Grow Your Portfolio the Intelligent Way

December 2005 Issue

By Richard C. Young

Riding Through Postcards…

In the 12 months end September, Harley-Davidson (NYSE: HDI) bought in approximately 22 million shares. The company cut the number of shares outstanding by a staggering 7.3%. Harley was able to finance this massive share repurchase because the combination of cash provided from operating and investing activities generated nearly $1.8 billion in the first nine months of 2005. And Harley has been aggressively increasing its dividend. As recently as 2002, it paid out $41 million in dividends. Last year, Harley paid out over $119 million in dividends. In 2005, a great deal more will be paid out.

A Cash-Generating Machine

Harley is a cash-generating machine. In 2002, operating activities generated $545 million in cash. In 2004, the number jumped to nearly $1 billion, and 2005 will show another gain. Meanwhile, the hefty capital expenditures of recent years have been reduced to $213 million in 2004 from $324 million in 2002. With capital expenditure pressures reduced and a continued high level of operating income, Harley will be able to continue to buy in millions of additional shares and increase its dividend at a high and steady rate. If I were a Harley director, I would advise a modest growth/high payout (dividends and share buybacks) strategy. Specifically, I would like to see revenue growth targeted at an average annual 7% and earnings growth at 11%, along with a steadily increasing payout ratio.

Harley-Davidson at $72 a Share

At the rate Harley is reducing its shares outstanding while increasing its profit margin, even a back-of-the-envelope earnings forecast would put Harley in line to earn $4/share soon, most likely even next year. Here’s some basic arithmetic to chew on: Half the companies in the Dow have single-digit profit margins. For the first three quarters of 2005, Harley’s was 18.2%. In fact, only five companies in the Dow have higher margins. An 18% profit margin for a basic union-organized manufacturing company is gangbusters. Over the years, the Dow sells at a norm P/E of 15. Today’s Dow P/E is 18, and Harley is only 15. Harley-Davidson absolutely deserves a P/E premium to the Dow industrials. If you imply a modest three-point premium to the historical average Dow P/E, you get a fair-value Harley P/E of 18X. Match this fair-value P/E to an upcoming $4/share earnings number, and presto—a $72/share stock price.

Harley a Premium Company

And don’t even think next year. Let’s say it takes three years for the market to wake up and price Harley at its deserved mini three-point P/E premium to the Dow. Let’s say it also takes three years for Harley to hit the $4/share earnings target and its derived $72/share market price. That’s a 41% increase from today’s $51/share. The three-year compounded rate of return would be over 12%/year plus the current 1.3% yield for a projected average annual total return of over 13%/year.

We have just completed a jam-packed Harley-Davidson riding season that included a palm-sweating run in the Colorado Rockies from Silverton to Ouray. Red Mountain Pass is 11,000 feet above sea level. Bad enough if you have a disdain for heights, as I do, but made a whole lot worse by a multitude of hairpin turns with zero guardrails at the peak and a road so narrow that a truck (yup, car carriers along with motor homes up there) coming around one of the many hairpin turns could easily have knocked us right off the mountain. We’d still be dropping. But the cherry on the cake was the fog and wet roads. I’ll tell you by the time I got off my bike in Ouray, you could have pried my fingers off the grips with a Vice Grip. This was a run that after the fact I thought I might have fared better with Harley’s brand-new on/off road Buell Ulysses than with my flatland Road King monster.

Buell Is a Secret

Harley has a big-time winner with the Ulysses. Among the deluge of motorcycle trade publications I get, my favorite for bike tests is Motorcycle Consumer News. After checking out the Ulysses in person, I was anxious to hear what the test riders thought. Well, MCN tested the new Buell against BMW’s great R1200GS, previously the standard setter in the Adventure Touring sector of the market. Here’s the surprising conclusion from my favorite test crowd. “Ridden back to back or playing follow the leader with the GS, the Buell is the more involving ride. It has the best suspension, handles with more finesse, brakes with more control, and puts the bigger grin on your face at the end of the road. The GS is a great bike, but we all agreed on this one.” Harley/Buell has to like this report.

Stay at the Dorset Inn

To get some flavor of why I like Harley, consider that Harley riders actually tattoo the company’s name on various body parts, while Wal-Mart haters put “No Wal-Mart” signs on front lawns in protest of a Wal-Mart coming to town. Vermont is real big on these signs. We’ve been all over the West on our Harleys, and Colorado was super, but given my single choice of a trip for you, preferably on a Harley, it would be a roundtrip run from Dorset, Vermont, through Vergennes on Rte. 22A and back on Rte. 7 and 30 through Middlebury. It’s like riding through postcards. Stay at the Dorset Inn, one of our favorite stops.

#1 Harley Dealership in the World

Harley flavor is magnified by visiting great Harley dealerships. This summer, we spent much time at the #1 and #2 dealerships in the world. I hope you get a chance to visit the world’s largest dealership, Destination Daytona, at the intersection of I-95 and US-1 in Ormond Beach, Florida, and the #2 Thunder Mountain Harley in Loveland, Colorado. Both will take your breath away. I guarantee that you will have your eyes opened as to why you own both Harley-Davidson’s stock and its great line of Harley/Buell motorcycles. Harley’s brand-new six-speed “Street Bob” is selling like crazy, and I love the new six-speed Dyna Super Glide. At a list price of $12,195, it’s a great buy. And don’t forget Harley/Buell’s sleeper, the Ulysses XB12X Adventure Sportbike. At a MSRP of $11,495, you are looking at one of the best buys in motorcycling.

Florida’s Castle Doctrine

Next on my hot list is Sturm, Ruger (NYSE: RGR). The directors have eliminated the dividend, and, as a result, the stock is down, now selling at $7.60/share. Here are three compelling reasons to buy Sturm, Ruger (aggressive investors only here).

(1) I like the company as a takeover candidate.

(2) In August 2005, the Senate passed The Protection of Lawful Commerce in Arms Act on a bipartisan 65–31 vote reaffirming the principle that manufacturers of lawfully sold non-defective products should not be liable in the event of subsequent criminal misuse of these products. On 20 October, the House passed this act with a bipartisan 283–144 vote. I believe President Bush will sign the bill. As noted in the WSJ: “The firearms bill has been a longstanding goal for the NRA and it follows enactment this year of business-backed class-action and bankruptcy legislation. All three previously had been blocked by Senate Democrats, but Republican gains in the 2004 election broke what had been years of stalemate.”

Third parties are now blocked from bringing civil-liability action against firearms manufacturers, distributors, or dealers for damages from the unlawful use of a qualified product. The provisions apply to both state and federal courts. In theory, a suit could be brought for negligence, but the standard for charging negligence is too concise for the tort crowd to mess with.

(3) With the passing of Jeb Bush’s and Florida’s so-called Castle Doctrine, violent attackers can now be shot on sight, whether in homes, grounds, car, or on the street. Florida residents no longer have to flee attackers. And legal liability is now limited. Michigan and Alabama have introduced similar legislation, and I look for the NRA to push for such legislation in every state plausible.

As roving gangs were looting his city blind, the since-fired New Orleans superintendent of police came up with this neat strategy: “We’re going to take all the guns.” No lie here. This leader of men unilaterally chose to override the Second Amendment and disarm citizens. I can just imagine the smile on the faces of the Israeli Special Forces team flown in via Russian helicopters to guard Garden District manses. Suffice to say, the Garden District remained fully armed.

The 460 XVR

I’ve given you three great reasons to buy Sturm, Ruger and, for that matter, Smith & Wesson (also only for aggressive investors). Instead of bocce, it’s going to be practice shooting at the range for Florida’s astute citizenry and, shortly to come, for Michigan’s and Alabama’s. For $647, you can blast away with Ruger’s 15-shot PC9GR carbine that weighs only a little over six pounds. And for a little over $800, you can take the proper defensive firing stance with the rugged brand-new .45-caliber Super Redhawk Alaskan. You get the confidence of a six-shot cylinder, and, at only 42 ounces, it is the most compact revolver ever offered in .45-caliber.

Maximum Firepower

For maximum firepower, I look for the well-prepared to invest $1,253 in Smith & Wesson’s brand-new 460 XVR with the highest muzzle velocity of any production revolver (over 2,300 feet per second). The 460 is the world’s fastest, most powerful .45-caliber revolver.

I would like to see Smith & Wesson take over Sturm, Ruger to create a real firearms powerhouse.

A Big Fast Score

In my October issue, Placer Dome (NYSE: PDG) was #1 on my Top-10 Countdown. Last month, I reinforced my strong buy rating, listing Placer #3. Two months ago, I wrote, “Placer Dome, one of the world’s largest gold mining companies, has also been one of the worst managed. A loss was recorded in the 2nd quarter, and the exec V.P. took the bullet and resigned. I like the company’s Cortez mine in Nevada, with emphasis on the solid exploration prospects for the property surrounding the mine. This company needs reorganization and a takeover. Buy it on that basis.”

World’s Largest Gold Producer

Well, I hope you listened to me, because Barrick Gold Corp. (NYSE: ABX) has made an unsolicited $9.2 billion offer for the company. Placer Dome shares jumped an immediate 21% to $19.95 on the news. A combo of the two would create the world’s largest gold producer. Stick with your Placer Dome here. Rather than trading at a 10% or so discount to the takeover price of $19.22/share, the stock is trading at a premium, indicating to me the possibility of a competing bid. Newmont Mining (NYSE: NEM) would be the logical second suitor, and Africa’s AngloGold Ashanti is a possibility. I’m adding both Barrick Gold and Newmont Mining to my Monster Master List.

Another Takeover

Inco Ltd. (NYSE: N) has agreed to take over Falconbridge (NYSE: FAL), and you gained 11% in one day on the announcement. In August, Swiss mining giant Xstrata (LONDON: XTA.L) (on my MML) acquired a 20% position in Falconbridge. And management was concerned about a hostile takeover? You are looking at a promising progression here. Falconbridge and Noranda recently combined under the name Falconbridge. Inco agrees to acquire Falconbridge before Xstrata figures out how to grab the whole company. I doubt the game has played out. Inco itself has been a target, as has Phelps Dodge and my highly favored Teck Cominco (TORONTO: TEK-SVB.TO). I think all will be grabbed. The grabbers look to me to be BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP), CVRD and Xstrata. I’m not interested in Brazil’s CVRD, but I like each of the other players.

Young Research is 100% committed to your success. To succeed, however, you must take action when I advise you to take action. Do not sit frozen in indecision, or your little goose will be cooked.

Here’s a shocking statement regarding a comfortable and financially secure retirement. I want you to write this on a 3×5 index card and tape it where you will see it daily: Your percentage portfolio withdrawal (say 4%) in retirement is likely to be more important than your specific asset allocation plan.

A Doomsday Scenario

Overdrawing your portfolio early in retirement is a doomsday scenario. And making the tragic mistake of not assembling a significant fixed-income component is a huge deal-breaker. Invest for interest and dividends. With your retirement money, do not invest for return on the come. The two most important words in investing are compound interest. And for compounding to do its work for you, you want a steady flow of cash payments.

Young Research’s Retirement Compounders

At Young Research, we assemble what we call our Retirement Compounders Portfolio. The portfolio is international and eclectic, and includes only dividend-payers and some companies too small or thinly traded to write about here. As of 28 October 2005, the portfolio yield is 3.73%, way above that of the S&P 500 and Dow. And the Retirement Compounders Portfolio YTD performance at +6.47% (unaudited) compares with actual negative numbers for most of the broadbased indices like the Value Line, NASDAQ, and Dow. On balance, the counterbalancing sectors, like energy, precious
metals, and resource companies, have saved the day. Counterbalancing, along with dividends, is
the hallmark of Young Research’s Retirement Compounders Portfolio. For example, we focus on timber companies as a way to achieve a high cash return and satisfactory counterbalancing.

Focus on Fixed Income

I have long used the phrase, put your age in Treasuries. In recent years, the low interest rate environment for fixed income has mandated a refined strategy. But today, with T-bill rates ready to hit 4%, my old lynchpin guide is looking practical once more. My Charts #50, #51, and #52 in your Economic Supplement allow you to quickly grasp the significance fixed-income plays in the construction of a serious portfolio.

Preferreds Rank First

I like a mix of 60% investment-grade preferreds, 20% full-faith-and-credit-pledge U.S. Treasury securities, and 20% low-cost, no-load mutual funds (often Vanguard funds). I’ve previously been using a 1/3, 1/3, 1/3 mix, but by booting up the preferreds component, I can give you a little more cash flow. I like new issues where you pay no commission and often buy at $25/share with five years until first potential call date. This fall, a handful of quality new issue preferreds has come out. I like the ING Group NV issue rated A2/A. I also like the HSBC Holdings PLC issue rated A1/A-. You can add each of these high-grade preferreds to your list with impunity.

How many preferreds should you own? Buy ’em all is my motto at our family investment company. You simply can’t diversify enough. It’s rare for an investment-grade preferred to run aground, but it does happen, so you want to hold your potential losses to the bare minimum.

Please remember as always with preferreds, these things trade like long, long bonds. When long rates run up in the cycle, you can expect the statement value of your preferreds to decline. Not to worry. Temporary value fluctuations come with investing in preferreds. You are investing for a flow of cash dividend payments.

Vanguard for Fixed Income

On the mutual fund front, I’d take sizable positions in Vanguard’s GNMA Fund, yielding about 4.6% with a short duration of only 3.1 years. And I much like Vanguard’s Short-Term Investment-Grade, with a duration of only 1.8 years and a 4.3% yield. In fact, it is my #1 fixed-income favorite. You will be able to ride up the yield as short rates continue to tick up. As the fund’s short-term holdings mature, higher-yielding securities will replace the matured issues. The fund’s yield will soon hit 5%.

With your Treasuries component, I like a nice mix of short maturities from T-bills out to 5-year notes. Turn to my valuation guide for 10-year Treasuries (Chart #17 in my Economic Supplement). The valuation indication is about 15. At a reading of 30, you would be talking turkey.

Don’t Buy a Dividend

A quick note on taxes. Don’t buy a mutual fund capital gains payout in the final weeks of the year. Whenever a fund has had a good year, you can look for capital gains, on which you will be taxed. Even if you own a given fund only on the day of record for a capital gains distribution, you will get hit on a full-year capital gains distribution. So wait until 2 January for solid performers of 2005. If your gains require offsetting, harvest your losses in the final weeks of 2005. It’s senseless to carry losses into next year if you have some naked gains.

Most Fund Costs Too High

On to equity mutual funds and exchange traded funds. I’m finding it harder and harder to find no-load, low-cost mutual funds that make any sense. An increasingly large percentage of the funds I like are now closed to new investors. This trend will continue. Wealthy investors may by necessity be forced to go strictly to the individual stock route, which makes the job of comfortable, consistent equities returns just that much more difficult. Few mutual fund managers add enough value to their funds to compensate for the high costs to shareholders in terms of loads (an unmitigated disaster for the unwary and uninformed), 12b-1 scabs, management fees and additional related fund expenses like custody and trading. Most funds trade way too much, creating associated trading costs and taxes for investors. There are not a dozen equity mutual funds still open to new investors that I would be in any hurry to buy today.

Less Keen on Indexing

An uncomfortable number of big funds are closet index funds. For decades, I was a big fan of index funds as your first and best core holding. For a wide array of reasons, I am no longer a fan and would not invest in a standard equity index fund today. That said, I own a lot of Vanguard 500 Index with a low-cost basis that I’m not inclined to sell and take a tax hit (a kind of reverse compounding). My advice is the same for you. Believe it or not, in the new century (nearly six years), the S&P 500 is down over 18%. It has been hard to make any money in stocks for a long, long time.

Paul Brown-Type Appointments

President Bush, having a tough year of it, has made three Paul Brown-type appointments. I love the appointment of Judge Samuel Alito to match up with my highly favored new Chief Justice John Roberts. Judge Alito brings with him impeccable credentials and judicial experience beyond that of any Supreme Court nominee since WWII. The WSJ quotes Judge Alito outlining that he has vowed to read the Constitution “with care and with restraint always keeping in mind the limited role the courts play in our constitutional system.” Nicholas D. Kristof wrote in The N.Y. Times, “One of the most fundamental mistakes that liberals made after WWII was, time after time, to seek social progress through the courts rather than through the political process.” The courts were often the most efficient way to advance a liberal agenda. I doubt a program of judicial activism is going to be part of the Alito playbook.

Strongly Against Judicial Activism

Robert H. Bork outlined in a recent WSJ editorial: “For the past 20 years conservatives have been articulating the philosophy of originalism, the only approach that can make judicial review democratically legitimate. Originalism simply means that the judge must discern from the relevant materials—debates at the Constitutional Convention, the Federalist Papers and Anti-Federalist Papers, newspaper accounts of the time, debates in the state ratifying conventions, and the like—the principles the ratifiers understood themselves to be enacting. Any philosophy that does not confine judges to the original understanding inevitably makes the constitution the plaything of willful judges.” It is to be hoped that Judge Alito will be a powerful presence on the court in moving far away from the misguided policy of judicial activism.

Great Pick for the Fed

President Bush’s third important nominee, Ben Bernanke for Fed Reserve chairman, is an equally solid pick. It’s not the task of the Fed to prick asset bubbles. The task of the Fed is to maintain the purchasing power of our currency, pure and simple. Ben Bernanke supports making the Bush tax cuts permanent and fast. The Bush tax cuts are largely responsible for pulling our economy out of the Clinton-era recession (see Chart #3) handed to President Bush, along with 9/11, as he took office. Mr. Bernanke, known as a free-trade advocate, is also an expert on monetary policy. I would look to him to introduce a course of action at the Fed that would lead to a specific inflation target. I like a 2% target. Like Dr. Greenspan, Bernanke believes that the Fed’s primary responsibility is price or inflation stability.

I love the Ben Bernanke appointment (my favorite for the job). How can you not like a man who loves baseball stats (see my Bill James item in “Breaking News”), is up to speed on the work of Libertarian philosopher Ayn Rand, taught himself calculus, learned enough Hebrew to perform the ceremony at his son’s bar mitzvah, and hates business suits? You’re going to like the extremely thoughtful and analytically rigorous Ben Bernanke, as will the financial markets.

Monster Master List Stocks

I’m adding Newmont Mining (NYSE: NEM), Barrick Gold (NYSE: ABX), Inco (NYSE: N), and a new name to you Restaurant Brands New Zealand (NEW ZEALAND: RBD.NZ). RBD has acquired all of the restaurant operations in New Zealand of Starbucks, KFC and Pizza Hut. Since going public, the shares have averaged an 8% yield. To make room, I’m temporarily dropping ChevronTexaco (NYSE: CVX), Royal Dutch (NYSE: RD), longtime favorite RPM (NYSE: RPM), and Wilmington Trust (NYSE: WL). All are fine companies and not necessarily sale candidates if you have been comfortable. I rotate names regularly to inject new blood and introduce new ideas. And I will bring a name back to the Master List at the appropriate time. Gone is not forgotten in this case.

St. Joe (NYSE: JOE). My advice for conservative investors has been to be out of St. Joe during the hurricane season. The season was a nasty one.
I think it is now safe to return to St. Joe here at $66/share. Rather than being hurt by the hurricane season, I see hot demand for properties in St. Joe’s Florida’s Panhandle. Our town of Key West got hit with a nasty storm surge thanks to Wilma. Residents thought the coast was clear when the wind died down. Then quicker than you could drive your car around the block, many houses had one to four feet of water. I’ve heard numbers like 60% of houses in KW got water and 80% of cars were flooded and ruined. If you ever face car flooding, disconnect and yank your battery pre-flood.

And my non-flood-zone, high-ground strategy has been my best advice of all. Our house did not flood because we are just about at the high point in KW. And our palm trees and those of others held up well. What did not hold up were non-indigenous trees, especially poorly rooted ficus and banyan trees.

Polaris (NYSE: PII) has been hit hard this year as industry-wide ATV sales have been soft. Nonetheless, sales should still increase by 5% to 6% this year. Stick with this industry leader.

Yankee Candle (NYSE: YCC) stock has also taken a 2005 hit based on slower sales than projected. Management had targeted 10% sales and 15% EPS growth for 2005. I doubt these numbers can be hit now. Current stock market valuation discounts a pessimistic outlook. Based on historical multiples, the shares could trade in the high $30s. With even the dourest outlook, $30/share seems a great bet. Stay with Yankee.

Coca-Cola (NYSE: KO) is getting solid traction in the emerging markets. Continue to buy my longtime favorite.

Fording Canadian Coal‘s (NYSE: FDG) stock price tailed off recently after a sales forecast cut. I can see the shares remaining weak for a period, but I’d stay with Fording.

Time Warner (NYSE: TWX) has been getting steady heat from corporate pain-in-the-butt Carl Icahn. C.I. instructs CEO Dick Parsons to spin off Warner’s cable units. Parsons, not surprisingly, is loath to spin off one of Warner’s strongest earnings generators. CEO Parsons announced at the quarterly earnings gab fest that Warner had raised its stock repurchase target over the next 21 months to $12.5 billion from $5 billion. I continue to like what is going on at Time Warner. Buy the stock.

Microsoft‘s (NASDAQ: MSFT) stock has not made many friends in a long while. I’m a fan. Over the next five quarters, Microsoft has some promising new products coming to market including Xbox 360, which has three 3.2-GHz central processors, a 500-MHz graphics chip, and 512 Mbytes of RAM. Users will see amazing visuals. Buy Microsoft.

Caterpillar‘s (NYSE: CAT) third-quarter revenue jumped 17% year to year and earnings rose 34% year to year, but Wall Street was not satisfied and sold the stock down. It’s nuts. CAT’s orders for industrial machinery are so strong that temporary production bottlenecks developed. The company just could not keep up with demand for its engines and machines used in mining. I don’t think having a whole lot of business is such a bad thing. Stick with CAT.

Marvel Enterprises (NYSE: MVL) reports that sales and earnings will fall sharply in 2006. There is great volatility in the company’s toy and licensing business, and 2006 will be an off year.
In 2007, Spider-Man and Fantastic Four sequels will arrive. In 2008, Marvel is expected to launch its own film slate. Based on the positive outlook beyond 2006, the board has approved an additional $250 million share repurchases. Following the downward revision for 2006, the Street hammered the stock. If 2007 earnings match 2005’s likely earnings, the stock will trade for 13X, or a 7.7% earnings yield. Not bad for a company with a strong balance sheet and a portfolio of attractive royalties.

Energy Stocks

It has been a whale of a year for energy stocks, but the U.S. continues to have a plethora of energy-related issues. Why not listen to the guy who is almost without question the expert on energy efficiency. The world’s
expert is Amory Lovins and A.L. is company-director of the Rocky Mountain Institute in Snowmass, Colorado. Lovins refers to the Alaska pipeline as one
of the fattest terrorist targets in the country. As A.L. points out, the U.S. relies on big centralized facilities like pipeline refineries and power
plants. He promotes instead small, widely distributed energy sources and is keen on wind farms and natural gas-fired micro turbines. According to Lovins,
booting up efficiency is the preferred way to slash reliance on Middle East oil. Adding just 2.7 mpg to the average for U.S. light trucks and cars could
displace most of the oil we import from the Middle East. These are not readings you get from the politicians.

Chinese End Game

Is China deceiving the world about its military spending and intentions? I believe the answer is clearly yes. London-based International Institute of Strategic Studies is floating a weapons and defense spending number of over $62 billion for last year versus official Chinese reports of $30 billion. Seems the comrades count spending on Russian submarines, aircraft, and destroyers as “off balance sheet” items. China is fixated on re-unification with Taiwan and anticipates military intervention from the U.S. I have explained why such intervention is not needed.

The comrades have other fish to fry and would be wise to focus on the country’s brewing stew of domestic time bombs. Beijing insider Laurence Brahm reports, “Guangdong province is bracing for a bird flu pandemic in humans. Beijing is stockpiling 30 tons of bleach powder and 20,000 protective masks in expectation of a massive outbreak of the H5N1 virus…. Entire communities on the mainland have cancer due to water pollution…. Until the SARS epidemic of 2003, people dumped their rubbish into Beijing’s streets, all day, every day. This rubbish lay all over the street. In summer it stank…. Rats feasted—they were the size of cats.” And the 2008 Olympics are supposed to be where?

Chinese Overcapacity

China has overproduced in spades. Industrial overcapacity is rampant across the economic spectrum. A big-time bubble exists in both steel and machinery. The banking system in China is already at category 4 financial hurricane risk. And now a tidal wave of new nonperforming loans is ready to roll over the bloated Chinese manufacturing landscape. Copper prices look to be in a coincidental cyclical bubble phase alongside the tottering peak of the Chinese manufacturing cycle. I look for steel and oil prices to fall from recent highs as pressure valves begin to blow.

Fixation on Taiwan Unification

The fly in the Chinese rice bowl is the mainland’s fixation on unification with Taiwan. If this strategic blunder comes to a military head, the lights will go off in China as China’s oil imports are cut off. Unemployment will soar and civil rebellion will sweep the country on the heels of widespread banking failures. Not a cheery prospect. Stay tuned.

We are getting intelligence out of South Korea that points to a United Nations Command and 8th U.S. Army (long stationed in South Korea) pull out/redeploy to Hawaii. All of this has a bad look to it, and I’m removing T. Rowe Price New Asia Fund from my Monster Master List. The fund has had a terrific three-year run, and I don’t want to take the tax hit myself in 2005. My strategy for both you and me is to sell in early January to delay the tax hit. In terms of geographic diversification, South Korea is New Asia’s #1 holding. I really hate to make the move. And my concerns, of course, may turn out to be unfounded. But with this defensive plan, I think I’ll sleep better, as no doubt you will also.

Breaking News
Air Travel and My Big Idea

Part of my Big Idea in 2008 is the emergence of brand-new air taxis. Travelers willing to pay a not unreasonable premium to commercial first class will be able to avoid commercial flights and major airports. Tops in the very light jets (VLJs) class is the Eclipse 500, followed by the Adam A700. Two new company’s Day Jet and Pogo Jet are setting up per-seat, on-demand service for use perhaps as early as midyear 2006. Some smaller deluxe prop planes will also be featured. I like the Swiss Pilatus PC-12, the French Socata TBM 700, Piaggio Aero’s Avanti II, and the world’s best-selling airplane, the Cirrus SR22. There will be many neat aircraft choices and companies with which to work. Remote places, a central part of my Big Idea, have never looked better.

The Digital Revolution

Voice-over-Internet protocol is going to dramatically change the telecommunications landscape. One small company, Skype, is really stirring the roux with a disruptive technology built around proprietary software. The software lets folk make free calls over the Internet to other Skype users, as well as dirt-cheap traditional calls.

A little company named Sonic Impact Technologies is producing a $39 battery-powered little plastic amplifier that offers absolutely amazing sound. Hook it up to your iPod and some Bose speakers, and you’re off to the races. And if you are a vinyl freak (and you should be), you’ll need $15,000 to buy ELP’s
laser turntable (no needle). Only one handmade unit is manufactured a day. The table employs five lasers and is 100% analog. And it will play warped
or scratched records
(www.laserturntable.com).

Cleveland Clinic #1

For the 11th consecutive year, U.S. News & World Report has named the Cleveland Clinic Heart Center #1 in the U.S.

Chaos Theory Meets Baseball

Always on my desk for quick reference are my compound interest tables, the U.S. Constitution, National Geographic’s Family Reference Atlas of the World, the National Journal Group’s The Almanac of American Politics, Richard Feynman’s The Pleasure of Finding Things Out, James Gleick’s Genius, David Ruelle’s Chance & Chaos, Cohen & Stewart’s The Collapse of Chaos, Rob Bowman’s Soulsville USA, Michael Lewis’ Moneyball, and various Bill James baseball statistics books.

You may be aware that Boston Red Sox hot-shot GM Theo Epstein recently quit after coming to loggerheads with team president Larry Lucchino. Theo was great, and Boston baseball fans are in an uproar, but no one should be too concerned. The best guy in baseball, Mr. Statistics Bill James, a team consultant, is going nowhere. If you read Moneyball (vital parallels to investing and a must read), you know that Bill James is the man—period. I’ve been following Bill since his start, and I know for a fact that math whiz and Red Sox owner John Henry has read most if not all the stuff Bill has ever written. It’s all in the numbers.

New Zealand My #1 Choice

BlackRock Dividend Achievers Trust is a listed closed-end fund that trades on supply and demand. Today, you can add this high-yielding (near 7%) fund
to your list at an actual discount to net asset value. If you are retired or about to be, here is a super cash flow generator for you. My #1 country
for international diversification is New Zealand. Earlier I gave you a great high-yielding New Zealand stock idea. I’ll have much more for you on New Zealand next month. Finally, from my Monster Master List, here is a list of quality names that for a variety of reasons investors have thrown overboard of late. As always, patience is required with names temporarily out of favor with the Street at large. You can buy on the cheap Alcan (NYSE: AL), Alcoa (NYSE: AA), ConAgra (NYSE: CAG), Flextronics (NASDAQ: FLEX), Marvel Enterprises (NYSE: MVL), McCormick (NYSE: MKC), Polaris (NYSE: PII), Sysco (NYSE: SYY), Disney (NYSE: DIS) and Yankee Candle (NYSE: YCC). Be patient and make it a good month.

Warm regards,

Richard Young signature

Richard C. Young

P.S. Is there any single word on the heart health front that gets any more press than cholesterol? Go to www.youngresearch.com for a real shocker. Debbie and I are big supporters of what I have posted there.

P.P.S. Prior to Katrina, New Orleans, America’s murder capital, had been recording almost one murder per day. Since 8/27, New Orleans has not recorded a single murder. Any hints here, Mayor Ray? And by the way, Mayor Ray, who has an MBA from Tulane, eliminated New Orleans’ pre-Katrina budget deficit and did a great job turning around Cox Communications cable operations. On my website I have info on New Orleans Musician Relief. They need our help. You’ll also find my latest CD additions.

P.P.P.S. Look for Japan to seek to tighten up its relations with the U.S. From the Japanese perspective, China’s stealth military buildup is taking on an ominous look. More next month, as well as more on the simmering cauldron in South Korea.

Richard C. Young’s Intelligence Report® (ISSN 0884-3031) is published monthly by Phillips Investment Resources, LLC, 9420 Key West Ave., Rockville, MD 20850. Please write or call if you have any questions. Phone: 301/424-3700 or 800/301-8968. E-mail: service@intelligencereport.com. Web address: . Editor: Richard C. Young; Group Publisher: Michael Bell; Chairman: Thomas L. Phillips; Associate Editor: Deborah L. Young; Marketing Manager: Jim Brinkhoff; President: John J. Coyle; Research Director: Jeremy Jones, CFA; Sr. Managing Editor: Shannon Miller; Business Manager: Thomas C. Burne; Research Associate: Rebecca L. Young; Editorial Assistant: Danielle Hart; Sr. Vice President: Christopher Marett; Subscriptions: $249 per year. © 2006 by Phillips Investment Resources, LLC, Founding Member of the Newsletter Publishers Association of America. Photocopying, reproduction or quotation strictly prohibited without the written permission of the publisher. While the information provided is based upon sources believed to be reliable, its accuracy cannot be guaranteed, nor can the publication be considered liable for the investment performance of any securities or strategies mentioned. Subscribers should review the full disclaimer and securities holdings disclosure policy at /disclosure.php or call 800/219-8592 for a mailed copy. Periodicals postage rates paid at Rockville, MD, and at additional mailing offices. Postmaster: Send address changes to Richard C. Young’s Intelligence Report, Phillips Investment Resources, LLC, 2420A Gehman Lane, Lancaster, PA 17602.

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