Sometimes, the Media R Us and Other Comments

By Lynn Carpenter

Dear Reader,

Three weekend IDE articles so far, and I’ve gathered a boatload of mail that I’d like to respond to today.

First of all, thank you to everyone who said such nice things, including the honorary three-dozen roses and nomination for president.  I also heard from readers I’ve known for years from Fleet Street Letter and the Oxford Communique.  It’s nice to be back in touch here and at Rising Tide.

Not surprisingly, the jabs I took at the media’s shallow coverage of economic announcements found a lot of agreement and similar observations.  D.S. says:

I have found the same thing on the corporate level.  I always listen to the conference calls of companies we own.  Often I’ll hear something completely different than the headlines the media reports, and I’ve made some great buys (and one sell I can think of) based on listening to all the execs had to say, instead of just reading the headlines.

Now that’s being a real investor, D.S..  Very smart.

Along those lines, W.S. asked what other sources you can use for better information.  On the company news level, in company press releases, such as those published by PR Newswire, you will often find good tidbits of information to use.  We tend to think of press releases as fluff, but the earnings releases are often very good.  Companies are under pressure to portray conditions accurately.  You can discover a lot.  When others are selling in a panic on the headline news that “earnings fell 20 percent,” you can find out that it was only because of justifiable one-time charges for a good business move and stay calm.

Do listen to conference calls if you can.  It is an education in itself to discover what analysts are focusing on.  Sometimes they make good catches.  Conference calls are announced ahead of time.  Some companies allow questions submitted in writing.  Most are closed with only analysts asking questions, but they tend to press.

For economic information, I usually go to the source quoted in media stories.  If the news is from the conference board, Google it to get the website.  The press release summary should be easy to find.  You can do the same with releases from the Bureau of Labor Statistics, the Fed, and other places.

Another favorite source of mine is Wachovia Bank’s economists.  They do weekly and monthly economic commentary as well as comments on key statistical releases.  These reports are very short, but good.

It’s not just the media that are annoying people.  I find out from your letters that our own newsletter industry gets some grief.  Here’s one from G.S., who said he likes what he reads in IDE …

…unlike a lot of stuff that comes around these days.  I guess the flood of copywriters that seem to have all been to the same school and write like clones has me a little numb - it's beginning to sound like one selfsame voice!  “The blind, dumb masses are marching to slaughter, but a few select individuals are privy to a ‘secret system’ allowing them entry to financial paradise, and now for $299 or $1,999, I could join their private circle.”  Anyway, good to read some straightforward talk for a change!

This one hit my funny bone.  And as we know, the funny bone is also a tender spot.  Just a couple of weeks ago, Andy wrote a short ad for me that promised people could be bored but do well.  It never saw the light of day in its intended form.  I was horrified to read what went out.  “You know what’s wrong with most investors,” it started out.  This is exactly 180 degrees turned around from everything I believe.  I don’t think anything is wrong with most investors except the bad information and terrible guidance they get.  When you see a flood of selling immediately after an earnings release, that is mostly institutions rushing out.  Not normal investors.  Oh well, I try.

It’s a dilemma.  Edit a sensible newsletter and copywriters have a terrible time figuring out how to sell it.  This has always been a problem for me.  I am told “sensible, well-researched, and clearly-written” are not hot buttons. 

On the other hand, this isn’t a government job - we can’t raise taxes and pay ourselves.  So unless I want to go around with a begging bowl, I need those enthusiastic copywriters because they know what you and I don’t like to know.  Their annoying formula works.  Sigh.

Chuck G went farther on the topic of copywriting.  He wrote a marketing parody that hit all the usual tactics -“a $2,000 value for only $1,000” and so on.  You think maybe we need to get some fresh ideas here?  But he added something I should pass on because I thoroughly agree:

Efficient Market Hypothesis?  Quite to the contrary.  The market depends on inefficiency.  Winners understand that inefficiency increases the probability of success.  Losers are betting on the efficient market theory which works sometimes.  It depends on the timing.  Just like playing a slot machine.  Timing is everything. Luck helps immensely.  Dumb luck works occasionally.

If you missed that and can’t place “Efficient Market Hypothesis,” the original article is in the archives.  The title was “What if the Market Couldn’t Beat the Market?”

And now a public lashing.  S.C. caught an egregious mistake.  I said I wondered what was so broad about American Express, Merck, Cisco, or Coke that the Dow committee liked.  S.C. wrote to say Cisco is not in the Dow.  He is quite right.  I was writing along, thinking “better put one of the tech names in for balance.”  And instead of typing Intel, I wrote Cisco.  It’s not in the Dow, never has been.  Good catch, S.C.

That covers the high points from my first two articles.  The third one was on inflation and recession.  It is surprising how much interest that got for a subject involving Fed policy.  Several people wrote to note their “on the ground” observations of the inflationary pressures we’ve been under for years.  A couple voted for recession, but most felt inflation biting down.

I’m going to save those letters.  In the meantime, I’d like to hear from you on the subject.  It is interesting what is not measured that affects our standard of living.  Stanford tuition is one … but also fishing licenses … and I’m sure you have more.  Drop me a note on how you feel about inflation versus recession.

Respectfully,

Lynn Carpenter

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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What I Learned from My Eviction

By Andy Carpenter

Dear Reader,

You’ll have to read down a bit to see why you should be so happy that I got evicted from my Beijing office space last month.

The end result should yield you a nice speculative China investment play.  So, if you rush ahead to find out why I got the boot, you’ll only have to backtrack

That’s because this story starts way back in the years before the turn of the century.  That’s when a smart man from Toronto traveled the globe selling magazines and paperback books to gas stations and convenience stores.

It was a great job for a man without a wife or children.

The man is Michael Kraft.  He eventually parlayed his love of publishing and his experience in China into a small company that sells English as a second language products to Chinese elementary and secondary schools.

Today, Kraft is CEO of the company – Toronto-based Lingo Media Corporation. Its stock trades on the Toronto Stock Exchange as well as in the U.S. on the OTCBB.

Some time last fall, Lingo sold its 193rd million title in China.  At about the same time, November 30, Kraft’s company also reported yet another unprofitable quarter.

Still, Lingo’s year-to-date revenues increased 783 percent to $2,533,504 as compared to $286,869 to 2006.  The company also managed to reduce its losses from $836,865 to $587,442.  More importantly, the losses dramatically decreased from 291 percent to 23 percent of revenue.

The reason revenues are small is one of those good-news, bad-news deals.

The bad news is, like many foreign businesses in China, Lingo has a partner in its endeavors - the Chinese central government.  In Lingo Media’s case, it’s the all-powerful Ministry of Education.

Lingo may have sold nearly 200 million titles in China, but the MOE keeps the profits and pays Lingo Media a royalty.

Still, that’s enough to pay Lingo’s growing staff in both Toronto and Beijing.

The royalties keep Lingo alive.  And no matter what else, that is key to thriving in China.  It’s very much like the old lottery slogan, “You Gotta Play To Win.”

Of course, as you can guess, the good news portion of Lingo Media’s deal is that it is hooked quite tightly to the Ministry of Education.  It has access to its highest levels.

And the Chinese are loyal.

And that bring us back to my eviction.

You see, I have known Mike Kraft for years.  Back in 2003, Mike offered me a corner of his Beijing office at a very nominal rent.  It was a nice fit because I get along great with his employees.  They too have become friends to both me and my wife Lynn.

You can probably guess why Michael tossed me out.

Profit On My Eviction

Lingo acquired a company last October that has forced it to expand rapidly.  As in, from four employees in Beijing to more than 15, and from no employees in Taiwan to more than 35.

That company is Speak2Me Inc.  It was a division of a Taiwanese software developer, but it really didn’t fit in with the developer’s core business.

This is where time on the ground – experience in China – pays off.  There aren’t too many people in the world with the connections to know about Speak2Me at all.  Mike Kraft, however, is one of those.

The best part of this deal is that it looks as though the Ministry of Education has given its blessing to the deal.  Even better, the business model allows all profits to flow directly to Lingo without MOE involvement.

Here is what Lingo has come up with for Speak2Me.

Speak2Me was already a nice product.  It uses animated characters to teach English as a second language.  It used to do that via CD ROMs.

But its entire platform has been put on the Internet at Speak2Me.cn.

That’s because what Kraft has come up with for Speak2Me may be one of the genius plays of the decade.

You see, Speak2Me’s English lessons take place on the Internet, where students use a speech-recognition and avatar (animation) technology to have a conversation with a virtual tutor.  Using a simple, inexpensive headset and microphone, the avatar - called Lucy - allows students to engage in conversation on a variety of topics.

Now, Kraft’s team has tweaked the Speak2Me program by adding a strong advertising mode.  It allows commercial marketers to purchase placement of their products into a library of more than 300 English conversational lessons.

As an example, this means a student in Beijing could be learning basic English by asking directions to Starbucks or Dunkin’ Donuts, or by talking about how much they enjoy driving though the countryside in their new car.

Better still, it sometimes seems as if every middle-class person in China is now trying to learn English.

And Speak2Me’s method looks fun… very different from the old-fashioned static methods – the kind you and I had in school – where language learners would ask directions to the library.

Speak2Me’s online service will also feature a social networking site, like Facebook or MySpace that should generate revenues as well.

And again, all this looks to be with the blessing of the central government.

So it looks as if Kraft is rolling out a product into the heart of China’s Internet craze – 210 million now online – with users who are hot to adopt both a more Western lifestyle, language and consumer habits.

Lingo Media currently trades in the $1.25 range on the OTCBB under the symbol LMDCF.

If you are looking for a speculation to hold for 12 month, may want to consider Lingo Media as a speculative China play.

Have a great weekend.

Andy Carpenter

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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