Things move faster. They just do. If you doubt it, consider the media you are digesting now. It didn’t exist really five years ago. You’d have to wait for it in a monthly periodical ten years ago… but likely you would not have seen this article, or the hundreds beside it, on a site such as Seeking Alpha.
You can read my post on a “Return to the 1970s” here. In the one week since that, the Dow has fallen from 7350 to 6726, a decline of -8.5%. One week is all it took for the Dow to hit my (self-defined) opportunity range of 6500 to 6800.
Things move faster. Yesterday, I had a chance to review a company’s tax returns. In advance of the Obama 2010 tax hikes, the CEO/entrepreneur had booked sizable income for 2008-9 that, in past years, he may have deferred to out-years. Such is American capitalist ingenuity. (I do not prepare the returns for this firm, I just got to look at them.)
Last night, I managed to see the HBO documentary “Perfect Upset”, about the 1985 NCAA championship game, and the triumph of Villanova’s underdog against the Georgetown Hoyas, against all odds.
There are coalescing factors at work, sentiment factors, and in this post I will discuss them.
Americans are creatures of optimism. Today, we are all Villanova – the underdogs. The relentless negativity of Obama apparatchiks will give way… once they realize they are not campaigning anymore, but helping run these United States.
For two months you have read about bad news for vehicle sales and industrial equipment, and various other all-time lows. You have read about Americans tightening their belts, growing their food, buying guns. About all manner of disease, pestilence, and depression to befall us.
Market sentiment is about to turn. The news simply could not get much worse than anticipated.
The Street’s whisper number for unemployment is 10.2% to 11% by year end 2009. By now, analysts (finally) have baked earnings models to include off-balance-sheet vehicles, impairments, and other such write-downs. So, way too late, investors who still heed sell-side analysts have a clear(er) picture of Dow, and S&P, earnings for 2009 and 2010. No sell-side analyst wants to be optimistic now.
Which is why Sentiment is about to turn. As these same sell-siders, with rare exception, did not divine their models’ inflated projections for year 2008, so too can they not see the pessimism of their current models.
It is impossible that Treasury Secretary Geithner is as big a doofus as Jim Cramer has made him to be. Personally, I think Jimmy’s badgering of Timothy is only big-brotherly tough love.
Psychologically, Geithner is one of those forlorn kids in a candy store – know the sort? – the kid who has five bucks to spend, but can’t decide what he wants, so he gets a bit despondent: too many ideas, too many options, not enough time to optimize the whole deal…
Geithner will find his own comfort cycle, and what he finally produces will be decent, well-considered, and positive. If you feel that he can’t do any worse, it also means you feel that he can do better.
Try as Obama’s administration might, the domestic entrepreneur is alive. Not just in small businesses, but in the CEO suites of our world-beating corporations.
If profits are heavily taxed in the US, the CEOs of Apple (APPL), Cisco (CSCO), Nike (NKE) and WalMart (WMT) will just direct investment dollars and growth to overseas opportunities. Any CPA (or physicist) will tell you that an aggressive engineered structure – like the administration’s tax proposals – only triggers equal, aggressive responses. Much like the entrepreneur/CEO I noted earlier, the CEOs of our best businesses will respond with mechanisms such as transfer pricing, overhead allocations, etc.
Obama’s proposals have only the effect of full employment acts for CPAs and lawyers for our current world beaters. (The administration’s big problem is the constraints that these proposals impose upon the “at-risk” industries like autos and chemicals… supposedly the industries that they wish to “save”.)
General Electric (GE) has had its demise writ large in these pages. CEO Immelt has done a dreadful job of outlining his company’s risks. Perhaps he – or GE Capital – doesn’t understand them. More likely, these risks are a moving target for which no handle is easily obtained.
You can read my October 7, 2008 view of the “Great Commercial Paper Bailout” here. To quote myself to clients then, with GE at $20.52: “GE is so f***ed in so many ways that nobody really knows what the hell is going on… There is no silver lining that I see”. So I haven’t been in love with GE before.
Elsewhere, what I said in that post is that the Fed/Gov intervention in the CP market was basically to prop up GE. But consider the following:
With General Motors (GM), we “saw the fires burning” for decades. Management versus union, bloated costs, declining shares – the worst of piggy American business. And marketing gas-hog, carbon-spewing SUVs that the Obamista love to hate. (That latter point is salient: Obamistas love their iPods – stylish, kind of green, personal, respectful, clean in appearance and function.)
GE is nothing like GM. GE has a case that it is trapped in a maelstrom not wholly of its own making. GE is a smart, well-functioning, somewhat “green” American business (one great progeny of Immelt is the “green” halo near GE). If GE got a tad caught up in financial engineering, well… that was the headiness of the era. GE was never an AIG.
Further, when GE Capital says that it “knows” the majority of its commercial loans, I know that, for a few of these loans, it does. The GEC loans I know are on office buildings in Los Angeles; the loan-to-value for each was 70% or less. While market LTV today is probably over 100%, all of the loans are producing, are adequately served by cash flows, and the owners should manage through.
As a real estate lender, GE was never a Wachovia (at whom, frankly, we laughed). GEC generally did not do “spec” like Lehman. Instead, the GEC boys were tough, principled, and tied to what-if analyses that considered seventeen different tragedies.
The game GEC played was committing to ten-year interest-only loans on commercial, while financing those loans internally at short-term CP rates.
It’s just my call on this: the great CP bailout will continue, for the benefit of GE. GE will not be allowed to go down.
Now that Immelt finally had the guts to slash the dividend, changes will – and must – come. Look for a bunch of truth-telling. A massive mea culpa write-down. Look for credit analysts to beat their breasts wondering how they got it all wrong. How GEC lied to them. Look for cuts in GE’s credit rating, the end of the world…
And then look for GE stock to climb to $15. Once the wizard finally raises the curtain, the market will discover that it ain’t so bad after all.
Manfred Zimmel may be a kook. Manfred Zimmel is not a friend. Manfred Zimmel has done nothing wrong but get nearly everything right. Altogether, Manfred is a dirty little secret from which you can take what you choose, kind of like PerezHilton.com.
I stumbled across Manfred’s website in my intellectual curiosity mode, researching “peak oil” in late 2004. I saved his December 2004 report as a pdf I called “Wacky Scary Right Questions”. In that report, Zimmel called for the SPX to hit 700 by mid-2008 (it was at 1150), for oil to hit $85/bbl by 2008 (it was at $45), the Euro to rise to $1.62 (was at $1.25), and gold to go above $700/oz. (was at $450).
Fair warning: Zimmel is an Austrian economist, an astrologer (?), and someone I have never met. He is and has been pessimistic on America, believes in a New World Order conspiracy, and sees a “Crack-Up Boom” coming that will subsume Capitalism as an ism and lead to 50% unemployment in the US, with 50% annual inflation, by 2012.
Still, when someone of Zimmel’s skew calls, essentially, for a boom in stocks – as in, the market’s early 2009 low should mark “the trough of the 4-year cycle since 2003” (buy his whole report if you must know more) with a rapid rise through mid-2009 – I have to return to Sentiment.
Sentiment: A Conclusion
Most of the boys who “know” have stopped coming on CNBC. Those who touted the market at 9200 do not return calls for interviews. If you’ve watched the last two months, you’ve seen many new faces.
The market as a whole is overwhelmingly negative. Cramer is calling for Obama-proof stocks. The belief is that we are all overwhelmed, the administration is a disaster for investors, there is no shelter from the storm this time. Meanwhile, of all people Manfred Zimmel – an astrologer/economist and perpetual contrarian bear – is expecting the market to rocket.
Me, I’m not calling a bottom until 6540. I’m not saying get heedless. But I will say it’s time to add positions, in opportunity targets like Disney (DIS), Nike (NKE), Intel (INTC), Cisco (CSCO), Costco (COST), and even UPS (UPS). And a host of other firms that you can identify, that will endure profitably into the next decade, and the next administration.
Warren Buffett may say to buy when all others are selling, but I prefer Coppola’s Apocalypse Now: “Someday this war is going to end,” says Captain Kilgore. “Yeah.”
Yeah. This war is going to end. And the future will belong to those who have endured.
DISCLOSURE: No positions in any stocks mentioned. Over coming week, will buy GE at $5, DIS at $16, INTC at $12, NKE at $37.