SMP Portfolio Change 6/11/08 +PAL -GW

Today marks the first adjustment to the SMP Portfolio in several months. With yesterday's $9/share offer for the purchase of Grey Wolf (GW), I am dropping that stock from the portfolio at today's closing price of $9.32

In its place, I am adding North American Palladium (PAL) at a price of $4.94
This stock is well off of its recent high of nearly $7/share just a few weeks ago.

Is North American Palladium (PAL) a Diamond in the Rough?

North American Palladium is a relatively unknown commodity in the American Stock Market. It's one of North America's largest producers of palladium, a silvery-white member of the platinum group of metals. The Company's core business is reinforced by a sizable contribution from platinum, nickel, gold and copper by-product metals.

On Monday, May 12, the company (Amex: PAL) came out with better than expected revenue and earnings numbers. First quarter earnings were $12.6 million, beating analysts' estimates. Expectations were that NA Palladium would earn $24.8 million for the year --- so earning half of that in one quarter sent the stock up by 15% on Tuesday. However, the stock was down 5% in after hours trading.

Let's see if this is an up and coming stock, or one to stay away from...

Applying the SMP Model to this stock is somewhat difficult. Only one analyst covered PAL, so projections must be taken with a grain of basalt. Assuming the mining income increase of 40% from 1st quarter 2007 continues to hold in future quarters, we can predict an annual income of $0.64/share. That's double the estimate of our single analyst. We also have to assume a 5-year growth rate for this stock, since none is provided. Let's extend PAL a healthy 15% EPS annual growth rate for the next five years. Applying the SMP Valuation Formula, we get a stock value of $6.47, which beats today's closing price of $6.17, and certainly beats the after hours price of $5.87, making this stock a tentative play.

However, due to the lack of analyst coverage and/or credible estimates, we really need more information about PAL and the industry as a whole. Can PAL sustain their earnings through the foreseeable future? What industry trends will become a factor? Mineral resources are an extremely warm sector right now. Will that market cool off if the U.S. (or Canadian) dollar rises? What if oil prices decline --- will that have an adverse effect on the stock price?

With a lot of unknowns, I think we can say that North American Palladium is a definite "Maybe". Look for price trends when finding an entry point, and then hold onto your hat. It could be a fast ride either way from here...

For more info on N.A. Palladium, visit their website.

Advanced Semi (ASX) UP on Subsidiary Acquisition

ASE Test Obtains Shareholder Approval for 'Going Private' Acquisition by ASE Inc.
Tuesday May 6, 6:00 am ET

HONG KONG, May 6 /Xinhua-PRNewswire-FirstCall/ -- Advanced Semiconductor Engineering, Inc. (NYSE: ASX, TAIEX: 2311, "ASE Inc.") and its majority-owned subsidiary ASE Test Limited (Nasdaq: ASTSF, TAIEX: 9101, "ASE Test") today jointly announced that shareholders of ASE Test approved the proposed "going private" acquisition by ASE Inc. of the outstanding ordinary shares of ASE Test that ASE Inc. does not directly or indirectly own, by way of a scheme of arrangement under Singapore law (the "Scheme"). At the May 6, 2008 meeting of shareholders of ASE Test convened by an Order of the High Court of the Republic of Singapore (the "Court"), the requisite majority of unaffiliated shareholders of ASE Test voted to approve and adopt the Scheme.

Under the terms of the Scheme, each ordinary share of ASE Test listed on The NASDAQ Global Market will be acquired by ASE Inc. for US$14.78 per share in cash, and each Taiwan depository share representing 0.0125 ordinary shares of ASE Test listed on the Taiwan Stock Exchange will be acquired by ASE Inc. for the NT$ equivalent of US$0.185 per share in cash (together, the "Scheme Consideration"). Payment of the Scheme Consideration will be made within 10 calendar days of the effective date of the Scheme.

The Scheme is subject to sanction by the Court, the lodgement of a copy of the Order of the Court sanctioning the Scheme with the Accounting and Corporate Regulatory Authority of Singapore and the satisfaction of other customary closing conditions. A further announcement regarding the Court hearing date to sanction the Scheme and the anticipated effective date of the Scheme will be made in due course.

ASX is trading up around 5% from its close at $5.13 Monday.

Why It's OK to Try to Time the Stock Market

Last year, when the Dow Jones Index hit 14,000 for the second time, I felt that a pullback was definitely coming. I had recently watched one of my favorite stocks of the past two years, New Century Financial (NEW), dwindle away to nothing as exposure to subprime loans eroded confidence in the mortgage bank. I had read some pessimistic views of the company's future on stock message boards, but didn't really believe them until the B-word (bankruptcy) started looming it's ugly, bloated head.

Those who predicted a crash in the mortgage industry were right on target, and the price of New Century's stock dropped from $30 to $3 in a matter of weeks. It was a sign of things to come, as nearly every financial institution in the United States has faced serious profit and cash-flow problems related to the decline in the housing sector.

This sudden crash led me to take a sober look at the stock market, which was at an all-time high. I decided to pull 75% of my retirement money out of the mutual funds I was holding, and transfer it into safer accounts, such as money markets and CDs. While the returns have been predictably blase (around 4%) , I avoided losing the 10% or more that would have occured if I had left the funds in their previous investments.

My view on today's stock market is that it is overly optimistic. Investors seem to be turning a blind eye to the multitude of negative forces on the economy. Oil prices are at an all-time high, as are housing foreclosures. Unemployment numbers are steadily climbing, and more people are reaching into their retirement funds to meet their normal living expenses. The Federal Reserve has seen fit to drop interest rates to 3%, and President Bush has authorized a stimulus package to help put funds back in the pockets of Americans. The United States government has already spent hundreds of billions of dollars to try to help out our nation's financial institutions, including Bear Stearns in the last two weeks.

The effect of all the government help is that more money is being printed, and the U.S. dollar has sunk to an all-time low against such currencies as the Euro and Canadian Dollar. I recently read that Warren Buffet said that he is transferring much of his portfolio to foreign investments. Looking at the picture of the American economy, I can't say that I blame him.

Looking forward, I see more trouble on the horizon. As more people realize that they need to tap the equity in their homes to stay afloat, more and more houses will be put up for sale. This will drop housing prices further, causing more foreclosures as people come out upside-down on their loans. As people lose equity in their homes, the government will probably respond by printing more stimulus paper, until the dollar becomes the laughingstock that it is already becoming. This will drive the stock market down to levels not seen since 2001.

The problem is that Americans are lulled into a false sense of security because the economy has always bounced back. But, there is no guarantee that it will continue to do so. In order for our economy to right itself, it will take strong fundamentals. Inflation must be held under control. Job creation must outpace unemployment. Most importantly, government spending must be reigned in, and the dollar given value again. Partly for political reasons, I don't see this happening any time soon, and some of these areas are just beginning to show their weakness.

The slowing economy has not really manifested itself in ways that greatly affect the average consumer yet. Sure, gas prices are high and energy costs continue to skyrocket. But, many Americans have prospered the last ten years or so because of the rapid climb in housing prices. When the problems do start becoming more apparent, a panic-driven economy could arise in which many of the luxuries and conveniences that we know could become a thing of the past. One only has to look back at the 1970's to see double-digit inflation, mortgage rates, and gas lines a mile long (I'm not kidding).

At some point, if the U.S. government takes the necessary steps to stabilize the economy, we will reach a point of equilibrium. At that point, I will reinvest myself in the American Stock Market. But, it could be at least several years from now.

In the meantime, I will continue to try to find the jewels in the rough. I will continue to maintain the SMP Portfolio, with its 10 stocks, as I have done the past 4 years, with resounding success.

SMP Portfolio update - April 1, 2008

A couple of weeks ago, battered airline company ExpressJet (XJT) announced terrible quarterly earnings and the stock plummeted below $2/ share. XJT has rebounded nicely this week, although the prospect for future earnings still looks quite dim. I'm taking this opportunity to get out of XJT at a decent price. I'm adding refining company Tesoro (TSO) to the SMP Portfolio as of market close today, April 1. It's down around 50% compared to its 52-week high, and is still somewhat near the bottom. If near-term earnings hold up, it looks like a safe gamble.

Here are the closing numbers:
XJT exit price: $2.67
TSO entry price $32.15

SMP Portfolio Update 12/31/2007

I've updated the SMP Portfolio transactions history, up through the end of 2007. You can find it by clicking on the SMP Portfolio History link under the tan java applet above the post section.

Are Money Market Funds Safe?

The recent downturn in the mortgage and housing markets hit some of the big financial institutions really hard in 2007. Outfits like Citi (C), Washington Mutual (WM), and Countrywide Financial (CFC) have seen their stock prices drop dramatically in the last six months. That's not to mention the companies like New Century Financial (NEW), who went completely bankrupt.

The majority of problems in the financial industry have been caused by huge investments in mortgage-backed securities. These investment vehicles have been difficult to value because it was often not known what percentage of the mortgages were those made to risky customers. Thus, those who land money to the big financial institutions have started to pull back their funds, and the banks have had to look elsewhere (such as overseas) for funding. In fact, Citibank has received huge cash infusions from Arab investors twice in the last three months, and may need more very soon.

This cash shortage that is facing U.S. Financial institutions is putting a strain on their ability to cover their more liquid investments, such as Money Market Funds. These funds typically pay out 4 - 5 percent interest, which rivals any CD or other short-term investment. The problem is that Money Market Funds are NOT insured up to $100,000 like your bank account. That means that if the bank needs your money to make up deficits elsewhere, they can take it right out of your account and not pay it back.

In recent history, such a scenario has only occured once (in the late 70's). However, we are currently witness to a decline in home prices, and rise in foreclosure rates unparalleled in American history. There could be some rough waters still ahead for financial markets.

Many Americans have huge sums of money tucked away in MM funds sponsored by Smith Barney or Charles Schwab, for instance. Many of those funds are invested in mortgage-backed securities, which may lose most or all of their value in the coming months. The real crisis would occur if investors started pulling their money out of these funds in droves. Then, the banks would face a deeper shortage of revenue that they might not be able to replenish in a short amount of time.

If you are concerned about the stability of your Money Market fund, the best thing to do is to contact your financial institution and check into switching to a government-backed fund. It will probably yield a lower interest rate, but could be much safer than your traditional money market fund.