is not a serious post.

Model Portfolio update – bought Berkshire Hathaway Class B stock

The Model Portfolio bought 2 shares of Berkshire Hathaway Class B stock at yesterday’s closing price of $4095/share. The cost was $8190 for the two shares and $40 for the commissions, or a total of $8230. This brings the cash balance down from $79,966.58 to $71,736.58.

The Model Portfolio now consists of:
$71,736.58 in cash
2 shares of Berkshire Hathaway Class B
222 shares of DFJ
103 shares of FXY

Buying Berkshire Hathaway Class B

For the Doppler Value Model Portfolio, I am buying 2 shares of Berkshire Hathaway Class B stock, which will be 8%-9% of the portfolio. Under the rules for the model portfolio, this transaction will take place at the end of the day on Monday, May 12th at the closing price. I already am a Berkshire Hathaway shareholder, and I hope you are as well.

Berkshire Hathaway stock is a real blue-chip investment. It’s hard to argue with the long and successful track record of Warren Buffett and Charlie Munger. They have both created a pro-shareholder, pro-value culture that will live on through their successors long after they move on to the great See’s Candy store in the sky. Berkshire Hathaway owns a diversified collection of high-quality businesses, so intrinsic value will not be seriously affected by negative economic conditions or company-specific bad news.

Berkshire Hathaway is also a safer inflation hedge than gold. A Motley Fool article from this past January summarized the case for Berkshire Hathaway over gold.

Although I am convinced that inflation is a major issue, I have not and will not buy gold. Gold is a very risky investment that can go down as well as up. In the long run, gold tracks inflation. Most importantly, gold has no intrinsic business value. A business has a balance sheet and earns income and cash flow. You can analyze the business and make a rough estimate of its intrinsic business value. The same does not apply for gold. If I bought gold, I’d have no exit strategy. I cannot tell you if gold should be selling for $300/ounce or $3000/ounce. Just because inflation is heating up now doesn’t mean that will always be the case. There is always room for surprises. Maybe Helicopter Ben’s efforts to inflate the dollar into oblivion will fail, perhaps because a big enough collapse in housing or credit begins to destroy money faster than it is created. Maybe Helicopter Ben will get caught lip-syncing on “Saturday Night Live” and get replaced by Paul Volcker. If I buy gold but something unexpected happens, I could lose a lot of money.

Berkshire Hathaway, on the other hand, has intrinsic business value and is selling for a reasonable multiple, 1.67 times book value. Berkshire Hathaway has thrived in a variety of different economic conditions, averaging 21.1% annual growth in book value from 1965 to 2007. This period has included multiple recessions, the oil embargo of 1973-1974, multiple bear markets, a 16-year period of stock price stagnation, double digit inflation, double digit interest rates, a prime rate as high as 21%, the decline of General Motors and IBM, Democratic and Republican presidents, the S&L bailout, and much, much more. As Buffett has explained in past annual reports, the best hedge against inflation is a superior business franchise. A company with a superior business franchise can raise prices with little capital investment and with little or no penalty in sales volume. Capital-intensive companies in highly competitive industries, on the other hand, are hit hardest by inflation. A company in a highly competitive industry risks losing sales volume when it raise prices. High inflation means that companies requiring heavy capital investment need to spend even more money just to maintain current operations while the later payoff from such investment is devalued by the higher inflation rate.

Berkshire Hathaway has better long-term returns than gold AND has proven to be MUCH less risky at the same time. Berkshire Hathaway has intrinsic business value while gold does not. If my predictions of higher inflation ahead turn out to be wrong, Berkshire Hathway stock will likely continue to grow in value while gold will likely fall in value. The choice is clear: Berkshire Hathaway is a better and safer inflation hedge than gold.

I’m BULLISH!

I’m bullish onJapanese stocks. Yes, I sound dumb. Yes, I know that Chicken of the Sea is tuna fish. Yes, I know that Japan still hasn’t recovered from the recession of 1990. But Japanese stocks are more reliable and more fuel-efficient. (OK, OK, just kidding.)

Remember what Warren Buffett wrote in a _Forbes_ magazine commentary back in 1979: You pay a very high price for a cheery consensus. The corollary is that you pay a low price for a gloomy consensus, which is the case in Japan. Japan has the world’s cheapest stock market. The stigma of “basket case” Japan is the reason its stock market is so cheap. Without this stigma, Japanese stocks would be more expensive. Back in the late 1980s, the Japanese stock market was gripped by irrational exuberance, and large-cap stocks selling for 50-100 times earnings were common. The situation was similar to that of the recent US housing bubble, the Dot Con bubble of 1999-2000, and the Beanie Babies bubble of 1997. Back then, the popular perception was that the Japanese were taking over the world, had a “special cultural trait” that justified paying 50-100 times earnings for a stock, and were perfect at business management. Today’s perception that the Japanese are incompetent and hopeless is just as flawed as the past perception that the Japanese are superhuman.

The result of the Japan stigma is cheap stocks. According to Yahoo Finance, the WisdomTree Japan SmallCap Dividend ETF (symbol DFJ) is the cheapest diversified ETF at only 92% of book value and 5.56 times cash flow. All of the ETFs with lower price/book value ratios are heavily or completely weighted towards the industries that normally have low multiples, such as home construction and REITs. Even the Rydex “value” funds with lower multiples are biased towards these and other low-multiple industries.

Besides valuation, why did I choose DFJ over the other Japanese stock ETFs? DFJ is a small-cap ETF, and a small-cap company has more room to grow than a large-cap company. At the same time, the risk is limited by its diversification. Because no stock is more than 1% of the portfolio, this ETF is well-protected from company-specific risks. DFJ has low annual turnover (25%) and a reasonable expense ratio (.58%).

Why am I not buying specific Japanese stocks? I don’t know Japanese, and I don’t have access to the financial statements of Japanese companies. Although there are a few Japanese companies that trade on US stock exchanges, these tend to be the biggest companies with lesser growth prospects. These big-cap stocks have a larger following, and that greatly reduces the chance of finding an undiscovered bargain.

It is SO much more fun to be bullish than bearish. You get to deride anyone who disagrees with you as a cynical, faithless, wet blanket, worrywart Chicken Little gloom-and-doomer. Maybe I should go to Japan, tell everyone that I’m bullish on Japanese stocks, and label any Japanese citizens who disagree with me as unpatriotic.

Model Portfolio Update – purchased DFJ and FXY

DFJ (WisdomTree Japan SmallCap Dividend ETF) closed at $44.95/share today. FXY (CurrencyShares Japanese Yen Trust) closed at $96.84/share today. So the Model Portfolio has just bought 222 shares of DFJ for $9978.90+$40.00 in commissions and 103 shares of FXY for $9974.52+$40.00 in commissions.

So the Model Portfolio now consists of:
$79,966.58 in cash
222 shares of DFJ
103 shares of FXY

US Treasury Bills: no longer a safe haven

I used to regard US Treasury Bills and the Vanguard money market funds that hold them as safe investments and a good parking place for money awaiting a cheaper stock market. However, we are now in a new era of consistently negative real interest rates.

Inflation in and of itself isn’t the problem. It’s inflation accompanied by low interest rates that is the problem, and that will fuel even more inflation. Higher inflation accompanied by falling interest rates means an even more negative real yield, and the spiral has the potential to feed on itself.

Bernanke’s decision last September to make a bigger-than-expected cut in short-term interest rates just weeks after he publicly worried about inflation was the incident that finally proved to me that we really are in a new era and that they don’t call him “Helicopter Ben” for nothing. Subsequent events have only reinforced the case for more inflation.

In the 1950s-1990s, you could count on the Fed to maintain positive short-term interest rates. Any time inflation went up, interest rates would follow suit. Thus, Treasury Bills were a hedge against inflation. But the Fed of the 21st century has turned the financial landscape into a bizarre Alice In Wonderland world where Treasury Bills lose purchasing power. We have already seen Easy Al.com drop interest rates to near 0 in 2002-2004. As the credit/economic crisis continues to unfold, Helicopter Ben will keep dropping interest rates, which I think will approach 0% like they did during Easy Al.com’s big loosening. Inflation has been picking up over the last several years, but so much hanky-panky has been thrown into the CPI and PPI calculations that you can’t make an apples-to-apples comparison with 20th century inflation rates.

It is sad that there is now reason to lack confidence in the US dollar. It used to be that only survivalist kooks worried about hyperinflation. But Easy Al.com got the inflationary ball rolling, and Helicopter Ben is working hard to debase the US dollar into oblivion. We are now in a new era. In this Alice in Wonderland world, everything is a risky place for your money.

NOTE: Although cash equivalents are now guaranteed losers as investments, this does NOT mean cash is trash. If you live here in the USA, you still need US dollars to pay your expenses. So you still need to keep your rent money and the customary “emergency fund” in US dollars. It’s your longer term investments that face the big inflationary risks.

Model Portfolio: buying Hong Kong dollar CD

I am buying an Everbank Hong Kong dollar CD for 10% of the model portfolio. To simulate the time it takes to open an account at Everbank, this transaction will take place at the close of business next Thursday, May 15th at the prevailing exchange rate. The transaction cost of the currency exchange will be 1%.

Nicknames for fake bargain stocks

Just for kicks, let’s compile a list of nicknames for fake bargain stocks. Warren Buffett’s nickname for these is the cigar butt. I don’t like this term, because I think ALL cigars are DISGUSTING, new or used. Another popular term is “value trap”. My terms:
Used chewing gum stock
Used bubblegum stock
Yugo stock
Imposter stock
Mirage stock
Wild goose chase stock
Iron pyrite stock
Junk stock
Counterfeit value stock

Let’s hear some more nicknames for stocks that look like good values according to conventional yardsticks but are actually of lousy quality.

Model Portfolio: buying Japan

The Doppler Model Portfolio is purchasing Japanese investments – DFJ (WisdomTree Japan Small-Cap Dividend ETF) for 10% of the portfolio and FXY (CurrencyShares Japanese Yen ETF) for another 10% of the portfolio. In keeping with the rules I set, these purchases will take place at the closing price tomorrow (Friday, May 9th).

The Doppler Value Portfolio

The Doppler Value Model Portfolio is my simulated portfolio. The rules are as follows:
1. The initial portfolio consists of $100,000 in cash and begins on May 8th, 2008.
2. In the interest of simplicity, the model portfolio is NOT subject to taxes, much like an IRA account. An identical taxable account will fare worse, but the low turnover will minimize the difference between the after-tax and pre-tax performance when compared to investment strategies that involve higher turnover.
3. Sales and purchases of stocks will take place at the close of trading at least one COMPLETE calendar day after I announce the transaction. So if I announce a trade on a Tuesday, the trade takes place at the closing price on Wednesday. If I announce a trade on a Friday or over the weekend, the trade takes place at the closing price the following Monday. If I announce a trade on a holiday, the trade takes place at the closing price the next day that the market is open.
4. The commission for all stock trades will be 4 cents per share or $40, whichever is greater. I know that there are many brokerage firms with cheaper commissions, but I’m making some conservative assumptions to balance out my aggressive consumptions elsewhere in these rules.
5. The cash balance is invested in the Doppler Value Treasury Money Market Fund, a hypothetical money market fund that invests exclusively in US Treasury Bills. It is assumed that half of the portfolio consists of 1-month Treasury Bills purchased the previous month and the other half of the portfolio consists of 3-month Treasury Bills purchased two months before that. The Doppler Value Money Market Fund yield for the current month will be the average of these yields minus a .3% expense ratio. Since 1-month Treasury Bills in April 2008 averaged 1.072% and 3-month Treasury Bills in February 2008 averaged 2.174%, the yield for May 2008 is 1.323%. On average, the fictional Doppler Value Treasury Money Market Fund will yield roughly the same as the real Vanguard Treasury Money Market Fund. However, these two yields may be substantially different at times if interest rates are rising or falling, especially if the Vanguard fund has a longer or shorter average maturity.
6. Interest accrues daily but is credited monthly. Accrued but uncredited interest does NOT earn interest.
7. Purchases of CDs will take place at the end of the day 1 week following my announcement.
8. Cash dividends are NOT reinvested but added to the cash balance.