Next Meeting of the Scarlet Kings

Greetings to All,

The next meeting of the Scarlet Kings will be held on

Sunday, December 4th, 2011 at 12:30PM.

Location: Chili's (4500 Belt Line Road, Addison, TX 75001)

Please join us for a fruitful and lucrative discussion!

Very Sincerely,

VJ

Meeting Minutes

We had a wonderful meeting at Romano’s Macaroni Grill! We had a total of 4 attendees: (from left to right) Ryan Zamora, VJ Arjan, Jeff Harrington, and Kevin Day. I want to particularly thank Ryan and his photographic memory for putting together a summary of notes for our meeting, which was very helpful in creating the minutes below.

Housing and Unemployment

Kevin began by talking about the orderly decline in housing, in some cases housing prices that have dropped by 50% are finally bottoming out. People are finally coming to terms with the new normal, which includes not only a sluggish recovery in housing, but also in unemployment.

VJ chimed in that in this market, as housing is so depressed, the only direction that we can likely go is up. He also mentioned that the data is cautiously promising as well. The rate of foreclosures is decreasing. While it will undoubtedly take many years and perhaps a decade before there is a normalcy in the appreciation of homes, at least the bleeding is being quelched, slowly but surely.

Kevin talked about some of his friends, executives in their respective fields, who had been used to making $300,000 - $500,000 a year, are now being forced to accept jobs that pay near $100,000. Those who were leveraged to the hilt in credit cards and other debts are now in very difficult times. And the chances of them seeing the glory days of a significantly higher salary may be shot for a very long time.

This has also been extended to the average consumer, who has to think twice about buying a new car or new clothes. People, in general, are holding back.

The government is doing even more the increase consumption. Recently President Obama put out a new refinance program to help especially those who are upside-down on their mortgage. His goal is to increase cash flow and build equity in their homes. Jeff concurred with the President in that it will help people on the income statement side, which will lead to an increase in consumption and greater profits for corporations.

And although, corporations are recording record earnings, ultimately, Kevin believes, no amount of stimulus or increase in consumption will bring back the economy over the long-term.

The key will be to begin creating jobs and lowering the unemployment rate. Because of the unemployment rate is where it is, consumption is frail and this breeds a lack of confidence. Creating jobs is the only long-term solution.

Fix unemployment, restore confidence, and you fix the economy.

Occupy Wall Street

As may be imagined, we could not ignore the ‘Occupy Wall Street’ movement that is currently occupying hundreds of cities and has resulted in several casualties. We discussed whether or not this was a just cause.

VJ posed to the group whether this movement resembled the Vietnam War protests. Kevin declared that the seriousness of the war could not be compared to, what was politely put as, a bunch of people without jobs.

Kevin and Jeff then discussed the remarkable fact that President Obama was noticeably absent from really any discussion on this movement, which shows his lack of leadership. He has come out neither for it or against it. Truthfully, if nothing else, he ought to be rallying the movement and capitalizing on it, rather than just ignoring it, to garner support for his re-election.

It is true that a large portion of this group is composed of college graduates without a job, but there are also many people who have joined to voice their general frustration. Kevin pointed out that this country, historically, is a capitalist country and that the concept of a hand-out for those who do not have a physical or mental need for it runs counter to its principles.

The near-term will be important as the cold of the coming winter may kill the movement. However, the strength and momentum of the movement is something to notice. It has been 3 months now and it has shown no inkling of letting down. In fact, it may be strengthening as a few celebrities have now joined in. Unfortunately, this is also a place where things could get very ugly is it takes on the form of mob rule. It can be very frightening and, in the past, many countries have instituted martial law to put them down.

The Probabilities of Success

We all had a general discussion on what it takes to be a success and why enduring success is so rare. Kevin pointed out that all those who have been coming to these meetings can have no choice but to become successful. The multitude of people have no interest in high-level concepts and are concerned, more or less, about the present, with little foresight into the past or future.

While many are watching the football games on TV, we are discussing the future of the country, financially and politically, as frankly we all intend on making a mark upon it at some point in our lives. As Charles de Gaulle said, “the higher up I go, the less crowded it gets.”

Kevin also advised that one of the quickest ways to move up in life or in a company is to identify mentors and to be a likable and trustworthy individual. If people like you, especially those higher up, and they feel comfortable with you, then they will help you come up higher as well.

The other trait to have is to be confident in who you are. You have to like and believe in the individual staring back at you in the mirror, because if you don’t, nobody else is going to. Nobody is going to give you anything.

Ryan discussed how he saw this first hand in how a businessman from the Philippines successfully branched out to America. By his ability to make people feel comfortable with him and his confidence, he has come by great success.

Jeff then brought up the fact that, at least for the short-term, as the path to success is unclear with the volatile economic environment, it is important to play very good defense, especially when we’re starting out, a tenet that, by his own admission, he has come to live by.

Italy and the Euro Crisis

Above: Italian Government Bond Yields

What is so fascinating is that the day after our meeting, there were alarm bells going off about the possibility of Italy’s default. We discussed this in length before the news caught on to the seriousness of the threat.

Italy has the second largest debt load, next to the United States. Its debt-to-GDP is at 130 percent. It has a sovereign debt load of $2.6 trillion and an GDP of $2 trillion. This is a “Greece on steroids” as one economist put it. Italy’s economy is the 8^th largest economy in the world, six times larger than Greece’s. And to top it all off, it has a declining birth rate.

So where is the money to pay back its creditors going to come from? Maybe it won’t.

Assuming that the situation gets handled somehow, we reiterated how the Euro will continue to face challenges on the economic and political front as the EU began, unfortunately, seeking an economic integration before a political one.

Political Candidates

We expressed his frustration with the Republican candidates in their lack of concrete plan to resolve the economy. VJ noted the only one who has been courageous enough to pose a plan is Herman Cain, with his 9-9-9 plan. None of the other serious contenders have even come close, which he regards as a shame.

It is true that the President’s economic policies may be shaping up to be failed ones, but on the other end of the aisle there doesn’t seem to be any real alternatives. It seems that the Republicans are working off of spite and just bashing Obama’s policies by blaming him for not resolving the problem.

But to give credit to the guy, at least he is trying. He may be misguided in his approach, but at least he has an approach. Kevin and Jeff noted that the President’s squeaky-clean image doesn’t help the other side either, as there have hardly been any scandals to speak of.

Great Leadership

Above: Anson Dorrance, coach of the UNC Women's Soccer Team

We had a discussion on what makes a great leader direct an organization to a series of winning successes. VJ pointed out the story of the UNC Women’s Soccer team, which has the winningest record of any sport in college history with only 34 losses in its 32 year history. It has won 28 championships over this period. The reason can largely be attributed to the leader, Anson Dorrance, and of his embodiment of the core principles in the team's culture.

There are a few corporations who have lived by the same principles that have endured and evolved time and again. Some of them include: Gillette, IBM, Nordstrom, and Starbucks.

Analyzing management is key in our investing decisions. Here are some things that we as investors ought to be looking at:

- Longevity of executives and board of directors

- Low CEO turnovers

- Key performance indicators – how often the company meets its earnings targets. Does it overpromise and undeliver, or the opposite?

- Ease of communication between executives, the employees, and the consumer. For example, if you have a complaint against Nordstroms, you can actually call up their complaint line and get one of the Nordstrom family members on the phone to address your issue personally.

Jeff mentioned a saying from technical analysis: losers continue to be losers and winners continue to be winners.

The next meeting will be on Sunday, December 4^th, 2011. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com.

Also I find that there are many domestic and international readers who are following our blog posts not only in the United States but all over the world including Europe, Latin America, and Asia. If you wish to be added to our email list, please email at scarletkings@gmail.com.