January 11, 2005                                   Some thoughts and notes from seeing economist, Delos Smith

I continue to search for investment answers. Of course, as Delos Smith said in a speech last night, “There are no easy answers”. So what do I do? I read, read and read. I try to observe the economies via readings, talking to business owners, observe trends, watch the consumer and the retailers, listen to my children, listen to my friends, listen to my co-workers and so much more. I am certainly concerned with investments at this point. So many of the safe havens have risen to much higher prices. Examples of these are energy , utilities and precious metals. The safe haven of bonds are hardly safe. We try to invest with reduced durations and higher qualities, but when interest rates rise, all bonds will lose value (at least on a temporary basis). With that said, I continue to pound the books. I am looking at several investment ideas, but frankly I would like to pay 20% or so less than Wall Street is currently looking for from these specific issues. If you are clients of ours, your portfolios are a direct reflection of our research and concerns.

I would like to see a scenario where the typical investor is disgusted. The term for this is “capitulation. I would like to see the day where the typical investor finds it fool hearty to buy any common stock. As I write this, I remember being ridiculed and second guessed in 1999 and 2000, when we were loading up on high quality bonds. When everyone is selling, I expect that we will be buying. I hope to remain patient in my waiting.

Last night I had the privilege of hearing and seeing economist, Delos Smith. Delos is an economist who believes that economic theory should be based on facts, as opposed to anecdotal evidence. He insists that most reports we read are incorrect, and need to be deciphered with a greater amount of reading. I previously saw him 11/20/00 and he claimed that the economic reports we read are wrong generally because they get revised as time goes on.

The following are some notes and observations I took while sitting at the presentation put on by Delos Smith.

Please keep in mind that I have not authenticated his claims, or I may have misinterpreted any statements below.

1. Delos claims to ride a greyhound bus as opposed to a plane whenever possible. He was quoted as saying “that he learns more from a Greyhound bus than he ever learned on a plane”. I wondered if he borrowed that quote from Bruce Springsteen, who wrote in the song, “No Surrender” , ” We learned more from a three minute record than we ever learned in school”. What Smith and Bruce means is that you learn a great deal from real people, real situations. When you encounter a person on a bus, a train, on the street or in a recording that stirs the emotions, you can learn a lot about life and about yourself.

2. He insists that we are in a pure world economy. Most large companies are multinationals. He mentioned that Exxon Mobil, Proctor and Gamble and General Motors, to name only a few, are multinational companies that have material presences in over 200 nations. Many of these companies occupy more nations than does the United Nations. He claimed that although these are “American” companies by name, they are really multinationals. He mentioned that they will ultimately have allegiances to their stockholders and to themselves, and not necessarily to a hosting nation. He mentioned, “everything is made by the world. You can ignore the label.” If you are buying a GM car, you are buying a car that was made internationally. If you buy a Honda, you are buying a car that is made internationally. He mentioned that GM has over 200 manufacturing facilities outside the USA.

He insists that you can not think in terms of Nation States. Think globally, not locally. Everything we touch is a world instrument. He mentions that Airbus and Boeing have 95% of the same parts. There are several differences, but they are mostly slight differences. He mentioned that the number one difficulty that multinational companies are encountering is cultural differences.

3. He went on to discuss the confusion of Savings rates. The National Income Accounts savings rate is calculated by looking at taxable income only. This is the rate that is being quoted when we hear that the US has a 0% savings rate. He claims that the Federal Reserve rate does not include rising asset prices. Hence, these rates can be distorted by retirement plan savings and rising asset prices (such as real estate over the last 10 years). He emphasizes to merely be mindful of the varying calculations, and to collect and interpret data over a long period of time.

4. He claims that the recent increase in consumer confidence was merely a result of fuel prices going down. To me this seemed simple enough. I made a note to myself to simply watch energy prices for a possible gauge of our economic health and profitability growth.

5. He stresses the future of the education system. I am not certain what he meant of that. I assume he meant that education is of the greatest importance in the future. He discussed that the largest steel company in the world, is Nucor. They are located in the USA. He mentions that 20 years ago, it took Nucor about 25 people to generate 1 ton of steel. Now with automation and technology it takes less than 1 person to generate the same 1ton of steel.

6. He stressed that America is competitive and entrepreneurial. He again mentioned to think globally. He mentioned that he has spoken with a few USA furniture manufacturers. The ones that are only located in the US are losing business, not to foreign owned companies, but to companies that are based in the US , but manufacture worldwide. He discussed that certain people will be hurt by this, but that people will adjust. It is a mere economic evolution process. He went onto say, “education, education, education”.

7. He mentioned that we will see economic indicators that exclude food and energy. He explained the reason those components are excluded is because they don’t really show underlying economic trends. Food and energy will be consumed no matter what. I guess one could argue the demand will change with pricing, but Delos mentioned that the underlying economic trends are gauged without food and energy.

8. He mentioned that he is not overly concerned with the decline of the US Dollar. He thinks there might be an intervention at some point. He also mentioned that the US tourist industry is enjoying the falling dollar a great deal. Many foreigners are coming to the States. Of course, US manufacturers benefit from the weak dollar, since our goods are cheaper abroad. Keep in mind, if you travel abroad, you will feel the pain of the weak dollar in lost purchasing power.