a message from perk - Perkins Capital Management

October 18, 2012
Dear PCM Clients and Friends:
All of a sudden—just like a window shade coming down—it is autumn. It was hot, all over
America, and we didn’t think it was ever going to cool down, but it did, and now the hunting
season in Minnesota is here. The grouse opener was September 15, followed by
waterfowl and woodcock on September 22, pheasants on October 13, and deer on
November 3. For us, as we have written about in these letters for years, the important
season is waterfowl, which actually
opened one week earlier than usual this
year, but no matter, we didn’t go, and
won’t be, as our duck slough in
Kandiyohi County is without enough
water to navigate without significant
So, the severe drought
throughout the United States took its toll
on our hunting camp that we acquired
just a few years after we moved to
Wayzata in 1966, and have built over the
The first year was camping,
sleeping in the car, or a tent, then a used
travel trailer was purchased, and later a
little cabin from a resort was moved in,
and then two bunk houses, a variety of duck boats, and a shed for storing decoys. It has
been low on water before, 1976 to be exact, when we hunted from shore since we had our
black lab, DD to fetch the downed ducks, and he did. But this year, with no dog, our
hunting season consisted only of memories of seasons past.
When I was visiting clients in California recently, I was fortunate to have lunch in San
Francisco with my old friend, Michael (Mike) Moe, whom I have known since 1985. When I
met Mike he was a recent graduate of the University of Minnesota working at his first job
as a financial planner, and yearning to get into the stock research universe. This was all at
the time we had started Perkins Capital Management, and he looked at me as having had
two careers in the stock/equity business—the first one managing money, and the second
one as an analyst sales advisor. We talked about it—how to get into the business when
you have no experience, something that is not easy to do, as I wrote in the January 2007
letter; “you don’t have experience until you get it and, unfortunately, you can’t get it until
you have it.” A true conundrum and this is what Mike faced. We agreed the best way was
730 East Lake Street
Wayzata, MN 55391-1769
Telephone (952) 473-8367
Facsimile (952) 473-4702
PCM Clients
October 18, 2012
to somehow get a job as a stock broker, and get that experience from which the next step
could be taken. He did, with a prominent local brokerage firm then called Dain Bosworth,
and now RBC Dain Rauscher. Using his extraordinary writing abilities he wrote a stock
market newsletter for his clients called Mike Moe’s Market Minutes, which caught the
attention of Dain’s research director, and landed him a job as an analyst. His growth stock
research abilities soon caught the attention of Lehman, and it was off to New York followed
later by a job as Head of Growth Stock Research at Montgomery Securities in San
Francisco. More success followed as Head of Global Growth Research at Merrill Lynch,
also in San Francisco. Then in 2001 he struck out on his own, founding an institutional
research boutique named ThinkEquity, which he sold to a British firm, Panmure Gordon, in
2007. And the next year he started a new firm to provide research on private companies,
NeXtup Research, which later morphed into his present firm, GSV Capital. GSV has a
publicly traded closed-end fund (GSVC) which purchases private internet companies and
provides a mechanism for investors (including PCM clients) to own private, fast growing,
internet companies which could not otherwise be owned other than by the venture
capitalists who fund them. Mike has had his share of good ideas over the years, but this
was an outstanding one that had not been conceived before. After the announcement that
GSVC had bought a stake in Facebook, it went as high as $21 after a $14 initial offering,
but then when Facebook was a botched IPO his fund took a bad tumble, falling below $10.
The disappointment of Facebook took its toll on GSVC, but it certainly should not be selling
at a 40% discount from its book value. This will change; the fund has about 30 positions in
mostly private venture companies that will go public at some future date, hopefully at
prices higher than cost. A good example is its large position in Twitter which investors
cannot access other than through purchasing GSVC. Mike really understands the impact
the internet has made on every aspect of our daily lives—from social interaction to
shopping, to just about anything you can imagine. The true technology revolution.
Over all these years Mike has been a great source of investment knowledge for me. Along
the way, he wrote an excellent book: “Finding the Next Starbucks: How to Identify and
Invest in the Hot Stocks of Tomorrow,” the premise of which he is obviously putting to work
at GSVC. We try to pay attention to his 10 Commandments, which are embedded in the
GSV Capital investment process, and are very worthwhile for us to utilize in our investment
Here are Mike’s 10 Commandments:
1. Be right on the fundamentals
Earnings growth drives stock price. There is essentially a 100% correlation with how a company does
and how its stock performs over time.
2. Be Proactive — Not Reactive
Reporting what happened is what a news reporter does. Look over the horizon and around corners.
3. When in Doubt — Get it Out
PCM Clients
October 18, 2012
The difference between value-added information and a commodity could be minutes.
4. When Wrong — Admit it
The best investors and analysts are wrong a lot. The worst thing to do is rationalize a mistake. Be
intellectually and morally honest.
5. The Cockroach Theory
You seldom find just one cockroach in a kitchen. Likewise, if you find a problem at a company, there
are always more behind it. It’s rarely a one-quarter issue — the first loss is the best loss.
6. Research is About Information and Insight
Information is valuable if it is proprietary. Insight is valuable if you know what that information
7. The 4 P’s are Key for any Successful Growth Company
People, Product, Potential, Predictability. The first “P” (people) is the most important.
8. Use Independent Sources for Each Investment
Have regular dialogue with company management, but they will always see the glass as “half full.”
9. Look For the Main Reasons for a Stock to Move Up or Down
In addition, identify near term catalysts for price movements.
10. Be Passionate about Investing
But dispassionate about the investment. The stock doesn’t have feelings or know you own it.
Somehow Mike and his staff find time to write a weekly newsletter called A 2 Apple, which
always gives us valuable investment insight into various subjects. Rarely, do we not
benefit from Mike’s intuitive investment instincts. I value and cherish my long relationship
with him.
And, by the way, if you want to read more about Mike Moe, access The New York Times
August 30 article in the business section or the Barron’s December 2011 article.
The 3rd quarter rankings do not fall into any special pattern, although it is a surprise to see
the Dow Industrials so far below NASDAQ and the S&P Composite. Presumably, that is a
result of the “Apple effect.” We suspect the same is true with the year-to-date returns as
both the NASDAQ and the S&P Composite are near the top again with the Dow Industrials
near the bottom. Probably the 10% return of the NYSE Composite is more representative
of most portfolios which did not have a small stock component.
PCM Clients
Ranked by Q3 Return
Russell 1000 Total Return
Russell 3000 Total Return
NASDAQ Composite
S&P 500 Composite
NYSE Composite
Wilshire 5000
S&P Small-Cap 600 Total Return
Russell 2000 Total Return
Dow Jones Industrial Average
Value Line Composite
October 18, 2012
Ranked by YTD Return
NASDAQ Composite
Russell 1000 Total Return
Russell 3000 Total Return
S&P 500 Composite
Russell 2000 Total Return
Wilshire 5000
S&P Small-Cap 600 Total Return
NYSE Composite
Dow Jones Industrial Average
Value Line Composite
We have often quoted the great movie director, Cecil B. DeMille, who said “It is very
difficult to make predictions, especially about the future.” Sounds more like something
Yogi Berra would say, but regardless, it is true. Having said that, we would add that any
prognostication in an election year is even more fragile. The Ned Davis Dow Jones
PCM Clients
October 18, 2012
Industrial Average Cycle Composite for 2012, shown on the previous page, with their
permission, has been very much on the mark so far this year, and is now pointing down for
a decline into mid to late October, and then possibly a move higher into year end. This
correlates with the chart of the average election year, also shown, which also points down
into October. But look more closely, for as the chart shows (bottom green line), the Dow
drops more in October in the years when the incumbent loses and stays down for the
balance of the year. To be sure, this market has had a lot to contend with this year, both
positive and negative. Certainly, the most positive thing has been the expectation and
advent of QE3, or QE infinity as it has come to be known, because of its open-ended
design. It was widely anticipated, and really predicted by Bernanke at Jackson Hole, but
after the immediate euphoria, when it did happen, the market has declined since and now
the negatives are coming back into view—the European conundrum, slowing growth in
China, renewed concern about European growth, and finally, concern about the effect of
all of this on the U.S. economy. Not to mention the anticipated potential effect of the
failure of Congress to deal with the expiring tax cuts, and the potential damage to next
And to add to all the
positive action in the
market due to the
impact of Apple,
which represents 5%
of the S&P 500 and
13% of the NASDAQ
ago the slogan was
“as GM goes, so
goes the market,”
which really meant
that GM had such an
influence on the
influenced the stock
market. Now Apple
is up 55% so far in
2012, and 19% since
the May low. Not
worthwhile, it is, but
we wonder how much the market has been skewed to the upside by Apple’s performance.
Now as far as our prognostication of the market, we do think that it does hinge very much
upon the election. As we get closer to November 6, the view of voters will come into
PCM Clients
October 18, 2012
sharper focus and that may very well give us a clue as to the results on November 6,
maybe as much as several weeks before the election takes place.
Is it a Canada goose or a Canadian goose? We often hear people referring to a Canada
goose incorrectly as a Canadian goose. Likewise, there is confusion with the conventions,
which thankfully are now over. Once again we are reminded that it should be called the
Democrat convention and not the Democratic convention. It is the Democrat convention,
and we live in a democratic nation. There are three parties, Democrats, Republicans, and
Independents. We have a Republican convention, and we have a Democrat convention.
We watched both conventions, and certainly thought both were well orchestrated, but there
were two highlights for us—one at each convention.
At the Republican convention, it was the Clint Eastwood presentation. No script, nothing
prepared in advance, and by his own later admission an idea that came to him as he saw a
chair when he came on stage. Some people derided it, but we thought it was brilliant.
The highlight at the Democrat convention was the Bill Clinton speech. Amazing. He
actually believes his own lies, and seems to have conveniently forgotten that the problems
this country faced in 2009, which were handed to Obama when he got into office, had their
formation under Clinton on his watch. In our view, as we have written in past letters, the
Gramm-Leach-Bliley Act, signed by Clinton in November of 1999, began the tipping of the
stack of dominoes by effectively limiting the Glass-Steagall Act of 1933, which prohibited
bank holding companies from owning or running other financial companies such as
brokerage firms, and vice versa. In other words, banks were to be banks, and brokerages
were to be brokerages. So, Clinton effectively is responsible for banks underwriting SIVs
(Structured Investment Vehicles) and to package mortgages and mortgage backed
securities into the now infamous CDOs (Collateralized Debt Obligations). To make
matters worse, previously in 1994 he literally rewrote the CRA (Community Reinvestment
Act) forcing banks to make loans that were too risky to make sure that bankers got good
grades then, but got them in trouble later for doing what they were told to do.
We can’t blame this on Clinton, but the unilateral change in the Uptick Rule by SEC
Commissioner Christopher Cox sounded the death knell by allowing hedge funds, and
other pools of capital to short Bear Stearns, Lehman Brothers, and banks unmercifully
which, of course, exacerbated the problem. Finally, mark-to-market accounting was the
straw that broke the camel’s back as assets which were no longer able to be priced to
benchmarks were deemed to be worthless, which of course eliminated a great amount of
bank capital and so we wound up with TARP (Troubled Asset Relief Program) to bail them
So we witnessed the perfect storm in the Bush years, the culmination of years of mistakes
by Democrats, now conveniently blamed on the Republicans by Obama.
PCM Clients
October 18, 2012
In our July letter, we said a healthy thing to do is to avoid the Ss—sugar and starch--but
said there was also the third S to avoid (no, not sex) which is salt, and we said we would
have more to say on that subject at another time. That time is now, so to be healthy and
stay that way do your best to avoid those three Ss.
But first, a little history. In the world today, salt is plentiful and inexpensive, but that is not
the way it always was. For our ancestors salt was not easily found, so they got by on
about a tenth of today’s average salt use. Over time, we learned how to find salt and
extract it from the earth, but it was hard work and because it was so valuable it was used
for currency; a recent Harvard Health publication states the word salary is derived from the
Latin word for salt. Therefore, salt carried a certain prestige as even today a successful
man is “worth his salt” and a good man is “the salt of the earth.” Ultimately, over the years,
as salt was mined from the earth (salt domes) and recovered from former sea water lakes,
it became inexpensive and played a valuable role as a food preservative and so salt
consumption rose dramatically to as much as 7,000 mg a day in the 19th century. But
since we use other forms of preservation today, our need for salt is much less, but high
consumption continues, perhaps because of an acquired desire, so consumption in the US
is still nearly 3,500 mg daily. Salt, like sugar, is essential for human health, but not in the
amounts we are used to. In fact, the USDA urges Americans to consume no more than
2,300 mg per day, and the American Heart Association and the Institute of Medicine say
no more than 1,500 mg daily or about 3.8 grams of sodium daily. It has been determined
that the physiological requirement of sodium to sustain life is about 500 mg per day.
Every molecule of ordinary salt is composed of an atom of sodium (Na) joined to an atom
of chloride (Cl), chemically designated as NaCl. Nutritional information is usually
expressed in milligrams (mg) or grams (g) and on labels is referred to as sodium. Here’s
how it works:
1,000 mg sodium = 1 g sodium
1 g sodium = 2.5 g salt
Another thing to consider is the
difference between refined and
unrefined salt. Refined salt is
what you see in salt shakers on
dinner tables.
It has been
processed and bleached to give
it a pure white appearance, but
it also contains toxic additives.
The refining process removes
minerals as well.
manufacturers believe all white salt (or sugar) products look cleaner to consumers, and
therefore can increase sales. Unrefined salt has a light (not white) appearance and
PCM Clients
October 18, 2012
contains more than 80 healthy minerals, such as magnesium, calcium, and potassium.
Unrefined salt is best for you, but just try to buy it. Of course, just as with sugar and
refined flour products, the debate rages on as to how much benefit is gained by restricting
its use.
Evidence points in the direction that restricting sodium intake reduces
hypertension and the risk of heart attack. In fact, the Harvard Medical School, as recently
as this August, in its Harvard Health Publication, stated that more than 100,000 American
deaths per year (3 times more than prostate cancer) is the fault of too much sodium in
diets, more than we need. The major effect of eating too much salt is a rise in blood
pressure, which in turn leads to a greater risk of heart attack and stroke. The Mayo Clinic
supports this conclusion, which is why Perk’s doctor always admonishes him NOT to
EVER pick up a salt shaker. Mayo publications also say that sea salt and table salt have
the same basic nutritional value, despite the hype for sea salt. Salt is still salt.
The problem is that
even if you never
pick up the salt
shaker, you likely
still get more than
your recommended
allowance as it is in
every manufactured
product you buy:
bread, rolls and
bagels, cold cuts
meats, such as ham
and turkey, pizza,
soup, sandwiches,
cheese, pasta, and
on and on. Look at
the labels. Only one
can of soup can have 650 mg of sodium, over one-third of the 2,300 daily recommended
allowance or nearly one half the lower 1,500 mg recommendation.
The FDA is now making noises about limiting sodium in diets, and so manufacturers are
cutting back by making soup and salad dressings and other food items “low sodium”
meaning a little less salt. They may not taste as good, but we will get used to them, just as
we got used to having foods with more salt. New York Mayor Michael Bloomberg is on it!
Just as he was a major sponsor of smoking restraints in restaurants and obesity by forcing
restaurants to display the caloric content of their offerings and to restricting the size of soft
drinks, now he is calling on restaurants to use less sodium in their food. Well, a step in
that direction took place in late August when Boston Market, a 476 restaurant chain
removed its salt shakers from tables and replaced them with a little sign stating that if you
really want more salt the shaker is at the beverage station.
PCM Clients
October 18, 2012
So, the war against too much sodium (salt) is on. Maybe it is just as well that Jimmy Buffet
could not find his salt shaker:
Wastin’ away again in Margaritaville
Searching for my lost shaker of salt
Some people claim that there’s a woman to blame
But I know it’s nobody’s fault
___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
The cartoon is appropriate for the fiscal situation in the US, now with $16 trillion in debt.
We have been spending money under Obama like drunken sailors, except that when
drunken sailors ran out of money, they stopped spending!
Richard W. Perkins, C.F.A.
Senior Portfolio Manager
Richard C. Perkins, C.F.A.
Executive Vice President
Portfolio Manager
Daniel S. Perkins, C.F.A.
Executive Vice President
Portfolio Manager
As the bus stopped and it was her turn to get on, she became aware that her skirt was too
tight to allow her leg to come up to the height of the first step of the bus.
Slightly embarrassed and with a quick smile to the bus driver, she reached behind her to
unzip her skirt a little, thinking that this would give her enough slack to raise her leg.
She tried to take the step, only to discover that she couldn’t.
So, a little more embarrassed, she once again reached behind her to unzip her skirt a little
more, and for the second time attempted the step.
Once again, much to her chagrin, she could not raise her leg.
With a little smile to the driver, she again reached behind to unzip a little more and again was
unable to take the step.
About this time, a large Texan who was standing behind her picked her up easily by the waist
and placed her gently on the step of the bus.
She went ballistic and turned to the would-be Samaritan and yelled “How dare you touch my
body! I don’t even know who you are!”
The Texan smiled and drawled, “Well, ma’am, normally I would agree with you, but after you
unzipped my fly three times, I kind of figured we were friends.”
Married life can be very frustrating. In the first year of the marriage, the man speaks and the
woman is the one to listen. In the second year, the woman speaks and the man is the one to
listen. In the third year, they both speak and the neighbors listen.
In a divorce court a woman told the judge: “Your honor, I want to divorce my husband.” “But
why?” asked the judge. She replied, “Because he is not faithful to me.” The judge asked,
“How do you know ?” She replied, “My lord, not a single child resembles him.”
A husband visited a marriage counselor and said, “When we were first married, I would come
home from the office, my wife would bring my slippers and our cute little dog would run
around barking. Now after ten years it's all different, I come home, the dog brings the
slippers, and my wife runs around barking.”
“Why complain?” said the counselor. “You're still getting the same service!”
A wife, one evening, drew her husband's attention to the couple next door and said, “Do you
see that couple? How devoted they are? He kisses her every time they meet. Why don't you
do that?”
“I would love to.” Replied the husband. “But I don't know her well enough.”
Joe had suffered from really bad headaches for the last 20 years. He eventually decides to
go and see a doctor. The doctor said, “Joe, the good news is I can cure your headaches.
The bad news is that it will require castration. You have a very rare condition, which causes
your testicles to press on your spine and the pressure creates one hell of a headache. The
only way to relieve the pressure is to remove the testicles.”
Joe was shocked and depressed. He wondered if he had anything to live for. He had no
choice but to go under the knife. When he left the hospital, he was without a headache for the
first time in 20 years, but he felt like he was missing an important part of himself. As he
walked down the street, he realized that he felt like a different person. He could make a new
beginning and live a new life.
He saw a men's clothing store and thought, “That's what I need... A new suit.”
He entered the shop and told the salesman, “I'd like a new suit.”
The elderly tailor eyed him briefly and said, “Let's see... size 44 long.”
Joe laughed, “That's right, how did you know?”
“Been in the business 60 years!” the tailor said.
Joe tried on the suit and it fit perfectly. As Joe admired himself in the mirror, the salesman
asked, “How about a new shirt?”
Joe thought for a moment and then said, “Sure.”
The salesman eyed Joe and said, “Let's see, 34 sleeves and 16-1/2 neck.”
Joe was surprised, “That's right, how did you know?”
“Been in the business 60 years.”
Joe tried on the shirt and it fit perfectly.
Joe walked comfortably around the shop and the salesman asked, “How about some new
Joe thought for a moment and said, “Sure.”
The salesman said, “Let's see... size 36.”
Joe laughed, “Ah ha! I’ve got you! I've worn a size 34 since I was 18 years old.”
The salesman shook his head, “You can't wear a size 34.” A size 34 would press your
testicles up against the base of your spine and give you one hell of a headache.”
How do you know when you’re staying in an Arkansas hotel? When you call the
front desk and say, “I got a leak in my sink,” and the clerk replies, “Go ahead.”
The owner of a golf course in Georgia was confused about paying an invoice, so he decided
to ask his secretary for some mathematical help. He called her into his office and said, "Y'all
graduated from the University of Georgia and I need some help. If I wuz to give yew $20,000,
minus 14%, how much would you take off?" The secretary thought a moment, and then
replied, "Everthang but my earrings."
A senior citizen in Louisiana was overheard saying "When the end of the world comes, I hope
to be in Louisiana." When asked why, he replied, "I'd rather be in Louisiana 'cause
everythang happens in Louisiana 20 years later than in the rest of the world."
The young man from Mississippi came running into the store and said to his buddy, "Bubba,
somebody just stole your pickup truck from the parking lot!" Bubba replied, "Did y'all see who
it was?" The young man answered, "I couldn't tell, but I got the license number."
North Carolina
A man in North Carolina had a flat tire, pulled off on the side of the road, and proceeded to put
a bouquet of flowers in front of the car and one behind it. Then he got back in the car to wait.
A passerby studied the scene as he drove by, and was so curious he turned around and went
back. He asked the fellow what the problem was. The man replied, "I got a flat tahr." The
passerby asked, "But what's with the flowers?" The man responded, "When you break down
they tell you to put flares in the front and flares in the back. I never did understand it neither."
A Tennessee State trooper pulled over a pickup on I-65. The trooper asked, "Got any ID?"
The driver asked, "Bout whut?"
The Sheriff pulled up next to the guy unloading garbage out of his pick-up into the ditch. The
Sheriff asked, "Why are you dumping garbage in the ditch? Don't you see that sign right over
your head." "Yep," he replied. "That's why I'm dumpin' it here, cause it says, fine for dumping
Remember: “y’all” is singular. “All y’ all” is plural. “All y’all’s” is plural possessive.
Don’t be surprised to find movie rentals and bait in the same store.
Get used to hearing. “You ain’t from around here, are you?”
The proper pronunciation you learned in school is no longer proper.