Back from Napa

Dave Del Dotto is the real estate, no-money-down infomercial mogul. And he LOVES wine. He runs one of the wineries my wife and I visited on a four-night trip to Napa Valley.

Seems like most wineries burn cash. A lot of the ones we visited were owned by people who either still had their day jobs or had retired with a massive fortune (like Dave). The Bremers are in tree farms, heavy equipment, and insurance. James Cole didn't mention what he does for a living, but he still has his day job. Bill Keever is the retired president of Vodafone Asia. (Keever's 2007 Cabernet Sauvignon was one of the highlights of the trip. We also bought a bottle of Lindstrom, grown right next door to Keever.)

The standard joke is, "How do you make a small fortune? Start with a large fortune and go into the wine business."

Why do they do it? Passion for the craft in many cases – enough passion to turn your teeth purple.

Everywhere you go, you hear stories of how fanatical these people are about making great wine. Somebody once told me the guy from Nickel & Nickel went around the valley picking up handfuls of dirt and tasting it. It sounds a little crazy to me, and I don't know if it's true... but I believe it.

It's a wonderful experience, but after awhile, it all runs together. At the end of our third full day, late in the afternoon, we sat there with two glasses of red wine in front of us and couldn't tell which was which, even though we knew they were two very different wines. At least we liked them both... It's hard to get a bad drink of wine in Napa Valley. It only grows 4% of the wine grapes produced in California, but it's not just any 4%. It's the top 4%.

It's hard to get a bad meal there, too. The food in Napa is great, but it's funny... You pay all this money to eat all this fancy food, and the tastiest items on any menu were the locally grown heirloom tomatoes.

Go to Napa. Drink the wine. Eat the tomatoes. It's a wonderful place – even if it is located in a tax hellhole.

I bought some wine futures, but I just take delivery of the wine and drink it. I don't do it to make money. Making wine is rarely about making money. But it's always about enjoying life. Cin cin!

For Safeway to go head to head with Wal-Mart would be suicide. Wal-Mart operates on a much greater scale than Safeway and can wring better deals out of its suppliers, passing the savings on to customers.

From personal experience, I bet Safeway would have to drop prices another 20% or more on many items to compete directly with Wal-Mart. Safeway's gross margin is just 29%. Trying to lower that to Wal-Mart's 24%-25% level could be hard on the business. Safeway makes less than $1 billion a year. Wal-Mart makes $14 billion. A $14 billion profit is a lot farther from zero than a $900 million profit. A World Dominating franchise is just too hard to compete with. Competitors have gained some market share recently, but Wal-Mart is still No. 1, still the World Dominating retailer.

I understand Mr. Market being unsure of what the Fed will do about the sagging economy, since it's running out of ideas. The fed-funds rate is already at zero. It's already pumped trillions of dollars into the economy. It's backstopped loans and bailed out banks, automakers, and mortgage guarantors. Aside from Ben Bernanke's standing threat to drop dollar bills from helicopters, the Fed is running out of ammo.

But I can't imagine there's any uncertainty that the spigot labeled "cheap money" will remain wide open. I'm seeing 0% car financing deals and mortgage rates around 4.6%.

Right now, with stocks way up from their panicky March 2009 lows, folks feel pretty good. With interest rates hitting record lows, they feel even better. Even if they don't have money in the bank, they can go to the bank and borrow it. So in a way... don't we all have money in the bank right now? Whether it's ours or other people's hardly matters.

The Fed's weapon of last resort is "quantitative easing," government-speak for wholesale money printing. It's only a matter of time before they unholster the money gun and fire it straight at your paycheck and daily living expenses. But you're probably safe for a little while.

Eventually, the Fed will expand its balance sheet rapidly, then step in and buy everything in sight... Treasuries, mortgages, corporate debt, maybe even real estate. While not imminent, it is certainly inevitable. And when that time comes, you'll be happy you own gold.

Proper structural policies? Oh well. Maybe he's a PhD or something. The government doesn't need any new policies, except the policy of rapidly shrinking itself as soon as possible. Whether it's "proper" policy or "smart" regulation, the idea that government can be fine tuned is something no adult should ever entertain. Government is a cudgel. It's a boot. It comes out of the barrel of a gun, said Chairman Mao. If you let it, it'll grow and strangle you to death, as Komrade Obama is doing today. If you keep it small, maybe it can work.

We've already told you how government can help fix the economy: cut spending, now. You can only take so much money away from taxpayers (especially to fund entitlement programs) before they revolt. While the solution is simple, it's not easy. Politically, it's virtually impossible. I'm 48, and I doubt we'll see any decent tax or spending cuts in my lifetime, even if I live to be 120.

AMD is an appropriate hedge because it competes directly against Intel in the microprocessor market. But more importantly, AMD is such a poorly run business that in our office we frequently joke that shorting it is simply the appropriate default position for any trader who is too lazy or too bored to do anything else. "Don't know what to trade today? Why not go short AMD?"

"I am sorry to hear that some are having difficulties purchasing the High Yield Bonds. With the service that I have received from Schwab I would recommend Schwab to anyone. Buying the High Yield Bonds is a little different in that I have to call my Bond Trader to purchase them, but he always places the order with no attempt to try and sell me something else. He does always mention that the bonds are not investment grade. I believe that this is part of the requirements that Schwab places on him. He has gotten to where he expects a call from me in the middle of the month, just after I have had a chance to digest what Mike has written.

"Thank you very much for having Mike and Dan as part of your crew. Having read The Intelligent Investor several time (I bought my copy in 1972) they consistently present me with ideas that resonate." – Paid-up subscriber Mike Volckmann

"Though there are no commissions, Oppenheimer charges a 1.5% annual fee on assets. Etrade and Ameritrade have commission fees but no asset fees. Etrade is nice because you can see the bid and ask and make trades electronically. With Ameritrade, you talk with someone looking at a screen. Why I can't look at the screen is beyond me. Ameritrade has lost a lot of my business because in the electronic space with bonds, Etrade blows them away.

"With Oppenheimer, someone is literally on the floor. The other day I wanted to sell some sovereign bonds with a pretty high daily turnover. There were no bids on Etrade so I had to solicit them. I asked for an offer and the bid was a ridiculously low $540. I talked to the Oppenheimer folks, said I wanted $700 apiece (the price of the last sale), and a sale was made in an hour.

"A 1.5% asset fee on a stock only portfolio IMO is a waste. With bonds, though, the experience I have had using Oppenheimer has justified the admittedly high fee, and I highly recommend them for anyone wanting to invest in bonds." – Paid-up subscriber JZ

Regards,

Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
August 10, 2010