Update: Bargains galore as apparent danger looms

Everywhere you look, there's fear. $100++ oil, food prices skyrocketing, subprime and ABCP fiascos afoot and now we see unmistakable cracks in the world's largest economy. This week the number of new jobs created in the US dropped for the first time in years. To some bearish individuals, the recession is already here. Others are predicting a 1920's type global Great Depression.

There are 4 ways an investor can react to such news:

1. convert all investments into cash and hope inflation/stagflation and the tax bill doesn't eat away at your nest egg too much
2. buy T-bills and government bonds +/- high quality corporate bonds, anticipating that the Fed/BoC will slash interest rates and increase the value of those bonds
3. buy gold. Everyone else seems to be doing that, just like in the 80's (remember?)
4. go bargain shopping!

You might have guessed that I'm a number 4 type guy. Fortunately, I have lots of high powered company. Gurus like Buffett, Whitman, Miller, Chris Davis, John Rogers and Bill Nygren are in a buying frenzy every since August. They must smell value in the air-- an environment we haven't seen since 1990.

In such times, it's more important than ever to plan to be very, very picky: buying only companies that you would want to own for a long time, harbouring little or no debt and excellent long term management track record (having weathered many an economic storm such as this one). One would also hope for a nice dividend that matches the CPI to help keep inflation at bay and help out with the tax bill and a payout ratio for that dividend that is sustainable.

Today I put in lowball bids for the following securities:

DELL Dell computer--> this is a globally expanding cash machine finally changing its business model and has a genius at the helm now. It has laughably low debt, particularly for a tech company. Share buybacks. A slam dunk over the long term (just above 52 week lows) IMHO. Low risk, moderate reward.

HOG Harley Davidson--> major insider buying, manageable debt, good cash flows and global growth. Great management/margins/ROC. Large buy-back and increasing dividends over past 5 years. Low risk, moderate reward.

MCO Moody's--> duopoly & high barrier to entry, massive margins/ROC, 19% owned by Buffett, global footprint, gurus Cunniff and John Rogers adding to their positions. Investors hurt by subprime pain are launching class action lawsuit--Moody's has been down this route several times before... and always won in court. At risk of political retribution/forced deregulation although this has been threatened before and never happened. Moderate risk, high reward.

LM Legg-Mason--> considered world's best asset manager although some of their highest profile managers (Bill Miller particularly) have underperformed of late. Very well managed. Some SIV exposure (indirectly exposed to subprime mortgage stuff). Dodge & Cox and Marty Whitman have a large stake and are adding to their positions since September. Deep discount to intrinsic value ($69 v.s. $120) but has some short term downside if Citi sells their stake and more assets under management flow out as investors predictably panic----- I'm watching this one carefully. Moderate risk, high reward.

I'm also analyzing WTS and OXM. I've put a lowball bid in for the latter. I'll publish a more detailed analysis of these two later.

Good luck with your own analysis ;-)