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The Debt Ceiling and Evil Robots From Space

|Includes:DLB, IMAX Corporation (IMAX), RLD

From the Desk of Eric Wanger


The Debt Ceiling and Evil Robots From Space

On Raising the Debt Ceiling

There’s not much to say about the debt ceiling fiasco that hasn’t been said; I’m just glad the circus is over. Were we seriously considering telling our creditors we were going to start stiffing them because we just realized our spending is out of control? Maybe the next time Congress wants to debate a budget, they’ll actually debate a budget!

President Number of Debt Ceiling Increases Total % Increase In the Debt Ceiling

Kennedy

4 5%

Johnson

7 5%

Nixon

9 36%

Ford

5 41%

Carter

9 59%

Reagan

18 199%

Bush I

9 48%

Clinton

4 44%

Bush II

7 90%

Obama

3 26%
Click to enlarge

Source: http://progressivetoo.com.

Dylan Matthews, a Washington Post blogger, points out that the very concept of a federal debt ceiling has been controversial since it was first legislated in 1917. Apparently, it has caused trouble before. In 1957, for example, the Air Force had to stop paying its bills because of the debt ceiling. Matthews quotes a Brookings Institution study that suggests this spending freeze led to a sudden $8 billion (1.7 percent of GDP) fall in defense spending, which contributed to the 1957-58 recession. (Source: http://www.washingtonpost.com/blogs/ezra-klein/post/past-research-on-the-debt-ceiling/2011/07/11/gIQAV8U6YI_blog.html.)

Members of Congress Work Into the Night to Help Restore U.S. Financial Credibility

I'm hugely in favor of big spending cuts. I just want to see a budget debate, not a public display of economic ignorance and financial irresponsibility. Our present and future creditors would surely love it if Congress could produce any budget, espe­cially a vigorously negotiated one. Likewise, I’m sure the whole world would be thrilled if the U.S. could simplify and rational­ize its Byzantine (and pork riddled) tax code.

In the end I agree with both Ben Bernanke and Standard & Poors, the only loser in this fight was U.S. financial credibility. If you weren’t sure that our legislators would put partisan politics ahead of good fiscal governance, you are now. For Pete’s sake gentlemen, we’re now being chastised by Communists on mat­ters of fiscal responsibility!


Evil Robots From Space: In 3D

I just took our entire Chicago office to see the greatest movie in the history of the world. And by that I mean, of course, Trans­formers 3: Dark of the Moon. Dark side of the Moon? Nope, just Dark, no Side. Anyway, the last 45 minutes of the movie show our office building — 401 N. Michigan Ave. — and our entire north-of-the-river Michigan Avenue neighborhood being attacked, crushed, killed, and destroyed by giant killer robots, giant evil robotic dirigibles, giant fanged killer worm-snake ro­bots, giant multi-colored robot lasers, and giant robotic aerial drone things that, of course, destroy everything in their path.

We watched the movie being filmed last summer. It was great seeing our entire neighborhood turned into a post-apoca­lyptic robot-trashed pyrotechnically enhanced wasteland. (And, given that we aren’t paying our interns squat this summer, tak­ing them out for bowling, pizza, and a movie was a really cheap way to thank them for an entire summer of hard work.)

Ironically, there was probably too much swearing for me to feel comfortable taking my own children to see the film, but it made for an ideal office outing, especially when combined with bowling and dirty martinis.

3D movies, as it turns out, represent an investable theme as a sub-sector of the entertainment industry. IMAX Corp. (NYSE: IMAX), RealD (NYSE: RLD), Dolby Laboratories, Inc. (NYSE: DLB), and others were, until quite recently, trading at astronomical valuations, fueled by investment banker and investor-relations hype. Valuations are now more reasonable. We like IMAX the most of the lot. They are in the business of delivering super-large scale movie films and equipment, includ­ing, but not limited to 3D films. They have a significant global backlog (nearly 100 facilities) in bringing new theatres online and do not depend wholly on a rapid U.S. recovery to fuel con­tinued growth.

As a research team, we are not totally convinced that 3D is a set of “products” rather than a set of “features.” Can 3D ca­pabilities be the sole business of a public company? We’re not sure. RLD is just such an example. They clearly made rapid and meaningful inroads into the U.S. theatrical 3D movie market. In fact, they seemed to exclusively capture AMC, Cinemark, and Regal, three of the biggest domestic operators. However, we agree with analysts like Richard Greenfield of BTIG, who wrote: “The major U.S. exhibitors are all paying far too much for 3D technology than they should be (Greenfield had a SELL rating on RLD at the time of this writing). Overseas, competition is real and building in the 3D technology sector with MasterIm­age, Dolby, Xpand, and IMAX all trying to grow their presence .

3D effects are certainly cool and will certainly be here to stay. But in competitive industries, clever new features are not always enough to give new players the ability to survive long-term. Remember American Call Waiting Corporation? We don’t either.

Regardless of the investment implications, we still had a blast experiencing the thrill of an entire squadron of U.S. Air­force Boeing Ospreys flying in low over Lake Michigan to en­gage the killer robot air force over Navy Pier. Imagine. It made our 3D glasses sing!

Alan Turing (the father of computer science) would be proud of the dialogue. Never before in the history of cinema have the robots gotten all the good lines, turning the entire human race into a lowly bunch of meat-bag straight men. John Malkovich, John Turturro, Frances McDormand, Leonard Nimoy, and even the real Buzz Aldrinjoined in the fun.

There’s no shortage of fear, anger and uncertainly out there, so we figured it was OK to have some fun. While the markets are unlikely to replay the depths of dispair we saw in 2008, it would be naive to expect decades of financial sinning to end in a simple one-dip hangover. It’s time we get our house in or­der. But, even then, it will take us a few more years to put our economy back on a sound footing. But I digress...

As I said, Transformers 3: Dark of the Moon was the greatest movie in the history of the world. And yes, Mr. Ralph Wanger, CFA, that includes Destroy All Monsters, Abbott and Costello Meet the Wolf Man, Animal House, Young Frankenstein, and Yellow Submarine. Did you take your entire office to see the Blues Brothers when they trashed Chicago? No, I didn’t think so.

Eric Wanger, JD, CFA

originally published Q2 2011

Stocks: IMAX, RLD, DLB