The Daily Reckoning February 21st

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National Security and Your Digital Data

One of the most dangerous threats to liberty and privacy today is called the “Cyber Intelligence Sharing and Protection Act,” or CISPA. The activists slayed this monster last year. Or so it seemed. But of course, the beast didn’t die.

Some powerful members of Congress are pushing it again.

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CISPA would allow government to force telecommunication providers to cough up your personal data on demand — no warrant, no notification, no chance for you to object. It is being pushed by two members of the House Intelligence Committee, with the support of large swaths of corporate America and the Chamber of Commerce (of course!).

The entire bill would serve as an amendment to the national security apparatus. No supporter of CISPA stands up and says, “My bill will wantonly violate the privacy of Americans in the service of Big Government snooping and thieving.” That would be telling the truth.

Instead, they say that such a bill is necessary for “our own security.” Unless we get behind this expansion of government power, we will likely become victims of “cyberterrorism” that only our own government can prevent.

Hmmmm. Actually, this whole push — and there are dozens of similar bills floating around — is an attempt by government to regain control of the communication system of which it lost control in the mid-1990s. Communication is one of the “commanding heights” that government must manage if it expects to retain its grip on the population.

CISPA is a huge effort toward that goal. It will never succeed in reversing the progress we’ve made, but it can do huge damage to the rights and liberties of people along the way.

To understand the government’s attempts to monitor and control the digital world, you have to take a step back in time.

There’s this weird 1947 law passed at the dawn of the Cold War called the National Security Act. It created the CIA, led to changing the name of the Department of War to the Department of Defense (George Orwell would be so proud!), and generally attempted to shore up the military in a time when people were pretty fed up with wartime sacrifices, suffering, and death.

It ended up sustaining vast military powers over the public just in time for the Cold War, which President Truman skillfully orchestrated, and defined American political parameters for the next 40 years.

The National Security Act was part of a larger attempt by government to survive and thrive in a new epoch.

There were other creations at the time, too. There was the Truman Doctrine, which attempted to contain Russian political influence in Europe. There was the Marshall Plan, which was essentially a gigantic corporate subsidy to American companies hoping to move in on war-torn Europe. And there was the Bretton Woods monetary agreement that made the dollar the world currency and paved the way for a paper-money world.

These were the gifts of this generation to postwar America, and we are still suffering under their awful weight. The catchphrase at the time: Retain control. Do not repeat the error of the past.

What was that supposed error? At the end of World War I, a fantastic thing happened on the home front. Censorship went away. The budget was cut. Price controls ended. Even the military budget was slashed. The planning apparatus that had imposed a socialist-style bureaucracy on the public for the duration of the war largely went away.

All that was left was the debt.

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More interestingly, after World War I, there appeared to be a wave of national disgust at the past war itself. Who started this darn thing? Who thought it was a good idea for 37 million people to die in the name of making the world safe for democracy? Is war just a racket that enriches states and arms dealers at the expense of the public? The questions persisted, and the public developed a voracious desire for war revisionism.

After World War II, the elites who benefitted from the war did not want the same aftereffects. The censorship ended, as did the price controls. The budget was cut dramatically (which, incidentally, produced not economic harm, but, rather, set the stage for a 1950s economic expansion). But one thing that stayed in place was the national security apparatus over the lives of the American people.

And so it has been until very recently. The dawn of the digital age (I like to date this from 1995) created vast new sectors of communication and life itself that live and thrive outside the apparatus of compulsion and coercion. The power elites didn’t plan it this way.

Then a revolutionary entrepreneurship took hold that created technologies that have completely changed the world. Smartphones brought miracles to our palms. 3-D printing is upending production systems. Data networks have reformulated the world financial system. And this revolution is intensifying by the day. The way matters are headed, the old-fashioned national state system of controlling us will be a dinosaur in a matter of only a few years.

What good is “national security” for the ruling elites if it only controls a tiny aspect of our lives? If the human population is migrating ever more to the digital world, what control or influence will the government have? The founding document of the national security state — this 1947 law — has no reliable control over the digital world. Surely it must be updated and the newly emerged world must become part of what is controlled!

This is what CISPA is all about.

The lesson of all of this? There is no way to separate the fate of individual liberty from the government’s national security agenda. The target is not really foreign bad guys. The target is you.

Maybe there was a time when bills like this would sail through in the name of protecting us. There was a time when the American people feared nuclear bombs from Russia and were willing to surrender their rights and liberties in the hope that government would save us.

But these times are different. Suspicion of government is at an all-time high. When the government comes along to say, “We are here to protect you,” there are many active and sophisticated people who know that this is not what’s really going on.

CISPA itself represents one of many massive threats to human liberty. It will have to be defeated again and again, so long as government is around. That’s because it is in the nature of government to want to know all things about us. A free people cannot let that happen.

We’ve all observed over the last 15 years or so that the “anarchy” of cyberspace can manage itself without violating our rights. Indeed, this anarchy is the greatest protection we have against the biggest enemy out there, which is not the cyberterrorists, but those who claim they are here to protect us against them.

Sincerely,
Jeffrey Tucker

Original article posted on Laissez-Faire Today

National Security and Your Digital Data appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The Coffee Can Portfolio

“Have you ever heard of the coffee can portfolio?”

I was having lunch with Preston Athey, the outstanding investor behind T. Rowe Price’s Small-Cap Value Fund (PRSVX), when he asked me this question.

I had heard of it, which I think surprised him a little because I was only 12 years old when it came out, and it is not a mainstream idea. I knew all about it, though, because the coffee can portfolio is one of those classic ideas that aficionados of finance don’t forget.

I want to tell you about the coffee can portfolio in what follows. You won’t find an easier or more effective way to manage your stocks than this. I also want to enlist your help in a little project that Preston suggested.

It all began with Robert Kirby, then a portfolio manager at Capital Group. He first wrote about the coffee can idea in fall 1984 in The Journal of Portfolio Management. “The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress,” Kirby wrote. “The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.”

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The idea is simple enough: You find the best stocks you can and let them sit for 10 years. You incur practically no costs with such a portfolio. And it is certainly easy to manage. The biggest benefit, though, is a bit more subtle and meaningful. It works because it keeps your worst instincts from hurting you. In his paper, Kirby told the story about how his idea came about.

“The coffee can idea first occurred to me in the 1950s,” Kirby writes. Then he worked for a big firm that counseled individuals on their investments. He had a client he worked with for 10 years whose husband died suddenly. She inherited his stock portfolio, which she moved to Kirby’s care. Looking at the portfolio, Kirby writes:

I was amused to find that he had been secretly piggybacking our recommendations for his wife’s portfolio. Then I looked at the size of the estate. I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it.

In doing this, a wonderful thing happened. Yes, it meant his portfolio had a number of broken stories worth $2,000 or so. Small positions. But he also had a few large holdings worth $100,000 each. The kicker, though, was this: He had one jumbo position of $800,000 that alone was bigger than the total value of his wife’s portfolio. As Kirby writes, “[It] came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox.”

That is an inspiring tale, a triumph of lethargy and sloth. It shows clearly how the coffee can portfolio is designed to protect you against yourself — the obsession with checking stock prices, the frenetic buying and selling, the hand-wringing over the economy and bad news. It forces you to extend your time horizon. You don’t put anything in your coffee can that you don’t think is a good 10-year bet.

Poor Kirby had been diligently managing the wife’s account — keep up with earnings reports, trimming stocks and adding new positions. All the while, he would have been better off if he followed the idler’s creed and just held onto his ideas.

This example reminds me of the work of Thomas W. Phelps, much-forgotten investment thinker who has since become one of my favorites. I praised this remarkable investor about a year ago, right here in The Daily Reckoning. (If you missed it the first time, you can check it out here: The Value of a Thief). Like Kirby, Phelps also believed in the power of “buying right and holding on.”

Why don’t more people hold fast? Phelps writes that investors have been conditioned to measure stock price performance on a quarterly or annual basis, but not business performance. One memorable example he uses (among many) is Pfizer, whose stock lost ground from 1946-49 and again from 1951-56. “Performance-minded clients would have chewed the ears off an investment adviser who let them get caught with such a dog,” Phelps wrote. But investors who held on from 1942-1972 made 141 times their money.

Phelps shows that if you just looked at the annual financial figures for Pfizer — ignoring the news, the stock market, economic forecasts and all the rest — you would never have sold the stock. It was profitable throughout, generating good returns on equity, with earnings climbing fitfully ever higher. Pfizer was a good coffee can stock.

So what stocks would you put in your coffee can today?

Preston Athey offered up Markel (NYSE:MKL) as his coffee can stock. Markel is an insurer and has a long-term track record as a winner. Investors are up over 2,000% since 1990. I am currently giving Markel a thorough look-through. The stock trades for $489 per share. Don’t let the high price throw you. As Preston pointed out, Markel is like a little Berkshire Hathaway. (Warren Buffett’s famous investment vehicle trades for $132,000 per share!) The key is what you get for what you pay. MKL trades for only 1.2 times book value, as compared with a long-term historical average of two times book. Insurance stocks are depressed. And as the cycle turns, you stand to gain not only as MKL’s book value increases, but also as the market restores the higher multiple on that book.

I am giving more thought to the coffee can portfolio and what I’d stash in it. What about you? What stock (or stocks) would you put in your coffee can?

I look forward to your thoughts…

Regards,

Chris Mayer
for The Daily Reckoning

The Coffee Can Portfolio appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

How to Play the Gold Drop

Gold has dropped like a big, yellow rock for five straight days.

The trouble started when $1,650 started looking vulnerable earlier in the month. The $1,650 area was crucial short-term support. After all, gold had been on the skids since its slow trickle down from $1,800 back in October.

After steadily trending lower, we finally got the big flush yesterday. The bottom completely fell out and gold dropped from $1,608 to a low of $1,554 in less than 24 hours. Early this morning, it has repaired some of the damage. As I type, the spot price is in the neighborhood of $1,570.

So let’s review:

Last week, I warned you that gold was set to drop a $100 to $1,550– check.

I also told you $1,550 could become a stellar buying opportunity.

But it isn’t. Not yet, anyway…

Forget your fundamental arguments. Gold is at the mercy of technicals right now. Sellers want to sell and you can’t stop them from doing so.

And don’t get caught up in any arguments about gold being oversold. Don’t get me wrong– it is. Gold is more oversold now than it has been in years. But that’s never a great reason to buy something. Gold could continue to drop and remain painfully oversold for weeks. Thinking that it couldn’t possibly go any lower is just plain reckless…

There’s absolutely no reason to rush into a gold trade right now. If it begins to show signs that $1,550 really is going to be the price floor, you will have plenty of opportunities to pick it up on the cheap.

Just don’t get caught buying early.

Gold is a falling knife– it could cut deep. Let this rush for the exits pan out before you make any plans to buy.

How to Play the Gold Drop appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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If Obama Spends, You Win

If I do my job right, every now and then I should stumble upon a profitable correlation in the resource space.

Today, I want to share with you my latest catch.

In particular, the airing of Obama’s public laundry, also known as the State of the Union Address, unveiled one market sector poised to boom. Indeed, as the government spends, this sector will win!

“America’s energy sector is just one part of an aging infrastructure badly in need of repair” president Obama was able to mutter through the incessant clapping during his recent State of the Union speech.

“So tonight” he later concluded “I propose a ‘Fix-It-First’ program to put people to work as soon as possible on our most urgent repairs, like the nearly 70,000 structurally deficient bridges across the country.”

Your humble editor didn’t lace up his boots to check out the bridge problem across the country, but recently I have seen the need for a country-wide infrastructural overhaul. And checking the math, just on the letter of Obama’s speech, “70,000” bridge-fixes won’t come cheap.

Luckily we don’t need to bicker whether the government spending in the infrastructure sector will be warranted or not – after all, we’re not here for politics, we’re here for profits!

There’s no doubt that some areas in our nation’s infrastructure have past their prime, many bridges and water pipes for instance. Not to mention loads of up-and-coming infrastructure trends – shale logistics, renewable energy, smart-grid, cheap natural gas utilization, etc – should fuel a further round of infrastructure spending.

In our original write-up in November we covered three different ways to play an American infrastructure boom – Fluor Corp (FLR), Mueller Water Products (MWA) and the SPDR FTSE/Macquarie Global Infrastructure ETF (GII). All three companies, since our initial write-up, are in positive territory. Today let’s cover the star of the bunch, Fluor Corp.

Fluor is up nearly 25% in the past three months. With budding infrastructure plays across the globe, this company has followed the market updraft higher (more than doubling the S&P’s move.)

Fluor’s construction projects run the gamut. The company has its share of U.S. government and local projects with bridges, beltways, FEMA work and Department of Energy projects.

But looking on a broader scale the company is a big player in the global market, including power plant construction, offshore oil production facilities, mining complexes, processing facilities and chemical plants. Yeah, you guessed it, these are the very projects that are starting to sprout here in the U.S. and in other emerging markets.

All said, with more money headed towards finding the world’s coveted natural resources a company like Fluor, can flourish. If China needs offshore oil, Mongolia need copper, Australia needs iron, South Africa needs synthetic fuels, And the U.S. needs manufacturing and chemical plants, Fluor has been the ticket.

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After all, the projects I just outlined are all past/present works for Fluor (including work on Mongolia’s world class, Oyu Tolgoi copper mine (shown above.)

So, in an effort to diversify some of our resource holdings – with out of control spending from big gold miners and unpredictable prices for oil and gas – Fluor offers another way to play the world’s resource boom.

Indeed, just yesterday Barrick Gold, the world’s largest gold mining company, announced a new gold mining project on the border of Argentina and Chile. Indeed, this gold mine could be a great addition to Barrick’s resource potential. But while that’s yet to be determined, I know what isn’t! Fluor was awarded the construction contract for this new development. So while the world craves more gold (and other metals), Fluor is enjoying a bevy of miners knocking on its door.

According to Fluor representative Rick Koumouris, “large, remote, complex” projects are emblematic of what the company excels at. So when it comes to frontier market mining projects or offshore energy developments, Fluor is a top-tier choice.

The company should also be a top tier choice for your resource portfolio. Year over year Fluor is just about even, but since our initial infrastructure talk in November prices have shot out of the gate, up 24% — a move that could continue in 2013.

Whether it’s infrastructure projects here at home (pertaining to Obama’s portended spending plans) or remote resource plays in emerging markets, Fluor is a solid, blue-chip way to play it.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

If Obama Spends, You Win appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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avatarThe Daily Reckoning - The Daily Reckoning posted Thursday, February 21st, 2013.

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