Sunday, March 8, 2009
Who Wants to be a Custodian? We Shall Overcome Someday... Intrinsic Investing Part II...
(Image from Carl the Custodian in The Breakfast Club)
Who Wants to be a Custodian?
Massilon used to be called Tiger Town. It was a tough city with tough people living there. Massilon and surrounding cities in Stark county used to have the bragging rights of such companies as Hoover Home Products... Manufacturing is still the crown jewel of this area. Timken makes some of the best bearings in the world... Diebold produces products for financial services and security. J & L Steel builds products that are used in heavy construction. Now things are rough in this little area of the state. According to Yahoo News, "Evidence of the slumping economy is stacking up at an Ohio school which has nearly 700 applications for one open janitorial job." (1) The job based on experience pays approximately $12-15 dollars per hour with benefits. I have deep respect for anyone who goes out and forges their way in today's economy. The number of applications suggests there are many Americans who will willingly take shovel ready jobs as part of Obama's budget and stimulus package.
We Shall Overcome One Day...
According to one report, the powers that be are trying to spend our way out of the economic slow-down. The Obama budget looks to ramp up government spending to an un-precedented level. This move is an attempt to "shock" the economy back to its regular beat, and encourage private investments to follow. One point of concern about the Obama budget is that it is based on positive GDP by the end of fiscal year 2009, with a lofty projection of 3% by the end of 2010. While I would like to see these predictions come true, we are reminded that during the Great Depression, Herbert Hoover said that "No country can squander itself to prosperity on the ruin of its taxpayers." That being said, Barack Obama is right, there MUST be accountability in government spending. And, the spending spigot should be turned off once the economy has recovered. This includes a closer look at government out-lays on entitlement programs that do not promote growth. I believe that Barack's stance on competitive government bidding is a great place to start!!!
Intrinsic Investing Part II...
There is value in today's market. There are companies that have been unduly punished by the bears on Wall Street. Many companies are trading at a significant discount to book value. That being said, there are two underlying factors which are keeping a person like me out of the long side:
1. Accounting practices: There really isn't a firm way to determine value on a number of companies based on traditional accounting formulas. The pressure to fudge numbers, under-report losses, and over-project earnings is one variable that no one can quite but a finger on yet. The unfortunate fact is that an under-funded if not completely inept SEC has not been able to take companies to task for stock market schemes (see Madoff...Stanford... Tyco... MCI... Enron... etc). This could well have been the real beginning of the meltdown. Without honesty and truth, credibility is lost. When panic strikes, it penetrates to the very core of reality. No artist and no paint brush can create a rosy picture if the very canvas of the art is flawed.
2. Credit: With injections of money from TARP... TALP... and whatever acronym that is currently being used, companies are destroying additoinal credit as soon as it is being created. Many big banks are still hedging on lending, because it has become more prudent to preserve capital. Other companies like AIG have become nothing more than a bottomless pit. The government could have easily purchased the company twice over as opposed to injecting additional funds into the company. Mark my words, AIG will be back for more... and maybe even more after that.
3. With accounting irregularities and credit issues at the heart of the matter. Confidence is the last, and maybe the most critical factor impacting Wall Street as well as the world economy. For instance, the Bank of England has for the first time in its 315 year history cut its rate to .5%. "The central bank is aiming to boost the money supply in hopes the moves will ease tight credit conditions and translate into increased spending, thereby preventing a sustained, widespread and potentially destructive fall in prices." (3) Unlike Iceland, and many of the eastern European nations, Great Britain in many ways effects the psyche of practically every country in the world. These is still time to short the Pound!!!
I do believe that many companies are on sale in today's stock market. I do however, believe that that the market in general, and stocks specifically offer considerable risk under the current economic conditions. A dear friend called her broker again to receive the latest casualty report of her investment portfolio. Now her portfolio is down 49.6%. Her broker's recommendation was to ride out the storm. While I am not a financial professional, I recommended that this individual take 25-50% of her funds out. Investments like mutual funds truly hold the biggest risk since they are so spread out. If this person's broker was honest, he would admit that he has a vested interested in keeping all of his clients in the market. That, he actually gets paid for the amount of money he manages. That, he will take a percentage of the profit from each person's portfolio when times are good, but not share in the loss when times are tough. A different approach would suggest that ANY companies worth a look would fit on a very short list of names. This broker has his needs placed before his clients. Just ask the guy who found out that his son's college money was halved, as he prepares to enter school in the fall.
Added positions on MCRI 6/2.5s and BNI 7/30s.
I have bids on NOC, DE, and TM. MTM and PPD are on the board as well. With on-going analysis of several other lovelies.