This is the kind of news that will at least begin the process of a true bottom.  I’ve been talking about the cycle of greed and fear recently and the need for a big institution to go under.  Call it what you want but Bear Stearns being taken out for 2 bucks is a hair above bankruptcy.  I can’t imagine being a shareholder  in this.. directly or indirectly through a mutual fund.  You have a company trading at 55/share early Friday morning with a stock market value of nearly 7 billion.  JP Morgan (JPM) takes it out just 2 days later for 2/share just 2 days later, which values the company at a mere 236 million.  Amazing.

According to WSJ, JP Morgan is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations.  The WSJ also goes on to say that while some well known billionairre investors such as Joe Lewis and Bruce Sherman stand to lose a fortune, the hardest hit will be the rank and file Bear Stearn employees who hold a third of the shares in the company.  Enron anyone? 

Looks like the Fed is in the cutting move a bit early too.

After an initial surge, futures are down big.  S&P down 20, Dow down 142, Naz down 33.  It gets mighty interesting from here.

We’ll see books  written about this epic battle of  the  3 tech behemoths – Microsoft, Yahoo and Google.  Another chapter was written this morning as Yahoo defiantly rejected Microsoft’s bid indicating it "massively undervalued" the company and that the company isn’t likely to consider an offer below 40.  There has been talk of Yahoo partnering with Google and using their advertising platform but I don’t see how they’re going to get around the regulators on that one.  Google CEO Eric Schmidt whined about a Yahoo/Microsoft merge as monopolistic… I’d have to say Yahoo + Google in any capacity is more so.  Sure Yahoo retains its pride with this rejection and stirs some excitement amongst employees in their battle with the much hated Microsoft, but is it a good business decision?  Time will tell, but I don’t think Yahoo is in any position to playing chicken with Ballmer.  A couple things are certain though.  This fight just got a whole lot more interesting and whichever way this plays out Google benefits big time.  Long Google and looking to get longer.

The Seattle Times has a good rundown of what might happen next.

According to Reuters, Vanguard Mutual Funds pulled in the most money to its stock and bonds mutual funds in 2007, eclipsing American Funds which held the top spot since 2002.  Vanguard saw net inflows of 76.2 billion last year compared to 42.7 billion in 2006 as investors poured money into its safer money market accounts and ETF’s.  According to the Financial Times, ETF’s provided a major boost with assets growing from 23 to 42 billion last year.  It expects to add more ETF’s this year after adding 10 new ones last year and is seeking regulatory for actively traded ETF’s (a subject for another post). 

The biggest percentage increase of inflows were to State Street Global Advisors, a unit of State Street Corp (STT) with a huge jump to 49.2 billion in assets from just 3.4 billion the year before mostly due to the popularity of its growing list of ETF offerings.  Wow!  No wonder STT is trading near all time highs. 

I personally would like to see companies close out more and more of their most unpopular ETF offerings and come up with more unique offerings in niche segments such as Platinum or Solar (I know PBW comes close).. I would guess we’ll see these ETF’s soon.  How many big cap, or mid cap or global diversified funds do we need!  It’s getting ridiculous and this industry is due for a shakeout.

Between battling flu bugs and an exhausting move I’m just not able to get back up to speed here in 08 as quickly as I had hoped.  Posting will be light again from me this week but I fully expect to be back working my tail off next week to bring you profitable ideas.  In the meantime, look for two excellent posts from SelfInvestors contributors Robert Williams taking a look at the oil industry and Barry Brush discussing an options straddle trade. 

There is much debate about whether individuals with a self-directed portfolio can outperform the major indices as well as mutual funds, which are touted by Wall Street as the only way for the average investor to accumulate wealth.  It makes sense doesn’t it?  By keeping alive the pervasive myth that a buy and hold strategy in mutual funds is the best way to go, they ensure that you’ll continue to dump your hard earned cash into their funds while they collect their exorbitant management fees.. all the while soothing your concerns of under performance by repeating the mantra "that over the long haul we will out perform the market."  Sure, there are some very good funds out there, but I believe with some solid technical analysis skills, the right tools, discipline and organization anybody can greatly exceed average returns.  I thought I’d highlight some advantages and disadvantages of a self-directed portfolio.

Advatages:

1.  Greater returns
The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general.

2.  Potential for reduced fees.
By using ETF’s and trading with a discount broker you can reduce investing costs.  Just remember that the larger your account the smaller your trading costs.  If you’re daytrading a small account you will get killed in commissions!  On the other hand, if you have a large account and making a few trades in stocks and ETF’s, suddenly that 2% management fee you were paying before looks real expensive doesn’t it!  The larger your account, the more it makes sense to invest for yourself.

3.  Nobody cares more about your money than you do.
You take control of your financial situation and your future!   No mutual fund manager will have you in their best interest.

4.  Mobility/Flexibility
Trading for yourself full time can yield large gains in both bear and bull markets allowing you to work anytime from anywhere in the world if you so choose.

5.  It’s Fun!
Researching the next great companies, following breaking news each day and exchanging trading ideas with others all over the world is great fun.

Disadvantages:

1.  Time
It requires more time to do this on your own but it’s your financial future, so make time.  By using just ETF’s and making a few well researched trades each month, your time is minimal and the payoff can be huge.

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Did you know that you can  use a self-directed IRA account to invest in real estate too?

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If you’re looking to get a leg up in your self-directed portfolio endeavors, how about giving the Self Investors Gold membership a look?  You’ll receive buy and sell alerts in a Model Portfolio within minutes of every transaction.  After a top tier performance  of 27.6% last year, the Model Portfolio is posting strong gains again this year of over 24% while the S&P is in the red.

The hotly debated estate tax issue has been in the news again recently after the Senate Finance Committee held a hearing where Chairman and Montana Democrat Max Baucus said he supports ending the estate tax along with the Iowa Republican Senator Charles Grassley who said, ""The estate tax is unjust. … Death should not be a taxable event."

Warrent Buffett weighed in on the other side saying, "In a country that prides itself on equality of opportunity, it’s becoming anything but that as the gap between the super-rich and the middle class is widening."

Below is an editorial written by Dan Ferris of DailyWealth and republished here with permission.  I completely agree with the Senators and Dan Ferris that a repeal of the estate tax is in order.  Now Buffett is obviously a smart guy who has amassed a fortune but he’s wrong on this.  In my opinion this is not an issue of equality but rather an issue of the best way to distribute wealth.  Bottom line.  Who would you rather distribute wealth?  The government or the wealthy?  With all the inefficiencies of goverment, the waste, the fraud… is this really a very difficult decision?  The United States in terms of percentage of GDP gives back more to local charities and world programs than any other nation in the world.  With a repeal of the estate tax that kind of giving will only increase.

Consider this.  Suppose the estate tax was repealed and Warren Buffett passed on all of his wealth to his children (what’s ever left over after his charitable donation to the Gates foundation).  Now his children will be given the same opportunity to direct this excessive wealth into charities that they believe strongly in just as their father did.  The alternative is allowing the goverment to decide where to allocate this wealth. 

Dan makes a great point in saying "It’s interesting to note that Buffett advocates the estate tax, and yet has deprived the government of its fair share of his own national resources by giving some $37 billion to the Bill & Melinda Gates Foundation. The shares are worth more now, too, so the taxman is further deprived as the market bids up Berkshire’s stock."

Does Warren Buffett not trust that his own children will continue his charitable ways?  Does he not trust that your children will?  What do you think?

Why Warren Buffett Is Dead Wrong About the Estate Tax
By Dan Ferris

I saw the following recently in an article at CNNMoney.com:

"’Without the estate tax, you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit,’ Warren Buffett told the New York Times in 2001. ‘[Repeal would be like] choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics.’"

Warren Buffett, one of the world’s richest men, is referring to the practice of leveling large taxes on your wealth after you die. Of course, the problem with Buffett’s statement is that "the resources of the nation" don’t belong to "the nation" at all. You own your wealth or, at least, you’re supposed to own it. I guess if you have a billion dollars, you think you get to say how "the nation" ought to be run. 

The wrong-headed idea that permeates our culture and allows for Buffett to advocate estate taxes is the idea of "giving back to the community." This idea is a nonstarter because there was no taking in the first place. You get rich by offering value for value. You get rich by trading, not taking. "Taking" is what the government did to Suzette Kelo when it condemned her house so Pfizer could build a parking lot (a crime that was upheld by that bastion of justice, the U.S. Supreme Court, in Kelo v. City of New London). THAT is taking. 

But traders have no need to give back anything, unless for reasons of recission due to the use of fraud or force, unless they’re guilty of a crime. Earning wealth is not a crime… at least, it’s not supposed to be one. I heard Buffett once say that he always planned to give his money "back to society." Never mind that nothing was "taken" from any "society," only wealth that was created and trading that was done. Why does he feel so guilty?

If Buffett needs to imagine a future that doesn’t rankle his idea of fairness, maybe he should remember that incapable allocators of wealth will lose their wealth to other more capable allocators. So if the inheritors aren’t the Olympians he says we’re making them out to be, the market will take care of that.

Like a man looking for a good time on a small budget, money goes where it’s treated best. People who inherit wealth and don’t treat it right will lose it. But to be quite accurate, that’s off topic. Even if the inheritors of wealth don’t lose it, it doesn’t matter. The most important point, the one Buffett doesn’t acknowledge, is that the wealth is theirs to lose or keep as they may. It absolutely, positively does not belong to "society."

It’s also a mistake to suggest that, by honoring property rights and allowing people to keep their wealth, we are somehow choosing some sort of future "Olympic team." Not true at all. We are simply acknowledging a man’s right to dispose of his property as he sees fit. There can be no such thing as the "aristocracy of wealth" Buffett fears.

The inheritable wealth Buffett wants to destroy through taxation (a euphemism for "theft") must be created and earned. An aristocracy, on the other hand, is the ruling class in a monarchy. All of the monarchy’s wealth is seized, conquered, and redistributed wealth. The term, "aristocracy of wealth," is like "military intelligence." It’s self-contradictory. That the aristocracy passes its wealth from generation to generation is a funny thing to worry about, too. The aristocracy eventually has to sell it all off to keep out of the poor house. You can’t live on unproductive inherited wealth forever, anymore than you can live on borrowed money forever. To paraphrase Robert Louis Stevenson, those who attempt to live on unproductive inherited wealth, sooner or later, sit down to a banquet of consequences.

It’s interesting to note that Buffett advocates the estate tax, and yet has deprived the government of its fair share of his own national resources by giving some $37 billion to the Bill & Melinda Gates Foundation. The shares are worth more now, too, so the taxman is further deprived as the market bids up Berkshire’s stock. 

Isn’t Buffett afraid that Bill and Melinda already have much more than their fair share of national resources to command? Isn’t he committing the wrong he alleges will be righted by the estate tax? Who cares about the Gates’ superior ability to command the resources? The playing field is decidedly other unlevel already, yet Buffett insists in unleveling it some more. Seems like Buffett thinks your estate ought to be taxed, because you don’t know what you’re doing.

According to Buffett, your children will be better people if we just steal your money before you can give it to them. They’ll have to work harder.

Buffett thinks the estate tax creates a level playing field. Ah, the level playing field, the illusive goal of the society builders and master planners. The only trouble with the level playing field is that you can’t ever have one, because it means penalizing people for their ability, for their success. It means cutting the tops off the maple trees so they don’t block the sunlight for the oak trees (or are oaks taller than maples? I don’t know).

And if we consistently chopped the tops off all the tall trees just for being tall, then the Buffetts of the world would never have the chance to amass so much to give back to society. At that point, he’d be society, waiting for someone to give him something back.

I wonder how he’d like that?

Good investing,

Dan Ferris

Until the end of August I’ll be traveling around the northeast coast – Connecticut for a wedding, then New Hampshire and Maine for a little road trip so posting will be very light but I’ll be back in full force after Labor Day and refreshed for the rest of the year.  Until then, good trading to all… be careful out there!

From what scientists are saying you would think that this "frozen smoke" will in fact save the world or at the very least have a major positive impact on everything from protecting the environment, to filtering water, to insulating our homes, to ensuring the safety of our military and firefighters all the way to creating better tennis rackets (Dunlop has created one).  It’s expected to rank right up there with Bakelite of the 1930’s, carbon fibre of the 80’s and silicone in the 90’s.

Aerogel was first created by Steven Kistler in 1931 as a result of a bet with another chemist and according to TimesOnline was later enhanced by NASA in order to catch dust from a Comet’s tail.  A company created by NASA called Aspen Aerogels eventually produced a stronger, more flexible version of the gel in 2002 which is being used in space suits for the first manned mission to Mars scheduled for 2018.

Look for all kinds of products to be outfitted with this material over the next several years as companies look to make products lighter and stronger.  Aspen Aerogels is still a private company so there isn’t a way to invest yet, but it will be a company worth watching over the next few years if and when they get bought out or pursue an IPO. 

However, there is another way to play the aerogel space for the time being – Cabot Corp (CBT), a company that is apparently in a race with Aspen to develop as many aerogel patents as possible. It produces a family of silica aerogels under the trade name Nanogel and is gaining wide acceptance for use in thermal protection, diffused light and sound reduction.  The company is also addressing the needs of oil and gas operators who are developing subsea fields or new LNG systems.  The company is not a an aerogel pure play, but also worth keeping an eye on.

 A video of this fascinating material:

With uranium prices skyrocketing over the past few years there has been big interest in a nuclear/uranium focused ETF in order to invest in this industry in a  diversified way.  The wait is now over with the arrival of the Market Vectors Nuclear Energy ETF (NLR) which began trading on the Amex on Wednesday of last week (it is off nearly 10% from the opening price).  I first wrote about a way to play the spot price of uranium several months ago but until now there wasn’t a way to play a basket of uranium/nuclear companies across the mining and nuclear plant operators.  The ETF seeks to replicate the performance of the DAXGlobal Nuclear Energy Index, a basket  of 38 nuclear related stocks maintained by Deutsche Borse.  About half of the ETF will be comprised of uranium miners while roughly 32% will be made up of nuclear plant builders.  Here are the top 10 holdings of the fund:

Nuclear power is already a major source of energy in some European countries as well as Japan, Canada and South Korea and will be in increasingly so in the US.

from www.timeofchange.org

Uranium stocks have been getting hammered recently as the price of uranium corrects a bit, but at some point it will be time again to get into the nuclear space and make some profit.  That time may come soon and should start with the Market Vectors Nuclear Energy ETF (NLR). 

::: >>>> For more analysis on the nuclear/uranium ETF click here