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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM EST, Wednesday, August 22, 2007:
Think chickens with their heads chopped off. Our Fed treasury secretary Paulson is giving interviews on CNBC, saying the world is not coming to an end. Several Fed Reserve governors are pumping out press releases with the same message. The Fed Reserve is pumping money into the economy like it had just discovered how to make gold from lead. And Senator Dodd is waxing enthusiastically that everything is OK, now that he's in charge. Clearly, they're worried.

My friends are scouring the world for "bargains." I am too, but being slow and deliberate. More on that in a moment. For now, a warning. Where do you have your cash? Is it in a money market fund? Do you know what your money market invests in? I suspect some "money market" funds aren't 100% safe. I recommend two places for your money:

1. Your local bank. Sovereign is paying me 5.19% on a one-week CD. That means I roll it or (can cash it out once a week). A one-week lockup is more than adequate for me -- for my spending and for funding a stock bargain.

2. A local muni bond floater. I live in tax hell -- New York City. The Feds get me. The State gets me. The City gets me. That means I lose 40% of my income. I can earn 3.66% on one-week triple tax-free floaters from my friend Seth Wernick at Citigroup. That 3.66% is actually equal to 6.10% pre-tax, which is really good.

Most money market funds are a rip-off, especially those your broker has. Most pay under 1%. And many are not safe. Some own junk.

My summer intern's latest project. I say to Michael Biblowit, "PWE and ERF offer huge yields now their prices are down, way down. Are they worth buying?" Michael's answer:

High dividend yields? Yes, but probably not sustainable. Depends on the future price of oil and gas. Penn West Energy Trust (PWE) and Enerplus Resources Fund (ERF) are two of many companies in the current market offering generous yields (13.4% and 11.4% respectively) as a result of their falling stock prices. For these two companies, the reason they offer large dividends is their status as energy trusts. Such firms pledge to distribute most of their profits to shareholders in exchange for tax breaks. PWE and ERF pay out distributions on a monthly basis. The idea of regular cash flows holds particular appeal in a volatile market such as we currently face.

The question is whether these companies can afford to maintain the dividends. After looking into their financials, I see some reasons for doubt and some for optimism.

Penn West is based in Canada and all of its land holdings are located there. In May 2005, it changed from an exploration and production company to an income trust. The initial distribution was $0.26 CDN per share. That number was last raised in February 2006 to $0.34 CDN. When it reported earnings for the first half of 2007, PWE committed to maintaining this rate at least through the third quarter of this year.

The earnings announcement also contained a net loss for the year so far, but this was due to a non-cash tax charge in anticipation of a proposed Canadian tax on income trusts that won't take effect until 2011. Tax benefits were the main reason for corporations to become income trusts in the first place, so how exactly the trusts react to this law and whether it causes many to restructure remains to be seen.

PWE's cash flows (non-GAAP measure) for this year look OK, which is important because that is what the company uses to help it set dividend levels. For the first six months of 2007, cash flows were $637.5 million CDN, up 26% from the previous year. The increase, though, was completely due to the 2006 merger with Petrofund. The weighted average sales price PWE received for its oil and natural gas output is down slightly this year compared to last, when taken net of risk management measures (i.e hedging) . This number is actually way down from the price received in 2005. PWE projects total 2007 cash flows of $1.3-1.4 billion CDN. (And we all thought the price of oil was rising.)

In 2006, cash flows worked out to $5.86 per share and PWE paid out $4.05 per unit in dividends. PWE seems comfortable with that 69% payout ratio. It believes that leaves it with enough money left over for capital investments. Assuming the current rate holds, distributions will end up at $4.08 for this year. The projections mentioned above would result in cash flows of $5.43-5.85 per unit, based on the number of units outstanding as of June 30. If the optimistic forecasts hold, PWE will easily maintain its dividends, but if the actual results end up closer to the pessimistic numbers, things could get difficult, as that would lead to a payout ratio over 75%.

PWE is acting as if they have plenty of money left after distributions to spend on growth. It is in the process of buying C1 Energy Ltd, continuing to try to expand through acquisition. Looking at the quarterly report, however, it appears PWE borrowed some money to help it pay its dividends this year. The idea of a company needing to borrow to cover its dividend payouts does not breed confidence given the tightening credit market.

The stock price itself has dropped a lot the past couple months. PWE closed at $23.38 on Tuesday, just above its recent 52-week low.

ERF is a very similar company to PWE. It is based in Canada, though unlike PWE it owns a bit of oil producing land in the US. Both are looking to oil sands projects as important opportunities for the future. Their current market caps are not far apart. ERF has been an income trust since 1986, much longer than PWE. It closed at $40.65 on Tuesday. This was just above its 52-week low, which it hit the same day as PWE. In fact, the two stocks have tracked each other's movements incredibly closely, which is logical given their overlapping businesses.

This graph -- PWE is bluish -- shows just how strong the correlation is. Since it arises from genuine commonalities in what affects the companies' stock prices and how, it is almost certain to continue. Thus, the returns from investing in either company should be close. PWE offers a small edge at the moment in dividends, with a yield of 13.4% versus 11.4% for ERF.

For the first six months of the year, ERF's cash flow from operations was up 11% in 2007. However, like PWE, this increase was in spite of the company receiving slightly lower prices, on average, for its oil and gas. ERF distributes $0.42 CDN per share monthly, the same rate it has done this since late 2005. It has not made the same stated commitment that PWE made to hold its dividends stable. (That could be good, bad or mean nothing. I suspect it means nothing.)

The payout ratio for ERF is comparable to PWE. It is 74% for the first six months of 2007 compared to 79% for the same period last year. The payout ratio was 71% for all of 2006. These values sit in the middle of where they were in the preceding years. They are higher than the numbers for PWE because of a difference in how the two firms derive them. Performing the equivalent calculation for PWE gives a payout ratio of 73.4% for 2006. ERF did not use its borrowings to pay for its dividend payouts.

As I said at the beginning, there are positive signals and negative ones. The dividend yields are generous and the stock prices seem fair. How good a buy you think the stocks are depends largely on what you believe oil and gas prices will do over the next several months. If they climb higher, ERF and PWE could exceed their projections and be able to maintain or even increase dividends. If energy prices hold fairly steady or fall (which is what has happened recently), then energy trusts may struggle. My bet is that the markets are telling us through these lower prices that they expect oil to fall. If Harry's right about the possibility of a mild recession, oil may drop even further, along with PWE and ERF.

PWE has a slightly higher yield, a lot more undeveloped land and a more attractive price/book ratio, but ERF has a longer track record of being a successful income trust, better margins and a lower debt load.

Harvard endowment posts 23% return for year to June 30, 2007. That was before the summer's rocky road. I called Harvard for a breakdown (allocation) of its investments. Its annual report isn't out yet. But we know that it invests broadly -- hedge funds, real estate, commodities and timber. It loves timber.

Eating and exercise. This photo is a great illustration to a great article on eating.

Marion Nestle is a professor of nutrition at NYU. She has a piece in Scientific American. I thought of excerpting it. But the article is so good, it's worth reproducing in full. The bolding is my own. Read her conclusions on organic foods. Eye-opening:

Eating Made Simple

How do you cope with a mountain of conflicting diet advice?

As a nutrition professor, I am constantly asked why nutrition advice seems to change so much and why experts so often disagree. Whose information, people ask, can we trust? I’m tempted to say, “Mine, of course,” but I understand the problem. Yes, nutrition advice seems endlessly mired in scientific argument, the self-interest of food companies and compromises by government regulators. Nevertheless, basic dietary principles are not in dispute: eat less; move more; eat fruits, vegetables and whole grains; and avoid too much junk food.

“Eat less” means consume fewer calories, which translates into eating smaller portions and steering clear of frequent between-meal snacks. “Move more” refers to the need to balance calorie intake with physical activity. Eating fruits, vegetables and whole grains provides nutrients unavailable from other foods. Avoiding junk food means to shun “foods of minimal nutritional value”—highly processed sweets and snacks laden with salt, sugars and artificial additives. Soft drinks are the prototypical junk food; they contain sweeteners but few or no nutrients.

If you follow these precepts, other aspects of the diet matter much less. Ironically, this advice has not changed in years. The noted cardiologist Ancel Keys (who died in 2004 at the age of 100) and his wife, Margaret, suggested similar principles for preventing coronary heart disease nearly 50 years ago.

But I can see why dietary advice seems like a moving target. Nutrition research is so difficult to conduct that it seldom produces unambiguous results. Ambiguity requires interpretation. And interpretation is influenced by the individual’s point of view, which can become thoroughly entangled with the science.

This scientific uncertainty is not overly surprising given that humans eat so many different foods. For any individual, the health effects of diets are modulated by genetics but also by education and income levels, job satisfaction, physical fitness, and the use of cigarettes or alcohol. To simplify this situation, researchers typically examine the effects of single dietary components one by one.

Studies focusing on one nutrient in isolation have worked splendidly to explain symptoms caused by deficiencies of vitamins or minerals. But this approach is less useful for chronic conditions such as coronary heart disease and diabetes that are caused by the interaction of dietary, genetic, behavioral and social factors. If nutrition science seems puzzling, it is because researchers typically examine single nutrients detached from food itself, foods separate from diets, and risk factors apart from other behaviors. This kind of research is “reductive” in that it attributes health effects to the consumption of one nutrient or food when it is the overall dietary pattern that really counts most.

For chronic diseases, single nutrients usually alter risk by amounts too small to measure except through large, costly population studies. As seen recently in the Women’s Health Initiative, a clinical trial that examined the effects of low-fat diets on heart disease and cancer, participants were unable to stick with the restrictive dietary protocols. Because humans cannot be caged and fed measured formulas, the diets of experimental and control study groups tend to converge, making differences indistinguishable over the long run—even with fancy statistics.

Food companies prefer studies of single nutrients because they can use the results to sell products. Add vitamins to candies, and you can market them as health foods. Health claims on the labels of junk foods distract consumers from their caloric content. This practice matters because when it comes to obesity—which dominates nutrition problems even in some of the poorest countries of the world—it is the calories that count. Obesity arises when people consume significantly more calories than they expend in physical activity.

America’s obesity rates began to rise sharply in the early 1980s. Sociologists often attribute the “calories in” side of this trend to the demands of an overworked population for convenience foods—prepared, packaged products and restaurant meals that usually contain more calories than home-cooked meals.

But other social forces also promoted the calorie imbalance. The arrival of the Reagan administration in 1980 increased the pace of industry deregulation, removing controls on agricultural production and encouraging farmers to grow more food. Calories available per capita in the national food supply (that produced by American farmers, plus imports, less exports) rose from 3,200 a day in 1980 to 3,900 a day two decades later.

The early 1980s also marked the advent of the “shareholder value movement” on Wall Street. Stockholder demands for higher short-term returns on investments forced food companies to expand sales in a marketplace that already contained excessive calories. Food companies responded by seeking new sales and marketing opportunities. They encouraged formerly shunned practices that eventually changed social norms, such as frequent between-meal snacking, eating in book and clothing stores, and serving larger portions. The industry continued to sponsor organizations and journals that focus on nutrition-related subjects and intensified its efforts to lobby government for favorable dietary advice. Then and now food lobbies have promoted positive interpretations of scientific studies, sponsored research that can be used as a basis for health claims, and attacked critics, myself among them, as proponents of “junk science.” If anything, such activities only add to public confusion.

No matter whom I speak to, I hear pleas for help in dealing with supermarkets, considered by shoppers as “ground zero” for distinguishing health claims from scientific advice. So I spent a year visiting supermarkets to help people think more clearly about food choices. The result was my book What to Eat.

Supermarkets provide a vital public service but are not social services agencies. Their job is to sell as much food as possible. Every aspect of store design—from shelf position to background music—is based on marketing research. Because this research shows that the more products customers see, the more they buy, a store’s objective is to expose shoppers to the maximum number of products they will tolerate viewing.

If consumers are confused about which foods to buy, it is surely because the choices require knowledge of issues that are not easily resolved by science and are strongly swayed by social and economic considerations. Such decisions play out every day in every store aisle.

Are Organics Healthier?
Organic foods are the fastest-growing segment of the industry, in part because people are willing to pay more for foods that they believe are healthier and more nutritious. The U.S. Department of Agriculture forbids producers of “Certified Organic” fruits and vegetables from using synthetic pesticides, herbicides, fertilizers, genetically modified seeds, irradiation or fertilizer derived from sewage sludge. It licenses inspectors to ensure that producers follow those rules. Although the USDA is responsible for organics, its principal mandate is to promote conventional agriculture, which explains why the department asserts that it “makes no claims that organically produced food is safer or more nutritious than conventionally produced food. Organic food differs from conventionally grown food in the way it is grown, handled and processed.”

This statement implies that such differences are unimportant. Critics of organic foods would agree; they question the reliability of organic certification and the productivity, safety and health benefits of organic production methods. Meanwhile the organic food industry longs for research to address such criticisms, but studies are expensive and difficult to conduct. Nevertheless, existing research in this area has established that organic farms are nearly as productive as conventional farms, use less energy and leave soils in better condition. People who eat foods grown without synthetic pesticides ought to have fewer such chemicals in their bodies, and they do. Because the organic rules require pretreatment of manure and other steps to reduce the amount of pathogens in soil treatments, organic foods should be just as safe—or safer—than conventional foods.

Similarly, organic foods ought to be at least as nutritious as conventional foods. And proving organics to be more nutritious could help justify their higher prices. For minerals, this task is not difficult. The mineral content of plants depends on the amounts present in the soil in which they are grown. Organic foods are cultivated in richer soils, so their mineral content is higher.

But differences are harder to demonstrate for vitamins or antioxidants (plant substances that reduce tissue damage induced by free radicals); higher levels of these nutrients relate more to a food plant’s genetic strain or protection from unfavorable conditions after harvesting than to production methods. Still, preliminary studies show benefits: organic peaches and pears contain greater quantities of vitamins C and E, and organic berries and corn contain more antioxidants.

Further research will likely confirm that organic foods contain higher nutrient levels, but it is unclear whether these nutrients would make a measurable improvement in health. All fruits and vegetables contain useful nutrients, albeit in different combinations and concentrations. Eating a variety of food plants is surely more important to health than small differences in the nutrient content of any one food. Organics may be somewhat healthier to eat, but they are far less likely to damage the environment, and that is reason enough to choose them at the supermarket.

Dairy and Calcium
Scientists cannot easily resolve questions about the health effects of dairy foods. Milk has many components, and the health of people who consume milk or dairy foods is influenced by everything else they eat and do. But this area of research is especially controversial because it affects an industry that vigorously promotes dairy products as beneficial and opposes suggestions to the contrary.

Dairy foods contribute about 70 percent of the calcium in American diets. This necessary mineral is a principal constituent of bones, which constantly lose and regain calcium during normal metabolism. Diets must contain enough calcium to replace losses, or else bones become prone to fracture. Experts advise consumption of at least one gram of calcium a day to replace everyday losses. Only dairy foods provide this much calcium without supplementation.

But bones are not just made of calcium; they require the full complement of essential nutrients to maintain strength. Bones are stronger in people who are physically active and who do not smoke cigarettes or drink much alcohol. Studies examining the effects of single nutrients in dairy foods show that some nutritional factors—magnesium, potassium, vitamin D and lactose, for example—promote calcium retention in bones. Others, such as protein, phosphorus and sodium, foster calcium excretion. So bone strength depends more on overall patterns of diet and behavior than simply on calcium intake.

Populations that do not typically consume dairy products appear to exhibit lower rates of bone fracture despite consuming far less calcium than recommended. Why this is so is unclear. Perhaps their diets contain less protein from meat and dairy foods, less sodium from processed foods and less phosphorus from soft drinks, so they retain calcium more effectively. The fact that calcium balance depends on multiple factors could explain why rates of osteoporosis (bone density loss) are highest in countries where people eat the most dairy foods. Further research may clarify such counterintuitive observations.

In the meantime, dairy foods are fine to eat if you like them, but they are not a nutritional requirement. Think of cows: they do not drink milk after weaning, but their bones support bodies weighing 800 pounds or more. Cows feed on grass, and grass contains calcium in small amounts—but those amounts add up. If you eat plenty of fruits, vegetables and whole grains, you can have healthy bones without having to consume dairy foods.

A Meaty Debate
Critics point to meat as the culprit responsible for elevating blood cholesterol, along with raising risks for heart disease, cancer and other conditions. Supporters cite the lack of compelling science to justify such allegations; they emphasize the nutritional benefits of meat protein, vitamins and minerals. Indeed, studies in developing countries demonstrate health improvements when growing children are fed even small amounts of meat.

But because bacteria in a cow’s rumen attach hydrogen atoms to unsaturated fatty acids, beef fat is highly saturated—the kind of fat that increases the risk of coronary heart disease. All fats and oils contain some saturated fatty acids, but animal fats, especially those from beef, have more saturated fatty acids than vegetable fats. Nutritionists recommend eating no more than a heaping tablespoon (20 grams) of saturated fatty acids a day. Beef eaters easily meet or exceed this limit. The smallest McDonald’s cheeseburger contains 6 grams of saturated fatty acids, but a Hardee’s Monster Thickburger has 45 grams.

Why meat might boost cancer risks, however, is a matter of speculation. Scientists began to link meat to cancer in the 1970s, but even after decades of subsequent research they remain unsure if the relevant factor might be fat, saturated fat, protein, carcinogens or something else related to meat. By the late 1990s experts could conclude only that eating beef probably increases the risk of colon and rectal cancers and possibly enhances the odds of acquiring breast, prostate and perhaps other cancers. Faced with this uncertainty, the American Cancer Society suggests selecting leaner cuts, smaller portions and alternatives such as chicken, fish or beans—steps consistent with today’s basic advice about what to eat.

Fish and Heart Disease
Fatty fish are the most important sources of long-chain omega-3 fatty acids. In the early 1970s Danish investigators observed surprisingly low frequencies of heart disease among indigenous populations in Greenland that typically ate fatty fish, seals and whales. The re­searchers attributed the protective effect to the foods’ content of omega-3 fatty acids. Some subsequent studies—but by no means all—confirm this idea.

Because large, fatty fish are likely to have accumulated methylmercury and other toxins through predation, however, eating them raises questions about the balance between benefits and risks. Understandably, the fish industry is eager to prove that the health benefits of omega-3s outweigh any risks from eating fish.

Even independent studies on omega-3 fats can be interpreted differently. In 2004 the National Oceanic and Atmospheric Administration—for fish, the agency equivalent to the USDA—asked the Institute of Medicine (IOM) to review studies of the benefits and risks of consuming seafood. The ensuing review of the research on heart disease risk illustrates the challenge such work poses for interpretation.

The IOM’s October 2006 report concluded that eating seafood reduces the risk of heart disease but judged the studies too inconsistent to decide if omega-3 fats were responsible. In contrast, investigators from the Harvard School of Public Health published a much more positive report in the Journal of the American Medical Association that same month. Even modest consumption of fish omega-3s, they stated, would cut coronary deaths by 36 percent and total mortality by 17 percent, meaning that not eating fish would constitute a health risk.

Differences in interpretation explain how distinguished scientists could arrive at such different conclusions after considering the same studies. The two groups, for example, had conflicting views of earlier work published in March 2006 in the British Medical Journal. That study found no overall effect of omega-3s on heart disease risk or mortality, although a subset of the original studies displayed a 14 percent reduction in total mortality that did not reach statistical significance. The IOM team interpreted the “nonsignificant” result as evidence for the need for caution, whereas the Harvard group saw the data as consistent with studies reporting the benefits of omega-3s. When studies present inconsistent results, both interpretations are plausible. I favor caution in such situations, but not everyone agrees.

Because findings are inconsistent, so is dietary advice about eating fish. The American Heart Association recommends that adults eat fatty fish at least twice a week, but U.S. dietary guidelines say: “Limited evidence suggests an association between consumption of fatty acids in fish and reduced risks of mortality from cardiovascular disease for the general population ... however, more research is needed.” Whether or not fish uniquely protects against heart disease, seafood is a delicious source of many nutrients, and two small servings per week of the less predatory classes of fish are unlikely to cause harm.

Sodas and Obesity
Sugars and corn sweeteners account for a large fraction of the calories in many supermarket foods, and virtually all the calories in drinks—soft, sports and juice—come from added sugars.

In a trend that correlates closely with rising rates of obesity, daily per capita consumption of sweetened beverages has grown by about 200 calories since the early 1980s. Although common sense suggests that this increase might have something to do with weight gain, beverage makers argue that studies cannot prove that sugary drinks alone—independent of calories or other foods in the diet—boost the risk of obesity. The evidence, they say correctly, is circumstantial. But pediatricians often see obese children in their practices who consume more than 1,000 calories a day from sweetened drinks alone, and several studies indicate that children who habitually consume sugary beverages take in more calories and weigh more than those who do not.

Nevertheless, the effects of sweetened drinks on obesity continue to be subject to interpretation. In 2006, for example, a systematic review funded by independent sources found sweetened drinks to promote obesity in both children and adults. But a review that same year sponsored in part by a beverage trade association concluded that soft drinks have no special role in obesity. The industry-funded researchers criticized existing studies as being short-term and inconclusive, and pointed to studies finding that people lose weight when they substitute sweetened drinks for their usual meals.

These differences imply the need to scrutinize food industry sponsorship of research itself. Although many researchers are offended by suggestions that funding support might affect the way they design or interpret studies, systematic analyses say otherwise. In 2007 investigators classified studies of the effects of sweetened and other beverages on health according to who had sponsored them. Industry-supported studies were more likely to yield results favorable to the sponsor than those funded by independent sources. Even though scientists may not be able to prove that sweetened drinks cause obesity, it makes sense for anyone interested in losing weight to consume less of them.

The examples I have discussed illustrate why nutrition science seems so controversial. Without improved methods to ensure compliance with dietary regimens, research debates are likely to rage unabated. Opposing points of view and the focus of studies and food advertising on single nutrients rather than on dietary patterns continue to fuel these disputes. While we wait for investigators to find better ways to study nutrition and health, my approach—eat less, move more, eat a largely plant-based diet, and avoid eating too much junk food—makes sense and leaves you plenty of opportunity to enjoy your dinner.

Some of my friends are lucky. They have grandchildren. To them I dedicate these:
My young grandson called the other day to wish me Happy Birthday. He asked me how old I was, and I told him, "62."
He was quiet for a moment, and then he asked, "Did you start at 1?"

My grandson was visiting one day when he asked, "Grandma, do you know how you and God are alike?" I mentally polished my halo while I asked, "No, how are we alike?"
"You're both old," he replied.

A little girl was diligently pounding away on her grandfather's word processor. She told him she was writing a story.
"What's it about?" he asked.
"I don't know," she replied. "I can't read."

I didn't know if my granddaughter had learned her colors yet, so I decided to test her. I would point out something and ask what color it was. She would tell me and was always correct. It was fun for me, so I continued.
At last she headed for the door, saying sagely, "Grandma, I think you should try to figure out some of these yourself!"

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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