Home » Writings and Commentary » Onyx Report Cruel Summer 2008














COMFORT 716,238

999,716,238 MILES




– July 19, 2008, 7 p.m. at 111 West Jackson – Suite 1108


I’ll Be Watching You


Every breath
you take

Every move you

Every bond you
break, every step you take

I’ll be
watching you


Every single

Every word you

Every game you
play, every night you stay

I’ll be
watching you


Oh, can’t you

You belong to

How my poor
heart aches

With every step
you take

Every move you

Every vow you

Every smile you
fake, every claim you stake

I’ll be
watching you


Since you’ve
gone I’ve been lost without a trace

I dream at
night. I can only see your face

I look around,
but it’s you I can’t replace

I feel so cold,
and I long for your embrace

I keep crying
baby, baby please

 Oh, can’t you

You belong to me

How my poor
heart aches

With every step
you take

Every move you

Every vow you

Every smile you
fake, every claim you stake

I’ll be
watching you

Every move you
make, every step you take

I’ll be
watching you


I’ll be
watching you


& Police


















C.R.E.A.M 22





1: Cruel Summer




summer streets

the pavements are burning

sit around

to smile

the air is so heavy and dry

voices are saying

did they say?

I can’t understand

too close for comfort

heat has got right out of hand


a cruel, cruel summer

me here on my own

a cruel, cruel summer

you’ve gone

city is crowded

friends are away

I’m on my own

too hot to handle

I got to get up and go


not the only one









June 30, 2008






It’s a cruel summer.


2008 has emerged as a new era paradigm of economic malaise.
The perfect storm confluence of such damaging economic indicators has not been
experienced since The Great Depression. In order to mitigate any charges of
sensationalism and outright irrational fear, we must advise the reader that the
overall magnitude and duration of today’s economic slowdown cannot rival that
of The Great Depression. Our intent is to highlight the junction of events that
will stymie development and financial growth over the next decade. Readers must
take heed and operate accordingly.


Common sense and the comings of goings of life reveal
inflationary trends, the absolute collapse of real estate, layoffs, and
plunging equity markets. Although the National Bureau of Economic Research has
yet to apply the official ‘recession’ label to today’s period, obviously an
economic slowdown is well underway. Lawmakers, investors, and business
operatives appear embarrassingly off beat and out of touch with the demands of
the era. The commentary mirrors the popular culture of the 1980’s and the measures
that will prove mandatory may facilitate outcomes reminiscent of the era.


Although I have acknowledged The Great Depression, I have
selected the particular popular culture of a decade with which I am
familiar to draw parallels.


The 80s began as a period of economic uncertainty, raging
inflation, and the ever-present Soviet Threat. The American city was to become
decimated by the crack cocaine epidemic and numbing levels of violent crime.
Contrary to the realities of the period, we must acknowledge the innocent
optimism of the era that was to be manifested into the musicianship and
mainstream culture of the time frame. This quirky behavior, indifferent to the
challenges of one’s environment may best be described as ‘corny.’


Celebrities, socialites, and trendsetters gallivanted
throughout the landscape sporting big hair, pastel colored pants, excessive
makeup, and sport coat / tee-shirt combinations. Total flamboyance was the
order of the day. Pat Riley, Gordon Gekko, and Don Johnson, once the epitome of
what passed as cool have morphed into the lasting caricatures of this time
frame. In spite of The Cold War effectively checking American power, raging
inflation, and crumbling real property values exhibitionism and flair defined
the 1980’s.


Let us forward to the present and borrow from Phil Collins
and his Miami Vice theme. We must note that the commercial environment of 2008
should have been anticipated and that we have foreshadowed these issues coming
‘in the air tonight’ long ago. The inevitable boom and bust composition of
capitalism will marches on relentlessly.


Similar to the fifteen minutes of fame to flameout pattern
of ‘80s celebrity, the records of several one-time rock star executives,
government officials, and market watchers have been tainted. The inevitable
markings of time have marred the legacy of these leaders more than any dated,
embarrassing 1982 photo.


Jim Cramer advised viewers of his Mad Money program
to purchase Bear Stearns stock amidst the complete meltdown of the institution.
Alan ‘The Maestro’ Greenspan, once credited as the architect of the 1990s boom
has been vilified and denounced as the chief instigator of today’s real estate
bust and credit crisis. The Federal National Mortgage Association once regarded
as critical to homeownership and the well being of U.S. finance has been
exposed as an unwieldy organization of mismanagement and largesse that is
arguably a potential menace to the system. The creditability of The
Bush-Clinton political era lay in shambles.


Nothing is sacred, yet all idols remained eerily optimistic
as they were tossed from high above. While the positive banter continues, the
only means with which to commence a return to normalcy and reality will prove
to be the ultimate and complete destruction of particular ideals. The idols
must not be merely discarded; the idols must be obliterated and smashed into
pieces. Strong, visionary leadership is the solution to restore confidence, yet
shock the status quo with an outlook that is based upon reality. The table has
been set for a charismatic consensus builder to emerge as President.


Irrespective of party lines, the vibe surrounding Barack
Obama matches that of Ronald Reagan. Both gentlemen initiated campaigns set out
to galvanize the tattered psyche of America with bombast and rhetoric. Both
candidates have risen to prominence into the vacuum of leadership that has
occurred in direct response to Carter and Bush administrations largely
perceived to be inept. Both gentlemen enter the void of U.S. confidence that
has been decimated by sputtering economics and international strife. Soviet Power,
Japan, the emerging Brazil, Russia, India, and China [BRICS], and The Middle
East have challenged the U.S. model; and political legacies will be cemented by
one’s entry into the fray at these inflection points.


The times will require courage and progressive statesmanship
that may run contrary to the mindset of the masses. Leadership must maintain
stern conviction, adhering to one’s principals in the face of popular


The conversation is not political. The conversation is


Let us define the aura of cool. Being cool is the ability to
remain comfortable with self, marching to the rhythms of one’s personal drum.
There is often a callous disregard, if not utter disdain for the socialized
mainstream. Generally, an idea or style is initiated within a small set of the
population and is adopted strategically by various centers of influence and
trendsetters. The masses, seeking approval and accepting cues from this
leadership begin to follow the idea and accept the concept as law. Mass
marketing and mainstream acceptance of the concept degrade that activity that
what was at once edgy and biting into the waters of the lame.


Of course, I could feel it coming in the air tonight.


The West had taken upon an air of entitlement. Benign
inflation, asset appreciation, and low unemployment had become fully embraced
ideals of the general population. The machine of capitalism could not be
stopped as Cuba and North Korea remained the only withering bastions of central
planning. Sophisticated, individual stock ownership and real estate
speculation that had been the hallmarks of the elite merged into lifestyle
principles of the masses. Homeownership at any cost, day-trading, and private equity
dealings were to become unquestioned, acclaimed generators of wealth at the
height of American economic arrogance.


Any investment theory that diffuses into the mainstream
realm of general moneymaking law becomes lame, dead money. The landscape is
littered with the shards of ‘can’t miss’ investment idols: real estate, modern
portfolio theory, program trading, day trading, technology stocks, rose petals,
China, Fidelity Magellan, and Long Term Capital Management.


The real estate market was doomed and relegated to failure
the moment that hoards of lawyers, educators, service workers, and fire
fighters began quitting salaried occupations to forge careers as real estate
speculators without inspiring dubious looks and rounds of laughter from all
onlookers. The masses were convinced that real estate presented a viable
investment that would continue to appreciate at the very same moment that the
rich, cool kids were liquidating and snickering in the hallways.


‘Real Estate’ was the automatic solution to wealth,
prestige, retirement, and comfort at the very moment that the asset class
symbolized the destruction of value in actuality. Real Estate is merely the
latest example of an investment maxim that had been awarded ironclad, viable
allocation status by general consensus to be torpedoed by reality.


I see little difference between a jheri curled, leather
pants 80s hipster and the dawdling, sheep-like investment community. Most will
remain garish and out of place, due to the shortcomings of the human psyche.
Human nature and the fight or-flight arrangement of humanity are not conducive
to moneymaking. There is no solution to the boom and bust pattern of
capitalism. One may only read and react to The Game:


A select few locate an underappreciated asset and begin to
invest on the cheap, with intentions of profit. The cheap asset begins to
generate profits and attract the attention of rainmakers that also seek to
invest, increasing the value of the original investment. Dynamic competition
then enhances the profitability of the investment.


Uncle Harry, Joe Six Pack, the media, and all persons
maintaining a pulse soon agree that this asset is a boon to civilization and
will continue to produce enormous profits at no risk into perpetuity. The
masses rush into the arena, bidding up prices to unsustainable levels to
capture these returns. The investment has become an outright speculation and a
game of chance that is doomed to fail. The originators recognize and sell out.


Profits disappear, as the cost of entry and investment do
not correlate to any measures of positive cash flow. Value disintegrates and
the pricing collapses. The asset class becomes a bust as the masses reject the
investment and accept the doctrine of liquidation, selling out at any price.


Take that to the Bridge.


Study the history of the crowd, or raging mob and one will
note the disheartening propensity of man’s moral code to vanish within the
spirit of the collective. From birth, society conditions the individual to be
controlled by fear, greed, and the overall approval of his peer group. Although
these implicit directives are essential to the functioning of mankind, these
directives also lead mankind towards collective mob-like extremities and cannot
be ignored. The mob is a powerful, often times violent enterprise as the
individual submits to groupthink.


The crowd is privy to gamesmanship by ranking governing
officials, media outlets, and the savvy investor. 2008 is the crossroads. 2008
marks the arrival of a synthesis of powder keg events that may be logically
diffused through intelligent policy; or further exacerbated by playing upon the
fears of the mob.


Lawmakers and the uninitiated continue to feed the public a
steady stream of generally useless propaganda. ExxonMobil, commodity
speculators, OPEC, ratings agencies, financial intermediaries, George W. Bush,
Countrywide, and The Federal Reserve Bank continue to rotate as convenient
proxies and agents of destruction in today’s march towards populism. The mob
cannot recognize the obvious that amounts to the most elementary of any rap
lyric: speculators will speculate.


I have already addressed the principals of asset pricing
location, inflation, and destruction. These cycles are inevitable outcomes
arising from the socialization of the individual. Speculators will continue to
locate avenues from which to speculate and the masses will continue to fall in
line with the group, perpetuating this boom and bust.


Sweet dreams are made of these. Who are we to disagree?


We shall seek to better our present condition through
investment. The majority seeks comfort within the group and often achieves
greater solace in failing with the pack, than succeeding as an individual.
Speculation, inflation, expansion, and outright collapse are the inevitable
consequences of a capitalist system that is based upon the output of fallible
man. Any enterprise engineered to rely upon the graces of mankind will remain
far from perfect, due to the imperfections of human thought.


Ronald Reagan, military spending, free trade, supply side
economics, and the reduction of top line tax rates hastened the inevitable
demise of The Soviet Union and central planning. Washington gambled that the
communist infrastructure would be unable to match the monetary requirements of
a U.S. military buildup and eventually crumble from within. Perhaps Mikhail
Gorbachev acknowledged the writing upon the wall and launched Perestroika,
reforms shifting the centrally planned regime towards free markets.


The fall of The Berlin Wall, originally constructed to
restrain East Germans from fleeing the stranglehold of communism and marching
into the West, marked the ultimate failure of government control and launched
the worldwide embrace of unfettered capitalism.


No laboratory could have produced a more effective case
study than post war Berlin. The Western half controlled by France, The United
Kingdom, and The United States was to embrace capitalism and rise from ruin
into a vibrant city center. East Berlin, occupied by Soviet power fell into
communism and apparently remained mired in economic and social rubble until
reunification. The fall of The Berlin Wall lifted the veil over the city, and
revealed an enclave that featured higher levels of wretched destitution than
the staunchest critics of communism could have ever prognosticated.


Eastern European labor flooded the market, competing for
jobs internationally and pressuring wages. The fall of communism and the
ensuing globalization of trade undergirded the Nirvana of steady growth and low
inflation. Eastern Europe, China, and India introduced voracious, untapped
markets for finished goods while supplying an infinite supply of ready labor.


The inability of Western labor to demand wage increases due
to international emerging market job placement competition dismantled any
inflation expectations and led to artificially low global interest rates.
(Market interest rates rise in anticipation of future inflation to compensate
investors for risking purchasing power tied to fixed investments.) These
favorable interest rates led to the irrational exuberance of rampant stock
market and real estate speculation. The possibility of any outright bust was dismissed
at the time.


The waltz towards the right wing commenced full bore,
without any regard to the ultimate consequences. The worldwide axis of power
came to be dominated by Reaganomics, Margaret Thatcher, John Major, and the
Bush – Clinton regimes. Yes, readers may pause at the association of the
Clinton name with this group.


In terms of economic policy, what is to separate Bill
Clinton from the commercial conservatism of this era?


The tremendous productivity gains courtesy of The Computing
Revolution and the vast technology spending build out predicated upon an
illusory Y2K doomsday was the principal driver delivering The Clinton
Administration up onto the liberal pedestal. Sadly, Al Gore did not invent the


Capitalism, free markets, tax cuts, and globalization became
the catchall solution to all sovereign obstacles beginning in the 80s. The
collapse of Soviet power and ending of The Cold War further ignited the embrace
of Adam Smith, laissez-faire, invisible hand unbridled capitalism.


The technology bust, real estate rout, recession, commodity
inflation, and increasing wage gap margins has exposed the damaging
implications of pure, unchecked capitalism. The present slowdown in economic
activity has promoted a gradual shift towards Keynesian economics; i.e. the
responsibility of government to coral the unbridled chaos of free markets.


The political environment is calling for increased taxation,
regulation, and barriers to international trade. The theory is that these
measures will check income inequality, curb speculation, and protect domestic
jobs from global competition. The Republican Party is in shambles, exchanging
the principals that have carried the party from Grant to Reagan for whatever
votes may be claimed in these upcoming elections that should result in a rout.
Entrenched G.O.P. decision makers are competing with one another to embrace
liberalism (compassionate conservatism), exemplified by John McCain, the
one-time Republican maverick that has now risen to the forefront of the right.


The intensity of the political debate along the respective
presidential campaigning trails has exposed the reactionary tendency of human
nature. All camps have both initiated and retrenched upon economic and foreign
policy that panders to their particular voter base. The misplaced optimism
resulting from the over arching solutions addressing the nation’s ills is
synonymous with Bananarama’s Cruel Summer.


The music video features the bubbly group singing a
composition of abandonment while toiling as gas station attendants. Business is
at a standstill due to the towering $1.83 price of fuel that is driving away
customers. The tone is curiously upbeat, given the subject matter. In the
spirit of 1980s randomness, the performers quit the service station, hop into a
Mack truck and flee the area as the targets of a high-speed police chase. The
party eventually emerges atop a rooftop and begins to cavort and dance with the
very same law enforcement that was at once in hot pursuit of the group.


Today’s constituents are also shimmying to the percussion of
political rhetoric, oblivious to the status quo. The storyline is often
irrational, uncoordinated and even nonsensical.


Offshore drilling along the continental shelf will not drive
down the price of oil and gasoline overnight. Windfall profit taxes upon oil
companies have already proven to be useless during the Carter Administration.
The housing bust will not evaporate with any special voucher, nor will the
credit markets be rehabilitated in short order with any Federal Reserve term
structured lending facility. Speeches will not cease Iranian aggression.


There is no silver bullet solution to this cruel summer.


2: The Payback






The Big Pay Back. Revenge.
I’m Mad.



—James Brown






‘As long as the
music is playing, you’ve got to get up and dance.’ —Charles Prince


The capitalization of ONYX INVESTMENTS, INCORPORATED at June
29, 2008:







ExxonMobil Corporation



Berkshire Hathaway Class B



United Technologies
Corporation (UTX)



Nike, Incorporated Class B



Philip Morris International



Coca Cola Company (KO)



Best Buy Corporation (BBY)



Goldman Sachs Group (GS)



Altria Group (MO)



Apache Corporation (APA)









Total Equities



Cash, Cash Equivalents
Available for Withdrawal






The only equity position outside of this company titled
under my own name ‘Kofi Bofah,’ remains ExxonMobil Corporation. The
capitalization does not include any outside, separate accounts managed by ONYX
INVESTMENTS, INC. Fixed assets such as furnishings and computing equipment also
remain outside of the tally.


We must continue to purchase shares of strong business
enterprises at reasonable prices in order to mitigate the downside risks of
stock ownership. Equity investment remains the most suitable option with which
to create wealth. This is the only Payback.


Ironically, we introduce our positions with the language of
Charles Prince, former Chairman of Citigroup and lasting casualty of today’s
credit crisis. We remain undeterred by reactionary bear market fear. We will
continue to dance and to seek value, regardless of overall investor sentiment.
The stock market cabaret features infinite numbers of disc jockeys spinning
varying themes. Our goal is to exit the room or particular asset class before
the party becomes too crowded.


There is little choice but to boogie—the stock market
representing the least of all evils. Interest rates are miserably low in
comparison to the commodity inflation that is beginning to raise the price
levels of all goods. The purchasing power of all cash holdings will be
destroyed by inflation.


The bond market remains hostage to credit, inflationary, and
interest rate risk. As the economy deteriorates, corporate borrowers will
generate minimal profits, increasing the possibility of default. Bonds, which
disburse fixed, interest payments to investors and lenders over select time
periods are sensitive to inflation by definition.


Ex: Mr. Lender purchases a $1,000 ten-year bond issued by
Acme Corporation, yielding 5%. Mr. Lender is agreeing to loan Acme $1,000 for
ten years, in exchange for 5% interest (coupon) payments annually. Mr. Lender
will receive his original $1,000 investment at expiration of the ten-year
period. Mr. Lender will be unable to achieve a higher rate of return than the
fixed 5% if he holds the bond through duration.


Mr. Lender wishes to tie up capital for ten years in order
to earn a measly 5%.


Remember, inflation is the product of an overabundant money
supply competing for limited amounts of goods. Inflation is also the
consequence of investors being enticed to risk capital due to irrationally low
interest rates.


What if inflation were to surge upwards to 10% per annum?


First, the purchasing power of this gentleman’s interest
income and principal investment would be decimated. Next, the Federal Reserve
Bank will undertake a program of monetary tightening, or raising interest rates
to limit the money supply and combat inflation. Newer bonds will be issued onto
the market carrying higher interest rates that will reduce the value of Mr.
Lender’s 5% bond. Mr. Lender will be unable to fetch $1,000 for his 5% coupon
original investment as Acme issues newer bonds yielding 15%. Mr. Lender must
either liquidate at a loss, or continue to allow his measly 5% interest rate
return to be destroyed by inflation.


What if Acme Corporation were to enter a period of lagging
profitability due to unfavorable macroeconomic conditions and the viability of
the enterprise is in doubt?


Acme Corporation defaults on its debt and ceases executing
any interest payments applicable to Mr. Lender. The value of Mr. Lender’s bond
is obliterated and he will be unable to claim his original $1,000 loan. Mr.
Lender may sell his 5% bond to a purchaser of distressed debt at a huge loss,
or he may hold his nearly worthless position and endure the Acme bankruptcy
process. Perhaps Acme will liquidate assets and return $300 of the original
$1,000 loan; or perhaps Acme will sell itself to a savvy private equity buyer
for thirty-five cents on the dollar.


What if Mr. Lender’s investment proves prescient and Acme
Corporation establishes itself as the world’s largest manufacturer of widgets?


The stock appreciates by 500% over ten years, while Mr.
Lender bristles at his slight 5% bond return. Mr. Lender was able to purchase
200 gallons of Exxon Regular 87 Octane gasoline at the beginning of 2008.
Although Mr. Lender dutifully reinvested his interest income over the lifetime
of the bond, Mr. Lender is still able to purchase 200 gallons of Exxon Regular
87 Octane gasoline in 2018.


May we liberally apply the term ‘madness,’ or ‘plum crazy’
to describe long-term bond market exposure at these pathetic rates while
inflation expectations are on the uptick?

Indeed, it is a cruel summer. Pick your poison.


Cash holdings will trend towards worthless due to inflation.
Bonds are subject to credit, interest rate, and inflationary risk; while stock
market returns that are driven by corporate earnings will stall during
recessionary periods.


We have combated the conundrum by purchasing the stock of
established enterprises, seeking dividend income, and building cash positions
amidst illusory periods of stock market appreciation. Our method is far from
reactionary, as we began to gird the portfolio for recession last summer, near
the absolute peak of The Dow Jones Industrial Average. We have actually
increased exposure to stocks during this bear market.


Intelligent observation will note the listing of issues long
since discarded: Electronic Arts, Fannie Mae, United Postal Service, Danaher Corporation,
3M, Burlington Northern, and Starbucks. Our intention was to harvest cash,
mitigate the risk of economic fallout, and to brace for ballooning energy
costs. Although these positions were never essential components to our
integrated business mix, we must respect our victory by omission, in
sidestepping the total wreckage of Starbucks and Fannie Mae shareholder value.


Casual observation will note the dominating position of
ExxonMobil. Our capitalization expresses little confidence pertaining to 2008
equity markets. Rather than any particular endorsement of investment merit,
numerous, slight positions within our portfolio represent commodity hedges and
are in place merely to counteract the possibility of a complete collapse in
oil-market pricing.


Of course, the dividend is all-important.


XOM—ExxonMobil Corporation—Irving, Texas


$110,162.50 (1250 Shares @

Price to Earnings: 11.46

Earnings Yield: 8.73%

Dividend Yield: 1.82%


Our approach to portfolio allocation turns the idea of
modern portfolio theory upside down. Rather than discarding the principles in
the garbage, perhaps we shall break dance upon them. Modern portfolio theory is
a concept that is turned upside down daily, as textbook strategies become
irrelevant in real time.


The fundamental precepts of modern portfolio theory state
that all assets are perfectly priced due to the infinite amount of participants
and transactions occurring within financial markets. Hence, all relevant
information has been priced into investable assets and every valuation is
logical. Attempting to outperform the Standard and Poors 500 equity index is
futile, due to the sheer competition. Under modern portfolio theory (MPT), the
only appropriate means with which to invest is to invest across all asset
classes, systematically calculating historical average rates of return and
standard deviations to arrive at an ‘optimal’ portfolio mix that maximizes the
expected capital appreciation and minimizes statistical variance, or risks.


The only realistic means with which to construct this
optimal portfolio would be to invest in a collection of index funds
representing large, medium, and small capitalization U.S. stocks; treasury
securities, junk bonds, currency, international equities, commodities, real
estate, and international bonds. Locating individual stocks as viable
investment options remains contrary to the theory as every respective share of
a business carries specific risk particular to that enterprise that would short
circuit the overarching MPT figures.


The stock market collapsed by 23% on October 19, 1987 for no
apparent reason. With such Black Swan events dotting the landscape, agreeing
that all relevant information is rationally valued within the marketplace must
be folly. Over the long run, free markets prove to be a reliable pricing
mechanism; however human nature will always create small pockets of opportunity
that may be gamed intermittently.


Diversification for the sake of diversification would have
torpedoed this portfolio. The only consistent outperformers during this decade
have been energy and basic material stocks. Recently, the raging bear market
has crushed nearly all asset classes. In spite of the far reaching business
malaise, the success of the commodities boom has continued to march upward.


Exxon emerged as such a large weighting of our
capitalization due to attrition, rather than any love affair over the company.
Throughout the past year, retail stocks have stood on the precipice of a
consumer spending meltdown; pharmaceutical companies remain besieged by generic
competition and the machinations of The Federal Drug Administration; financial
intermediaries were aggressively manufacturing garbage securities;
international stocks were overvalued; and the minimal yields upon fixed income
have rendered the bond market effectively useless in terms of wealth creation.


Over the past decade, no asset class has effectively
combined the intriguing opportunity for capital appreciation coupled with
reasonably priced securities in the fashion of commodity stocks. The only
suitable strategy over this period has been to allocate money towards raw
materials, while hedging against the unlikely event of steep declines in
commodity pricing.


The commercial action over the past year has vindicated this
stance. Real estate has been thoroughly brutalized, financial intermediaries
have been decimated by a credit crisis, international stocks have plunged, and
the bond market was routed earlier this year. Meanwhile, the price of crude oil
has rocketed by over 80% over the past twelve months.


ExxonMobil’s longstanding reign over this portfolio is
another indicator of my recent bearishness towards stocks and the overall
economy. I would much rather prefer that financial, consumer discretionary, and
cyclical industrial outfits lead market indices. Leadership in these areas
signals economic expansion; and generate higher levels of investment returns in
the aggregate.


High energy costs strangle the economy by handicapping
productivity, and igniting inflation. Although I am pleased with the
performance of this stock, I am hopeful that long-term appreciation will
eventually arrive courtesy of areas outside of oil. Recognize that the hefty
XOM weighting has been a matter of necessity, rather than any predetermined
ideal preference.


Traditionally, commodities and materials operations have
been the Rodney Dangerfield the investment universe: no respect. The price of
oil last peaked in 1983; and has required another twenty-five years to overtake
this prior advance when adjusted for inflation. Contrary to the recent,
historical run-up any investment outside of a pure disaster would have
fared better than direct exposure to crude oil over the past quarter century.
The commodity complex including gold, aluminum, palladium, and cotton has demonstrated
similar results.


The shares of materials stocks rarely outperform for
extended periods of time. I am unable to present any leading commodity
producing enterprise that may be described as a ‘story stock.’ The long-term
records of the Exxons, Alcoas, U.S. Steels, International Papers, and
Freeport-McMoRans of the world appear paltry in comparison to the Nikes,
Apples, Microsofts, Dells, Starbucks, and Best Buys.


Although crude oil has elevated into the $140 range over the
past year, XOM stock has barely budged over the 52-week period. The stock is
trading at a paltry 11 times earnings, which is impossibly cheap for an
enterprise that has doubled earnings per share amounts over the past four year
period. Due to heightened profitability and aggressive share buybacks, XOM has
grown earnings by 10% and 16% annually over the prior two years. If ExxonMobil
were in the business of building computers as opposed to oil platforms, I am
confident that this stock would be nearing $300; rather than this year’s


This phenomenon is due to the impossibility of branding
related to any commodity, which is homogenous by definition. Consumers may
acknowledge differences separating Nike from Addidas, Coach from Wal*Mart, or a
McIntosh computer from a PC and spend accordingly. In the aggregate, there is
no difference in terms of quality or cache between Chevron gasoline and Exxon
gasoline, or Alcoa aluminum and Kaiser aluminum. Businesses related to
commodities must compete in terms of pricing and overall business efficiency.
There is no pricing power here, as logical consumers will patronize the
businesses that serve goods featuring the lowest prices—quality being a
constant throughout a raw material industry.


The lack of branding that defines a commodity, which leads
to ruthless competition and thus smallish profit margins, equates to an
investment class that typically lags the overall market. ExxonMobil’s track
record of market outperformance is due to intelligent, conservative management.
Any rhetoric to the contrary defies logic.


Let us continue to expose any talk of ‘price gouging’ and
windfall taxes as hollow.


In terms of profitability, ExxonMobil 2007 operating margins
stand at 16%. Coach 2007 operating margins were 24.4%. The gross margins for
the luxury goods maker stood at a gaudy 77%.

In spite of the historically elevated crude oil prices,
Exxon profit margin statistics barely match the percentages of the standard
American business. However, Coach is able to manufacture leather bags on the
cheap in China, slap a ‘C’ on the article, and inflate the price to thirsty
consumers; yet Exxon is despised as the evil price gouger.


What are the criteria behind identifying a ‘windfall?’ What
are the criteria behind identifying who shall be taxed for this ‘windfall?’


Perhaps every homeowner that sold his home prior to today’s
real estate bust should have been subject to this windfall tax. Certainly,
property returns were higher for real estate investors than that of ExxonMobil
during the housing bubble. These tax receipts could have been applied towards
affordable housing, managed to keep housing prices aligned with reality, and
mitigated the economic fallout that is courtesy of any bust.


The talk surrounding this windfall tax proposal is that tax
revenues will be directed towards alternative energy research and somehow ease
the price of crude oil and refined petroleum products. The proposition
demonstrates as much logic as a 1980s music video featuring a Eurythmics –
Sweet Dreams
band member that happens to be a cow, or a A-ha’s
Take on Me
woman that is able to teleport from reality and into a sketch


First, any tax that applied to a business will be passed
directly onto consumers. Next, investors and entrepreneurs will then begin to
shun the area due to the threat of any government-imposed cap upon
profitability. Eventually, domestic oil companies will demonstrate reluctance
towards transacting business within The United States of America. International
producers will step into the void, further exacerbating American dependence
upon foreign oil and negating any remaining shred of energy security. Lastly,
alternative energy resources are uneconomical. Renewable energy is far from
matching any fossil fuel in terms of cost.


Jimmy Carter has already proven that any windfall profit tax
upon Big Oil is useless.


BRK.B—Berkshire Hathaway, Incorporated Class B—Omaha,


$28,084.00 (7 Shares @

Price to Earnings: 16.43

Earnings Yield: 6.09%

Dividend Yield: Nil


All seems quiet along the Berkshire front. Warren Buffett
has made little noise other than his Anheuser Busch investment, entry into the
bond insurance market, and his accumulation of railroad stock. These
transactions represent meager allocations in comparison to the enormous levels
of cash and profits that the Berkshire conglomerate generates. The billionaire
Berkshire Hathaway manager is expressing difficulty in regards to discovering
suitable investment opportunities for the organization.


Still, the stock has performed relatively well over the past
year as investors have reacquainted themselves with the principals of Warren
Buffett and conservative investing. The portfolios of Berkshire Hathaway,
Fidelity’s Contrafund, and ONYX INVESTMENTS have demonstrated strong overlap
over the past few years. The overlap is strictly coincidental.


In addition to committing substantial resources towards the
energy sector; Burlington Northern Santa Fe, Danaher, Nike, Coca Cola, and of
course, Berkshire Hathaway, have been duplicated among the three financial
intermediaries at particular junctions in time. I do not attempt to mimic
another investor. I may only proceed with my own personal logic as an
investment compass.


Railroad Burlington Northern Santa Fe was actually
liquidated from this portfolio upon news that Berkshire Hathaway had begun
purchasing the stock. I was not eager to entertain the idea of chasing a stock
that had been driven up by the sharp elbows of Warren Buffett and his clan of
followers. We will allow Mr. Buffett to execute the heavy lifting and gain
exposure to the railroad through our Berkshire Hathaway investment vehicle


Mr. Buffett continues to stockpile cash. The company has
become too unwieldy for the Oracle of Omaha to locate investment bargains
without executing absolute buyouts, or massive disruptions. Due to the size of
the enterprise, buyouts of smaller or medium scale businesses would barely
budge the needle. Berkshire has become a victim of its own success and
continued, exceptional outperformance will mandate large deals that are few and
far in between.


Warren Buffett has been trading rankings with Mexico’s
Carlos Slim and Microsoft’s William Gates for the crown as the world’s richest
man over the past several years. Moneymakers everywhere should serve notice and
respect his investment principals. The bedrock of Buffett’s success remains
long term, fundamental value investing.


His stable of equity investments within the Berkshire
conglomerate equate to a Who’s Who of economic Americana. These names include
Coca Cola, The Washington Post, American Express, Wal*Mart, Proctor &
Gamble, and Wells Fargo. Notable wholly owned subsidiaries that have come into
the fold are listed as Fruit of the Loom, Russell, McLane, GEICO, and NetJets.


Berkshire Hathaway is an economic juggernaut of a
conglomerate comprised by its select business units, stocks, derivatives, and
debt instruments. Investment activity is financed via insurance operations that
provide cheap ‘float’ that is readily leveraged by investment genius, Warren

Buffett. The model is almost unfair.


UTX—United Technologies—Hartford, Connecticut


$18,510.00 (300 Shares @

Price to Earnings: 13.77

Earnings Yield: 7.26%

Dividend Yield: 2.07%


Characterized by stable cash flow, healthy dividends, and
adequate growth, the strong industrial is essential. Economically sensitive,
these stocks may move in tandem with the general outlook. Superior enterprises
continue to generate growth amongst periods of economic contraction and


We must introduce the world’s largest engineering, aerospace
and defense conglomerate as our leading industrial. The outfit is comprised of
six major business units: Carrier, Hamilton Sundstrand, Otis, Pratt &
Whitney, Sikorsky, and UTC Fire & Security (includes Chubb and Kidde). The
Connecticut manufacturer has established dominant positions in air
conditioning, aerospace, elevators, defense, and fire detection.

The company is noted for its efficiency and organizational
expertise, recognized by Forbes designation of the UTX conglomerate as
the ‘Best Managed Big Company in America.’


On April 9, 2008, legendary chief executive officer George
David relinquished the role and the company introduced Louis Chenevert as his
successor. Chenevert, groomed for the position has operated as a loyal
understudy to George David and I am doubtful that the new leadership will
implement any large-scale shifts in strategy. Under the fourteen- year
stewardship of Mr. David, revenues have increased by 150%, and profits have
ratcheted upward by over 600%, from $585 million in 1994 to $4.2 billion in 2007.
The stock appreciated by 800% in 14 years, quadrupling the benchmark Standard
and Poors 500 index. Investors have reaped the benefits of David management and
the leader’s mantle is littered with numerous CEO of the year awards. George
David is expected to remain with the company, serving as chairman of the board.


The Dow Jones Industrial component is making an unsolicited
$2.63 billion bid to acquire Diebold, the controversial manufacturer of voting
and automated teller machines.


The company earns a large share of total sales and profits
internationally. Results have benefitted from a weak dollar that enables U.S.
goods to be priced competitively abroad and boost earnings upon the
repatriation of profits. Strong growth has been demonstrated broadly across the
six UTX units. Weakness in the U.S. housing sector will eventually translate to
lesser demand for the group’s Carrier and Fire & Security business. These
troublesome segments account for 10% of the company’s revenue overall.


We are pleased with our prior decision to exchange 3M stock
for this United Technologies investment. UTX has outperformed the St. Paul, MN
manufacturer by a wide margin since the transaction.


Although a global slowdown will adversely affect UTX share
performance, we remain comfortable with the enterprise as a long-term core


NKE—Nike Corporation—Beaverton, Oregon


$17,883.00 (300 Shares @

Price to Earnings: 15.94

Earnings Yield: 6.27%

Dividend Yield: 1.54%


The revered brand is the world’s leading designer and
producer of athletic footwear and equipment. Subsidiaries include Converse,
Cole Haan, Hurley International, and Umbro. The Starter brand was sold for $60
million in cash considerations during fiscal 2008 for a gain of $29 million.
The Nike Bauer Hockey division was also shed this year for $189 million,
resulting in a gain of $32 million.


Revenues have grown by 14 percent over the past year and net
income has also risen by an impressive 26 percent. Although the company
continues to execute exceptionally by all measures, stock performance has
recently been discounted by the threat of a consumer slowdown, particularly
affecting the U.S. market.


The United States is a mature market for NKE and the company
derives the bulk of its sales growth overseas. For example, fiscal year pre-tax
income has increased by 22% in Europe (Middle East / Europe / Africa), 36% in
Asia, and 24% in Latin America. Countering this explosion of international
growth is the United States, where Nike has grown pre-tax income by a scant 2%
over the past fiscal year.


Nike derives approximately 60% of overall profits
internationally. Our weakening dollar has enhanced results—currency effects
having increased revenue growth by 5% over the full year. Another direct
consequence of increased international commerce is the reduction of taxes upon
earnings. The effective tax rate has been reduced from 32.2% to 24.8% courtesy
of these measures.


The Beijing Olympics are emerging as yet another battle in
the Shoe War that rages on between Nike and Adidas AG. Adidas has recently
opened a 34,100 square foot shop in the heart of Beijing’s entertainment
district. Adidas has also purchased the rights to serve as the official
sportswear provider of The Beijing Games, at an estimated cost of $100 million.
The sportswear giant is seeking to use China as a platform to overtake Nike.


In spite of these efforts, the majority of Chinese consumers
identify the Olympics with Nike. With 2008 sales of $1.1 billion, China is
Nike’s largest market outside of the United States. NKE will also sponsor 22 of
28 Chinese federations for the Olympics. Management appears unconcerned as to
any legitimate Adidas threat. According to Chief Executive Mark Parker:


‘Nike is the strongest, most relevant, most sought-after
sports brand in China.’


I am also dubious to the idea of Adidas being able to
surpass Nike in terms of execution, style, marketing, and general cache. Nike
is iconic.


PM—Philip Morris International (MO: Altria Spinoff)—New
York, NY


$14,817.00 PM (300 Shares @

Price to Earnings: Annual
Earnings Undefined

Earnings Yield: Annual
Earnings Undefined

Dividend Yield: 3.73%


The stock arrives here due to the ongoing and now complete
breakup of The Altria Group. Altria at one point served as the holding company
for Kraft Foods, Philip Morris U.S.A, Philip Morris International, and Miller
Bear. Altria spun off Philip Morris International on March 19, 2008 to
investors. The transaction was slightly irregular as the ‘spinoff’ of Philip
Morris International actually accounted for 60.5% of the break up.


We are unable to present summary earnings statistics because
the entity has only operated as a stand-alone company for one quarter.


The original purchase of Altria was strictly a dividend
play. Altria is now yielding an impressive 5.64% on dividends. The total return
of a stock is calculated by the sum of its capital appreciation and dividend
yield. Compare a stock to a real estate investment. Dividends are synonymous
with rental income. Capital gains are synonymous with the profit that as made
at the closing of the house sale.


The appearance of Altria on the balance sheet last year was
another sign of my initial and ongoing bearishness towards equities. Dividends
are critical amidst periods of stalling financial markets. MO is another
example of attrition, rather than absolute endearment within our


We are seeking to protect principal and earn a return above
inflation during an impending market rout. Cash will be ravaged by inflation.
Bonds will be crushed by inflation and falling credit quality. Lastly, economic
retrenchment will decimate the valuations of economically sensitive stocks. The
goal emerges to locate a business that is indifferent to the overall economy
and returns sufficient capital to shareholders in the form of dividends. We
define ‘sufficient’ as a dividend yield that is comparable or higher than the
prevailing interest rates of ten year U.S. Treasuries.


The 10 Year Treasury is the benchmark because if we are
investing for income, the dividend must exceed the yield on guaranteed
risk-free government debt as adequate compensation for the downside risk of investing
in any stock. We will approve of a stock featuring a current dividend yield
approaching the 10 Year rate as efficient businesses regularly increase
dividends that boost the effective yield on the original investment
dramatically. The 10 Year rate has oscillated between 4-5% over the past year.


For example, the current yield on our ExxonMobil stock is
1.82%. The $88.13 per share investment will distribute $1.60 worth of dividends
(rental income) annually. $1.60 divided by $88.13 equals a dividend yield of
1.82%. Of course, Exxon shares bought at $40 a few years ago are still entitled
to these $1.60 dividend payments. The effective dividend yield on these earlier
purchases is now a respectable 4%. Due to the compounding of earnings and
dividend increases, the effective yield will soon top 10% and replace the
entire cost of the original investment over time.


Real Estate Investment Trusts (REITS), utilities, and banks
generally carry high dividends. REITS were dismissed due to my general disdain
towards the real estate market. Dividends are not guaranteed and I reasoned
that a property market slowdown would force the hand of the REIT sector to
begin slashing dividend payouts.


Utilities, though boasting inelastic demand that is
unrelated to economic cycles are typically burdened with large amounts of debt
and offer little chance of price appreciation. Utilities often trade in tandem
with the bond market. Interest rates rise and utility stocks fall due to the
higher costs of the underlying debt service and the fact that fixed income
investors chasing yield will dump utility stock for freshly issued bonds
carrying higher interest rates.


Bank stock dividends have remained under siege due to the
credit debacle. The action is characterized by Citigroup, which cut its once
formidable dividend payout in order to preserve capital. Enormous dividend
yields are often a sign of trouble. The stock valuation may simply have been
blitzed since the time of its last dividend announcement, and the payout is in


Enter Altria.


Altria is a stock that I have monitored since the late 90’s.
I can recall dividend yields that have shifted between the 5-15% range. Demand
for the product is inelastic, meaning there is no correlation between this
company and any whims of the economy. Importantly, the stock has consistently
increased dividend payouts throughout its history.


As an added bonus, the stock has appreciated sharply over
the past twenty years. The most notable declines were in 1999 and 2003.
Intelligent investors will note that 1999 was a year of frenzied stock market
speculation and 2003 was a year of sharp equity appreciation from the bottoms
of the 2000-2002 tech bust and September 11th disaster.


Altria, similar to Berkshire Hathaway is a stock that
investors abandon during periods of euphoria. I am doubtful that upside mania
will return to the stock market in the near term. If so, we will patiently
collect these healthy dividend payouts while the remainder of our portfolio is
swept upward by the rising tide.










Backup Singers and Dancers


We itemize the smaller, complimentary selections of our
capitalization. These bit players may perform in the background, but each one
capable of landing a big break. The positions support the superior talent already
occupying center stage. The time has not yet arrived for these issues to
achieve stardom and shine:







Div. Yld.











Coca Cola

Atlanta, GA






Best Buy

Richfield, MN






Goldman Sachs

New York, NY







New York, NY







Houston, TX






BHP Billiton

London – Melbourne





The portfolio remains in flux, as we approach an inflection
point. Our transaction history up to this point signals a stance predicated
upon a recessionary outlook and the unlocked value of commodity related
investments. Our top holdings emerged as ExxonMobil, Berkshire Hathaway, and
the Altria / Philip Morris International combination. Big Oil, a conservative
investment vehicle, and tobacco came to dominate our portfolio as we braced for
impending doom.


The riskiest of our investments were sold off last summer
and we did not return to any regular pattern of buying until January of this
year. Starbucks, Electronic Arts, Danaher, and Fannie Mae were also dismissed
from the portfolio before the Dow Jones Industrial Average began to crash and


Starbucks stock has been absolutely decimated over the past
year. The idea was clearly a disaster from the beginning and our only saving
grace is that the position remained minimal, never elevating beyond the very
basement our investment allocation. ONYX INVESTMENTS is a collection of rough
and tumble, rugged commercial regimes: Big Oil, Big Mining, High Finance, jet
engines, flat panel televisions, and The Marlboro Man.


SBUX has no business here.


Coca Cola and Best Buy have both turned in mixed
performances. Each stock has outperformed at particular points—Coca Cola due to
its positioning as a consumer staple and worthy international player; Best Buy
due to flat screen and Web 2.0 demand. The valuations of both companies have
fallen recently along with the overall market.


Goldman Sachs was purchased amidst the credit crisis that
reached its nadir earlier this year. We were bloodied, yet unbowed during the
Bear Stearns debacle and actually increased our GS stake at the time. We have
capitalized upon the opportunity to purchase the battered shares of the world’s
preeminent investment bank. The troubles of the financial sector have been well
documented, yet Goldman has been a leading performer within this portfolio
since our initial purchase.


Apache is a high-octane version of ExxonMobil. The company
specializes in upstream production—the location of crude oil and natural gas.
Exploration and production is a high risk, high return area of the oil chain.
Refining crude oil into finished petroleum products such as gasoline, asphalt,
heating oil, and jet fuel is subject to the price movements of the refined
products and is traditionally a business characterized by enormous fixed costs
and minimal profits.


The refining industry is under pressure by the upward march
of crude oil and the inability of gasoline prices to maintain this torrid pace.
The ‘crack spread,’ the margin separating crude oil cost-inputs from finished
product revenue-outputs has been squeezed and profits are minimal. Downstream
retailing of gasoline has become a losing proposition as credit card fees owed
to the banks for plastic transactions are eradicating service station net


ExxonMobil has been touched by these trends. Poor refining
margins represent a present a persistent specter haunting the quarterly reports
of Big Oil. Exxon has recently announced its intention to exit the service
station business—franchising these enterprises strictly to independent


Apache, unhindered by the intricacies and nuisances of the
vertically integrated oil company has rocketed upward throughout the oil boom
and its performance has trounced the already impressive returns of Chevron,
British Petroleum, Total, and Exxon since their emergence from 2003 lows at the
commencement of The Iraq War. APA has doubled in one year, while the integrated
oils remained flat in the aggregate over 52 weeks. BP and Total shares have
actually declined over the 52-week period, behaving in stark contrast
to $140 crude.


BHP Billiton is the world’s largest mining company and is a
play on the commodity boom. The American Depository Receipts may be purchased
on The New York Stock Exchange for the international company that is dual
listed in London and Melbourne, Australia.


The smallish allocations of BHP and Apache within our
balance sheet indicate that these stocks are on the verge of absolute
liquidation, rather than accumulation. These enterprises are both superior
players inside of the commodity sphere, but we are doubtful that such
outperformance may continue. Fundamentally, these stocks will always remain
prone to the vicissitudes of a ramshackle raw materials market, regardless of
operational excellence.


We will begin sorting through the muck, assuming a collapse
in commodity prices. The battleship must be turned around. Economic recovery is
inevitable and our focus will gradually shift towards financial, retail, and
consumer discretionary stocks. As disc jockey, I will begin playing records
that are slightly more upbeat.


3: C.R.E.A.M.





Cash Rules Everything
Around Me.


Wu Tang Clan




We opened this work with the lyrics of Sting’s I’ll be
Watching You,
to establish the idea that constant vigilance and awareness
is mandatory for successful investment. We followed these verses with our title
track, Cruel Summer. Bananarama’s 80s melody establishes today’s
investment background—a hodge-podge of unrelated vocals and rhetoric that has
proven to be slightly more optimistic than the situation has warranted. Our
transition into James Brown, the hardest-working man in show business was a
call to the grueling endeavor that is manufacturing investment profits amidst
an unfavorable macroeconomic environment. The investor must remain committed
and exemplify a steely resolve towards his particular principals in order to
wrestle with this bear market. Essentially, he must have Soul.


We conclude with C.R.E.A.M – Cash Rules Everything Around
, a gritty composition from The Wu Tang Clan. Our intent with this final
stanza is to provide real talk, avoiding the innuendos and subtleties that mark
the bulk of financial writings.


The Gold Coast Florida retirement of shuffleboard and golf
is unrealistic and will prove to be an impossible achievement for most. There
is no financial plan that will save the hoards of baby boomers that are set to
leave the retirement party with a gold watch and a shortfall of retirement
savings. The financial plan at retirement for thousands of baby boomer shall
unfortunately be summarized in three words: Get a Job.


Americans simply do not save enough. The reasons are
several: overwhelming ignorance of the financial system, rampant consumerism,
and the implicit safety net that has materialized courtesy of the ongoing
strength and flexibility of The United States Government. The facts become even
more troubling as we consider the low-return environment that will continue to
frustrate savers and the consequences of a Social Security and Medicare system
that is teetering upon the brink of collapse.


Although the university system within this country is
unrivaled, our methods related to secondary education are abhorrent. Schools
remain overcrowded and underfunded. Students are unable to identify the capital
of Montana, let alone the capital reserve ratio of Bank of America. For those
that are fortunate to reach the pinnacle of a doctorate, the individual may
very well undertake two decades of schooling without any lesson concerning
basic financial literacy.


The individual enters the job market stymied by burdensome
college loans. These loans are a function of the inability of personal wages to
maintain sufficient pace with the costs of education and the unwillingness of
prior generations of family members to save aggressively.


Our college-educated specimen has been socialized to fall in
line with his peer group and critical capital is spent to preserve a particular
image, contrary to prevailing financial logic. The person is inundated with
specialized marketing tactics that promote pure consumerism. Visceral wants
become mistaken for absolute necessities.


Entitlement has become the calling card.


Mr. Worker is responsible for his own retirement through a
defined contribution, or 401(k) plan. The investment gaffes of General Motors,
the airline industry, and Stodgy Corporation X have destroyed the sanctity of
the old-line defined benefit / pension plan. This responsibility has been
shirked by the corporation and foist upon the employee.


How is Mr. Worker to complete this intimidating paperwork
without any basic knowledge of the strengths and weaknesses of various
investment classes?


The situation is not helped by the 401(k) GIGO: Garbage In.
Garbage Out.


The majority of 401(k) investment options are worthless. Mr.
Worker may select a lifestyle fund marketing gimmick, stable value fund,
company stock, or exhibit A: the mutual fund that drowns investors with fees
and never matches the S&P 500. Worse yet, Mr. Worker kicks back and allows
the company to select the ‘suitable’ allocation.


The company, left to its own devices will decide upon a mix
of the most conservative of funds for Mr. Worker. The company wishes to avoid
any possibility of a lawsuit, rather than actually engineering competitive
returns for the employee. Mr. Worker’s pretax 401(k) income will be evenly
divided into a money market and bond fund for the next thirty years. The set-up
will barely match inflation.


Congratulations, Mister!


Lifecycle funds charge high fees in exchange for the ongoing
retooling of the portfolio as the investor approaches retirement. The worker
selects a target date of retirement and the fund automatically adjust the
allocation through the time frame. Voila! The unassuming worker will be set
into his Golden Years.


The caveat lies in the fact that numerous funds of the same
target date all present varying allocations. The marketing gimmick contradicts
its own self. There is no ‘automatic’ allocation for all individuals that
retire at the same date. There are simply too many variables to check off any
investment option and go, as if the prospective retiree were speeding through a
tollbooth with EZ Pass.


Stable value funds are anything but. These money market
funds will be ravaged by inflation over the course of the 401(k) investment.
Bond funds that retain the flexibility to rotate into debt instruments
featuring higher rates of interest would be a better option for the
conservative saver.


Perhaps Mr. Worker will utilize his 401(k) as a vehicle to
purchase company stock. Perhaps he feels that as an employee, he possesses an
obvious measure of insider knowledge. Maybe the decision is an expression of
the company man, toeing the company line. For whatever reason, the transaction
violates all principles of basic diversification.


Mr. Worker is now relying upon Corporation X for both a
paycheck and a retirement. Let us imagine that Corporation X begins to falter
economically. Corporation X announces a round of layoffs at the very moment
that the stock tanks. Mr. Worker now commiserates with Mr. Enron, Mr. WorldCom,
and Mr. Global Crossing. He is out of work and out of savings.


In spite of its inherent shortcomings, the 401(k) plan is
essential due to the employer match. This ‘free money’ shall never be ignored.
As Charles Prince would state, the music is playing and workers have no choice
but to dance.


Certainly, 401(k) savings have been ravaged by the nature of
the beast. Mutual funds carrying hundreds of stocks are unable to sidestep the
dire machinations of any bear market. I fear that the confidence applied
towards the financial industry will be further compromised as misinformed,
frustrated savers cope with stalled retirement savings and become the easy prey
of charlatans dispensing promises of easy money.


Our white collar, college educated employee is already
doomed to underachieve financially. Fortunately for this gentleman, the
consequences are far from dire. The sophistication of the U.S. banking system
enables Mr. Worker to leverage his earnings into borrowing power, or Mr. Worker
can simply scale down his lifestyle.


We must also address the plight of the entry-level,
wage-earning employee. Globalization and the collapse of central planning have
unleashed a flood of competitive Eastern European and Asian labor into the
marketplace that will suppress working-class wages. Crumbling American
secondary schools have left working-class citizens unable to compete with our
foreign counterparts and the pressure will be felt.


Surging energy, food, and health care costs will continue to
decimate the personal balance sheets of this group that rarely participates in
any asset boom due to a lack of free capital. Essentially, income gaps will
enlarge dramatically, reaching the point of destabilization.


Flash points have already emerged from Cleveland to
Zimbabwe. Crime is on the uptick inside the city limits of The American
Metropolis. Gentrification and rehabilitation projects that were touted amidst
the real estate boom remain unfinished and swaths of land lay fallow. Predatory
lending combined with the fiscal ignorance that is a staple of our original
thesis has led to the foreclosure epidemic that is decimating neighborhoods.
Further economic deterioration will drag the American city towards a culture of
lawlessness not seen since the 1980s.


Zimbabwe is a disaster. The country is an extreme example of
the dangers of unchecked, unmitigated power of a particular class over another
and the ensuing fallout. The property of wealthy white landowners was seized
and distributed to the general populace. Production and the Zimbabwe economy
ground to a halt as the historically disenfranchised citizenry lacked the
expertise to exploit the newfound bounty. Zimbabwe government turned to the
printing press and simply manufactured money to provide services and remit
payments. Inflation is now an unfathomable 1,000,000%.


The strife has come to a head with the violence, corruption,
and reign of terror that have surrounded the sham re-election of Robert Mugabe.


Perhaps the international community would blink if Zimbabwe
lorded over billions of barrels in proven oil reserves. Perhaps the ongoing
Iraq War has exhausted the military and political will of the West. I fear that
the muted responses to Darfur, Tibet, Burma, and Zimbabwe upheaval are the
signal that the U.S. is entering another era of isolationism. Sadly, the
perfect vortex exists for the continuation of abject misery that seems to
always mar the developing world.


Contrary to this tough talk, I remain fully convinced that
The United States of America will maintain its dominant position as the world’s
sole super power well into the foreseeable future. The embarrassingly low
savings rates and towering debt levels are actually an endorsement of the
sophistication and stability of The U.S. Government and its formidable banking
system. Americans are positioned to leverage debt and risk capital as a direct
consequence of our established financial markets, insurance community, and
protection of property rights.


Resource rich Russia, Latin America, Africa, and The Middle
East are all prone to ‘Dutch Disease,’ or the propensity of a large commodity
discovery to sabotage the progressiveness of a political state. 1960’s Natural
gas discoveries within The Netherlands proved to be a setback, as the nation
relied upon commodity flows to fund its coffers. The build-out of natural gas
infrastructure came at the expense of any commitment to outside diversified
industry. Outside of natural gas, the export economy was compromised due to the
artificial support of the home currency granted by resource demand abroad.
Strong currency damages the profitability of finished goods for export by
offering the international consumer unacceptably high price levels that will be
refused. The discovery of the commodity began to elevate a select few into the
aristocracy. Inevitably prices collapsed, devastating the economy and social
fabric of the nation.


I have already introduced the dangers of commodity
investment. The homogenous unit lacks pricing power. Hence, market share is
perpetually under attack. The idea also applies to sovereign nations that will
compete for global market share.


The stability of these areas will always be challenged by
gross income inequality and the possibility of a commodity bust. The vast chasm
of prestige separating the ruling elite and oligarch business class from the
masses frequently leads to excessive trade protectionism as patricians savagely
guard their respective empires. The pattern ignites internal unrest and the
ultimate erosion of individual freedoms.


Mikhail Khodorkovski, founder of Yukos Oil and once Russia’s
richest man was found guilty of tax evasion and securities fraud. The gentleman
has been jailed—shipped to Siberia for nine years in what has become a mockery
of justice. Khodorkovski’s political ambitions were a threat to The Kremlin and
the gentleman was unduly targeted. Of course, Yukos was eventually seized and
‘sold’ to the state controlled Gazprom at fire sale prices.


The examples of corruption, instability, and violations of
basic individual rights are far too common in resource rich Latin America,
Africa, Russia, and The Middle East. The devastating effects of slavery,
colonialism, imperialism, and mercantilism have established the pattern. The
borders of these areas and the former Soviet satellites were sketched without
any regard to the demographics of the indigenous population. Lisbon, Madrid,
London, Brussels, and Paris imperialism established political boundaries in
these regions with the sole intention of exploiting materials. The discovery of
vast amounts of natural resources within a particular region is often more of a
curse than it is a blessing.


Chinese and Indian commerce still remain privy to strong
state control. Indian business is shackled by the propensity of every
discernable marketable activity to require a permit from the government.
Japanese interpretation of capitalism calls for a level of consensus that
impedes the destruction of waste that is necessary for the functioning of the
system. The reluctance to shut down weak firms and the taboo of agitating for
corporate change locked Japan into a deflationary economic period lasting 20 years.
European capitalism also lacks dynamism, with the overzealous protection of
labor from layoffs, heavy scheduling, and wage cuts.


Carl Icahn, the billionaire investor that has terrorized the
boards of Motorola, Time Warner, and Yahoo is unwelcome in Japan and Western
Europe. The eccentric gentleman would be the epitome of the socially awkward
American blowhard. Picture Mr. Icahn appearing all too frequently on television
to snipe at media, initiating irate phone calls to management, and embarking
upon systematic letter writing campaigns demanding restructurings that will
unlock the value of his investment.


Carl Icahn is essential to American Business. The free
market competition, emergence of entrepreneurs and capital investment shoring
up weaknesses in the marketplace, and the ongoing destruction of weak firms
that may appear chaotic are in actuality the perfect syncopation of business,
political, and social rhythms. The liberalism of The American Dream is the
basis of our ultimate protection and ironclad position as the world’s leading


Puff Daddy would exclaim:


We won’t stop. Because we can’t stop.










4: Thank You








Exhibit A – Performance


We present our performance in
comparison to the broader market Standard and Poors 500 Index. Energy remains
the key component. Of course past returns are no indicator of the future and we
may not telegraph future movements. Perhaps the only information which truly




S&P 500 Index




















Exhibit B – Favorite Musicianship


My writing style is similar
to a sober Charlie Parker on the alto saxophone. This jazz legend exploded with
ideas and his music plays as if he were attempting to compress an infinite
amount of ideas into a single bar. Of course, the jazz player improvises and
selects his spots to perform within the layered composition of his band mates.
I approach the computer terminal with no outline. I merely begin to type.
Writer’s block is evasive, and the difficulty lies in transmitting my ideas
onto paper before they vanish into my subconscious.


Investing is jazz, funk, rap,
and rock and roll. The shrewd moneymaker improvises throughout the musical
selection that is the economy. He must remain aware of the rhythms that
undergird market sentiment and financial cycles. Of course, any activity centering
upon a profit motive is gritty and raw.


I probably listen to rap
music 90% of the time. I prefer the releases from the mid-nineties of this
genre. I target the tracks where the accumulation of money and the
struggles of the overall mission is the focus. I could do without the
commercialism that touts the spending of money, objectification of
women, and the elementary school rhymes that passes for artistry these days. I
am not overly critical of these newer artists. There must be a market as somebody
is buying the music. Critics often mislabel hip-hop as a menace to society.
It is society that shapes the art. Music does not shape society.


Rap music parallels economics
and investing. The novice is unable to differentiate Goldman Sachs stock from
Bear Stearns or Jay-Z from Nelly. There is also a small sampling of
transcendent lyrical artistry among a sea of worthless drivel within the Rap Game.
Of course, there are millions of different stock, bond, and mutual fund
offerings—the majority of which offer little rationale for investment. Lastly,
any rap song that is repeatedly played on the radio has already become
out-of-fashion. Investment maxims appearing on the front pages of newspapers
and CNBC programming are similarly tired.


My environment has molded my
taste in music. 111 West Jackson is my studio. I often return to the office
late at night to ‘put beats on wax,’ (write); or simply ‘rock out,’ or
executing and relaxing.


My list follows. I am a bit
one-dimensional; I must be in a special mood to voluntarily hear anything
besides rap. I want my music to bang and I am at my best while moving with a
controlled rage. I cannot afford to be lulled to sleep by soft, Secretary Rock.





Exhibit B – Favorite Musicianship Continued


The debut album is typically the
most remarkable effort for the musician. The performer arrives on the scene
with an edginess that is fueled with the anger, struggle, and dedication that
is necessary to perfect one’s craft without any recognition. I wish to capture
this fire and never lose sight of the urgency.


Many entertainers fall victim
to their own fame and self-destruct—unable to handle the newly bestowed
acclaim. I respect the multi-millionaire that continues to perform as if he
were a starving, desperate artist. 50 Cent and Puff Daddy are not lauded as exceptionally
skilled lyricists or musicians, yet the business savvy of these gentlemen
matches that of any chief executive officer.


With entertainment empires
that include record labels, clothing lines, restaurants, and sporting
franchises; Puff Daddy, 50 Cent, and Jay-Z are all worth well over $300
Million. Jay-Z should top $1 Billion shortly.



Genre / Artist






‘80s Music

The sweet memories of being
young and innocent.


percussion music native to Washington, D.C.

Miles Davis

Unmatched style and flair.
Improvisation = Investing.

Isley Brothers

Greatest Hits
album is always in reach.


Wore out Reasonable
well before you heard the name ‘Jay-Z.’

Jay-Z, P.
Diddy, 50 Cent

Irrespective of
musicianship, the shrewdest businessmen.

LL Cool J

Longevity Defined: Momma
Said Knock You Out.


Never able to
duplicate initial Illmatic album.

Geto Boys / UGK / OutKast

Legitimized the South in
the Rap Game.

Tupac /
Notorious B.I.G.

The Greatest of
All Time.

Wu Tang Clan

The Goldman Sachs of rap.
The influence of the group is far-reaching.

Eric Clapton /
Phil Collins

Do not Laugh.


Exhibit C – Where are They Now?


As stock pickers, we must
acknowledge the errors of commission and omission. ‘Ghost’ Stocks have been
bought and sold, or represent shares which we have seriously contemplated
purchasing. Our top gaffe has emerged as our dismissal of The Wrigley Company.
The stock should have been bought in favor of Coca Cola. The strong brand,
sales growth, and stable management initially piqued our interest. The approved
Mars combination has lifted the stock from $45 to $78 over the recent two-year


Although Google has become a
story stock, we have not descended into any form of abject misery due to its
omission. Technology investing is not our forte and analysis of GOOG’s pricing
places the stock outside of our parameters. The stock is richly valued and pays
no dividends. The company provides no earnings guidance and shares remain prone
to wide swings upon every quarterly release.


The investments that we have
foregone are equally as important as our actual positions. The following list
is a monument to stock market carnage. Starbucks, Fannie Mae, Sears Holdings,
UPS, Coach, and 3M are stocks that have been thoroughly trounced following
their expulsion from this portfolio. I have attempted to outline my broader
reasoning with the following chart.


Specifically, SBUX was a
concession of defeat. I came to the realization that Starbucks was a growth
trap—a former highflyer that appears to be a bargain. Starbucks has been hemmed
in by its own success. Stores that are located at every corner, at every block,
at every city only cannibalize each other. McDonalds and Dunkin Donuts have
also entered the fray and represent formidable challengers to the coffee maker.


As I have remained skittish
towards real estate throughout, Fannie shares were dumped quickly following an
illogical spike in FNM shares.


Sears was dismissed the
moment that media pundits crowned Chairman Edward Lampert the second coming of
Warren Buffett. I originally made the bet upon the obvious activity that flowed
between Sears and K-Mart, which signaled the imminent merger. I reasoned that
Sears Holdings possessed valuable real estate at the height of the boom and
that Lampert would begin liquidating stores and property to allocate towards
intelligent stock market investment. The stock spiked upon the speculation of
my prior rationale as investors concluded that Sears = Berkshire Hathaway.


Eddie Lampert is no Warren
Buffett. Lampert curiously held onto the real estate; and his attempts to
transform Sears into a legitimate retailer are baffling to any visitor of a
Sears store. I unceremoniously dumped the stock upon witnessing Edward Lampert
on the front page of a major financial magazine.


Financials were also listed
as ‘Ghost Stocks’ at this point last year. We acknowledged that banking,
insurance, and brokerage stocks were critical components of any appreciating
market. However, we had yet to invest within this segment due to our concerns
regarding the credit and real estate sectors. Our beliefs were validated
earlier this year, and we exploited the implosion of financial stocks to select
Goldman from the rubble.








Stock has been
cut in half; Greenberg shadow plagues firm.


CAT nirvana continues:
stock rides commodity, construction boom.


Shares bought
and sold. Stock has been trounced since, on recession fears.

Fannie Mae

Sold at the first signs of

General Motors

Strong ’06
performance. Decimated from $40 to $9 since.


Excellent business.
Terrible price.

K-Mart / Sears

Shares bought
as K-Mart, merged with Sears. Stock collapsed after sell order.

Kraft Foods

Altria spin-off dumped for
cash. Stock is relatively flat.


Stock dumped in
favor of UTX. UTX has outperformed.


Steady Growth.


Pepsi and Coke stock
interchangeable over 3 years. KO higher dividend.


Conceded defeat and
liquidated. Stock continues to be obliterated.

United Parcel

Bought as oil
hedge. Liquidated well before the stock fell victim to $100 oil.

Valero Energy

Surged from $10 – $80; but
has fallen back to $33 due to poor refining margins.

Whole Foods

plunge from $80 to $20.


From $45 to $80 on Mars
buyout. A glaring omission.

Whole Foods

plunge from $80 to $20.








Exhibit E – June 30, 2007 Positions






ExxonMobil Corporation



Berkshire Hathaway Class B



Best Buy Company,
Incorporated (BBY)



United Technologies (UTX)



Federal National Mortgage
Assn. (FNM)



Nike Incorporated Class B



Burlington Northern Santa
Fe (BNI)



Altria Group (MO)



Coca Cola Company (KO)



Danaher Corporation (DHR)



Electronic Arts (ERTS)



Starbucks Corporation






Total Equities



Cash, Cash Equivalents
Available for Withdrawal






Exhibit F – June 30, 2006 Positions






ExxonMobil Corporation



Best Buy Company,
Incorporated (BBY)



Minnesota Mining and
Manufacturing (MMM)



Berkshire Hathaway Class B



United Parcel Service, Inc.
Class B (UPS)



Federal National Mortgage
Assn. (FNM)



Coca Cola Company (KO)



Nike Incorporated Class B



Electronic Arts (ERTS)



Danaher Corporation (DHR)



Starbucks Corporation






Total Equities



Cash, Cash Equivalents
Available for Withdrawal





*Reflects 2:1 NKE split.








1,000,000 Miles

Kofi Bofah, Chairman