Shhh ... It's Our Little Secret

This article is a departure from my former pieces, and may be a bit too racy for the puritanical. Read on if you dare … but don’t say I didn’t warn you.

As an investment professional, I’ve always got my ear to ground looking for new opportunities. Recently, I got an e-mail that intrigued me. It was from Adultvest.com, which touted itself as America’s only venture capital firm specifically aimed at promoting adult-based businesses.

One of the “dirty” little secrets of the internet, is that the revenue generated by the porn industry blows the doors off of everything else on the web. By the end of 2007, worldwide porn revenues --- are you sitting down --- topped $97 billion. Even though porn is banned in China, it accounted for roughly 28% of worldwide gross revenues, followed closely by South Korea at 27% and Japan at 21%. Apparently, the slumping U.S. economy also hurt domestic porn revenues, because we only accounted for about 14% of the global internet sales.


Let’s put this in perspective. Last year, internet powerhouse Google ginned about $11 billion in gross revenue, eBay, the web’s biggest swapmeet brought in nearly $7 billion, Yahoo, no slouch by any means, settled for a measly $6 billion, while giant internet discounter Amazon generated $14.84 in gross revenues.

These, of course, were their gross revenues. This means that their ultimate net earnings amounted to a fraction of these figures. Although there are currently no figures on the net income realized by the internet porn industry, most analysts agree, that other than salaries commanded by its biggest and most popular assets, their costs are marginal.

Even though the U.S. only consumes less than 15% of porn worldwide, nearly 89% of all internet adult products are conceived and created in the old US of A. Nearly 269 new porn sites go online every day!

The center of the porn universe has been and continues to be the San Fernando Valley, right here in Los Angeles. As a native Angeleno, it kind of makes me proud, in a perverse sort of way. Some folks call it the “Hidden Hollywood.” If I were an exec at Disney or Time-Warner, I’d sure like figure out how I could bring this burgeoning industry out of the closet, so that I could get a piece of the action for my stockholders.

Here’s what’s really troubling me … How can the U.S. be so successful and pioneering in an industry like porn, yet be eons behind the rest of the world in everything from manufacturing advances to higher efficiency transportation. As any computer geek will tell you, the porn industry has been ahead of the curve in nearly every tech innovation on the web. There has yet be a pop-up blocker or spaminator that can keep all the smut at bay.

The growth in the industry hasn’t come from multinational conglomerates backed by a host of global investment banks. Quite to the contrary, porn has grown on the backs --- forgive the allusion --- of societal outlaws and misfits whose entrepreneurial spirit should be the envy of MBA’s far and wide. If we’re looking for solutions to our economic malaise, maybe we should ignore the usual cast of Harvard, Yale and Stanford eggheads,
and look no further than those tempting little e-mails that all of us pretend to ignore, but secretly want to explore.

As any Madison Avenue sales exec will tell you … sex sells!

For your entertainment and educational pleasure, I have included two "must see" video clips. Don't worry, both are rated "G."

The first is the solicitation I received from Adultvest.com, and the second is an innovative display of critical business statistics that would make any marketing professional proud.

COME ON ... CLICK IF YOU DARE.





To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Milking America

We live in a topsy-turvy world.

Can you imagine it … $3.87 a gallon … for milk!

Is there no end to the lengths to which our nation’s farmers will go to make a profit? What’s next, $10 for a brick of cheddar --- a premium on extra-sharp --- a black market for Munster or Gouda? My wife and I have set up a bootleg churn in our garage, because even the price of “I Can’t Believe It’s Not Butter,” has spun out-of-control!

Yesterday, the Wall Street Journal reported that the Commodities Futures Trading Commission (CFTC), the federal agency that regulates the commodities industry, was launching a probe into milk price manipulation, and in particular, cheese futures on the Chicago Mercantile Exchange.

The CFTC alleges that the farmers’ cooperative that controls nearly one third of the milk in America engaged in illegal market manipulation. According to the Journal, the Justice Department is getting ready to charge the Kansas City based Dairy Farmers of America (DFA) with variety of anti-trust violations --- including conspiring to suppress the price it paid for raw milk in the Southeast, while raising the prices it charged retailers. There are even allegations of secret payments to regulators.

Is nothing sacred? Who do these guys think they are … Exxon-Mobil?

The irony is so thick you could whip into a dessert topping. If the dairy farmers and their evil henchmen are facing prosecution, shouldn't the oil industry face similar investigative scrutiny?

Look, I’m a capitalist. I don’t begrudge anyone a fair profit. The operative term, however, is “fair.”

In 2003 when oil was $30 a barrel --- a time dinosaurs still roamed the earth --- the
average price of gasoline was $1.52 per gallon. Despite this modest price, Exxon-Mobile still turned a profit of nearly $21 billion on $246 billion in sales. Not to shabby.

I’m not going to pretend that I understand all of Exxon’s costs. But obviously, when gasoline was selling for $1.52 a gallon they were able to turn a nice profit.

Here’s the math. Don’t panic. You don’t need your calculator or abacus.

Ok, I’m going to go slow so that even our regulators and the math challenged (like me) can follow. In 2003, the average price for a barrel of oil was $28. There are 42 gallons in a barrel which means that price of a single gallon of oil was about 66 cents.

If the main ingredient in gasoline is oil, and Exxon was able to turn a significant profit at an average price of $1.52 per gallon, that means that the aggregate cost of refining, distributing, marketing and tax was less than 86 cents.

Now, with crude oil trading above $125 a barrel and the average price of gasoline peaking above $3.80, Exxon still posted record profits of nearly $11 billion last quarter. At that rate, Exxon’s net profit for 2009 is projected at $44 billion --- more than twice what it made in 2003, when the average price of oil was only $28 per barrel.

I’m no genius. But if the price of oil went up and the cost of refining, distribution, marketing and tax remains constant, shouldn’t Exxon’s profits likewise remain in the same ballpark? Did Exxon or the other oil companies suddenly find a way to dramatically cut their costs, or is there something more nefarious at work?

So as you’re filling the bottomless tank on your SUV this holiday weekend, ask yourself, who do I have to thank for this blessing. The list is long. Do I thank Senate Energy Committee Chairman Ted Stevens of Alaska or heap praise on the excellent work done by the “Secret Energy Task Force” convened by our own beloved Vice-President Dick Cheney, the former CEO of Haliburton.

The “Task Force” first met in 2001 when crude oil was trading at about $20 a barrel. Cheney and his group of "concerned" citizens didn’t meet again until oil hit $55 in 2004, $70 in 2005 and finally $79 in 2006. As far as we know, after their 2006 meeting, it was "Mission Accomplished."

Are the dairy farmers being investigated because they're less American than the boys at Exxon or Shell? From my limited vantage point, their only real mistake was that they didn’t have their own secret task force protected by “vice-presidential executive privilege.” Otherwise who knows … milk might have hit $5 a gallon without a single regulator batting an eye.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Alphabet Soup

Has financial innovation gone too far? When PhD economists can't explain how your investments work, the clear answer is ... yes.

During a recent conversation with an old friend, I made the mistake of asking him how he was doing in the market. Without missing a beat, here is what he said:

“I recently met with my CFP, who also is a CIC and CLU, and associated with an FCM. He recommended that I stay the course on my LEAPS, look for the exit on my CDO’s, and attempt to marginalize my MBS losses. Overall, to minimize my CGT and to boost my EPS ratios, he's urging me to put more into ETF’s and to consider making a significant shift into EU-backed CFD’s”.

Translation:

“I’m not really sure what broker wants me to do. But I don’t want to look an idiot. So I’m going to swallow hard, pretend that I really understand, prepare for the worst and hope for the best.”

In the dog-eat-dog world of Wall Street banks, the quest to capture more your investment dollars is akin to the arms race. Everyone is trying to invent a better mousetrap. This has resulted in the development of extremely complex hybrid securities one piled on top the other, whose risk and return properties aren’t well understood.

These incomprehensible instruments were not set up to address fundamental economic problems. Rather, they are schemes to attract more and more of your investment dollars. More disturbing, is that it appears that many of these “innovations” were not created to build client wealth, but for the sake of the new brokerage fees they generate.

The profits of the investment banks promoting these "innovative" investment offerings have been astronomical. As long as everyone was making money, there were few complaints. Lawmakers and regulators have kept their hands off for decades to encourage financial innovation. But with the collapse of Bear Strearns, and the likelihood that other institutions may follow, the government is starting to take a closer look. Unfortunately, for the small investor, and the economy as a whole, it may be too little too late.

Everyone wants transparency. But regulators can’t regulate what they don't understand. And if the regulators are at bamboozled, how can investors be expected to crack the code? I'm in the business of investing, and frequently, I'm at a loss to explain how some of the newer financial instruments really work.

Transparency and disclosures are worthless as long as investment banks and their executives are intent on using a sleight of hand. Despite popular belief, there was plenty of disclosure about what Enron was doing. The problem was that it was so complicated that no one understood it, least of all the investors and regulators.

Wall Street bankers can’t be trusted to make things clear. It’s not in their best interest. Because if you understood what they were really doing with your money and real risks involved, you'd probably balk at the investment.

Simple is always better. As any mechanic will tell you, more moving parts means a greater chance for a breakdown. The same commonsense applies to investing.

No one would argue the investment acumen and wizardry of Warren Buffet. As the "Whiz" once observed; “If I can’t understand, they don’t want me to understand it.”

Translation:

If you don’t get it, and you can't spell it, don’t do it!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

The World as We Don’t Know It

As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know.

Donald Rumsfeld

So here’s what we know … the price of oil has hit a new record above $121 a barrel (gulp). According to the Lundberg Survey of 7,000 gas stations nationwide, the average price at the pump for unleaded regular is $3.62 per gallon, up $.15 in the past two weeks alone. In California (always a leader), more and more stations are starting to post their prices at $4.00. Yikes!

Everyday seems to bring more reasons why the price of oil is skyrocketing. Last week, prices were affected by uncertain domestic inventories. Today, oil reportedly surged because of damage to a flow-station in violence plagued Nigeria, Africa’s largest producer. Next week the prices could spike because the “moon is in the seventh house and Jupiter is aligned with mars.”

Call me “Captain Obvious,” but nobody seems to know how high we will go.

Now there are predictions of a “super spike” ranging from $150 up to $200 a barrel!

Oil prices have reached this point without additional global turmoil. Granted, we still are fighting two wars in the Middle East and the threat of Jihadist terrorism persists. Additionally, there is no debate that Asian demand has ballooned and the dollar has cratered. But, in reality, there have been no new major events justifying this tectonic shift in prices. Yet here we are.

Two years ago when oil was trading below $50 a barrel, famed trader/raider T.Boone Pickens projected oil prices above $100. Analysts at noted investment bank Goldman-Sachs echoed Picken’s call. Rational thinkers (yours truly among them) scoffed at these predictions. Color me wrong.

In a recent press statement that would make master obfuscator Alan Greenspan proud, the folks at Goldman said: "The core of our 'super-spike' view is that oil prices will keep rising until demand declines globally on a multiyear basis, resulting in the return of excess capacity and a lower cost structure. Given this view, once excess capacity returns, we think prices can move sharply lower."

Huh?

The causes of the relentless climb in oil prices have been repeatedly chronicled -- demand from China and India, the falling dollar making oil an inflation hedge, speculation, OPEC supply restraints, supply threats in Iran, Iraq and Nigeria, and refinery bottlenecks in the U.S. … and the list goes on.

But what do we really know … let’s be honest … we don’t know, because we really don’t know.

If you’re in business or in the business of investing, how do you plan five-years in advance, let alone five-months? The watchwords are diversity and flexibility. As we have seen over the past three years, only the nimble will survive.

If you’re going to take your cues from anyone, you have to look no farther than Harvard and Yale. Their endowment portfolios have grown exponentially over the past several years because of their willingness to embrace diversity, flexibility and risk. Last year alone, David Swensen, Yale’s investment manager posted a 23 percent gain, and 16% annually over the past 10-years. Harvard’s endowment has seen similar results.

The key to success by these two Ivy League giants has been a mix of assets which are inversely correlated or non-correlated to one another. In their model, risk is ameliorated through this form of diversity. They trade everything from stock indices and commodity futures to real estate and currencies. If they're losing money in one sector, they quickly re-evaluate and shift to another. At one point, Harvard even hired several professional foresters to assess potential in the domestic timber market.

So here’s a simple survival rule for the current marketplace … When you don’t know what you don’t know, don’t get stuck on what you think you know, because you really don’t know what could happen. In other words, keep an open mind and be willing to change your strategies to fit the conditions of the shifting global economy.

If that makes sense to you, then you’re ready to face the unknown or to fill the job as our next Secretary of Defense.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.