Tired of Business as Usual

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I’m concerned about the lack of progress made by our elected officials in Washington on the major issues of the day.  Where are the solutions for our energy crisis, social security funding or a cost efficient health care system?  We have been patiently waiting for decades to solve each of these, and other, problems.  Has our democratic way of living broken down and become obsolete?  Do our decision makers place party politics and getting votes in front of patriotism and doing what is right for America and its citizens?

No, the system isn’t broken, and no, we don’t need a new form of government to get things done.  We just need citizens to step forward and help our senators and representatives make the right choices in these difficult times.  And we need politicians who will listen to citizens, like you and me, who have good ideas from time to time.

The Pickens Plan

I think we’ve all read or heard about T. Boone Pickens’ plan to help solve the energy crisis.  His plan would build enough wind turbines to produce 20% of our electricity within the next 10 years.  We have a lot of wind in the central part of the United States, and it’s free.  The conversion to wind will lower our dependence on foreign oil from the current 70% down to 50%.  Our dependence could be reduced even more with the additional use of solar energy.

The Pickens Plan also calls for using substantially less natural gas to produce electricity and using our vast natural gas resources to power our cars and trucks.  Most auto manufacturing companies produce cars powered by natural gas now, but very few are sold in the U.S.  The conversion from our gas guzzling cars to cars powered by natural gas and other fuel alternatives could be relatively quick and easy.  I like the idea that we could fill up our cars with natural gas right at home before we leave in the morning.

Is the Pickens Plan cost efficient?  If you can believe T. Boone, less expensive energy, such as wind, solar and natural gas, will save us billions.  And even more importantly, all of the equipment needed to make this happen will be made in America by U.S. citizens.  Furthermore, a big chunk of the $700 billion that we send out of this country to buy oil will no longer be sent to the Middle East and other places around the world.

Better Than What We’ve Got Now

What are the drawbacks?  I don’t know enough about energy or the costs to give you a knowledgeable answer.  I am sure there are issues to be worked out, but maybe the Pickens Plan could serve as a starting point and be refined to apply to the real world.  A seemingly well thought out plan with a few problems is a lot better than no plan at all, which is what we’ve got now.

Let’s assume the Pickens Plan is a good starting point.  How can we get Congress and the president to adopt it?  That’s the billion-dollar question.  When I watched Mr. Pickens’ testimony before a Senate committee a few weeks ago, I noticed that the senators seemed very impressed.

Will the Pickens Plan get a fair hearing in Congress?  I hope so.  Americans are tired of politics as usual in Washington.  I, for one, would like to see our elected officials listen to ideas that will help solve these major problems.  Let the citizens of this great country come up with the ideas for solutions.  Congress and the President can make a few changes and then vote to implement them and get us out of the oil predicament that we’re in.

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Inspired by Olympians’ Determination

I have thoroughly enjoyed watching the Olympics on TV, since the grand opening ceremony on August 8.  I have admired all of the athletes from countries around the world.  The medal performances are great to watch, but I enjoy the human-interest stories.  Every athlete seems to have a very interesting tale about his or her long journey to Beijing.

There are about 10,500 athletes in Beijing competing in 302 events in 28 sports.  Some athletes have overcome severe illnesses, injuries or political obstacles.  Natalie du Toit from South Africa competed in swimming with just one leg.  Natalia Partyka of Poland competed in table tennis without a right forearm.  Dara Torres of the U.S. won medals in swimming at the ripe old age of 41. Maarten van der Weijden of the Netherlands won a gold medal in the 10k open water swim competition after fighting back from having severe leukemia.

All have trained extremely hard to reach their goal of becoming Olympians.  Competition is fierce, and only a small percentage win medals.  I feel badly for talented athletes who suffer a minor slip on the balance beam, or lose by 0.01 second in the pool, or have a bad day at the track or rifle range.  They have trained so hard for their moment in the spotlight only to seemingly fail. 

In my mind, every Olympian is a winner.  Without exception, all have dedicated a large part of their lives striving to become the best in the world.  Their passion and devotion is beyond my comprehension.  But when these athletes step away from sports to pursue their various careers, all call upon their passion and devotion to become the best they can be.  Many will become the leaders of tomorrow.  How do I know? 

My daughter is one of the very best athletes in the sport of rowing.  Two and a half years ago, she made the very difficult decision to devote her time and energy to become a doctor rather than train for the Olympics.  She is not in Beijing, but she is well on her way to becoming the best she can be in her chosen career.

We can all take something from these Olympics and apply it to our everyday lives and even our investing skills.  I’m invigorated by the energy that athletes are able to call upon day after day, week after week in their training and in their daily lives.  I’m determined to follow their example by working hard, working efficiently and providing the best investment advice possible.   

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American Capital Strategies (ACAS) is the largest publicly traded private equity fund in the U.S.  The company has invested $12 billion in debt and equity securities in 219 small to mid-sized companies.

ACAS is a limited partnership and is not subject to federal income tax on the portion of income and capital gains distributed to shareholders. 

ACAS shares have declined from a high of 50, because investors misunderstood an accounting change and are concerned about the effect of the banking crisis.  The company must now comply with accounting statement 157 issued by the Financial Accounting Standards Board.  Statement 157 requires ACAS (and similar companies) to estimate the fair market values of investment holdings for all quarterly and annual reports.

Before the new rules and prior to the quarterly statement reported for the first quarter of 2008, ACAS used two accounting methods starting from date of purchase. One maintained the cost of an investment until the date of sale or redemption, while the other one used a sliding scale to increase the value of a holding to the date of anticipated sale or redemption. 

Because of the new rule, new appraisals of ACAS’ holdings revealed the value of the holdings as of March 31 were $997 million, or $5.09 per share, below the values carried on the company’s books.  However, still following the new rule, ACAS will continue to hold investments until maturity and will receive the same amount at redemption as before the new rule. 

Shareholders will continue to be paid dividends based upon the income and realized gains from the investments.  The company has increased the dividend for 10 straight quarters.  The dividend yield is a whopping 19.5% and will not be reduced during the next 12 months or more.

Management at ACAS is baffled by the low price of their stock.  They will buy back up to $500 million (12% of shares outstanding) while the stock is trading below the current book value of $28.70.  In addition, management has confirmed that the dividend will be increased again before the end of 2008.

ACAS appears to be unaffected by the current financial crisis and continues to grow at a steady pace.  ACAS recently raised the dividend to $1.00 quarterly and changed its dividend policy for the future.  From now on, distributions will be based on net operating income plus net capital gains.  (Previous distributions were based on net operating income only).  ACAS will save on tax expenses, and limited partners will receive larger distributions.  With its size, ACAS should be able to take advantage of better buying opportunities during the next six to 12 months.  The tighter credit standards at lending institutions will present better opportunities for ACAS during the next several quarters.

ACAS is clearly a bargain and well worth buying.

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Sincerely,

Roy Ward
For Cabot Wealth Advisory

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