Taking Stock of Obama

NEW YORK (BizBlog100) – Panjandrums and pundits of all stripes have awarded the election to Barak Obama. What will ensue?

Foremost, we are in a Keynesian mood. The scale of the successive bailouts creates a new standard for government spending. For the moment, deficits don’t matter. Inflation? Leave it for tomorrow. My picks for the Obama Market are Goodyear, Yahoo, and General Electric.

Obama is committed to spending for healthcare. One way he can do this is help address the legacy costs at major industrial companies. Manufacturing industries are burdened by rising retiree payments at a time when they need to reinvent their businesses.

Government support for the resolution of these legacy claims can be a meaningful competitive assist to industry. More important, providing an assured health benefit level to retirees and displaced workers would bring great relief to many middle American families. It will be a bailout of people.


Goodyear (GT-$8)

If this happens, if Obama goes this way, the major beneficiary is Goodyear. GT confronts these costs and reports higher payment levels. Apparently some type of settlement with retiree claim holders (VEBA) is emerging. While I do not know the scope or progress of this adjudication, a positive outcome would be an additional reason to buy GT stock.

As always, the main reason to own GT is to play the economic cycle. In automotive stock tradition, the tire industry will come off the bottom quickly, even before customers increase new car purchases. Auto sales peaked in 2006 and domestic production declines will continue at least into 2009. But even if the decline lasts into 2010, the tire stocks will move by mid 2009, within six months. We are, after all, surprisingly close to 2009!

The tire business is not an easy one. The principal cost is oil, competition is global and the rubber workers, now part of the United Steelworkers Union, have a truculent history. But the bad news is out! Lower OE production, volatile oil price, less driving are known and discounted. With a market equity at $2.1b and long term debt of $4.5b underwriting $`17b in sales and 1b operating profit, the upside operating and financial leverage is significant.

Goodyear has survived on the strength of its aftermarket brand name and I see nothing that impairs that franchise. Indeed, I suggest that the value of the brand name alone is worth the market equity. GT is a superior cycle play, as compared to the Companies formerly known as The Big Three.

I’ don’t know what next year’s earnings will be but GT will generate significant cash, perhaps $1b, after $.75b retirement funding. Relief from these costs would be a major boon to Goodyear and won’t be noticeable in the federal budget. Go vote Ohio!




Yahoo (YHOO-$12)

YHOO is a good bet because it is inconceivable that Microsoft will not seek to acquire the company at a price that may make Carl Icahn frown but will reward a $12 buyer. The day that the Justice Department terminates its review of the Yahoo-Google deal is the day YHOO will start to move---and I don’t think Mr. Balmer will be far behind.

Why is it an Obama situation? The prospective disposition of Yahoo is a critical test of communication policy, particularly the concentration of search-based ad serving. It is also meaningful because Yahoo’s significant portal business gives it weight as a media traffic manager.

I do not see any competitor outbidding MSFT for YHOO. The only obstacle would be an anti-trust action preventing a combination of the #2 and #3 players in the search market. And I can also see why certain media companies might join MSFT’s habitual foes in opposing the combination (if Google doesn’t scare them more).

This is where Barak, a man sharing mutual esteem with Warren Buffett, comes in. I would hardly expect an Obama administration to prevent Mr. Buffett’s good friend Bill from doing what was in the interest of his shareholders.


General Electric (GE-$18)

My final Obama pick, General Electric also has Buffett flavor since WB purchased $5b of GE securities. I’m not bragging that I bought it 20% cheaper than WB since he gets a 10% preferred dividend compared to the 7% expected on the common. But I am glad to be in any investment group that includes him!

In the peculiar financial world now created, GE’s seven per cent dividend is inferior to the 3-4% rates paid by money funds, presumably reflecting the risk of a dividend cut and also discounting potential dividend growth.

I don’t see GE cutting the dividend after 100 years including not less than 15 years of split-adjusted increases. Their position is buttressed by the dominant position they have in key high tech markets such as jet engines and power generation, partly offset by their exposure to financial markets.

My ace in the hole is nuclear power. Obama concedes that nuclear is part of the solution, subject of course to the highest levels of safety. If he follows through on his plan to tax carbon emissions, the relative economics of nuclear will improve dramatically. And GE will bring home business of billion dollar proportions.

Of course, the path to the billions proceeds through The Oval Office. Perhaps Warren will have a word.

New Year Greetings!

October 1, 2008

New Year Greetings!

Business students ask me if the financial world as we know it is ending. First, I remind them they are students with at least a year, perhaps three, before they need personally brave the professional market. I also say that Monday’s 7% decline is only a gray copy of the 23% decline experienced on the Black Monday of 1987. May get worse before better.

Students remind me that they are already employed at hedge funds, insurance brokerages and chic Manhattan eateries. They say business sucks.

I tell them that the business cycle is real---housing is weak, perhaps to weaken further. Since the housing sector leads the ups and downs of the economy, business activity measured by employment will continue to decrease. With extensive home foreclosures in California and Florida and for sale inventory increasing nationwide, there is no clear sign of a bottom. Moreover, the prospect of higher interest rates is a big negative for all assets, as are property tax increases of the sort Mayor Mike Bloomberg proposes.

It’s going to be a lumpy Christmas. The consumer is not buying durables; business is slowing production; investment is apt to decline. Unemployment, now at 6% is likely to increase.

The bigger question: what is the shape of the recession? Will it be the sideways correction characteristic of the early 1990’s or the more severe contraction, as measured by double-digit unemployment, of the early years of the Reagan administration (early 1980’s)?

My hope is that it will be the more severe type, since I think it important to fully purge the effects of the lax underwriting and lending. I want to see a reinforcement of moral hazard criteria. I want to see the elimination of adding value by obfuscations, of bonuses paid for notional profits, of enormous legal fees for meaningless opinions. I want to see the private equity guys scream.

And I think they will. Hedge fund strategies inevitably involve leverage. Even a contra-strategy, perhaps betting on a rate rise, is diminished by a higher cost of funds. And, given deficits in budget and trade and the latest round of monetary exuberance, I do see higher rates!

Hedge funds, particularly the equity sort, are bull market strategies. Since 1992, private investment values have increased at least as fast as the public markets. The gain has been compounded by attracting additional investment capital. I expect the private capital pool to contract as the consequences of accelerating insolvencies and frozen prime brokerage accounts reverberate. To be sure, some investors may be sufficiently nimble in selection and trading that they continue to earn outsize profits and outsize fees. Most won’t.

Mild or severe, the downside duration is probably two years, at most. Homebuilding actually began declining in 2006, so a 2010 pickup seems reasonable. But the market will move up earlier.

I encourage my students to think that, like Clinton, Obama will use the first years of his administration to establish some degree of fiscal sanity and let The Invisible Hand impose Creative Destruction.