ThomasGoodwin.com

As always, I appreciate when people take the time to post comments, provide feedback, or send me emails. I received an email yesterday from a reader named Connie after posting Sunday’s article The Week Ahead, which mentioned Berkshire Hathaway & Warren Buffett having an interest in Johnson & Johnson, Coca Cola, and Union Pacific - all three due to report quarterly earnings this week.

Connie writes: “Berkshire Hathaway owns Helzberg Diamonds. There is gossip that they might sale the company. Can you get some facts?”

I had not heard that Buffett/Berkshire Hathaway were looking to sell Helzberg Diamonds. Everything you read about in the financial blogs and press right now deals with the already-announced plan for Berkshire to take a stake, if not totally acquire, the homebuilder Hovnanian Enterprises (NYSE:HOV). Hovnanian has operations in 17 states, including those hit most hard by the sluggish real estate market - namely Florida and California.

With nothing published on a potential Helzberg spinoff or sale it’s entirely speculation at this point as neither the parent company Berkshire Hathaway (hereafter referred to as BRK) or subsidiary Helzberg would admit something like that unless the ink was drying on the paper.

But for the sake of arguement, let’s say it IS true that BRK wants to unload the diamond & jewelry retailer. It’s doubtful that the sale of the company would have a dramatic effect on BRK’s share price. BRK has equity interests in approximately 60 different companies. IF that equity was spread evenly among its investments that would mean that Helzberg would represent AT BEST a 1/60th proportion of BRK’s investment portfolio. We know that BRK has significant holdings in much larger companies like Coca Cola (a 8.6% stake).

But without diving into where all of BRK’s money is spread around, consider this: Warren Buffett is a long-term investor. He has owned Helzberg Diamonds since the 1990’s, which any investor would consider long-term given that it’s past the halfway point of the first decade in the 2000s. But Helzberg isn’t the only jeweler that BRK owns. Consider Borsheims, a jewelry store chain that is not so ironically based out of Omaha, NE where Buffett also calls home. BRK has owned this chain since 1989. Not to suggest that Buffett would automatically sell the business that he has owned the longest, we know that’s not the case. But I wouldn’t know how to determine which one he would be considering to sell if he thought the jewelry business was becoming over priced and wanted to cash out to bank a realized gain.

Rather than focusing on BRK and its subsidiary Helzberg, if you were to capitalize on the sale of Helzberg it would most likely be in taking a position (long or short) on the business that is acquiring Helzberg. If it’s not being acquired, namely if it’s being spun off and taken public, you have to analyze how much (if any) of the equity in the jeweler BRK is going to retain after the sale.

This might be a long shot but I could see a private equity company having an interest in Helzberg. Blackstone Group (NYSE:BX) is a good example to use because it’s publicly traded so there is more information available on it. This company recently announced it was buying Hilton Hotels (NYSE:HLT) and the deal is expected to close in October. Blackstone might be interested in Helzberg to 1) diversify and 2) as a real estate play. This is pure speculation on my part though. In fact, if a large company such as Blackstone came in and purchased Helzberg from BRK it probably wouldn’t be a sizable portion of Blackstone’s overall assets either. Blackstone might trade downward slightly on such news (so you would have a good short opportunity) as the buyer often faces some downward pressure in an acquisition while the seller often sees some increase in stock price… that’s when the seller is selling their entire company though not when they are raffling off pieces of their business.

This is probably a longer answer than most wanted, but I thought it warranted further investigation into WWWBD… What Would Warren Buffett Do? Or What WILL Warren Buffett Do?! Time will tell. As always I welcome your comments and feedback…

I came across this excellent article on Yahoo! Finance (which actually originated on Seeking Alpha) about Warren Buffett’s appetite for the railroad stocks. We had touched on this just very briefly in my Sunday post The Week Ahead when looking at stocks that are due to announce their quarterly earnings this week. Union Pacific (UNP) was one of those stocks set to report on July 19th, and one that Warren Buffett takes an interest in himself.

The above mentioned article was interesting because it highlighted some things that you might not otherwise consider when looking at railroad stocks, especially in comparison with other transportation & logistics stocks. For instance, the article notes that the railroad is not nearly as affected by the relative change in gas & oil prices as say the trucking industry or common carriers like FedEx and UPS.

But there are a couple of things that I want to build off of from this article.

1) The article mentions that when Warren Buffett invests in something like a railroad stock other investors follow suit, thereby pushing the stock in question higher. This makes me wonder: Is there a Warren Buffett stock effect in the stock market?!

One has to wonder if the mere interest of one individual in a particular stock or sector can and should have a significant effect on the valuation of the business(es) in question. Without having done any homework on this whatsoever, I wouldn’t hesitate to say yes! Even as the words of the Fed Chairman don’t necessarily represent just the words of the Chairman but rather represents the analysis of many economists working for the Chairman, so too does the words of Mr. Buffett represent the analysis of Berkshire Hathaway’s employees and the management of its subsidiaries.

What I mean by this is that if Mr. Buffett becomes bullish or bearish on something, you had better take note of it! A man with that many connections and the capability to summons an advisor or specialist with knowledge of any given business provides Mr. Buffett the ability to make informed decisions and capitalize on that same decision using cash where others would need to leverage assets to achieve the same results.

2) The second thing I wanted to briefly point out is something I think the article fails to mention. Perhaps these railroads are not undervalued from a P/E or earnings standpoint at the time that Mr. Buffett decides to buy them, but possibly that Mr. Buffett sees additional value that others are overlooking. The article asks if Mr. Buffett is going to cause Berkshire Hathaway to derail due to buying a railroad that is relatively expensive. But I wonder if it’s worth considering that railroads have traditionally held vast amounts of real estate. These railroads could be excellent investments if there was some belief that they would one day liquidate some land holdings that many have held since the eastern US was connected to the western side.

Now I am certainly not bashing the article. It does an excellent job making its point that we do need and will always need these logistics companies to move freight. And it further makes the valid point that some of the developing countries are just now coming on board the train so to speak. In the event the above link does not work, I have posted the article to my own website in Adobe PDF format. As always, I welcome your comments and feedback…

Well, I’m filing this under my Real Estate category for lack of a better place to put it. If you live in or around Cincinnati, Ohio (or really a lot of places throughout the midwest… even California out west) you’re experiencing near drought conditions with far below average levels of rainfall.

With the lack of rain and hot summer weather, the ground has become hard as rock and there are the cracks and crevices forming in the ground. My neighbor filled me in on something that the person who owned my house before me did when the ground is this dry and we do not get rain.

The previous owner of my house would go out and water the ground right next to the house… say within a foot or two and enough to get soil nice and moist so it would sink in a couple of feet. A nice dose of water every few days or so, usually applied early in the morning or late at night so it would sink in and not evaporate away during the hazy sunny daytime hours. Doing this (the previous owner alleges) helped keep the soil from cracking and kept some moisture in the ground so the soil would stay packed together near the foundation of the house.

So why do this? Well, when you get a heavy down pour of rain, as is often the case with many summer storms, the ground doesn’t act as a funnel or drain sending all that rain down through the cracked soil and up against the foundation of your house. Essentially, by watering the ground on a somewhat regular basis, that steady amount of moisture has kept the soil packed together and without the large cracks near the foundation the water will take the path of least resistance away from the house (where the ground has more severe cracks and is still dry so it can absorb more).

Now, I don’t know if this is an urban legend or if there is some truth to it, but I live in a house that was built in 1943 and shows no signs of ever flooding (knock on wood). I can’t recommend doing this or swearing by it, but I see the logic in it and I throw this bit of information out there for others who might be interested in trying something like this with their gardening (perhaps you have some plants around your house that can use some extra watering) or I’m definitely interested in hearing from people that may know whether or not there is some truth to this and/or have tried it.

As always, I welcome your comments and feedback…

Several economic indicators coming out this week will test investors on how confident they are that consumers will continue to open their wallets. The Producer Price Index (PPI), a measure of wholesale prices, will be reported on Tuesday. The Consumer Price Index (CPI) will follow the next day. Then we round out the week with the number of Housing Starts and Building Permits. The PPI and CPI are excellent indicators of inflation in the short term while the housing industry is obviously in desperate need of some buyers to come forward and help revive the new homes/construction industry… just ask Home Depot that reported weaker than expected quarterly sales last week.

The economic indicators being reported will probably take a back seat to the slew of earnings being reported this week. The following is a very abbreviated list. There are many more companies reporting earnings this week. I have chosen a few notables, many of the following are components in various indices, and there are a few locally based companies in the Greater Cincinnati, Ohio area that I would like to direct your attention to (stock’s ticker symbol in parenthesis):

July 17th:
Johnson & Johnson (JNJ)
The Coca Cola Co. (KO)
Wells Fargo (WFC)
Yahoo! (YHOO)

July 18th:
Abbott Laboratories (ABT)
Altria Group (MO)
Cintas Corporation (CTAS) - a Cincinnati, Ohio area based company (Mason, Ohio)
EBay (EBAY)
JP Morgan Chase (JPM)
Pfizer (PFE)
Allstate (ALL)
Washington Mutual (WM)
Wesbanco (WSBC)

July 19th:
Capital One (COF)
Fifth Third Bank (FITB) - Cincinnati, Ohio based company
Harley Davidson (HOG)
Honeywell (HON)
PNC Financial Services (PNC)
Sherwin Williams (SHW)
The Hershey Co. (HSY)
Union Pacific (UNP)

July 20th:
Citigroup (C)
Caterpillar (CAT)
Wachovia (WB)
Whirlpool (WHR)
Sonoco (SON)

Harley Davidson has one of those stock ticker symbols that is unique in that it helps identify with the company’s products, culture, and customers. Beyond the name being “cute” there is really no significance to the special ticker symbol.

I would draw your attention to Johnson & Johnson (JNJ), Coca Cola (KO) and Union Pacific (UNP) reporting earnings this coming week. Billionaire and respected investor Warren Buffett is fond of these particular companies. He regularly enjoys drinking Diet Coke and in this month’s (August 2007) issue of Smart Money it mentions that he has nearly $4 billion invested in the railroad industry (including Union Pacific). Mr. Buffett’s company Berkshire Hathaway owns approximately 8.6% of Coca Cola as of the end of March 2007.

Here’s looking to The Week Ahead!!! I hope you have a great week regardless what the market does. As always, I welcome your comments and feedback…

After taking the past few days off I wanted to catch up and post my usual The Week In Review as well as look forward to The Week Ahead. A lot has happened since I last wrote so pardon me if I skip over some things and give you a very brief summary this week…

There wasn’t anything scary about Friday the 13th this past week unless you are a Bear in the market. The Dow broke its previous all-time high and even flirted with 14,000 this past week. During Friday’s trading the DJIA index rose to within 70 points of this next milestone only to pull back slightly and settle at 13,907 (a 2% gain on the week!)… other indices were moving significantly higher as well. The S&P 500 was up 1.4% to 1,552.50. The NASDAQ was up 1.5% in line with the S&P 500, ending the week at 2,707.

The week ended on an excellent note for the indices but early in the week appeared to be singing a different tune. On Tuesday, Home Depot and Sears reported lower than expected earnings. Home Depot blamed the sluggish housing market for the decline. I don’t entirely buy into Home Depot’s reasoning. I expect Lowes (NYSE: LOW) to post better numbers than the Home Depot did. Lowes reports its second quarter earnings on Monday, August 20th. Although I wouldn’t expect Lowes to completely sail past the analysts’ estimates of $0.61 per share quarterly earnings, I do think it will meet or slightly exceed them.

Considering the negative news coming from Home Depot earlier in the week, the market was much more upbeat Friday when General Electric posted better than expected quarterly earnings sending the stock to a five year high above $40 per share. The GE quarterly earnings even over-shadowed the 0.9% drop in retail sales that the US Department of Commerce reported on Friday for the month of June. This nearly 1% drop followed the May increase of 1.5%. I think the GE results were more of a surprise to investors than the slight drop in retail sales, so although these sound like conflicting results being reported, the GE results are for an entire quarter - not just the month of June like the Department of Commerce’s report, and furthermore the GE reported results were much more unexpected than a very slight decrease in the retail sales for the month of June.

Here’s looking to The Week Ahead!!!

As always, I appreciate your comments and feedback…

If you own a home in Ohio and you’re 65 (or turning 65 in 2007), it’s a good year for you. Ohio is expanding its eligibility for the Homestead exemption on your real estate taxes. This benefit, which was already in place but with certain income restrictions, has been expanded to allow all homeowners age 65 and older as of this year, as well as all surviving spouses that are 59 1/2 or older regardless of income.

The first $25,000 of a home’s value is no longer being taxed for these individuals. Let me just take a moment and say what a great way to help our seniors in this state. Many of these people are on fixed incomes and yet they face the same rising costs - like gasoline - that the rest of us do!

The Cincinnati Enquirer posted a nice article on this expanded tax benefit.

As the Enquirer article points out, if you qualify you won’t just automatically see the tax benefit next time you get the real estate tax bill in the mail. You must contact your local county auditor’s office to request the homestead exemption and you will have to fill out an application, which is simply so the auditor can keep track of how many people & properties qualify for this credit.

Hopefully we will see more relief coming in the way of real estate taxes to help make the cost of homeownership more affordable and therefore bring more buyers into the market. It’s not just about bringing more buyers into a market where there are a larger number of sellers. That would be a nice economic benefit for the state, but it also helps the local communities’ quality of life when people own their homes as residents take more pride in their homes, neighborhoods, schools, communities, and so forth.

As always, I welcome your feedback and comments…

If you are like many entrepreneurs you have a great idea but are struggling to get your new venture started. Of the many decisions that you need to make - from marketing your product or service, handling logistics, to managing your cash flow, etc. one of the most important decisions will be deciding what form of business entity you will operate.

There are several to choose from:
Sole Proprietor
Partnership
Joint Venture (for combining two or more existing businesses in a given project)
C-Corporation
Limited Liability Corporation
S-Corporation

Since most people are familiar with the more basic sole proprietorship and partnership models, we will skip those and examine the pros and cons of the various types of corporations. We are also snubbing joint ventures since those are mostly done in a specific project setting between multiple companies.

The C-Corporation will be your basic company that maintains its own financial statements and can choose to reinvest earnings or distribute them as it sees fit. The income or losses will be reported on the company’s own income tax filing and any dividends will be taxed to the individual shareholder.

Since many start-ups are smaller in nature it makes sense that an entrepreneur would not want to pay income tax as a C-corp and then again as an individual. This brings us to our next two forms of incorporation:

The Limited Liability Corporation, or LLC, passes earnings on to the shareholders’ income tax return (so it is not taxed at both the individual level and the corporation level). However, if you are the SOLE owner of an LLC you will be taxed as if it’s a sole proprietorship. You may still have some of the limited liability protection that an LLC provides; for instance your personal assets may be shielded in the event the business venture goes bust.

However, most lenders and creditors are wise to the fact that a one-person LLC is really just a sole proprietorship that’s incorporated for liability purposes. Therefore, the creditors will want you to personally guarantee the repayment of any loan, usually by making you personally responsible for the debt if the business goes bust. This makes sense when you’re the only person owning/running the organization as you ultimately affect the degree of success that your business achieves.

Another form of business that you may consider, especially if you’re flying solo and were thinking about filing the LLC method, is to form an S-corporation. The “S-Corp” is purely a tax maneuver with the IRS. You file the C-corp articles of incorporation the state of your choosing. You then submit the Form 2553 with the IRS and select S-Corporation. This form of business venture allows the income to pass through to your personal income tax so once again, like the LLC, it is not taxed twice (once as a corporation and once as an individual taxpayer). It’s important to note that you need to file this form within 75 days of filing your articles of incorporation, otherwise you have to wait until the next year (by March 15th if your new company operates on a calendar year) to change your tax status. You would operate as a C-corp in the meantime.

The S-corp is more limited in use than the LLC or C-Corp. An S-corp may not have more than a handful of owners… I read in one place 75 owners and in another place 35 owners. I need to seek clarification on this part. Regardless which number it is, or even if it’s neither of those numbers, that is still a limited number of shareholders allowed. Also, you cannot have more than 25% of your company’s gross receipts as passive earnings, i.e. rental property/real estate that you are not actively managing the business. If you’re a landlord but spend more of your time doing other things, it’s probably better to file as an LLC. An LLCs stock can also be held by other entities such as other companies (or even parent companies) whereas an S-corp can only be held by individuals who are U.S. citizens or permanent residents.

Wow, it really sounds like I am touting the LLC over the S-corp. Well, that’s not necessarily true. It depends on your individual situation: how many owners you have, how many of the owners are actively involved in the business, how the ownership and profits are to be split up, and so forth. A drawback to the LLC in this respect is that members (owners of LLCs are referred to as members) would have to show a gain made by the LLC regardless whether or not that gain was distributed to them by the LLC or the LLC reinvested those earnings into the company (gains not distributed are referred to as “phantom income” because it was never received). If the company reinvested earnings over multiple periods, this could have a compounding tax effect (added taxes without realized gains) by the various members. One way around the phantom income problem in an LLC is what’s known as “gross-up” clauses to be added to the LLC’s operating agreement. These clauses simply state that the LLC will reimburse the shareholders for tax incurred on income that they did not receive.

As you can tell, the water is getting kind of muddy, but I hope when you analyze your own situation you can pick out the pros and cons of the various forms of incorporation and choose one that fits you best! This article is not meant to be considered legal advice, tax advice, or in anyway represent a recommendation to set up your business venture in one particular fashion over another. Since the laws vary by state and the tax code changes yearly, it is highly recommended that you seek legal counsel and the advice of a CPA, accountant, or tax attorney prior to starting a new business venture.

As always, I welcome your comments and feedback

Before I begin dishing out investment advice I think it is prudent that I disclose my current investments. Please keep in mind that my investment strategies and my specific choices for investment may not be suitable for other people and everyone should consider their own risk tolerances as well as match their investments with the goals that they have in mind for those investments, like whether those investments are for a long-term goal like retirement or an upcoming event such as a child that will be attending college within the next 5 years or so. Your timeframe and your risk tolerance will certainly affect your investment decisions.

My investments are primarily through my 401(k) retirement account. Although my company does not provide any matching whatsoever (rather, they have a fully funded pension), I find the 401(k) to be a convenient investment vehicle in that I can have my retirement savings taken directly out of my paycheck. Once again, this may or may not be something you should consider. If your company does not match your contributions and you do not like the investment options open to you, perhaps you should consider an IRA - you can choose between a traditional IRA or a ROTH IRA. We will discuss those at a later date.

For now, I present to you my investments in summary so you will know in the future that when I recommend something that I feel is a good investment, I won’t be saying it just to line my own pockets.

Here is a summary of my investments in my 401(k) account.

You might be thinking, “that’s fantastic, Thomas, thanks for the breakdown of what you invest in… but how have your investments performed since you began investing in the above mentioned account?!” Well, I have been contributing to my account since November 2003 (when I started working at my current employer).

This document shows my return on investment from 12/31/03 to 7/9/07 in my 401(k).

The only other investment that I have outside my 401(k) is some common stock that I have accumulated in ONE particular company. I own a few shares in Cincinnati Financial Corporation (NASDAQ: CINF). While I am not reporting my exact number of shares to you, as of this date the market value of this common stock is less than the total value of my 401(k). You will NEVER hear my opinion - buy, sell, or hold - on this company and I will not mention it in any of my articles or post about it in my blog. That being said, since I don’t intend to follow the stock publicly in my blog, I will no longer update you on my holding of the stock - how many shares, if any, that I own or even whether I am taking a position long or short on the stock.

I will soon begin posting updates on individual stocks that I like and welcome your input as I undertake this new chapter in my blog and website. Please let me know if you have any specific stocks that you are interested in reading more about; or likewise if there are any particular industries that you have an interest in or want to learn more about how they operate. As always, I welcome your comments and feedback…

Last week we saw investors push the major indices higher, although on a lighter volume of trading. If last week was a lucky week because of Saturday’s date being 7/7/07, hopefully this week won’t follow suit and be unlucky with Friday the 13th.

Several economic indicators will be reported throughout the week:
Consumer Credit for the month of May will be released on Monday, July 9th.
Wholesale Inventories for May on Tuesday, July 10th.
Crude inventories on July 11th.
Initial umemployment claims, the trade balance for May, and the treasury budget for June will be released on Thursday, July 12th.
Export and Import prices, business inventories, the Michigan Sentiment’s preliminary July numbers, and retail sales will be reported on Friday the 13th.

Retail sales are what I would like to briefly focus on. With the slowing home sales, one has to wonder how consumer confidence and retail sales will keep up if people worry about an inevitable increase in their adjustable rate mortgages (ARMs) as well as their ability to borrow additional money or refinance to save money.

I wouldn’t worry much about the trade balance as the dollar has been falling recently against the Euro, making our products a little more affordable for those over seas with higher valued currency. Look to retail sales at the end of the week to be a make or break point for much of the market.

I wouldn’t be surprised to see some early-week buying to follow up last week’s mini rally. The Dow is near (64 points off of) its all-time high of 13,676, which was set just over a month ago on June 4th, 2007.

Just so people don’t think I am biased in only looking at the DOW, other major indices are nearing some higher numbers… The S&P 500 is just 8 points shy of its all-time high. The NASDAQ is sitting on a 6.5 year high after Friday’s rally.

Turning from economic data and market indices, let’s look at earnings announcements this coming week…

Alcoa, Inc (NYSE:AA), a Dow Jones Industrial Average and S&P 500 component, is expected to report its second quarter earnings on Monday, July 9th. Analysts expect $0.81 per share earnings. If the company beats expectations, this could give the DOW and the S&P averages a lift on Monday.

Here’s looking to The Week Ahead… try to avoid crossing the path of any black cats on Friday. As always, your feedback and comments are welcome…

Whether you call it lucky or not is up to you, but the bulls had a good week. The Dow Jones Industrial Average, which started the week at 13,409, finished the week up just over 200 points (a 1.5% gain). The week was filled with mostly good news as investors were delighted in a lower than expected decline in factory orders as reported on Monday. Trading took a backseat to fireworks and cookouts on Wednesday for the 4th of July holiday in the U.S. Then, the week ended on another good note with the unemployment rate meeting the 4.5% expected rate and the nonfarm payrolls being surprisingly slightly higher.

While all of this is a little more cause for cheer rather than alarm, it does not signal any dramatic or unexpected changes. The markets were trading a much lighter volume as investors were much busier spending time attending family reunions to boast about their first half of the year investment results it seems.

Regardless what the unemployment rate does in the short term, it is nice to end the week with a positive comment… so I just wanted to note that the 4.5% unemployment rate is quite low and is an excellent sign that the economy is still doing quite well overall. There are several economic indicators being reported next week, in fact it seems like we have something coming out every day next week… some are more important than others as usual. For instance, retail sales data for the month of June will be released by the Department of Commerce on July 13th (considered to be an important economic indicator). Not as important… the treasury budget announced by the US Treasury Department on the 12th. We will revisit these items when we look at the week ahead.

Here’s looking forward to The Week Ahead… both literally and in the ongoing blog that will be updated later this weekend. Till then, enjoy your weekend! As always, I appreciate your comments and feedback…