Asmus Puhl Finance Blog

Every day we are witnessing a new record price for gold and a lower price of the dollar.

And we are quick to explain it:

There are the carry trades:  to take on debt in US-Dollar costs a littlebid more than nothing and this money will be invested in assets like p.e. gold.

With an interest level of more or less zero you don’t bother that gold is an asset that does not pay any interest.

Other comments point to the US public deficit and to a possible inflation at the horizon.

So the rising gold price seems to be the parallel of the falling dollar.

But don’t these explanations focus too much on the dollar?

Is the public deficit and the accumulated debt of the Euro – countries so much better than those of the US ?

European economic growth perspectives are worse than that of the more dynamic US economy!

Japan with its extremely low interest level already spends 23% of its budget for interest on its public debt.

Do the Asian sovereign investors really have so much more faith in the Japanese Yen or the Euro when they try to diversify their currency reserves?

Isn’t Allen Greanspan right when he says that the „rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies.”?

This would mean a move away from all paper currencies!

Will public debt problems jump faster from the Arabian desert into the European monetary union than we think?

Members like Greece, Italy or Portugal are already in a worse situation than many people believe. Dubai could only be the starting point of a more widespread crisis.

I think if gold will hold or move up when the Dollar is at least temporarily strengthening this will be a clear indicatior that we are in a multi-year gold bull market which will us take much higher than the next threshold of $ 1’200 .

Don’t forget that the „All time high” of gold at $ 873/oz. about 30 years ago today would translate into $ 2247/oz. !

Markel Corp. (NYSE: MKL), one of the stocks this blog follows intensely released their 2009 Q3 results:

The combined ratio improved to 96% from 124% in Q3 2008 and they increased book value/share by 23% to $ 274.33 which was driven by improvement in the market value of the company’s investment portfolio!

So isn’t this a good moment to listen to some comments from Tom Gayner, chief investment officer of Markel, which he made on the conference call?

Markel in 2005 acquired its first controlling interest in a privately owned company.

In 2006 and 2007 prices for this type of investment were simply to high.

So Markel waited patiently with discipline through 2008 and now they saw the opportunities they were waiting for:

In October of this year they acquired privately held Panel Specialists Inc. based in Temple,Texas.

As a result of the dramatic dislocation in the world of private equity and alternative investments controlling interests of 80 to 100% of privately held companies were finally available at prices which represent good investment value.

But what are the criteria they are looking for?

They are the same as when they consider other equity investments:

They are looking for profitable, cash generating businesses run by management teams with equal measures of talent and integrity. These businesses have reinvestment opportunities and capital discipline and are available at fair prices.

When Markel acquires a controlling interest in these companies they are able to decide on capital allocation and executive compensation levels. These are exactly the 2 points where a lot of value gets dissipated in public companies.

Doesn’t this all sounds familiar?

Isn’t it classic Berkshire style?

I think we can expect great things from this company within the next couple of years as the economy continues to improve!

And by the way:

Don’t forget that Tom Gayner sits also on the board of Colfax Corporation (NYSE: CFX) where he can help to evaluate acquisition objects!

This was Colfax CEO John Young’s  comment about the 2009 Q3 results!

… and the numbers clearly reflect that:

Net sales in the third quarter were $ 128.5 mil, 16.2% less compared to Q3 2008.

Net income was $ 1.8 mil including restructuring charges of $ 9.6 mil.

These results are preliminary 2009 Q3 results because they do not include the recent favorable asbestos ruling on October 14, 2009 for the company’s warren pump division.

Colfax still felt the crisis, there is no doubt!

But in this environment management quickly reacted, cut cost and reduced headcount by 15%. All cost reductions will translate into approximately $16 mil of savings in 2009.

The most impressive evidence of management’s action is the dramatic improvement of their cash flow statement:

They went from free cash flow negative one year ago to a free cash flow of $26.2 mil and a margin of 6.7% in the first 9 months of 2009!

Encouraging signs are coming from their order book:

On a sequential basis, their organic orders were up 15% driven by increases in the commercial marine, Navy, power generation and general industrial markets.

Backlog is also up slightly since the end of the second quarter.

Colfax still remains cautious and lowers their outlook for FY 2009:

They now expect adjusted earnings/share of $0.88 – $0.94 .

On Friday the stock closed at $ 12.04.

So for FY 2009 the P/E is 13  and the price/free cash flow ratio is about 17.

This seems to be a reasonable price for a high quality company.

Why not snap up some shares and wait until the economy further improves?

Future acquisitions on this way will certainly bring some upside potential too!

Watch for the strategic moves of some market participants especially in Asia,

we pointed out on this blog several times when commenting the Gold market’s recent run-up!

And now India’s central bank buys 200 tonnes of Gold from the IMF!

This is the biggest single gold purchase within the last 30 years.

Gold jumped to a new record high this morning as it becomes evident that large buyers like governments and central banks accept these current price levels!

Will governments of other countries follow? Will they diversify their reserves away from the US-Dollar?

India today confirmed they will do so!

Don’t forget that the Asian countries are not indebted like the US or the major European countries. They have money. They accumulated huge currency reserves over the last years and they are more and more frustrated about the declining value of the US-Dollar.

Stay tuned as this story unfolds!

And here they are, the preliminary results of Q3 2009!

Adjusted earnings came in at $ 0.23/share.

… if it is of any importance for you they beat analysts estimates by 3 cents.

And the market reacts favourably:  The stock is up more than 2 % in today’s early trading!